Explanation of an Annual Report and How It's Read
Let's talk about an annual report.
Any company in the United States that is publicly traded and is regulated by the Securities and Exchange Commission, or SEC, has a legal obligation, to report every quarter, a certain set of financial disclosures in a very prescriptive structure. This is often called the 10K if it's in an annual report, and in a quarterly report, it's referred to as the 10Q. These are basically just the reporting the numbers the government requires to the company's shareholders.
Often people refer to the 10K and the annual report as the same thing - but they're actually slightly different. The 10K is the actual document submitted to the government, and it's very firm set of requirements. Every company has the same table of contents that it works off of, and is required to submit the same financial information. These are the only pieces that are REQUIRED.
However, approximately 60-70% of company's will chose to also create an Annual Report in addition to the 10K. The annual report is typically more of a marketing document. Normally, this first item in this packet is a letter to the shareholders - this is not a legal requirement. Instead, it's an opportunity for the CEO to connect directly with shareholders in about one to two pages.
Within an annual report, there are typically five to 10 pages of marketing material. These tend to discuss how they organization has had an impact, new products they've launched, etc. Then after about 15 pages, you'll see the 10K behind it, and that's how they build the annual report. If you're looking to learn all you can about a company, the greatest source document you could find are the 10K and annual report.
However, they can be lengthy documents - so if you don't want to spend hours pouring over them, what are the essential parts for you to understand? Well, here's our list:
1. Business Overview - the company's representation of themselves. In three or four paragraphs they describe who they are, what they do, and their products and/or services.
2. Management Discussion & Analysis (MD&A) - this is where very clearly they'll give an explanation of the financial reports. Easy explanations of the dynamics of what is happening in theit financial statements.
3. The financial statements - There are three that we focus on:
1. Income statement - the profit statement
2. Balance sheet - reflective of the assets and liabilities of the company
3. Cash Flow Statement - cash in, how it was received, how much was received, and how it was spent in this period of time
These three financial statements are very high-level documents, however behind each line on the documents are pages of disclosures.
At Acumen Learning, we've developed a tool called the executive alignment tool. This tool is designed specifically for you to better understand what is important in these documents, for example, the letter to shareholders. Some key understandings include:
How do you capture the key points
Align with the key objectives that are being communicated through that letter
How you can make better decisions as a business, as an employee of the company, or as a business leader in the company.
If you'd like to learn more about what we do as a company, how we develop these skills and understanding for employees, reach out to us at acumenlearning.com.
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