Annual reports produced by companies are a primary source of information about a company’s activities over a specific period of time. The information disclosed in these reports is prepared by the company’s management and is useful to different users, mainly investors and creditors.
The primary purpose of an annual report is to convince existing shareholders to continue investing in the corporation. However, management may also use the annual report to: (1) persuade prospective shareholders to invest in the corporation, (2) inform financial analysts about the investment quality of the corporation, (3) inform lenders, such as bankers and suppliers, of the credit-worthiness of the corporation, and (4) provide evidence to government agencies of compliance with regulations.
As a manager, you are (or will become) involved in the preparation of financial statements, which entails knowledge of the disclosure requirements. Furthermore, you will most probably use financial statements frequently in your profession. For example, as a manager, you will be the responsible person for the accuracy of the information in the financial statement. As an analyst, you may be asked to advise clients about investments in particular companies. More importantly, as an individual investor you may use financial statements to select your personal investments.
The basic purpose of the Financial Statement Project is to “get your hands dirty” with analysis of a public company.
The objectives of this project are:
- To expose you to alternative formats for presentation of financial statement disclosures as well as the accounting terminology which may differ across companies.
- To integrate real world illustrations of the accounting issues and disclosures related to the specific topics covered in this course in order to gain a better understanding of the course material.
- To formally perform financial statement analysis and prepare the report.
- To enhance your business research skills by searching for company-related information in current business periodicals, the financial press, and other financial publications.
You are asked to divide the class into groups of four students, max, per group. You will be assigned a public company or you can choose the company that you are working for if it is a public company. When you receive the annual report, familiarize yourself with its contents by reviewing it carefully. Annual reports usually have a contents page to help you locate specific items.
The project comprises several parts and requires you to locate and extract specific information from the corporation’s financial statements, especially the notes and supporting schedules which are located after the financial statements in the annual report. Notes provide additional explanations, descriptions, and supporting information not conveniently displayed within the body of the financial statements. Supporting schedules are tables that provide more detailed information about certain items in the primary financial statements.
Inexperienced financial statement users sometimes regard the notes and supporting schedules as unimportant. However, most of the information contained in the notes and schedules are required by GAAP and provide potentially valuable information to financial statement users concerning the corporation. For example, a contingent liability may be shown in the notes rather than the liability section of the balance sheet. A financial statement user who ignores the notes would not be aware of any contingencies that may occur.
Read the instructions carefully and write your answers in the space provided. If the space is insufficient, use additional sheets.
- If the requested information is not disclosed by the corporation, write “not disclosed” in the blank space. Note, however, that some of the requested information may not be disclosed, but could be calculated based on the disclosed information.
- Whenever possible, give page numbers in the annual report so that your answers can be checked or your computations cab be verifies.
- Indicate whether dollar amounts are in thousands or millions of dollars.
- Hints on finding the information:
- Disclosures may be contained in the financial statements and/or in the notes;
- Not all disclosures pertaining to a topic are necessarily contained in one note, so you need to skim the content of other notes to make sure you haven’t missed anything. Be sure to always check the “significant accounting policies” related to each major topic.
- Financial statements are “condensed,” i.e., there is not a separate line item shown for every account that you will encounter in this course. As a result, if you don’t see a particular item in the statement, you may find the item disclosed in the notes.
- Some annual reports will not contain the requested information. When the structure of the financial statements make it impossible to answer certain questions, simply indicate why you are unable to answer the question as stated.
- The term “current” refers to the year for which the annual report was prepared.
- Certain parts of this project require calculation of selected ratios. Although instructions are given for ratio calculations, you may wish to refer to the related chapters in the textbook for a review of the computations and interpretations of some of these ratios.
- Enclose all supporting documents and extra pages that you may use to prepare this report.