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BI > JUNE 2006
What 's Important in an Annual Report
Running a Faster Paper Chase by Bob Adams
Editor 's note: This article is based on a class taught by Bob Adams at past CompuFest meetings and is just a sample of the excellent education available at the annual event organized by the Computer Group Advisory Board. This year 's meeting will be June 23-25 in Reno, Nev. Bob, a CGAB vice president, will teach sessions titled Advanced SSG Topics:
Judgment Aids; Take the Oops Out of the SSG; and Follow Your Stocks: A Monthly Analysis Tool. CompuFest 2006 details and registration information are available at www.compufest2006.com.
Corporate annual reports are important research tools that enable investors to keep current on the
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A company 's financial statements are analogous to your personal finances. The income statement is comparable to your paycheck stub -- a big number at the top and a smaller number at the bottom. The number at the top represents your total pay, and the number at the bottom shows what 's left after taxes and expenses: health insurance, retirement, etc. A company 's income statement lists the same items, and net earnings represents the "little" number at the bottom.
The cash flow statement is similar to your checkbook. You deposit the value of your paycheck after expenses into your checking account. The company "deposits" net earnings (called operating income), along with other income -- income from investing and financing -- into its cash flow statement. The statement is similar to your checkbook balance, which represents your cash on hand after expenses.
The final report is the balance sheet. Cash at the end of the year is transferred to the balance sheet, where it becomes part of the assets that you, or a company, own. That, minus the liabilities, represents your net worth. The same is true of a company, except a company must report its worth at the end of each fiscal year. A company 's total assets and total liabilities will always balance -- mainly the result of the item called stockholders ' equity.
Using a Spreadsheet
Now let 's analyze the financial data in an annual report. My spreadsheet saves time
This team has been assigned to perform an executive summary of Berkshire Hathaway Inc. (BHI). This company has been profitable for the last three fiscal years, and is on the U.S. Stock Exchange. This summary will contain information gathered from BHI’s most recent annual report. Using the company’s balance sheet, cash flow statement, and income statement (all three are attached following the references) 14 key areas will be addressed:
As money is spent statements are updated to reflect the accounts affected by the spending. Managers use these financial statements, such as an income statement or balance sheet, to check the progress of plans and programs. Management uses the information provided by financial statements to monitor financial resources and activities. The income statement shows the results of the organization's operations over a specific period, such as revenues, expenses, and profit or loss. The balance sheet shows what the organization is worth (assets) at a particular point and the extent to which those assets were financed through debt (liabilities) or owner's investment (equity) (Bank of America, 2007).
The statement of cash flow shows the amount of increase or decrease in cash that the company has on hand every quarter. This statement reports what a company pays out each quarter. Most of the time when a company has a major contract the money won’t be received until a later date.
investors, auditors, executives of the business, etc.) an overview of the financial results and condition of the company. The major financial statements that come out of the accounting cycle are income statements, balance sheets, Statement of cash flows and Statement of retained earnings. Income statements are considered the most important of all the financial statements since it presents the operating results of an entity , e.g. revenues, expenses, and profits/losses generated during the reporting period (Bragg, 2017). Balance sheets provide reports of assets, liabilities, and equity of the entity as of the reporting date and can be considered the second most important statement because it provides information/figures about the liquidity, as well as the capitalization of a company (Bragg, 2017). Statement of cash flows exhibits the cash inflows and outflows that occur during a reporting period, which provides a useful comparison to the income statement, particularly when the amount of profit or loss reported does not reflect cash flows encountered by the businesses (Bragg, 2017). Statement of retained earnings is the least used financial statement that provides information regarding changes in equity during the reporting period and can include information such as: sale or repurchase of stock, dividend payments, and changes caused by reported profits or losses. Statements of retained earnings are often
taxes, wages) or amount owed. Equity is also known as owner’s net worth, stockholders’ equity, etc. or amount vested with no obligation to payback. This difference is known as the net asset or net worth of the company
The balance sheet (BS) is significant to a business due to its ability to provide a “snapshot” of a company’s assets and liabilities at any given time. This financial document is a cursory representation of a business’s health. The use of comparative BS whether it be yearly, quarterly, or monthly provides the interested parties a tool to observe trends that are positive, negative, or neutral to a company’s financial health (Finkler, Jones, and Koyner,2013) .
The accounting equation: Assets = Liabilities + Owner’s Equity. Assets are the resources of the company. Examples include cash, land, buildings, and equipment. Liabilities are “outsider claims”, the company’s obligations to creditors. Examples include accounts payable, notes payable, and income taxes payable. Owner’s Equity represents “insider claims” of the company or the owner’s share of the assets. If a business is keeping accurate records this equation should always be in balance.
The cash flow statement on p74 is a summary of all the transactions that affected the cash account for the year. The cash flow statement helps to predict future cash flows. It helps to evaluate management decisions. Wise decisions lead to profits and strong cash flows, and vice versa. The investment activities show what investments the company is making. Cash flow statements also determine the company’s ability to pay dividends and debts. From the
For a partnership or sole proprietorship, it would include the owners’ capital or drawing accounts.
Salaries expense and machinery and equipment would be the company’s cash outflow. The cash outflow is $2,250,000.
Items that are known monies of the company that have not been paid such as the salary for employees or taxes and deferred or unearned
Financial statements of the company are significant for the investors who would like to venture into the business operation. It gives them the insight whether the business is making profits or it is doomed to fail;
Accountants, business owners, investors, creditors and employees use four basic financial statements of an organization to determine the financial well-being and future earnings potential of that organization. Financial statements are a key tool in seeing and understanding the past, present and future condition of an organization. What are these financial statements and what do they mean to the reader? Do the financial statements mean something completely different to an investor, creditor, and employee?
of cash flows. Since the income statement is based on the accrual method, net income
| Below is an excerpt from the cash flow statement of a firm for fiscal year 2003: Cash flows from operating activities: Net income Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization Amortization of software Tax benefits of employee stock plans Special charges (Gains)/losses on investments Change in operating assets and liabilities: Receivables Inventories Pension assets Other assets Accounts payable Pension liabilities Other liabilities Net cash provided by operating activities Cash flows from investing activities: Payments for plant and other property Proceeds from disposition of plant and other property Investment in software