The Securities and Exchange Commission (SEC) requires that every stockholder of a publicly-traded U.S. corporation be given a copy of its annual report, a formal document describing the corporation's performance over the past year. However, besides being required by law, annual reports can also serve as vital sources of company information-information that should be a part of your investment decisions.
Like many individual investors, perhaps you feel you just don't have the time to teach yourself all you need to know about the annual reports that arrive in your mailbox. In the hopes of making these important documents more accessible, this three-part article will take a brief look at some (but not all) of the main sections contained in a typical annual report. Of course, not all reports will contain every one of these sections; nor will they all offer the same degree of information. But, as you familiarize yourself with their contents, you may find them significantly less intimidating than when you began.
BackgroundAnnual reports are designed to meet the needs of a wide-ranging audience. Shareholders, regulatory agencies, financial analysts and economists quite often have very different reasons for reading them. One fortunate result of having to satisfy such a diverse readership is that most annual reports follow a similar format, which greatly facilitates their use.
Even though an annual report may seem to be filled with numbers, only its financial statements and accompanying notes are produced solely by the company's accountants. The statements and their notes lie at the heart of every report and must conform to the regulatory and professional standards of such organizations as the SEC, the Financial Accounting Standards Board (FASB) and the American Institute of Certified Public Accountants (AICPA). Most of the rest of an annual report will deal with recent issues that the company feels are important. Some of these discussions are grouped around accounting figures; some are not.
Getting StartedJust about every annual report begins on a positive note with some version of the following:
- Annual Report Highlights. A review of the most favorable aspects of the company's past year of operations. Topics typically include profit and sales figures, new product introductions and recent acquisitions. Graphs and tables are often used to compare the most recent sales, profits and earnings per share (EPS) figures with corresponding data for previous years.
- Letter to Shareholders. These letters are usually signed by the company's president or chairman, recount the past year's achievements and express confidence for the year ahead. As you read them, try and see beyond the marketing messages to what is really being (or not being) said.
- Review of Operations. In some annual reports, this section may read more like a public relations exercise than an offering of useful information. The company's products and services receive glowing tribute, frequently accompanied by lush photographs of smiling workers, the headquarters "campus" and other facilities.
Financial StatementsThe financial statements and their notes are the most important section of any annual report. They provide the reader with a recent financial history of the company in a concise format and describe any significant business-related events that took place during the year. At a minimum, an annual report will include these three financial statements:
- Statement of Cash Flow. Measures the flow of cash and cash equivalents into and out of the company.
- Statement of Earnings. Summarizes the results of the company's business operations, including revenue and expenses, over a given period of time (usually three years).
- Statement of Financial Position. Offers a "snapshot" view of all of the company's assets and all claims against it as of a certain date (noted on the statements themselves).
Because of expansion, mergers or acquisitions, corporations may consist of a number of subsidiaries or divisions. Creating separate financial statements for each would be a time- consuming and expensive process. As an alternative, many corporations present "consolidated" financial statements- indicating that the financial data for all of their holdings is being presented as if it belonged to one consolidated company.
