Financial statement

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Conflicts of interest in Financial Reporting

Published December 20, 2013 by Mayrbear's Lair

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Conflicts of interest exist between management and capital market participants because shareholders are interested in the economic reality of a firm’s transactions and managers are under pressure to report information that will satisfy them. Berman and Knight (2008) inform us that handling the company’s finances is both an art and a science (Berman & Knight, 2008). While firms are encouraged to follow the Generally Accepted Accounting Principles (GAAP) parameters in their bookkeeping procedures, conflicts of interest can affect the quality and reality of their reports. Miller (2002) asserts that some firms believe Quality Financial Reporting (QFR) offers stockholders more certainty; others argue it reveals too much information to competitors (Miller, 2002).

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The following scenarios can help illustrate how conflicts of interest between management and shareholders can alter a firm’s economic reality by the quality of their reports. Fraser and Ormiston (2010) suggest that red flags are raised immediately when a cash statement reveals significant changes that show a decrease in accounts receivable (A/R) and an increase in cash from operating activities (Fraser & Ormiston, 2010). This could result from a strategy some managers used under duress to inflate CFO figures by selling A/R for cash to appease shareholders. Conflicts of interest can also affect accounting procedures that may occur at a natural gas company, for instance, that utilizes fracking practices. Because of the demand to find alternative gas resources, this industry is banking on the lower rates they offer consumers and managers are under pressure to provide data that supports the enterprise is profitable while environmentally safe. If for example, management has knowledge the industry is not environmentally safe, in an effort to maintain operations, they may use incomplete reporting tactics to shield this data as long as they can along with any other questionable investing activities that could reveal unethical practices such as funds diverted to falsify results. One method shareholders can use to verify the firm’s claims is to scrutinize the outflows of the investment activities and review the notes for clues. Managers want to achieve desired outcomes and shareholders want to hear a company is financially healthy. Because of this component, it presents opportunities for conflicts of interest to develop that can affect the quality of reports that will alter a firm’s economic reality.

Due to the winter holidays, there will be no new posts for the next few weeks. Look for a new blog post Monday, January 6 where I take a closer look at what Annual Report financial ratios reveal.

Thank you for tuning in everyone! Wishing you all a very beautiful winter holiday season.

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References:

Berman, K., & Knight, J. (2008). Financial intelligence for entrepreneurs. Boston, MA: Harvard Business School Press.

Fraser, L., & Ormiston, A. (2010). Understanding financial statements. Pearson Education.

Miller, P. (2002, April). Quality Financial Reporting. Retrieved November 25, 2013, from Journal of Accountancy: http://www.journalofaccountancy.com/Issues/2002/Apr/QualityFinancialReporting.htm

The Quality of Financial Information

Published December 19, 2013 by Mayrbear's Lair

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The holidays are creeping up on us and I just realized, I neglected to post Wednesday’s blog. This post is significant to my research work in financial analysis because it helps us understand that in order to keep apprised of how well a company is doing, the quality of financial reporting is the key component that determines whether the statements paint an accurate portrait of the firm or not. For example, because of scandals that occurred from companies like ENRON, AEI, and WorldCom, a revolution occurred with respect to financial reporting. According to Bahnson and Miller (2002) old practices and habitual thought processes with respect to accounting principles were put aside and replaced with new strategies and systems. As a result, accountants and finance executives are expected to embark on a different path that embraces a new shift in the bookkeeping paradigm called quality financial reporting (QFR). For financial managers to consider investing in a company they are looking for accurate information about two significant components: (1) opportunities to receive future cash flows, and (2) information about those opportunities (Bahnson & Miller, 2002). QFR provides complete information to investors and creditors to give them confidence in a company’s performance abilities. Much of the information provided on financial statements can be intimidating to many managers and entrepreneurs. This is a typical response from those who lack the financial intelligence required that can help them make more effective decisions in running their firms. Berman and Knight (2008) explain that the figures on financial statements help strategists determine a variety of estimates and assumptions. Learning how to assess that information helps planners to identify the bias of the data provided, in one direction or another (Berman & Knight, 2008). In this context, where financial results are considered, bias merely suggests that the numbers may be skewed in a certain direction. In other words, bookkeepers and finance professionals are trained to use certain assumptions and estimates rather than others who view the reports for other purposes. QFR is essential because it provides sufficient information to identify not only the source of those gains, but whether there are any other events or circumstances that could have an effect out the outcome, like pending litigation.

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Much of the information provided on financial statements can be intimidating to many managers and entrepreneurs. This is a typical response from those who lack the financial intelligence required that can help them make more effective decisions in running their firms. QFR is effective at painting an accurate view of the company’s financial condition. For example, revenue should not be recognized until there is evidence that a sale has transpired. In other words, the recipient has received delivery of the product or completion of the services rendered and revenue is collected. Many companies, however, violate this policy and report revenue prematurely without all criteria being met. Analysts can look for clues of false revenue reporting in the financial reports. For instance, the notes can reveal the company’s position with respect to collecting revenue policies to ascertain whether any changes occurred and determine the reason for the changes as well as the impact they can have.  Another clue is an analysis of the financial statements to determine the pattern of movement from sales, inventory, and accounts payable. For example, spikes in revenue during the final quarter may be a sign of revenue reported prematurely unless there is a specified reason for the spike to generate sales (like an end of the year close-out sale to liquidate inventory). Companies do not commonly experience spikes from sales in the fourth-quarter so this immediately raises flags. Other methods companies use to raise revenue levels include keeping the account records open longer at the end of the allotted accounting period. Some corporations on the other hand, use deceptive tactics like reporting gross sales rather than net to show higher revenue. For example, a company that is acting as an agent for another organization may collect their revenue in the form of a commission. According to regulations set forth by the GAAP (generally accepted accounting practices), agents are not considered the owner of merchandise being moved. Fraser and Ormiston (2010) explain that the GAAP requires the reporting of Gross Revenue for Principal Owners and Net Revenue for those who act as a representative in the in the sale of a product or service.  In other words, because agents are not considered the owners or originators of the product who assume the risk of the merchandise, the company acting as the agency can use the net method for recording revenue. Therefore knowing that a company collects revenue as an agency analysts can scrutinize the data closely to determine whether they reported gross or net revenue.

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QFR is also important because it can help strategists understand the various inventory valuation methods. For instance, there are times when companies produce lower or higher earnings due to the fluctuation of inflation. Analysts again must look to the financial notes to determine the details of the company’s accounting policies to disclose whether the changes in revenue occurred due to LIFO (last in first out) or FIFO (first in first out) inventory cost flow accounting assumptions. If the value of the products sold, for example, falls under its original cost, the product is written down to reflect the market value and is determined by the cost to replace or produce an equivalent. This means that write downs can also play a part in the company’s profit margins which affects the comparability and quality of financial reporting. Accounting practices that do not provide details and incorporate misleading information is considered an unacceptable practice and any CEO that signs off on documentation that provides a misrepresentation of the truth is putting their career at risk and may face dire consequences as a result. That should be incentive enough to engage in QFR. To surmise, QFR provides investors the ratios that reveal whether companies are able to buy inventory and pay their bills. Furthermore, they provide profitability ratios that help creditors understand how much capital the company is generating while efficiency ratios reveal how well the company is managing their assets. The more complete these reports are the more likely they are to reduce shareholder uncertainty. In the eyes of investors and creditors, certainty reduces risk and reduced risk, provides shareholders with the satisfaction of a lower rate of return. In the long run, a lower rate of return means a lower cost for capital, which ultimately produces a higher stock price for the company. In conclusion, providing quality financial information is an essential component to management that contributes to a company’s long term success.  Tomorrow’s blog will post on schedule and will take a look at how different conflicts of interest can effect quality reporting.

References:

Bahnson, P., & Miller, P. (2002). Quality financial reporting. New York, NY: McGraw-Hill.

Berman, K., & Knight, J. (2008). Financial intelligence for entrepreneurs. Boston, MA: Harvard Business School Press.

Fraser, L., & Ormiston, A. (2010). Understanding financial statements. Pearson Education.

Income Statements

Published December 4, 2013 by Mayrbear's Lair

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Corporations exist for the benefit of their shareholders. Comprehending financial statements is an essential skill that can help investors and creditors make more effective decisions with respect to investment management and commercial lending. Alvarez and Fridson (2011) explain that because corporate financial statements are difficult to understand strategists must have a comprehensive knowledge of how to read the data that is contained within these financial statements. The objective of these reports is not to educate the public about a firm’s financial situation. Their goal rather, is to maximize the wealth of their shareholders. In other words, financial statements serve to help leaders develop more effective methods to maximize shareholder wealth while reducing the cost (or interest rate) at which they can borrow and in turn, sell shares of stock at higher rates to generate more wealth for the shareholders (Alvarez & Fridson, 2011). In short, the main objective of financial reports is to help corporations acquire inexpensive capital.

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Financial report Income statements provide a picture that helps analysts determine a company’s profitability. Ittelson (2009) postulates that in order to understand the information that is contained within these statements the reader must first have a better understanding of the item terms they contain. For instance, the terms sales and revenue are identified as the income statement’s top line and are used to measure the capital a company receives from their consumers. The terms profitsearnings, and income on the other hand, are used to measure the company’s bottom line and reflects the amount of capital that is left over as revenue after expenses are deducted. Simply put, revenue is the top line of the income statement while income is considered the bottom line (Ittelson, 2009). Understanding the these terms more clearly can help make it easier for individuals to extract information that is pertinent to them.

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Sales, in the meantime, are considered a major source of revenue for a firm and income statements are utilized to provide analysts a means to measure and assess a company’s operating performance because they help paint a better picture of a firm’s earnings. Fraser and Ormiston (2010) explain for instance, that earnings on income statements provide data for several years. This allows strategists to observe and compare changes and trends that occur over a given period of time (Fraser & Ormiston, 2010). For example, there are two significant causes that can effect changes in sales numbers: (a) price increases and (b) liquidity of sales units. When a company’s sales increase for instance, analysts must determine whether the change occurred due to price increases, volume activity changes, or a combination of both. In other words, strategists use this information to determine whether sales figures are increasing due to price hikes, the movement or liquidity of large volumes of units, or whether it resulted from of a combination of both factors. Generally, as a rule, higher earnings result from moving large units of stock. Another reason could be that higher prices were implemented to keep up with the expanding rates of inflation. Sales figures can also become affected by a cost flow assumption that some accountants used to value inventory. For example, some companies use the last-in, first-out (LIFO) method to report sales and inventory. This strategy allows the last purchases a company makes during the year appear as an expense on their income statements and is reflected on the statement to show higher-quality production earnings. Because of these kinds of strategies, income statements must be assessed accurately to help analysts determine the true picture of the revenue, expenses, and earnings of an organization with an awareness of the imperfections of the accounting system implemented by the manipulation of bookkeepers intended on distorting a firm’s economic reality to impress potential investors.

References:

Alvarez, F., & Fridson, M. (2011). Financial statement analysis: A practioner’s guide. Hoboken, NJ: John Wiley & Sons, Inc.

Fraser, L., & Ormiston, A. (2010). Understanding financial statements. Pearson Education.

Ittelson, T. (2009). Financial statements: A step-by-step guide. Amazon Digital Services, Inc.

Understanding the Balance Sheet

Published November 25, 2013 by Mayrbear's Lair

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Making investments in a company’s stock is a significant event in an individual’s life because an uninformed decision can become quite costly. To make the most informed decisions, individuals should conduct extensive research to help them make choices they feel secure about. To achieve this, many people can look to a company’s annual report for more insight into their financial condition. Roth (2008) explains that a company’s financial statements contained within their annual report are a significant asset to help individuals who are looking to make a sound investment in a company’s stock. They help people make better assessments by learning about a company’s strategies, financial health, and even information about their behavioral and moral values (Roth, 2008).  For this blog post, we will address our fictitious friend Liz who is confused about the true state of the Target Corporation’s financial condition (See Exhibit A below). This is a brand she is considering investing in because of her emotional attachment to it. However, the figures her buddy Tom disclosed upon reviewing their balance sheet suggested that investing in Target was not a sound idea because of the substantial percentage amount (74%) they invested of their total assets as risky obligations. Tom’s percentage rate caused Liz confusion because her calculations arrived at a different figure which was lower and amounted to 65%.

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To help Liz with her confusion, we must explain how Tom arrived at his position. First, let’s analyze how Liz calculated her figures. For example, at the end of their fiscal year in February, 2008, the Target Corporation had liabilities (including current and long-term) that rounded off to about $29 million, while their asset totals came to about $45 million. To help Liz better understand these debt structure figures, she looked to a common-size balance sheet formula to translate these numbers into percentages. By taking the $29 million liabilities figure and dividing it by the $45 million asset figures, Liz came up with 65% as amount of debt Target has accrued. Tom, however, arrived at a figure that was nearly 10% higher which confused Liz because her math equations incontrovertibly added up.

Calculating-Percentages

What Liz did not take into consideration in her calculations, however, were the company’s commitments and contingencies contained within the notes of the report.  Fraser and Ormiston (2010) suggest that even though the balance sheet may not reflect a dollar amount in this category, this disclosure is intended to draw attention to the information that is located in the notes of the financial statements. These notes are significant because they list the commitments of a company’s contractual obligations that may still have an adverse effect on their financial outlook. Because companies engage in complicated financial reporting procedures that include such things as product financing, sales of receivables with recourse, limited partnerships and joint-ventures, that are not required to be included on the balance sheets, they are however, provided in the notes (Fraser & Ormiston, 2010). These are complicated components that are difficult to comprehend but play an important role in painting a full picture of the company’s operations. In other words, there are other factors that are not reported on a company’s balance sheet with unpredictable outcomes that can have an effect on Target’s future liabilities. In other words, Liz also needed to include in her calculations the figures provided in the commitments and contingency notes as well. These notes revealed for instance, that Target also had further contractual obligations and operating leases that extended beyond the year 2008 which included lease payments of $1,721 million with options that could extend the terms of the lease. Their contractual obligation payments also consisted of interest rates and a $98 million commitment in legally binding lease payments for the planned openings of future facilities that were scheduled to occur in 2008 or later. Tom arrived at his additional 10% figure because he factored in the information of these provisions to his equations and Liz did not.

Exhibit A

Target Example

References:

Fraser, L., & Ormiston, A. (2010). Understanding financial statements. Pearson Education.

Roth, R. (2008). The writers guide to annual reports. Atlanta, GA: Booksurge.com.

The Eastman Kodak Company 2007 Annual Report – Initial Analysis Conclusion

Published November 20, 2013 by Mayrbear's Lair

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Part one revealed Kodak’s rise to success. In this post, we look into the components that altered that status. Snyder (2013) asserts that many believed Kodak’s problems began when digital technology was introduced, his research, however, disclosed that their problems developed further back. For example, when Kodak competitor Polaroid introduced a camera that developed photos in sixty seconds, Kodak focused the energy of their R&D engineers to come up with a similar product. Their attempt to mimic another company’s technology not only tarnished their image, it caused them to lose focus on the market. This allowed Japan’s Fuji Corporation to slowly dominate the industry when they released a 400-speed film product before Kodak. Later, when Kodak introduced their version of the Polaroid instamatic camera, this copy-cat strategy resulted in a costly lawsuit that was filed and won by the Polaroid company for patent infringement (Snyder, 2013). In short, Kodak’s blind ambition, poor investment choices, and an attitude that they were too big fail, ultimately clouded their judgment. Consequently, every attempt they made to salvage the company’s image in hopes of reclaiming their title as a dominant force in the marketplace only cost them more as they continued their downward spiral and evidenced from the data reflected in the financial statements of their annual reports.

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Annual Report Findings

Even though PR fluff can try to disguise the true nature of a company’s operational health, the financial statements contained in their annual reports can help analysts discover the truth about a company’s financial condition and overall performance. Mattioli and Spector (2011) postulate, that in spite of their financial hardships, Kodak was committed to meet their obligations to suppliers and creditors (Mattioli & Spector, 2011). For example, an initial assessment of the 2007 Annual Report’s financial statements which include the (a) balance sheet, (b) income statement, and (c) cash flow balances, (see Exhibit A below) indicate that for the period from 2005 to 2007 Kodak was making a genuine effort to salvage their firm even though profits continued to steadily decline. In 2007, the gross profit figures of $2,516 (represented in millions for instance), were not far off from the figures reported in 2005 ($2,531). In the meantime, the balance sheet indicates that their assets showed an increase in value which could suggest they felt confident enough make further investments to continue moving forward with day-to-day operations.

The net profit figures from the income statements, however, suggest a drastic fluctuation during that three year period beginning by showing a loss of $1,261 net profit in 2005 (in the millions), another loss of $601 in 2006. and finally in 2007 they showed a gain in the amount of $676. Although this indicates profit rather than loss during that three year period, it still did not give shareholders confidence in the company’s performance outcomes. In the meantime, the cash flow figures confirm a steady decrease during that time which further confirmed that the company was not performing well. Signs of trouble in the Kodak Company were further apparent in that their stock activity also fluctuated considerably during that time. For instance, at the end of 2005, Kodak’s stock price was valued at $72.24 a share. In 2006, the stock went up to $81.33, perhaps because of their attempts to seek out loans to help build shareholder confidence. However, by the end of 2007, Kodak’s shares dropped lower than they were in 2005 to a mere $70.23 per share. This indicates that in spite of their efforts to resurrect the company, they were still struggling considerably.

The information gathered from Kodak’s financial statements, such as: (a) assets that dropped to a value of $13,659 from $14,320, (b) accounts payable liabilities went from $12,932 to $10,630, and (c) shareholder equities that decreased from $14,320 to $13,659, revealed that incoming revenue and shareholders’ equity showed a steady decrease during that accounting period.  Based on the findings of this initial analysis, these figures divulge that during that time, the Kodak Company did not exhibit the performance levels of a healthy enterprise.

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Conclusion

Comprehensive financial analyses help forecast a company’s financial health from the information provided in their annual reports. The significant financial data and ratios that are contained in them help provide strategists key information to determine industry trends. Friedlob and Welton (2008) assert that the key to understanding an annual report is that they are designed to help satisfy the needs of many individuals including shareholders, creditors, economists, analysts, and suppliers (Friedlob & Welton, 2008). The findings of this study revealed that Kodak Eastman’s financial troubles began years ago because company leaders lost sight on the key component that made them a giant in their industry: to provide innovative high quality products. Synder (2013) submits there many more reasons that led to Kodak’s slow demise which included such factors as: (a) their focus on copying Polaroid’s innovations, (b) their abandonment of the 35mm camera market, and (c) making costly acquisitions like Sterling Drug for $5.1 billion with no experience in managing a pharmaceutical company (Snyder, 2013). These short sighted decisions cost them greatly in the long run and were reflected in their overall performance outcomes revealed in the 2007 Annual Report which confirmed their slow and steady decline in revenue and stock equity. In addition, the legal proceedings section of the notes contained in the report indicates that they were involved in a variety of investigations and in various stages of litigation which analysts knew could also produce adverse effects on Kodak’s future financial condition.

The initial examination and assessment from the findings of this research conclude that the Kodak Company was financially unstable during that time and is supported by the declining numbers disclosed from their annual report. In short, the financial figures revealed that the entrepreneurial decisions corporate leaders made at the firm yielded unimpressive performance outcomes due to many factors, including: (a) tunnel vision strategies that were focused on out-maneuvering competitors, (b) exorbitant acquisitions with no experience in how to manage them, and (c) a costly lawsuits from Polaroid and others that helped tarnish their image. In the meantime, Eastman Kodak has been working diligently to find ways to salvage the strategic errors of leadership that led to their bankruptcy after 120 years of public service. Mourdoukoutas (2013) explains that since that time, Kodak sold a large portion of the business, their patent portfolio, and laid-off most of their staff members to lighten the debt they carried. In addition, their R&D division is now focused on creating new products which is what the company excelled at when it was initially founded (Mourdoukoutas, 2013). In the long run it would appear that Kodak’s over confidence and lack of effective leadership with innovative decision making may have played a role that resulted in their empire systematically crumbling and hopefully they are on the road to a more prosperous venture.

Exhibit A 

Cover sheet exhibit A

(figures provided from Eastman Kodak Company 2007 Annual Report, 2008)

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References

(2008). Eastman Kodak Company 2007 Annual Report. U.S. Federal Government, Securities and Exchange Commission. Washington: Securities and Exchange Commission.

Eastman Kodak Company. (2013). Retrieved November 1, 2013, from cobrands.hoovers.com: http://cobrands.hoovers.com/company/Eastman_Kodak_Company/rfhiff-1-1njhxk.html

Fraser, L., & Ormiston, A. (2010). Understanding financial statements. Pearson Education.

Friedlob, G., & Welton, R. (2008). Keys to reading annual report. Hauppauge, NY: Barron’s Educational Series.

Mattioli, D., & Spector, M. (2011, October 25). Eastman Kodak Seeks Rescue Financing. The Wall Street Journal, 4.

Mourdoukoutas, P. (2013, November 2). Can Eastman Kodak rise again? Retrieved November 3, 2013, from forbes.com: http://www.forbes.com/sites/panosmourdoukoutas/2013/11/02/can-eastman-kodak-rise-again/

Roth, R. (2008). The writers guide to annual reports. Atlanta, GA: Booksurge.com.

Snyder, P. (2013). Is this something George Eastman would have done? New York, NY: CreateSpace Independent Publishing.

Financial Statements

Published November 15, 2013 by Mayrbear's Lair

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Financial statements contain an enormous amount of valuable information with respect to a company’s financial position, the success of their operations and provides a clear insight of their future potential. They help investors make effective decisions because they answer such questions as: (a) would an investment yield an attractive return; (b) what is the level of risk they pose; (c) should existing inventory be liquidated, and (d) are cash flows sufficient to support the firm’s borrowing needs. For example, because of changes in the economy as well as advances in technology in how music products are now marketed and sold, someone looking to invest in a record company like the one I used to work at, Capitol-EMI Records (CER), would look to the financial statements of their annual report to help them determine how well the company is performing.

In it’s hey day, CER was considered a prestigious primary market record label that is still recognized worldwide today. It is part of the EMI Music Group and is a subsidiary of the Universal Music Group. The company was founded in 1942 by American lyricist, songwriter, and recording artist Johnny Mercer, who wrote the famous lyrics to Henry Mancini’s Moon River that later went on to become the trademark song for singer Andy Williams  (The Johnny Mercer Research Guide, 2012). Throughout the years, CER has consisted of an impressive artist roster including such mega stars of the past like The Beatles, Kenny Rogers, David Bowie, Tina Turner, Bob Seger, as well as the giants of today like Katy Perry and Coldplay. In the global marketplace, CER distributes a wide genre of music including, pop, rock, classical, jazz, R&B, and hip-hop through various sister labels. With offices around the globe, the Capitol Records Tower in Hollywood, California is their most famous landmark.

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Investors that are looking to figure out how well the company is performing today would seek answers from the company’s annual report. Friedlob and Welton (2008) explain that the key to comprehending any annual report is understanding that they are developed to help satisfy the many needs of a variety of different people including shareholders, creditors, potential shareholders and creditors, as well as economists, financial analysts, and suppliers  (Friedlob & Welton, 2008).

EMI’s Annual Report provides information that discloses how well the company is performing, their financial condition, and where the company is headed. Fraser and Ormiston (2010) purport that segmenting the financial information helps direct individuals to the data that is relevant to them (Fraser & Ormiston, 2010). For example, a creditor may want to peruse the cash flow statements to gain insight into the company’s liquidity. The Consolidated Financial Statements however, would be useful to investors because they provide details on all the company’s financial branches that reveal the true nature of their net worth. Any person therefore, looking to invest in the Capitol-EMI family, would need to take into consideration the information provided from these consolidated statements. They are important documents that will help investors decipher how well all of the company’s affiliates are performing to give them a clearer a picture of its net worth.

References:

(2011). EMI annual review 2009/2010. Finances. Hollywood: Maltby Capital Ltd.

The Johnny Mercer Research Guide. (2012). Retrieved October 30, 2013, from The Johnny Mercer Foundation: http://www.johnnymercerfoundation.org/initiatives-charities/for-researchers/johnny-mercer-research-guide/

Fraser, L., & Ormiston, A. (2010). Understanding financial statements. Pearson Education.

Friedlob, G., & Welton, R. (2008). Keys to reading annual report. Hauppauge, NY: Barron’s Educational Series.

The Annual Report

Published November 13, 2013 by Mayrbear's Lair

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Today begins our six week adventure navigating through topics that will help us understand how business owners can make the most effective the financial decisions that help them run their companies more efficiently with higher profits. Dr. Felix Lao (2013) explains that:

“The measurement of accounting information is critical to the owners of the business to make judgments about the value of assets or liabilities owed by the business. It accurately measures profit or loss made by the business in a particular period. Shareholders can make decisions and evaluate about the future of an organization by looking at past and current financial data. It helps management actually manage the operation by looking at functional units as well as overall performance and effectiveness to plan. The information provides critical tools that reveal an accurate and true view of the financial position of the company to ensure that risks are adequately and appropriately taken and the resources are invested well.”

To give us a better understanding of the financial condition of a company, my research work will take a closer examination of the extensive financial information that is contained within a firm’s financial tome known as their Annual Report. Take for example a company like Target that does a fabulous job selling products to customers.  A good number of consumers are so pleased with this corporation’s performance in fact, that many consider buying shares in the company’s stock.

To find out more about their financial situation investors will look to their annual reports to help them determine how well the company is performing.  Unfortunately, more questions arise regarding the content of these reports because most individuals are not trained in deducing the information they contain to help them comprehend the true nature of the company’s financial health.  Technical questions about the firm’s financial condition and performance cannot easily be addressed unless the key elements in the annual report are understood. Investors must acknowledge that in order to figure out how well a company is doing they must look to the company’s financial statements because those are the documents that can provide details that address the following information: (a) where a company’s money came from, (b) how it was spent, and (c) where it currently stands.

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Typically, there are four kinds of financial statements in a company’s annual report: (a) the balance sheets that disclose what a company owns and owe, (b) the income statements that reveal incoming revenue and outgoing expenditures, (c) the cash flow statements which show the exchange of currency transactions, and (d) the statements of shareholders’ equity which reveal the changes in shareholder interests (Beginners guide to financial statements, 2007). Individuals who can comprehend the information these statements contain are in a better position to understand the company’s financial condition.

The financial statements in a company’s annual report are useful for many reasons. For example, Fraser and Ormiston (2010) explain that they not only reveal how well the firm is performing, they also show whether or not it is providing opportunities for growth and future advancements  (Fraser & Ormiston, 2010). The enormous volume of information in these reports can  be intimating to the untrained eye. To help with an overview of the most important aspects, each report contains a 10-K form which serves as a summary that highlight the report’s key components.

Smart investors will look to the contents of the firm’s annual report to help paint a clear picture of what a company is doing, what it claimed it was going to do, what it actually did, and most significantly, what it intends to do next. Roth (2008) also points out that annual reports are significantly more important in today’s economy because they have become a platform for which organizations use to expand their investments, launch new products, create more effective marketing strategies, address behavioral or morale issues, and can even alter a company’s strategic direction (Roth, 2008).  In other words, the information provided in them are beneficial to investors and creditors whose interpretation of the contents contained within these reports can help them assess the firm’s viability.

References:

Beginners guide to financial statements. (2007, February 5). Retrieved October 28, 2013, from U.S. Securities and Exchange Commission: http://www.sec.gov/investor/pubs/begfinstmtguide.htm

Fraser, L., & Ormiston, A. (2010). Understanding financial statements. Pearson Education.

Lao, F. (2013). Ashford University. Clinton, IA.

Roth, R. (2008). The writers guide to annual reports. Atlanta, GA: Booksurge.com.