The Annual Report Project Template Guidelines

The Annual Report Project provides you the opportunity to perform an analysis of a corporate annual report. You will obtain the annual report of a publicly traded company and answer questions regarding the application of financial analysis concepts studied in Chapter 17.

The Annual Report Project:
• Will increase your interest in financial accounting by allowing you to personally choose the company you will review.
• Provides hands-on exposure to financial statements of a real-world company.
• Emphasizes the importance of the notes to the financial statements.
• Provides an opportunity to examine the application of procedures and methods discussed in your accounting textbook.
• Encourages you to work with spreadsheets.

The Annual Report Project consists of eleven sections as follows.

         Section 1 - Obtaining the Annual Report
         Section 2 - Company Information
         Section 3 - Overview of the Annual Report
         Section 4 - The Balance Sheet
         Section 5 - The Income Statement
         Section 6 - Current Assets
         Section 7 - Long-lived Assets
         Section 8 - Liabilities
         Section 9 - Stockholders’ Equity
         Section10 - Statement of Cash Flow
         Section11 - Overall Evaluation

Section 1
OBTAINING THE ANNUAL REPORT

Obtain the most recent annual report (2016 or 2015) of two corporations in the same industry which are traded on one of the US stock exchanges (NYSE, AMEX or NASDAQ).
Do not select a public utility, brokerage firm, insurance company, bank, co-operative or government entity. In addition, please note that summary annual reports are not acceptable.
You should be able to retrieve and download a public traded company's report from an Internet site. A useful resource is fortune.com. This site provides links to the Web sites of Fortune 500 companies.

1. Choosing a company
Choose a company in which you are interested in. Perhaps the company has been featured in the news lately. Perhaps you own stock in the company. Perhaps you would like to own stock in the company.

Section 2
INFORMATION ABOUT THE COMPANY

Prepare a one page or so introduction about the two companies to include the following:

1. Name of companies chosen for comparison.
2. Information about the companies:
What is the industry classification for the company (according to Fortune or the Internet site you are using)?

Describe the nature of the company’s business.
List the company’s primary products or services (use brand names where available).
What is the address of the company’s corporate headquarters?
What is the address of the company’s Web site?
List other countries in which the company operates:
What were the company’s revenues for the most recent fiscal year?
Who is the chairman of the company’s board of directors?
Who is the company’s CEO?

3. Provide the following market data:
On what stock exchange is the company’s stock traded?
What is the ticker symbol for the company?
What was the price of the company’s stock at the end of one day during this past week?
Price: _______________________ Date: ______________________
What were the lowest and highest stock prices during the past year?
52-week low: __________________ 52-week high: _________________

Section 3
OVERVIEW OF ANNUAL REPORT

   1. REVIEW THE CHAIRMAN’S LETTER TO THE SHAREHOLDERS.

Summarize the major points made in the letter in a paragraph or two.
Locate the management report(s) and the independent auditor’s report(s).

Answer the following questions.

a) Who is responsible for the preparation and integrity of the financial statements?
b) Does the company maintain a system of internal controls? Why?
c) Does the company have an audit committee? What is its purpose?
d) What is the name of the independent public accountant (auditor)?

(Note: There are two independent auditor’s reports: (1) a report on internal control, and (2) a report on the financial statements. The following questions relate to the financial statement audit.)

e) According to the auditor’s report on the financial statements, what is the auditor’s responsibility?
f) According to the audit report, what is an audit?
g) Summarize the auditor’s opinion.

Section 4
THE BALANCE SHEET

THE BASICS
Locate the company’s balance sheet.

1. The accounting equation is Assets = Liabilities + Stockholders’ Equity. Replacing the words in the accounting equation with dollar amounts, give the company’s accounting equation at the end of the current and prior years.

                  Assets          =    Liabilities          +       Equity
This year _______________    ______________ _______________
Last year _______________    ______________ _______________

2. Calculate the company’s current ratio for both this year and the prior year.
Show your computations.
This year:

Current assets    =    ___________________ =
Current liabilities

Last year             =    ___________________    =

Explain what information this ratio provides. (Hint: See the Financial Statement Analysis chapter of your textbook.) Use complete sentences.

Has the current ratio improved or worsened? Explain. Use complete sentences.

FURTHER ANALYSIS
4. Prepare common-size balance sheets for the two years presented, expressing each balance sheet item as a percentage of total assets (Total assets = 100%).
(Refer to the discussion of vertical analysis in the financial statement analysis chapter of your text.)

Use a spreadsheet program such as Excel to do this part of the assignment. Label the spreadsheet “Common Size Analysis – Balance Sheet.” Insert the accounts and classifications in column A and the amounts for each of the two years in columns B and C. In columns D and E, use a formula to convert the amounts in columns B and C to percentages.

INFORMATION FOR DECISION MAKING

5. Answer the following questions: Use complete sentences.
a. In which assets does the company have the most significant investment?
b. Is the company financed primarily with debt or equity? Explain using the information obtained in questions 1–4.
c. Is the debt primarily short-term or long-term? Explain.
d. Comment on any significant changes in individual assets or liabilities. Use the information obtained in question 4.
e. Comment on any significant changes in the composition of current assets or current liabilities.
Use the information obtained in question 4.
f. Evaluate the company’s debt-paying ability. Refer to the information obtained in the previous questions.

Section 5

THE INCOME STATEMENT (for each company)

1. Calculate the following ratios for each of the three years presented.
Show your computations.
                                                            Current year                   Last year          Two years ago
• Gross profit rate (%)                         ____________             ____________       ____________

• Ratio of operating                            ____________             ____________       ____________
expenses to sales
(or operating revenue) (%)

• Profit margin (%)                               ____________          ____________       ____________
Net income/sales or operating revenues

• Return on assets                                  ____________          ____________       ____________
Net income/average total assets

You will find prior years’ assets in the Five-Year Summary of Selected Financial Data.

FURTHER ANALYSIS
4. Prepare common-size income statements for the three years presented, expressing each income statement item as a percentage of total revenue. (Total revenue = 100%). (Refer to the discussion of vertical analysis in your textbook.)
Use a spreadsheet program to do this part of the assignment. Label the spreadsheet “Common Size Analysis – Income Statement.” List the revenue and expense classifications in column A, the amounts for the three years in columns B, C, and D. In columns E, F, and G, use a formula to convert the amounts to percentages.

INFORMATION FOR DECISION MAKING

5. Answer the following questions. Use complete sentences, and explain your answers by reference to the information you obtained in the preceding questions.
a. Comment on the trend in total revenue. Is it increasing or decreasing during the three year period?
b. How has the gross profit percentage changed over the three-year period?
Refer to the information obtained in question 2.
c. Comment on the ratio of total operating expenses to operating revenues over the three year period. Refer to the information obtained in question 2.
d. Comment on individual revenue and expense items that had significant percentage changes (changes as a percentage of total revenue or total expenses) over the three-year period. Indicate the percentages.
e. Comment on the overall trend in operating income and net income as a percent of sales over a three-year period. Refer to the information obtained in questions 2 and 4.
f. Comment on the significance of these changes. Do they indicate a positive or negative trend for the company? Explain.
g. Include any other comments that you consider relevant.

Section 6
CURRENT ASSETS

Refer to the notes to the financial statements. The first note, “Summary of Significant Accounting Policies,” provides information about the company’s inventory costing and other accounting methods. You will also need to refer to the other notes to the financial statements and to the financial statements themselves in order to answer the following questions.
IMPORTANT: For each answer given, indicate the page number on which the information was found.

THE BASICS

1. Accounts Receivable
(a) What is the amount of the company’s accounts receivable?

Before subtracting the allowance for doubtful accounts (gross accounts receivable):

This year _______________ Last year ________________

After subtracting the allowance for doubtful accounts (net accounts receivable):

This year ________________ Last year ________________

(b) What is the amount of the allowance for doubtful accounts?

This year __________________ Last year ________________

What percentage of the gross accounts receivables are considered bad debts?
The credit risk ratio: Allowance for doubtful accounts

Gross accounts receivable

This year __________________ Last year __________________

2. Inventories and Cost of Goods Sold

(a) What is the amount of inventory?

This year ____________________ Last year ____________________

(b) What is the amount of cost of goods sold?

This year ____________ Last year ____________ 2 years ago ____________

(c) What inventory costing method has the company chosen?

(d) What other information does the company provide in the note about its inventory?

FURTHER ANALYSIS
Analysis of Current Assets

3. Calculate the following ratios: Show your computations.

(a) Receivables turnover          =                   Sales                = ______________ =
                                                               Average net receivables

(b) Average collection period =                   365                   = ______________ =
                                                                        Turnover

(c)    Inventory turnover             =       Cost of goods sold = ______________ =
                                                                  Average inventory

(d) Average days inventories held =                      365             = ______________ =
                                                                              Turnover

4. Explain what information each of these ratios provides.
(a)
(b)
(c)
(d)

INFORMATION FOR DECISION MAKING

6. Evaluate the company’s receivables collection. In your answer, consider the type of product(s) the company sells, the industry in which the company operates and the type of customer it serves. Refer to the information obtained in the preceding questions.
7. Evaluate the company’s inventory management. In your answer, consider the type of product(s) the company sells, the industry in which the company operates and the type of customer it serves. Refer to the information obtained in the preceding questions.

Section 7
LONGLIVED ASSETS
Refer to the notes to the financial statements. The first note, “Summary of Significant Accounting Policies,” provides information about the company’s depreciation and amortization methods. You will also need to refer to the other notes to the financial statements and to the financial statements themselves in order to answer the following questions.

THE BASICS
Property, plant and equipment

1. What depreciation method does the company use?
2. What is the amount of depreciation expense for the current year?
(Hint: Look at the operating activities section of the cash flow statement if the indirect method was used.)

Current year____________________ Last year___________________

Intangible assets

3. Does the company have any intangible assets? If so, what are they?
4. Does the company report any goodwill?

What is the amount?

FURTHER ANALYSIS
5. Calculate the following: Show your computations.

You will find prior years’ total assets in the Five-Year Summary of Selected Financial Data.

(a) Average useful life of plant assets = Average cost of plant assets = __________________
                                                                  Depreciation expense

(b) Average age of plant assets =       Accumulated Depreciation = ______________ =
                                                                  Depreciation Expense

(c) Asset turnover =       Sales                =
                              Average total assets

                           __________________       __________________       __________________
                                 current year                               last year                      two years ago

(d) Return on assets = ___Net income__ =
                                       Average total assets
                                    __________________       __________________       __________________
                                 current year                last year             two years ago

6. What information is provided by:
(a) The asset turnover ratio
(b) Return on assets

INFORMATION FOR DECISION MAKING
Answer the following questions. Use complete sentences.

8. How does depreciation expense affect cash flow?

9. Comment on the average age of the company’s assets relative to their average useful life. Refer to the information obtained in question 5, above.

10. Refer to the investing activities section of the company’s cash flow statement.
What was the amount spent to purchase long-lived assets (capital expenditures) during each year presented?
                                 __________________    __________________
                                             current year          last year
11. Evaluate your company’s capital spending. Compute the capital expenditure ratio

                  Cash provided by operating activities = ____________________ =
                                 Capital expenditures

Comment on your company’s ability to finance its capital spending through operations. (A ratio of 2 would indicate that the company could have purchased twice as much property, plant and equipment as it did without any additional external financing.)

Section 8
LIABILITIES
Refer to the financial statements and notes to the financial statements. The first note, “Summary of Significant Accounting Policies,” provides information about the company’s accounting methods. You will also need to refer to the other notes to the financial statements and to the financial statements themselves in order to answer the following questions.

THE BASICS
1. What is the amount of the company’s current liabilities?

                     This year ______________________ Last year ____________________

2. What is the amount of the company’s long-term liabilities?

                     This year ______________________ Last year ____________________

3. Refer to the notes to the financial statements. Does the company report any other commitments or contingent liabilities? If yes, provide a description of any contingencies discussed.

FURTHER ANALYSIS
6. Calculate the following ratios for both years presented in the balance sheet:

(a) Current ratio                                     = ____________ = (current year)
                        = Current assets
                           Current liabilities
                                                               = ____________ = (prior year)

(b) Quick or Acid-Test ratio                   = ____________ = (current year)
                           = Quick assets
                              Current liabilities
                                                               = ____________ = (prior year)

(c) Debt to total assets ratio             = ____________ = (current year)
                              = Total liabilities
                                 Total assets
                                                                  = ____________ = (prior year)

7. Explain what information each of these ratios provides.
(a)
(b)
(c)

INFORMATION FOR DECISION MAKING

8. Evaluate the company’s debt-paying ability. Use complete sentences. Refer to the ratios and other information obtained above. Your analysis should include a consideration of unused lines of credit and of any existing off-balance-sheet financing arrangements.

Section 9
STOCKHOLDERS’ EQUITY
Refer to the financial statements and notes to the financial statements. The first note, “Summary of Significant Accounting Policies,” provides information about the company’s accounting methods. You will also need to refer to the other notes to the financial statements and to the financial statements themselves in order to answer the following questions.

THE BASICS

1. How many shares of common stock have been issued? How many shares are outstanding?
If these numbers differ, explain why.

2. Does the company have any preferred stock outstanding?

If so, how many shares? _________ Par value _______ Dividend rate ___________

3. Does the company report any stockholders’ equity accounts other than contributed capital (capital stock), paid-in capital in excess of par (additional paid-in capital) and retained earnings? List these accounts and their amounts (for example, treasury stock, accumulated other comprehensive income) Page _____

FURTHER ANALYSIS
4. Calculate the following ratios for each of the three years presented in the stockholders’ equity statement: (You may be able to find the year-end stock price in the financial review or financial highlights section of the annual report. If the year-end price is not available, compute the average of the high and low prices for the fourth quarter. Show your computations.

a. Dividend payout ratio = Total cash dividends paid on common stock
                                                                  Net income
                           __________________ __________________
                     current year                   last year

b. Dividend yield                      = Dividends paid per share
                                                         Stock price at year-end
                     __________________ __________________
                     current year                last year

c. Earnings per share (provided in income statement)
                     ________________ __________________
                     current year                last year

d. Price-earnings ratio = Market price per share of stock/Earnings per share
                        _______________ _______________
                        current year             last year

e. Return on common stockholders’ equity = Net income – preferred stock dividends
                                                                        Average common stockholders’ equity

You will find prior years’ stockholders’ equity in the Five-Year Summary of Selected Financial Data.
                                 Current year             Prior year

5. Explain what information each of these ratios provides. Use complete sentences.
(a)
(b)
(c)
(d)
(e)

7. Refer to the financing activities section of the company’s cash flow statement.Page ____

(a) What amount, if any, was received from common stock issued in each of the years presented?
               __________________ __________________
                  current year          last year
(b) What amount, if any, was paid to purchase treasury stock in each of the years presented?
               __________________    __________________
                     current year          last year
(c) What was the amount paid in dividends in each of the years presented?
                  __________________ __________________
                        current year    last year

(d) Did these activities result in a net increase or decrease in the company’s cash balance?

INFORMATION FOR DECISION MAKING
8. Based on the ratios computed in question 4 and your understanding of their meaning as indicated in question 5, evaluate the company’s stock as an investment. Refer to each of the ratios in your discussion.

Section 10
THE STATEMENT OF CASH FLOWS
THE BASICS
Locate the company’s statement of cash flows.
What is the period covered by the statement?
On what page of the annual report does the statement appear?
1. What was the ending balance of cash and cash equivalents in the current year?
Does this agree with the ending balance of cash and cash equivalents reported on the balance sheet? Explain any discrepancy.
2. What was the net cash flow from investing activities?
Was it an inflow or an outflow of cash?
What activity accounted for the largest cash flow from investing activities?
Was it an inflow or an outflow of cash?
3. What was the net cash flow from financing activities?
Was it an inflow or an outflow of cash?
What activity accounted for the largest cash flow from financing activities?
Was it an inflow or outflow of cash?
4. What was the net cash flow from operating activities?
Was it an inflow or an outflow of cash?
5. Did the company use the direct or indirect method in reporting net cash flows from operating activities?
How can you tell?

6. What was the net income for each of the three years presented?
                        __________________ __________________
                  current year             last year

What was the net cash flow from operating activities for each of the three years presented?
                        __________________ __________________
                  current year             last year

What were the major items accounting for the difference between these two numbers?

FURTHER ANALYSIS
7. Calculate the following ratios. Show your computations.
a. Free cash flow =
Cash provided by operating activities - capital expenditures – cash dividends

                        __________________ __________________ __________________
                  current year             last year    two years ago

b. Current cash debt coverage ratio = Cash provided by operating activities
                                                               Average current liabilities
Calculate this ratio for the current year only.

c. Cash debt coverage ratio = Cash provided by operating activities
                                                   Average total liabilities
Calculate this ratio for the current year only.

d. Cash return on sales ratio = Cash provided by operating activities
                                                            Net sales
                        __________________ __________________
                     current year             last year

10. Explain what information each of these ratios provides. Use complete sentences.
(a)
(b)
(c)
(d)
INFORMATION FOR DECISION MAKING
11. Evaluate the company’s liquidity, solvency, and profitability as indicated by the cash flow ratios computed above. Use complete sentences. Refer to each of the ratios in your discussion. Use an additional page if necessary.

Section 11
OVERALL EVALUATION AND RECOMMENDATION (1 to 2 pages maximum)

You have conducted an extensive review of two company’s annual report. Suppose that a friend has just inherited some money and is considering investing in the companies you have analyzed. What is your recommendation? Buy or pass? Which company? Fully explain the reasons for your recommendation in a one page summary. Refer to specific findings from your annual report project assignments, and provide full citations for any other sources you use. Include a discussion of:

• The company’s revenue, expense and income patterns
• Its asset base, asset composition, relationship between assets and liabilities and between liabilities and equity
• Its cash flows
• Its liquidity, solvency and profitability
• Management effectiveness and efficiency, and the return and turnover ratios
• The accounting methods chosen by the company and the impact of these choices on the financial statements. These choices include the company’s inventory costing and depreciation methods.
• Any other information which you consider appropriate in coming to a decision, including dividend patterns and price-earnings ratios.

Begin your discussion with a thoughtful analysis of the company based on the guidelines above, and end with the recommendation that analysis supports.

The Annual Report Project Template Guidelines The Annual Report...