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1、H O W T O R E A D A,FINANCIAL,REPORT,THE,OF,TABLE,OF,CONTENTS,INTRODUCTION.INSIDE FRONT COVER,HOW,TO,READ A FINANCIAL REPORT.1,A FEW WORDS BEFORE BEGINNING.3CONSOLIDATED FINANCIAL STATEMENTS.4THE BALANCE SHEET.8,JUST WHAT DOES,BALANCE SHEET SHOW?.22,THE INCOME STATEMENT.26,ANALYZING,THE INCOME,STATE
2、MENT.30,THE STATEMENT,OF,CHANGES,IN,SHAREHOLDERS EQUITY.36,THE STATEMENT,CASH FLOWS.39,ADDITIONAL DISCLOSURES AND AUDIT REPORTS.40THE LONG VIEW.42SELECTING STOCKS.43GLOSSARY OF SELECTED TERMS.44INTRODUCTIONKnown“from Wall Street to Main Street”and worldwideMerrill Lynch is a globalleader in the fina
3、ncial services industry.As a public service,Merrill Lynch wants to sharesome of its expertise in,and knowledge of,financial reporting through this booklet.We hope this booklet will serve as a valuable resource to help readers learn how to readand analyze a companys annual report.Through it,readers c
4、an learn that an annualreport is not just a jumble of numbers and mind-numbing data.Read with understandingand analytical insight,the numbers and data in an annual report can tell an interesting,meaningful and fascinating story.,s,s,s,s,s,1,HOW,TO,READ,A,FINANCIAL REPORT,GOALS OF THIS BOOKLETAn annu
5、al report is unfamiliar terrainto many people.For those who are notaccountants,analysts or financial planners,this booklet can help them to better under-stand such reports and possibly becomemore informed investors.This booklet was written and designedto help educate and guide its readersso they mig
6、ht:Better understand the data included infinancial reports and how to analyze it.Learn more about companies that offeremployment or provide investmentopportunities.A good starting point for achieving thesegoals is to become familiar with the maincomponents of a companys annual report.Please Note:Hig
7、hlighted throughout thisbooklet are key selected terms and defini-tions as a reference for readers.See alsothe Glossary of Selected Terms in theback of this booklet.COMPONENTS OFAN ANNUAL REPORTMost annual reports have three sections:(1)The Letter to Shareholders,(2)theBusiness Review and(3)the Fina
8、ncialReview.Each section serves a uniquefunction:The Letter to Shareholders gives abroad overview of the companysbusiness and financial performance.The Business Review summarizesa companys recent developments,trends and objectives.The Financial Review presents acompanys business performance in,dolla
9、r terms and consists of the“Managements Discussion andAnalysis”and“Audited FinancialStatements.”It may also containsupplemental financial information.In Managements Discussion and Analysis(MD it istypically undertaken by a Certified PublicAccountant(CPA).The auditors reportattests to whether the fin
10、ancial reports arepresented fairly in keeping with generallyaccepted accounting principles,knownas GAAP for short.Following is a brief description oroverview of the basic financial statements,including the footnotes:The Balance SheetThe balance sheet portrays the financialposition of the company by
11、showing whatthe company owns and what it owes at thereport date.The balance sheet maybe thought of as a snapshot,since it reportsthe companys financial positionat a specific point in time.,HOW,TO,READ,A,FINANCIAL REPORT,2,The Income StatementOn the other hand,the income statementcan be thought of mo
12、re like a motion pic-ture,since it reports on how a companyperformed during the period(s)presentedand shows whether that companys opera-tions have resulted in a profit or loss.The Statement of Changesin Shareholders EquityThe statement of changes in shareholdersequity reconciles the activity in the
13、equitysection of the balance sheet from period toperiod.Generally,changes in sharehold-ers equity result from companyprofits or losses,dividends and/or stockissuances.(Dividends are payments toshareholders to compensate them fortheir investment.)The Statement of Cash FlowsThe statement of cash flows
14、 reports onthe companys cash movements duringthe period(s)separating them by operating,investing and financing activities.The FootnotesThe footnotes provide more detailed infor-mation about the financial statements.This booklet will focus on the basicfinancial statements,described above,and the rela
15、ted footnotes.It will alsoinclude some examples of methods thatinvestors can use to analyze the basicfinancial statements in greater detail.Additionally,to illustrate how these con-cepts apply to a hypothetical,but realisticbusiness,this booklet will present andanalyze the financial statements of am
16、odel company.,A MODEL COMPANY CALLED“TYPICAL”To provide a framework for illustration,a fictional company will be used.It willbe a public company(generally,onewhose shares are formally registered withthe Securities and Exchange CommissionSEC and actively traded).A public com-pany will be used because
17、 it is requiredto provide the most extensive amountof information in its annual reports.Therequirements and standards for financialreporting are set by both governmentaland nongovernmental bodies.(The SECis the major governmental body withresponsibility in this arena.The mainnongovernmental bodies t
18、hat set rulesand standards are the FinancialAccounting Standards Board FASB*and the American Institute of CertifiedPublic Accountants AICPA.)This fictional company will representa typical corporation with the most com-monly used accounting and reportingpractices.Thus,the model company willbe called
19、Typical Manufacturing Company,Inc.(or“Typical,”for short).*The FASB is the primary,authoritative private-sector body that sets financial accounting stan-dards.From time to time,these standards changeand new ones are issued.At this writing,the FASBis considering substantial changes to the currentacco
20、unting rules in the areas of consolidations,segment reporting,derivatives and hedging,comprehensive income and earnings per share.Information regarding current,revised or newrules can be obtained by writing or callingthe Financial Accounting Standards Board,401 Merritt 7,P.O.Box 5116,Norwalk,CT06858
21、-5116,telephone(203)847-0700.,s,s,s,s,A FEW WORDS BEFORE BEGINNING,The following pages show a sample ofthe core or basic financial statementsa balance sheet,an income statement,a statement of changes in shareholdersequity and a statement of cash flows forTypical Manufacturing Company.However,before
22、beginning to examinethese financial statements in depth,thefollowing points should be kept in mind:Typicals financial statements are illus-trative and generally representative fora manufacturing company.However,financial statements in certain special-ized industries,such as banks,broker-dealers,insu
23、rance companies and pub-lic utilities,would look somewhat dif-ferent.Thats because specializedaccounting and reporting principlesand practices apply in these and otherspecialized industries.Rather than presenting a complete setof footnotes specific to Typical,thisbooklet presents a listing of approp
24、riategeneric footnote data for which a read-er of financial statements should look.This booklet is designed as a broad,general overview of financial reporting,not an authoritative,technical referencedocument.Accordingly,specific techni-,For example,the sample statements pre-sent Typicals balance she
25、et at two year-ends;income statements for two years;and a statement of changes in sharehold-ers equity and statement of cash flows fora one-year period.To strictly comply withSEC requirements,the report would haveincluded income statements,statementsof changes in shareholders equity andstatements of
26、 cash flows for three years.Also,the statements shown here do notinclude certain additional informationrequired by the SEC.For instance,it doesnot include:(1)selected quarterly finan-cial information(including recent marketprices of the companys common stock),and(2)a listing of company directors and
27、executive officers.Further,the“MD&A”will not be present-ed nor will examples of the“Letter toShareholders”and the“Business Review”be provided because these are not“core”elements of an annual report.Rather,they are generally intended to be explana-tory,illustrative or supplemental in nature.To elabor
28、ate on these supplemental com-ponents could detract from this bookletsprimary focus and goal:Providing read-ers with a better understanding of thecore or basic financial statements in anannual report.,cal accounting and financial reportingquestions regarding a persons personalor professional activit
29、ies should bereferred to their CPA,accountant orqualified attorney.To simplify matters,the statementsshown in this booklet do not illustrateevery SEC financial reporting rule andregulation.3,4,TypicalManufacturingCompany,Inc.,CONSOLIDATED FINANCIAL STATEMENTS,CONSOLIDATED BALANCE SHEETS(Dollars in T
30、housands,Except Per-Share Amounts)December 31,AssetsCurrent Assets:Cash and cash equivalentsMarketable securitiesAccounts receivablenet of allowancefor doubtful accounts of$2,375 in19X9 and$3,000 in 19X8Inventories,at the lower of cost or marketPrepaid expenses and other current assetsTotal Current
31、AssetsProperty,Plant and Equipment:LandBuildingsMachineryLeasehold improvementsFurniture,fixtures,etc.Total property,plant and equipmentLess:accumulated depreciationNet Property,Plant and EquipmentOther Assets:Intangibles(goodwill,patents)net of accumulated amortizationof$300 in 19X9 and$250 in 19X8
32、Investment securities,at costTotal Other AssetsTotal Assets,19X9$19,50046,300156,000180,0004,000405,80030,000125,000200,00015,00015,000385,000125,000260,0001,9503002,250$668,050,19X8$15,00032,000145,000185,0003,000380,00030,000118,500171,10015,00012,000346,60097,000249,6002,0002,000$631,600,See Acco
33、mpanying Notes to Consolidated Financial Statements.*See pages 40-41 for examples of the types of data that might appear in the notes to a companys financial statements.,TypicalManufacturingCompany,Inc.,CONSOLIDATED FINANCIAL STATEMENTSCONSOLIDATED BALANCE SHEETSDecember 31,Liabilities and Sharehold
34、ers EquityLiabilities:Current Liabilities:Accounts payableNotes payableAccrued expensesIncome taxes payableOther liabilitiesCurrent portion of long-term debtTotal Current LiabilitiesLong-term Liabilities:)Deferred income taxes9.12%debentures payable 2010Other long-term debtTotal LiabilitiesSharehold
35、ers Equity:Preferred stock,$5.83 cumulative,$100 par value;authorized,issuedand outstanding:60,000 sharesCommon stock,$5.00 par value,authorized:20,000,000 shares;issued and outstanding:19X9-15,000,000 shares,19X8-14,500,000 sharesAdditional paid-in capitalRetained earningsForeign currency translati
36、onadjustments(net of taxes)Unrealized gain on available-for-sale securities(net of taxes)Less:Treasury stock at cost(19X9 and 19X8-1,000 shares)Total Shareholders EquityTotal Liabilities and Shareholders Equity,19X9)$60,000)51,000)30,000)17,000)12,000)6,000)176,000)16,000)130,000)322,000)6,000)75,00
37、0)20,000)249,000)1,000)50)(5,000)346,050)$668,050),19X8)$57,000)61,000)36,000)15,000)12,000)181,000)9,000)130,000)6,000)326,000)6,000)72,500)13,500)219,600)(1,000)(5,000)305,600)$631,600),5,6,TypicalManufacturingCompany,Inc.,CONSOLIDATED FINANCIAL STATEMENTSCONSOLIDATED INCOME STATEMENTS,(Dollars in
38、 Thousands,Except Per-Share Amounts),Years Ended December 31,19X9,19X8,Net salesCost of salesGross marginOperating expenses:Depreciation and amortizationSelling,general and administrative expensesOperating incomeOther income(expense):Dividend and interest incomeInterest expenseIncome before income t
39、axes and extraordinary lossIncome taxesIncome before extraordinary lossExtraordinary item:loss on earthquake destruction(net of income tax benefit of$750)Net incomeEarnings per common share:Before extraordinary lossExtraordinary lossNet income per common share,$765,050)535,000)230,050)28,050)96,804)
40、105,196)5,250)(16,250)94,196)41,446)52,750)(5,000)$47,750)$3.55)(.34)$3.21),$725,000)517,000)208,000)25,000)109,500)73,500)10,000)(16,750)66,750)26,250)40,500)$40,500)$2.77)$2.77),See Accompanying Notes to Consolidated Financial StatementsCONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS EQUITY,(Dol
41、lars in Thousands),Foreign,Year Ended December 31,19X9,Additional,currency,Unrealized,Preferred,Common,paid-in,Retained,translation,security Treasury,stock,stock,capital,earnings,adjustments,gain,stock,Total,Balance Jan.1,19X9,$6,000,$72,500,$13,500,$219,600),($1,000),($5,000)$305,600),Net incomeDiv
42、idends paid on:Preferred stockCommon stock,47,750)(350)(18,000),47,750)(350)(18,000),Common stock issued,2,500,6,500,9,000),Foreign currency,translation gainNet unrealized gain onavailable-for-salesecurities,2,000),$50,2,000)$50),Balance Dec.31,19X9,$6,000,$75,000,$20,000,$249,000),$1,000),$50,($5,0
43、00)$346,050),See Accompanying Notes to Consolidated Financial Statements,50,7,TypicalManufacturingCompany,Inc.,CONSOLIDATED FINANCIAL STATEMENTSCONSOLIDATED STATEMENT OF CASH FLOWS,(Dollars in Thousands)Cash flows from operating activities:Net incomeAdjustments to reconcile net income tonet cash fro
44、m operating activities:Depreciation and amortizationIncrease in accounts receivableDecrease in inventoryIncrease in prepaid expenses and other current assetsIncrease in deferred taxesIncrease in accounts payableDecrease in accrued expensesIncrease in income taxes payableTotal adjustmentsNet cash pro
45、vided by operating activitiesCash flows from investing activities:Securities purchases:TradingHeld-to-maturityAvailable-for-salePrincipal payment received on held-to-maturity securitiesPurchase of fixed assetsNet cash used in investing activitiesCash flows from financing activities:Payment of notes
46、payableProceeds from issuance of common stockPayment of dividendsNet cash used in financing activitiesEffect of exchange rate changes on cashIncrease in cashCash and cash equivalents at beginning of yearCash and cash equivalents at the end of yearIncome tax payments totaled$3,000 in 19X9.Interest pa
47、yments totaled$16,250 in 19X9.See Accompanying Notes to Consolidated Financial Statements,Year Ended December 31,19X9$47,750)28,050)(11,000)5,000)(1,000)7,000)3,000)(6,000)2,000)27,050)74,800)(14,100)(350)(150)(38,400)(52,950)(10,000)9,000)(18,350)(19,350)2,0004,50015,000$19,500,s,s,s,8,THE BALANCE
48、SHEET,The balance sheet represents the financialpicture for Typical Manufacturing as itstood at the end of one particular day,Dec.31,19X9,as though the companywere momentarily at a standstill.Typicalsbalance sheet for the previous year end isalso presented.This makes it possible tocompare the compos
49、ition of the balancesheets on those dates.The balance sheet is divided intotwo halves:1.Assets,always presented first(eitheron the top or left side of the page);2.Liabilities and Shareholders Equity(always presented below or to theright of Assets).In the standard accounting model,theformula of Asset
50、s=Liabilities+Share-holders Equity applies.As such,bothhalves are always in balance.They arealso in balance because,from an eco-nomic viewpoint,each dollar of assetsmust be“funded”by a dollar of liabilitiesor equity.(Note:this is why this statementis called a balance sheet.)Reported assets,liabiliti
