The following categories are on a classified balance sheet

Assignment 5

INITIAL REVIEW OF ANNUAL REPORT AND FINANCIAL STATEMENTS
Name of your Company:

By now you should have received the Annual Report (plus SEC 10-K and proxy statement) you requested from your company. The purpose of this assignment is to review and understand the basic information that is reported in your company's Annual Report with primary emphasis on the financial statements. The SEC 10-K and proxy statement are the focus of Assignment 6.

ORGANIZATON OF THE ANNUAL REPORT:

In general, Annual Reports are organized into the six different sections below.

1. Financial Highlights: In the first few pages or so you will find a summary of financial highlights covering as many as 10 or 20 years. Often this section contains a variety of charts and graphs. These data are not financial statements but merely a shorthand summary of the firm over many years.

2. The Company and Its Products: Near the beginning of the report there is usually a fairly lengthy section about the company and its products. (If the company has had a good year there will probably be lots of color pictures of the executives. If the company had a bad year they might leave out pictures of the executives altogether.) This section of the report includes mostly public relations-type information. It's a chance for the company to brag about its products, people and activities.

3. Management Discussion and Analysis: Following the public relations section of the Annual Report you will find a section titled "Management's Discussion and Analysis." Often this section is referred to in the business press by its initials: the MD&A. Here, management is required to identify significant events, trends and developments affecting the firm and to discuss management's thinking on these matters.

4. Financial Statements and the Notes to the Financial Statements: Following the MD&A you should find the financial statements and accompanying notes. Generally, there will be a balance sheet, income statement, statement of cash flows, and a statement of stockholders' equity. Often, each financial statement will have the word "Consolidated" in its title to indicate that the corporation owns one or more subsidiaries and that the financial results of the subsidiaries have been combined with those of the parent company to produce a single set of financial statements. The Notes are an integral part of the financial statements because they disclose the accounting methods used by the firm, provide detail regarding certain amounts on the face of the financial statements, and disclose additional matters not otherwise revealed by the financial statements. Financial statements without the accompanying notes comprise incomplete disclosure and can be misleading.

5. Statement of Management Responsibility and the Report of the Independent Accountant’s (or Auditor's) Report: Read them carefully. These statements reveal (1) who is responsible for the content of the financial statements and (2) whether the financial statements present fairly the financial situation of the firm.

6. Basic Company Facts: Following the Notes to the Financial Statements there are usually two or three pages of basic facts about the company (e.g., list of officers and directors, stock exchange listing, state of incorporation).

COMPLETING THE ASSIGNMENT:

1. Read the Management Discussion and Analysis (MD&A) section. What is the general tone of management's comments in this section? Was the most recent year a positive or negative experience for the company? Does management appear optimistic or pessimistic about the future? Discuss.

2. The Income Statement

a. Which format was used to prepare your firm's income statement? (Check one)

Single-step

Multiple-step

HINT: If gross margin (also called gross profit) is reported on the income statement, it's the multiple-step format. Otherwise, the single-step format has been used.

b. Determine whether any of the following "special items" appear on the most recent income statement. They tend to appear near the bottom. Indicate below whether the item appears and (if it appears) indicate whether it increased or decreased net income. (These items will the subject of further analysis in a later assignment.)

Item Present?

Increase or Decrease?

Discontinued operations

Cumulative effect of a change in accounting principle

Extraordinary gain (or loss)

c. Using your judgment, list the major items of revenue and expense that are reported on your company's most recent income statement. For each item, indicate whether it is a revenue or an expense. Do not include any of the special items from Part b above.

Revenue or Expense?

1.

2.

3.

4.

5.

6.

3. The Balance Sheet

a. Which of the following terms describes the balance sheet as reported by your firm? (Check those that apply.)

Classified balance sheet

(i.e., assets are segregated into categories)

Comparative balance sheet

(i.e., more than one year of data is presented)

b. If your company presented a classified balance sheet, identify the amounts your firm reported for each of the following categories and the percentage of total assets that each represents.

Amount

Percent

Current assets

Property, plant, and equipment

Other long-term assets

Current liabilities

Long-term liabilities

Contributed capital

Retained earnings

LEARNING NOTE: If you were a creditor of a firm (i.e., the firm owed you money) you would be interested in whether the firm had enough resources to pay you when your bill came due. Two indicators of a firm's ability to pay its bills as they become due are ( 1) the amount of working capital (sometimes called net working capital), and (2) the current ratio (sometimes called the working capital ratio).

Working capital (WC) is the cushion by which total current assets exceed total current liabilities (WC = current assets minus current liabilities). The current ratio (CR) reveals how many dollars of current assets are available to pay off each dollar of current liabilities (CR = current assets divided by current liabilities).

c. What amount of working capital did your company have as of the date of its two most recent balance sheets? (Note: If your firm didn't prepare a classified balance sheet, you can't compute the amount of working capital or the current ratio. If that's the case, leave this page blank and skip to the next page.)

Most Recent Balance Sheet

Next Most Recent Balance Sheet

Working Capital

d. What was the current ratio, also known as the working capital ratio (current assets + current liabilities), at the end of the two most recent years? For comparison to other firms, check with five classmates (who are analyzing different firms) to see what their results were. Record those results below along with those of your firm. List the names of each comparative firm.

Your Firm

Most Recent Year

Next Most Recent Year

e. How does your firm appear to compare to the other firms you listed above regarding its ability to pay current liabilities as they become due?

4. The Statement of Cash Flows

a. Which format does your company use to report the statement of cash flows? (check one)

Direct format

The operating activities section begins with a line such as "Cash received from customers."

Indirect format

The operating activities section begins with a line such as "Net income" or "Net loss" and then proceeds to add and subtract items from that amount.

b. In the spaces provided below, fill-in the proper summary amounts from your company's most recent statement of cash flows. If any category reports a net cash outflow, show that amount in parentheses.

1) Net cash inflow (outflow) from operating activities:

2) Net cash inflow (outflow) from financing activities:

3) Net cash inflow (outflow) from investing activities:

4) Net increase (decrease) in cash [or, sometimes labeled net change in cash and cash equivalents for the year:

c. Now go back to the balance sheet and fill-in the following amounts that are reported for Cash (under the assets category).

1) Current year's ending cash balance

2) Prior year's ending cash balance

3) Change in cash balance during the current year

d. Does the number on line c.-iii above match the number on line b.-iv above? (Check one below) Hint: They should match. This is an example of financial statement articulation, which means that numbers reported on one financial statement are related to numbers on the other statements.

1) Yes or No

2) If the amounts do not match, by how much do they differ?

5. The Statement of Stockholders' Equity

a. Did your company include a statement of stockholders' equity with the rest of its financial statements? (check one)

Yes _ or No _ (If no, ignore question b that follows.)

b. Carefully review the most recent year's data on the statement of stockholders' equity. Were there any significant changes in the amounts comprising stockholders' equity between the beginning of the year and the end of the year? If so, complete the table below for the significant changes. In the right-most column, use parentheses to indicate a balance that decreased.

Ignore changes that you judge to be insignificant. If your company had no significant changes in the amounts comprising stockholders' equity, note that on the first line of the table.

Statement of Stockholders' Equity Accounts

Balance at the Beginning of the Year

Balance at the End of the Year

Change in the Balance during the Year

6. "Articulation of Financial Statements" refers to information on one financial statement being related to information on another financial statement. Find an additional example of articulation in your company's financial statements beyond the example involving cash from part 4.-d. on the previous page. Describe it below