Gibson, Charles

Schroeder, Nicholas

English

eGrove (Univ. of Mississippi)

Woman C.P.A. Volume 50 Issue 2 Article 4 4-1988 Improving Annual Reports by Improving the Readability of Footnotes Nicholas Schroeder Charles Gibson Follow this and additional works at: https://egrove.olemiss.edu/wcpa  Part of the Accounting Commons, and the Women's Studies Commons Recommended Citation Schroeder, Nicholas and Gibson, Charles (1988) "Improving Annual Reports by Improving the Readability of Footnotes," Woman C.P.A.: Vol. 50 : Iss. 2 , Article 4. Available at: https://egrove.olemiss.edu/wcpa/vol50/iss2/4 This Article is brought to you for free and open access by the Archival Digital Accounting Collection at eGrove. It has been accepted for inclusion in Woman C.P.A. by an authorized editor of eGrove. For more information, please contact egrove@olemiss.edu. Special FeatureImproving Annual Reports by Improving theReadability of FootnotesBy Nicholas Schroeder and Charles GibsonAnnual reports are the central feature of financial reporting. To many readers, footnotes are the most important part of the annual report. Individuals who diligently study the financial statements will spend much of their time reviewing the footnotes. Interpretation of the financial statements would be diffi­cult without the descriptions of the valuation techniques, revenue recog­nition methods, and other reporting options contained in the footnotes.When management fulfills its re­sponsibility to financial statement users, the footnotes are a source of useful and understandable informa­tion. Accountants have an interest in assuring that footnotes are written in a clear, understandable manner. When footnotes do not communicate clearly, the users may turn to other information sources or, worse, claim that the financial statements are mis­leading.Gauging ReadabilitySeveral microcomputer software packages are now available to gauge readability. However, little benefit will be obtained from a readability measurement that does not also give suggestions for improving the doc­ument. Fortunately, a software pack­age named Rightwriter1 provides 1The Rightwriter software is available for the IBM PC and compatibles. It is published by Decisionware, Inc., Sara­sota, Florida.Accountants have an interest in assuring that footnotes are written in a clear, understandable manner.both types of information. This pack­age measures a document’s readabil­ity using the Flesch-Kincaid Index, a widely used instrument with easily interpreted results. In addition, it offers a wide variety of suggestions on how readability of a document can be improved. Other measure­ments generated by the Rightwriter analysis are number of words in the text, writing strength index, jargon index, and descriptive index.Readability Index. The readabil­ity index score indicates the lowest education level of readers who would easily understand the text. A score of 1212 means a reader needs at least a high school education to easily read and understand the document. A word of caution is needed when in­terpreting readability scores. A high readability score does not mean the information is presented at the proper level for sophisticated read­ers. High readability scores simply indicate that the document contains complex sentence structure, big words, and many lengthy sentences. Even technical information, such as financial statement footnotes, can be more easily understood if written using common words and simple sentence structure.Strength Index. The strength in­dex measures the strength of deliv­ery. Writing that is clear without unnecessary qualifiers or complex sentence structure scores well on the strength index. The index is scaled from a low of 0.00 to a high of 1.00. Business reports should score above 0.50 according to the Rightwriter manual. The software will offer sug­gestions for improving the writing strength when the document scores below 0.50 on the strength index.Jargon Index. Jargon represents a vocabulary often known only to insiders. Jargon consists of entirely new words, abbreviations, acronyms, buzz words, and nouns created from common verbs or verbs created from common nouns. Jargon can block effective communication, especially in financial statement footnotes when the subject material is technical in nature.A jargon index of 0.00 indicates that the use of Jargon is within acceptable levels. A jargon index greater than 0.50 indicates a very heavy use of jargon. Because jargon causes a loss of communication effec­tiveness, it is important to minimize the use of jargon.Descriptive Index. The descrip­tive index measures the use of adjec­tives and adverbs. Too many adjec­The Woman CPA, April 1988/13tives and adverbs can make the writing hard to understand. Too few descriptors will make the writing terse and choppy. Scores between 0.10 and 0.90 on the Rightwriter scale are considered to be within the normal range.Improving ReadabilityThe key to improving footnote read­ability is to recognize where to make the improvements. The use of books such as Effective Writing: A Hand­book for Accountants [Arevalo, 1984] can sharpen the accountant’s effectiveness at written communica­tions. However, a book cannot cri­tique a financial statement’s foot­notes. Only a human expert or, now, a computer program can analyze text for writing quality. The Right­writer program can point out com­mon errors and poor writing habits that cause readability problems and lead to low writing style scores. The writer is then free to examine each of the comments to decide whether to make revisions.Computer software can recognize punctuation errors, overuse of the passive voice, and some grammati­cal errors. A good program can also point out sentence structure prob­lems and poor word choices such as using cliches, ambiguous terms, slang, etc. Rightwriter inserts com­ments directly into the text being analyzed. The program identifies possible problem areas and even sug­gests phrases which might improve the writing.Rightwriter also presents a sum­mary of scores and revision sugges­tions based on the problems noted in the text analysis. These comments and suggestions can serve as a focal point for revision of the document.Computer software can recognize punctuation errors, overuse of the passive voice, and some grammatical errors.EXHIBIT 1Mobil Corporation, Note 8 December 31, 1984At December 31, 1984, Mobil Oil and Mobil Credit had $3,403 million of unused lines of credit for short-term financing. Of these, $961 million supported commercial paper borrowing arrangements of Mobil Credit, $648 million of which may also be used by Mobil Oil.As of the end of 1984, Montgomery Ward and Montgomery Ward Credit had $600 million of unused lines of credit for short-term financing. Sub­stantially all of the unused lines of credit support the outstanding com­mercial paper of Montgomery Ward Credit and may also be used by Montgomery Ward. These lines of credit have been renewed consistently each year and, under informal arrangements, most of the lines are sup­ported by a combination of fees and compensating balances. The average cost of the unused lines is a fee of .2 of 1% plus compensating balances of about 3%. Should the lines of credit be utilized, the compensating balances may, in certain instances, be increased to a maximum of 8% of such borrowings. The compensating balances are determined on the average monthly collected balances per the banks’ records and are legally subject to withdrawal.Container had unused lines of credit for short-term financing of $68 million at December 31, 1984, for which a maximum commitment for 3/8 of 1% is paid.W. F. Hall Printing Company had unused lines of credit for short-term financing of $11 million at December 31, 1984.An IllustrationFootnote 8 from the December 31, 1984, annual report of the Mobil Corporation is shown in Exhibit 1. The Rightwriter analysis of the Mobil Corporation footnote is shown in Exhibit 2.Reviewing the Rightwriter analy­sis in Exhibit 2, we find several comments to consider. These com­ments point out one complex sen­tence, five uses of the passive voice, four long sentences, and a suggestion to replace one word. The readability index is 13.08 (readers need a 13th grade education to easily understand the footnote). The strength index is 0.00, indicating that the writing has room for improvement. There is a suggestion that the use of shorter sentences and the active voice would improve the writing style. The de­scriptive index is 0.42; the use of adjectives and adverbs is within the normal range. The jargon index is 0.00, indicating that the use of jar­gon is within acceptable levels.The summary also contains a recom­mendation on sentence structure. The recommendation suggests using sentences with simpler structure in­stead of the multiple clause sentences in the footnote.The final part of the summary is an uncommon word list. The writer should consider replacing these words as they may confuse the read­er. When synonyms for uncommon words are needed, a real-time the­saurus may be the quickest way to find a common word. Turbo Light­ning, Word Finder, or the thesaurus in the Multimate Advantage word processor are good examples of this software.2 A real-time thesaurus al­lows the writer to request a list of synonyms at the stroke of a key. When an acceptable substitute is selected, another keystroke will re­place the old word with the new word.2 Turbo Lightning is a product of Borland International, Scotts Valley, California. Word Finder is a product of Microlytics, Inc., East Rochester, New York. Multi­mate Advantage is a product of Multi­mate International, East Hartford, Con­necticut.Not every word on the uncommon word list should be replaced. Some words listed as uncommon may be common within the context used. Such is the case for this footnote. Four of the five words are proper names. The other is a common term14/The Woman CPA, April 1988in the context of this footnote. These words need not be replaced.The Mobil Corporation footnote was reworded based on the comments inserted in the text and the sugges­tions given in the analysis summary. The results of the editing and reword­ing can be seen in Exhibit 3. The analysis of the reworded footnote, shown in Exhibit 4, has only one comment inserted in the text. This use of the passive voice was left unchanged because it seemed to be the most appropriate way to phrase this sentence.The readability index for the re­vised footnote is 10.09, approximate­ly three grades lower than the origi­nal footnote. The strength index has moved from 0.00 to 0.75, a substan­tial improvement in the writing strength. The descriptive index stayed within the acceptable range and the jargon index remained at 0.00. There are no recommendations for improvement. The uncommon word list is the same because all of the words on this list were consid­ered acceptable.Substantial improvements were made in the readability index and the strength index by making only a few key changes. The revised foot­note is more likely to be easily under­stood by financial statement users.SummaryFootnotes are used to explain or amplify the items presented within the body of the financial statements. Accountants, whether preparers or auditors, have an interest in assur­ing that footnotes are written in a clear, understandable manner.A footnote in a financial statement was used to demonstrate how to use microcomputer software to improve readability and writing strength by locating and improving weak areas in the document. Microcomputer soft­ware packages are a useful tool in the accountant’s effort to improve the understandability and usefulness of accounting information. 12ReferencesArevalo, Claire B., Effective Writing: A Handbook for Accountants (Prentice Hall, 1984).EXHIBIT 2Mobil Corporation, Rightwriter Analysis of Note 8 December 31, 1984At December 31, 1984, Mobil Oil and Mobil Credit had $3,403 million of unused lines of credit for short-term financing. Of31. COMPLEX SENTENCEthese, $961 million supported commercial paper borrowing arrangements of Mobil Credit, $648 million of which may also be used by Mobil Oil.21. PASSIVE VOICE: be used17. LONG SENTENCE: 23 WORDSAs of the end of 1984, Montgomery Ward and Montgomery Ward Credit had $600 million of unused lines of credit for short- 17. LONG SENTENCE: 24 WORDSterm financing. Substantially all of the unused lines of credit support the outstanding commercial paper of Montgomery Ward Credit and may also be used by Montgomery Ward. These lines of 21. PASSIVE VOICE: be used17. LONG SENTENCE: 25 WORDScredit have been renewed consistently each year and, under informal arrangements, most of the lines are supported by a combination of fees and compensating balances. The average cost of the unused lines is a fee of .2 of 1% plus compensating balances of about 3%. Should the lines of credit be utilized, the compensat­ing balances may, in certain instances, be increased to a maxi­mum of 8% of such7. REPLACE utilized, BY SIMPLER: use21. PASSIVE VOICE: be increased borrowings. The compensating balances are determined on the 21.PASSIVE VOICE: are determinedaverage monthly collected balances per the banks’ records and are legally subject to withdrawal.Container had unused lines of credit for short-term financing of $68 million at December 31, 1984, for which a maximum com­mitment fee of 3/8 of 1% is paid.21. PASSIVE VOICE: is paid17. LONG SENTENCE: 30 WORDSW. F. Hall Printing Company had unused lines of credit for short-term financing of $11 million at December 31, 1984.SUMMARYREADABILITY INDEX: 13.08Readers need a 13th grade level of education to understand.The writing is complex and may be difficult to read.STRENGTH INDEX: 0.00The writing can be made more direct by using:— the active voice—- shorter sentencesDESCRIPTIVE INDEX: 0.42The use of adjectives and adverbs is within the normal range.JARGON INDEX: 0.00SENTENCE STRUCTURE RECOMMENDATIONS:1. Most sentences contain multiple clauses.Try to use more simple sentences.UNCOMMON WORD LISTThe following words are not widely understood.Will any of these words confuse the intended audience?MOBIL 4 MONTGOMERY 4 RENEWED 1 WARD 4 WF 1The Woman CPA, April 1988/15EXHIBIT 3Mobil Corporation, Rewording of Note 8 December 31, 1984At December 31, 1984, Mobil Oil and Mobil Credit had $3,403 million of unused lines of credit for short-term financing. This includes $961 million which supported commercial paper borrowing arrangements of Mobil Credit. Of the $961 million, Mobil Oil may also use $648 million.As of the end of 1984, Montgomery Ward and Montgomery Ward Credit had $600 million of unused lines of credit. This credit is available for short-term financing. Nearly all of the unused lines of credit support the outstanding commercial paper of Montgomery Ward Credit. These lines of credit are also available to Montgom­ery Ward. They have been renewed consistently each year. Under informal ar­rangements, a combination of fees and compensating balances support most of these lines of credit. The average cost of the unused lines is a fee of .2 of 1% plus compensating balances of about 3%. If Montgomery Ward uses the lines of credit, the compensating balances could increase to a maximum of 8%of such borrowings. The compensating balances are determined using the average monthly collected balances per the banks’ records. The compensating balances are legally subject to withdrawal.Container had unused lines of credit for short-term financing of $68 million at December 31, 1984. Container pays a maximum commitment fee of 3/8 of 1%.W. F. Hall Printing Company had unused lines of credit for short-term financing of $11 million at December 31, 1984.Dr. Charles H. Gibson is a profes­sor of accounting at the University of Toledo. He is a member of several pro­fessional organizations including the AAA, AICPA, FEI, and Ohio Society of CPAs. Dr. Gibson has authored or co-authored several books and arti­cles including a previous publication in The Woman CPA.EXHIBIT 4Mobil Corporation, Rightwriter Analysis of Reworded Note 8 December 31, 1984At December 31, 1984, Mobil Oil and Mobil Credit had $3,403 million of unused lines of credit for short-term financing. This includes $961 million which supported commercial paper borrowing arrangements of Mobil Credit. Of the $961 million, Mobil Oil may also use $648 million.As of the end of 1984, Montgomery Ward and Montgomery Ward Credit had $600 million of unused lines of credit. This credit is available for short-term financing. Nearly all of the unused lines of credit support the outstanding commercial paper of Montgomery Ward Credit. These lines of credit are also available to Montgom­ery Ward. They have been renewed consistently each year. Under informal ar­rangements, a combination of fees and compensating balances support most of these lines of credit. The average cost of the unused lines is a fee of .2 of 1% plus compensating balances of about 3%. If Montgomery Ward uses the lines of credit, the compensating balances could increase to a maximum of 8%of such borrowings. The compensating balances are determined using the average21. PASSIVE VOICE: are determined monthly collected balances per the banks’ records. The compensating balances are legally subject to withdrawal.Container had unused lines of credit for short-term financing of $68 million at December 31, 1984. Container pays a maximum commitment fee of 3/8 of 1%.W. F. Hall Printing Company had unused lines of credit for short-term financing of $11 million at December 31, 1984.SUMMARYREADABILITY INDEX: 10.09Readers need a 10th grade level of education to understand.STRENGTH INDEX: 0.75The strength of delivery is good, but can be improved.DESCRIPTIVE INDEX: 0.39The use of adjectives and adverbs is within the normal range.JARGON INDEX: 0.00SENTENCE STRUCTURE RECOMMENDATIONS:15. No recommendations.UNCOMMON WORD LISTThe following words are not widely understood.Will any of these words confuse the intended audience?MOBIL 4 MONTGOMERY 4 RENEWED 1 WARD 4 WF 1Dr. Nicholas W. Schroeder is an assistant professor of accounting at the University of Toledo. He is a member of the AAA, NAA, AICPA, and Ohio Society of CPAs. Dr. Schroeder has authored or co- authored several articles on account­ing education and computer software.MOVING???Please Give Us Six Weeks Advance NoticeATTACH LABEL FROM RECENT ISSUE HERE OR PRINT OLD ADDRESS AS WELL AS NEW IN SPACE BELOWName (please print)Old AddressCity State ZIPNEW ADDRESSCity State ZIPReturn this to:CIRCULATION DEPARTMENTTHE WOMAN CPAP.O. BOX 39295CINCINNATI, OHIO 4523916/The Woman CPA, April 1988

Improving Annual Reports by Improving the Readability of Footnotes

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Improving Annual Reports by Improving the Readability of Footnotes

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