{"id":90,"date":"2018-04-16T19:03:58","date_gmt":"2018-04-16T19:03:58","guid":{"rendered":"https:\/\/courses.lumenlearning.com\/wm-accountingformanagers\/?post_type=chapter&#038;p=90"},"modified":"2024-04-26T22:12:28","modified_gmt":"2024-04-26T22:12:28","slug":"the-annual-report","status":"publish","type":"chapter","link":"https:\/\/courses.lumenlearning.com\/wm-accountingformanagers\/chapter\/the-annual-report\/","title":{"raw":"The Annual Report","rendered":"The Annual Report"},"content":{"raw":"<div class=\"textbox learning-objectives\">\r\n<h3>Learning Outcomes<\/h3>\r\n<ul>\r\n \t<li>Summarize the information provided in a corporation's annual report<\/li>\r\n<\/ul>\r\n<\/div>\r\nPublicly traded corporations, like FaceBook (NASDAQ:FB), Home Depot (NYSE:HD), and Wells Fargo (NYSE:WFC) are required by the SEC to submit and publish an annual report that describes their operations and financial conditions. Most of the report is management\u2019s discussion and analysis (MD&amp;A) chronicling the company's activities over the past year, along with challenges and market risks. The final quarter of the report, more or less, is comprised of the audited financial statements and accompanying notes and disclosures. \u00a0The whole package usually runs around a hundred pages or so. Just for fun sometime, look up an annual report for a company you think is publicly traded, but be aware that just because a company is monolithic or iconic doesn\u2019t mean it\u2019s publicly traded. For instance, Fender Musical Instruments, Corp. is world famous for its guitars and is traded on the National Association of Securities Dealers Automated Quotations (NASDAQ) as FNDR, but Gibson Brands, Inc. is privately held, so there is no publicly disclosed information.\r\n\r\nFor those companies that are publicly traded, the annual report should include the following sections: Management\u2019s Discussion and Analysis, and the audited financial statements.\r\n<h2>Management Discussion and Analysis (unaudited)<\/h2>\r\nIn the Management discussion and analysis (MD&amp;A) section of a company's annual report, management provides an overview of the previous year\u2019s operations and how the company performed financially. Management also discusses the upcoming year by outlining future goals and approaches to new projects. \u00a0The SEC requires an independent CPA firm perform an annual audit of a company\u2019s financial statements, and an audit is an opinion as to whether the financials are free of material misstatement. Auditors perform test work to determine if the financial statements are materially correct, but CPAs do not audit the information in the MD&amp;A section.\r\n<h2>The Audited Financial Statements<\/h2>\r\nThe basic company financial statements included in the annual report are the balance sheet, the income statement, the statement of retained earnings, and the statement of cash flows.\r\n<h3>Balance Sheet<\/h3>\r\nAssets are what a company owns. \u00a0Equity and liabilities show who owns it. \u00a0Liabilities are debt, and equity is what is left over for the owners if all the assets and liabilities were liquidated at the amounts shown on the balance sheet. \u00a0You could imagine a simple balance sheet centered around your home or your car. Let\u2019s say your car cost you $25,000 and you put $5,000 down and financed the rest. \u00a0A simple balance sheet would show an asset of $25,000 that was equal to (balanced by) debt of $20,000 and equity of $5,000. A business balance sheet would be more complete\u2014in fact, one of the underlying accounting principles requires companies to show all assets and all liabilities on the balance sheet (the completeness principle.)\r\n<h3>Income Statement<\/h3>\r\nAlso called the P&amp;L for Profit and Loss, or the Statement of Earnings, the income statement shows increases and decreases in net assets from running the business. \u00a0Assets are increased by revenues and decreased by expenses. Revenues are the earnings of the business from selling goods or services, and expenses are the costs of doing business\u2014they measure the amount of resources used up producing revenue. \u00a0In fact, the word \u201cexpense\u201d literally means \u201cused up,\u201d as in, \u201cI went to the gym and expended all my energy.\u201d In this case, expenses are assets, mostly cash, but also equipment and other capital investments, used up in creating new wealth.\r\n<h3>Statement of Retained Earnings<\/h3>\r\nThe statement of owners\u2019 equity, also called the statement of retained earnings, reconciles the net income from the year to the balance sheet statement of equity. \u00a0In other words, if a company started with $30,000 in equity (last year\u2019s ending equity) and made $125,000 in net income, it would then have $155,000 in equity, before any additions or withdrawals. \u00a0If the owners took out $90,000 for their own use, equity would then show on the balance sheet as $65,000 ($155,000 less $90,000.) If, in addition, the company sold stock on the open market raising $1,000,000, equity would then be $1,065,000. \u00a0All of this information and more is available on the statement of retained earnings. There is a companion statement called the statement of comprehensive income that includes such things as unrealized gains and losses on investments; however, that is beyond the scope of this overview.\r\n<h3>Statement of Cash Flows<\/h3>\r\nFinally, the audited financial statements include a reconciliation of beginning and ending cash, called the statement of cash flows. \u00a0Similar to the statement of equity, it shows the transactions that affected cash in three sections: operations, investing, and financing. \u00a0Investing includes purchasing (and selling) fixed assets. Financing includes both debt and equity sources of capital. Operations is usually represented by a reconciliation of accrual basis net income to cash basis.\r\n<h2>Footnotes and Disclosures<\/h2>\r\nIn addition to the basic financial statements, companies using GAAP are required to add pages and pages of footnotes and disclosures, covering everything from the basis of accounting and the fiscal year, to how revenues are recognized, to outstanding lawsuits and other contingencies. \u00a0Some of these footnotes explain the amounts on the face of the financial statements, and some add information not apparent from the financials themselves.\r\n<h2>The Auditor\u2019s Reports<\/h2>\r\nThe SEC requires an independent CPA firm perform an annual audit of a company\u2019s financial statements, and an audit is an opinion as to whether the financials are free of material misstatement. Auditors perform test work to determine if the financial statements are materially correct. \u00a0However, CPAs do not audit the information in the MD&amp;A section.\r\n<div class=\"textbox tryit\">\r\n<h3>Practice Questions<\/h3>\r\nhttps:\/\/assess.lumenlearning.com\/practice\/2a20ff94-eb50-4ee8-ba06-163f5da9d6a0\r\n<\/div>","rendered":"<div class=\"textbox learning-objectives\">\n<h3>Learning Outcomes<\/h3>\n<ul>\n<li>Summarize the information provided in a corporation&#8217;s annual report<\/li>\n<\/ul>\n<\/div>\n<p>Publicly traded corporations, like FaceBook (NASDAQ:FB), Home Depot (NYSE:HD), and Wells Fargo (NYSE:WFC) are required by the SEC to submit and publish an annual report that describes their operations and financial conditions. Most of the report is management\u2019s discussion and analysis (MD&amp;A) chronicling the company&#8217;s activities over the past year, along with challenges and market risks. The final quarter of the report, more or less, is comprised of the audited financial statements and accompanying notes and disclosures. \u00a0The whole package usually runs around a hundred pages or so. Just for fun sometime, look up an annual report for a company you think is publicly traded, but be aware that just because a company is monolithic or iconic doesn\u2019t mean it\u2019s publicly traded. For instance, Fender Musical Instruments, Corp. is world famous for its guitars and is traded on the National Association of Securities Dealers Automated Quotations (NASDAQ) as FNDR, but Gibson Brands, Inc. is privately held, so there is no publicly disclosed information.<\/p>\n<p>For those companies that are publicly traded, the annual report should include the following sections: Management\u2019s Discussion and Analysis, and the audited financial statements.<\/p>\n<h2>Management Discussion and Analysis (unaudited)<\/h2>\n<p>In the Management discussion and analysis (MD&amp;A) section of a company&#8217;s annual report, management provides an overview of the previous year\u2019s operations and how the company performed financially. Management also discusses the upcoming year by outlining future goals and approaches to new projects. \u00a0The SEC requires an independent CPA firm perform an annual audit of a company\u2019s financial statements, and an audit is an opinion as to whether the financials are free of material misstatement. Auditors perform test work to determine if the financial statements are materially correct, but CPAs do not audit the information in the MD&amp;A section.<\/p>\n<h2>The Audited Financial Statements<\/h2>\n<p>The basic company financial statements included in the annual report are the balance sheet, the income statement, the statement of retained earnings, and the statement of cash flows.<\/p>\n<h3>Balance Sheet<\/h3>\n<p>Assets are what a company owns. \u00a0Equity and liabilities show who owns it. \u00a0Liabilities are debt, and equity is what is left over for the owners if all the assets and liabilities were liquidated at the amounts shown on the balance sheet. \u00a0You could imagine a simple balance sheet centered around your home or your car. Let\u2019s say your car cost you $25,000 and you put $5,000 down and financed the rest. \u00a0A simple balance sheet would show an asset of $25,000 that was equal to (balanced by) debt of $20,000 and equity of $5,000. A business balance sheet would be more complete\u2014in fact, one of the underlying accounting principles requires companies to show all assets and all liabilities on the balance sheet (the completeness principle.)<\/p>\n<h3>Income Statement<\/h3>\n<p>Also called the P&amp;L for Profit and Loss, or the Statement of Earnings, the income statement shows increases and decreases in net assets from running the business. \u00a0Assets are increased by revenues and decreased by expenses. Revenues are the earnings of the business from selling goods or services, and expenses are the costs of doing business\u2014they measure the amount of resources used up producing revenue. \u00a0In fact, the word \u201cexpense\u201d literally means \u201cused up,\u201d as in, \u201cI went to the gym and expended all my energy.\u201d In this case, expenses are assets, mostly cash, but also equipment and other capital investments, used up in creating new wealth.<\/p>\n<h3>Statement of Retained Earnings<\/h3>\n<p>The statement of owners\u2019 equity, also called the statement of retained earnings, reconciles the net income from the year to the balance sheet statement of equity. \u00a0In other words, if a company started with $30,000 in equity (last year\u2019s ending equity) and made $125,000 in net income, it would then have $155,000 in equity, before any additions or withdrawals. \u00a0If the owners took out $90,000 for their own use, equity would then show on the balance sheet as $65,000 ($155,000 less $90,000.) If, in addition, the company sold stock on the open market raising $1,000,000, equity would then be $1,065,000. \u00a0All of this information and more is available on the statement of retained earnings. There is a companion statement called the statement of comprehensive income that includes such things as unrealized gains and losses on investments; however, that is beyond the scope of this overview.<\/p>\n<h3>Statement of Cash Flows<\/h3>\n<p>Finally, the audited financial statements include a reconciliation of beginning and ending cash, called the statement of cash flows. \u00a0Similar to the statement of equity, it shows the transactions that affected cash in three sections: operations, investing, and financing. \u00a0Investing includes purchasing (and selling) fixed assets. Financing includes both debt and equity sources of capital. Operations is usually represented by a reconciliation of accrual basis net income to cash basis.<\/p>\n<h2>Footnotes and Disclosures<\/h2>\n<p>In addition to the basic financial statements, companies using GAAP are required to add pages and pages of footnotes and disclosures, covering everything from the basis of accounting and the fiscal year, to how revenues are recognized, to outstanding lawsuits and other contingencies. \u00a0Some of these footnotes explain the amounts on the face of the financial statements, and some add information not apparent from the financials themselves.<\/p>\n<h2>The Auditor\u2019s Reports<\/h2>\n<p>The SEC requires an independent CPA firm perform an annual audit of a company\u2019s financial statements, and an audit is an opinion as to whether the financials are free of material misstatement. Auditors perform test work to determine if the financial statements are materially correct. \u00a0However, CPAs do not audit the information in the MD&amp;A section.<\/p>\n<div class=\"textbox tryit\">\n<h3>Practice Questions<\/h3>\n<p>\t<iframe id=\"assessment_practice_2a20ff94-eb50-4ee8-ba06-163f5da9d6a0\" class=\"resizable\" src=\"https:\/\/assess.lumenlearning.com\/practice\/2a20ff94-eb50-4ee8-ba06-163f5da9d6a0?iframe_resize_id=assessment_practice_id_2a20ff94-eb50-4ee8-ba06-163f5da9d6a0\" frameborder=\"0\" style=\"border:none;width:100%;height:100%;min-height:300px;\"><br \/>\n\t<\/iframe>\n<\/div>\n\n\t\t\t <section class=\"citations-section\" role=\"contentinfo\">\n\t\t\t <h3>Candela Citations<\/h3>\n\t\t\t\t\t <div>\n\t\t\t\t\t\t <div id=\"citation-list-90\">\n\t\t\t\t\t\t\t <div class=\"licensing\"><div class=\"license-attribution-dropdown-subheading\">CC licensed content, Original<\/div><ul class=\"citation-list\"><li>The Annual Report. <strong>Authored by<\/strong>: Joe Cooke. <strong>Provided by<\/strong>: Lumen Learning. <strong>License<\/strong>: <em><a target=\"_blank\" rel=\"license\" href=\"https:\/\/creativecommons.org\/licenses\/by\/4.0\/\">CC BY: Attribution<\/a><\/em><\/li><\/ul><\/div>\n\t\t\t\t\t\t <\/div>\n\t\t\t\t\t <\/div>\n\t\t\t <\/section>","protected":false},"author":62559,"menu_order":11,"template":"","meta":{"_candela_citation":"[{\"type\":\"original\",\"description\":\"The Annual Report\",\"author\":\"Joe Cooke\",\"organization\":\"Lumen Learning\",\"url\":\"\",\"project\":\"\",\"license\":\"cc-by\",\"license_terms\":\"\"}]","CANDELA_OUTCOMES_GUID":"e024c674-4d31-4710-8a92-f0b93437f1f9, 37c14812-e6a9-4ad3-b274-eb411acffc1d","pb_show_title":"on","pb_short_title":"","pb_subtitle":"","pb_authors":[],"pb_section_license":""},"chapter-type":[],"contributor":[],"license":[],"class_list":["post-90","chapter","type-chapter","status-publish","hentry"],"part":28,"_links":{"self":[{"href":"https:\/\/courses.lumenlearning.com\/wm-accountingformanagers\/wp-json\/pressbooks\/v2\/chapters\/90","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/courses.lumenlearning.com\/wm-accountingformanagers\/wp-json\/pressbooks\/v2\/chapters"}],"about":[{"href":"https:\/\/courses.lumenlearning.com\/wm-accountingformanagers\/wp-json\/wp\/v2\/types\/chapter"}],"author":[{"embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/wm-accountingformanagers\/wp-json\/wp\/v2\/users\/62559"}],"version-history":[{"count":12,"href":"https:\/\/courses.lumenlearning.com\/wm-accountingformanagers\/wp-json\/pressbooks\/v2\/chapters\/90\/revisions"}],"predecessor-version":[{"id":4017,"href":"https:\/\/courses.lumenlearning.com\/wm-accountingformanagers\/wp-json\/pressbooks\/v2\/chapters\/90\/revisions\/4017"}],"part":[{"href":"https:\/\/courses.lumenlearning.com\/wm-accountingformanagers\/wp-json\/pressbooks\/v2\/parts\/28"}],"metadata":[{"href":"https:\/\/courses.lumenlearning.com\/wm-accountingformanagers\/wp-json\/pressbooks\/v2\/chapters\/90\/metadata\/"}],"wp:attachment":[{"href":"https:\/\/courses.lumenlearning.com\/wm-accountingformanagers\/wp-json\/wp\/v2\/media?parent=90"}],"wp:term":[{"taxonomy":"chapter-type","embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/wm-accountingformanagers\/wp-json\/pressbooks\/v2\/chapter-type?post=90"},{"taxonomy":"contributor","embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/wm-accountingformanagers\/wp-json\/wp\/v2\/contributor?post=90"},{"taxonomy":"license","embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/wm-accountingformanagers\/wp-json\/wp\/v2\/license?post=90"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}