V. STOCKS

K. Reading Corporate Annual Reports

1. Highlights – Contains basic information presented in a manner favorable to the corporation

a. Highlights statistics of which the firm is most proud

b. Generally includes total sales and net income

http://www.fanniemae.com/ir/pdf/annualreport/2007/2007_annual_report.pdf

K. Reading Corporate Annual Reports (Continued)

2. Letter to Shareholders – Review of the year just past and potential highlights of the year to come

a. Is a statement of management’s intentionsb. Can be checked with previous years’

statements to develop a sense of management’s credibility

3. Review of Operations – Provides an overview of a company’s products, services, facilities, and future direction

K. Reading Corporate Annual Reports (Continued)

4. Financial Statementsa. Report of the Independent Auditor – Can be at

either the beginning or the end of the financial statements http://library.corporate-ir.net/library/11/112/112348/items/276539/TYC_AR.pdf (p. 98)

i. “Clean” or unqualified opinion – statements present fairly the corporation’s financial position

ii. “Qualified” or “Modified” opinion – specific problems exist which must be addressed before the auditor can claim a fair and accurate presentation of the corporation’s financial position (page 122) http://www.ford.com/doc/2007_ar.pdf

K. Reading Corporate Annual Reports (Continued)

iii. Disclaimer of Opinion – A true opinion is not possible because of inability to fairly value assets, liabilities, etc.

iv. Adverse Opinion – The firm’s financial statements are inacurate.

5. Report by Management – certification of accuracy of report pursuant to Sarbanes – Oxley

K. Reading Corporate Annual Reports (Continued)

6. Balance Sheeta. Current Assets

i. Cash and Cash Equivalents – Cash and marketable securities with less than 3 months maturity when purchased

ii. Accounts and Notes Receivable – Customer balances owed to the company

iii. Inventories – Finished goods, work in process, and raw materials – LCM is most conservative, but can also be carried at FIFO & LIFO – LIFO cushion is used in an inflationary environment, undervalued inventory reduces assets

iv. Prepaid Expenses – Payments in advance for rent, insurance, subscriptions, utilities, etc. – listed as an asset that depreciates over time

K. Reading Corporate Annual Reports (Continued)b. Net Fixed Assets – Includes plant,

property, and equipment – also known as capital or long term assets – carried at cost with accumulated depreciation, except for land, which does not depreciate

c. Other Assetsi. Miscellaneous – Life insurance policies on

key executives, notes receivable after more than one year, long term prepaid expenses, and minority stock ownership in other companies

K. Reading Corporate Annual Reports (Continued)

ii. Goodwill – A company’s worth as an operating entity – assigned value in excess of book value, amortized over time

iii. Patents, Trademarks, and Copyrights – Listed at cost less amortization

d. Current Liabilitiesi. Accounts Payable – Amounts owed to

suppliersii. Notes Payable – Amounts due to banks or

other financial institutions for short term loans

K. Reading Corporate Annual Reports (Continued)

iii. Accrued Liabilities – Expenses recognized but not yet paid

iv. Federal Income Taxes Payable – Similar to accrued liabilities, owed to the federal government

v. Current Portion of Long Term Debt – Amount due in the next 12 months for the repayment of long term debt

vi. Dividends Payable – Dividends declared but not yet paid

K. Reading Corporate Annual Reports (Continued)

e. Long Term Liabilities – Debt obligations due after more than 1 year

i. Can include bonded debt, capital lease obligations, pension obligations, and long term warrantiesMSFT Annual Report 2008

ii. Deferred Federal Income Taxes – Recognizes accounting differences for tax purposes

K. Reading Corporate Annual Reports (Continued)

f. Shareholders’ Equity – The owners’ interest, the value of assets after creditors have been paid.

i. Preferred Stock – Pays a fixed dividend with payment priority over common stock dividends, has priority over common shares in liquidation

ii. Common Stock – Basic unit of corporate ownership, less priority over assets than debt and preferred stock, the value of which is listed at par (meaningless) or stated value, which is the lowest price at which the stock can be sold

K. Reading Corporate Annual Reports (Continued)

iii. Capital Surplus – Proceeds from the sale of stock in excess of par or stated value

iv. Retained Earnings – Corporate earnings not paid out in dividends (page 56) C:\Documents and Settings\Student\Desktop\Ford 2007 Annual Report.pdf

K. Reading Corporate Annual Reports (Continued)

Assets = Liabilities plus Stockholders Equity• If liabilities exceed assets, stockholders

equity is negative • Increasing corporate assets increases

stockholders’ equity• Increasing corporate liabilities decreases

stockholders’ equity• The balance sheet must balance

K. Reading Corporate Annual Reports (Continued)

7. Income Statementa. Net Sales – Cash and credit sales net of

returns and allowancesb. Cost of Goods Sold – Beginning inventory

plus purchases during the period less ending inventory

c. Depreciation – Tax concept allowing companies to allocate the cost of capital purchases over time

d. Selling, General, and Administrative Expense – Direct costs of production not included in cost of goods sold

K. Reading Corporate Annual Reports (Continued)e. Net Operating Profit – Sales minus cost of

goods sold minus depreciation minus selling, general, and administrative expense

f. Other Income and Expense – Income, gains and losses from investments, gains or losses on sale of assets, special payments to employees, and interest expense

g. Provision for Income Taxes – Estimated tax liabilities

h. Net Income – Sales minus everything except dividend payments

K. Reading Corporate Annual Reports (Continued)

8. Statement of Retained Earnings – Shows start of period retained earnings, increased by current year earnings, then decreased by dividends paid, to obtain ending period retained earnings

K. Reading Corporate Annual Reports (Continued)

9. Statement of Cash Flowsa. Cash Flows from Operating Activities –

Net income, adding back depreciation, deferred income taxes, which do not consume cash, less increase in accounts receivable

b. Cash Flows from Investing Activities – Changes in cash from actual purchase or sale of plant, property, and equipment; investment in other corporations; and loans made and collected

K. Reading Corporate Annual Reports (Continued)

c. Cash Flows from Financing Activities – Includes proceeds or redemption of short and long term bonds, issuance and/or repurchase of stock, and dividends paid

• In a conservatively managed company, permanent capital requirements are financed through retained earnings, long term debt, and/or stock sales; while short term cash needs are met by short term borrowing (commercial paper

K. Reading Corporate Annual Reports (Continued)

10.Discontinued Operations – Impact of sold, discontinued, or abandoned operations on the firm’s financial performance

11.Notes to Financial Statements – List accounting policies and provide additional disclosurea. Accounting procedure changesb. Pension and related benefitsc. Details of long term debt

K. Reading Corporate Annual Reports (Continued)d. Treasury Stock – Stock repurchased by the

corporation or not issuede. Taxes – Explanation of taxes paid, including

property tax, versus allocation for federal income tax

f. Leases – Includes long term non-capital leases

g. Financial Assets – Details of the firm’s investments

K. Reading Corporate Annual Reports (Continued)

12. Supplementary Tablesa. Segment Reporting – By product line and/or

locationb. Effects of inflation on assets, etc.c. Five year summary of operationsd. Two year summary of quarterly data

13. Management’s Discussion and Analysis14. Investors’ Information15. Directors and Officers