Financial Statements

Our purpose this week: learning how to understand and interpret financial statements. Show us that you have read and understood the required readings, links and attached files – quote them where appropriate.

Assignment:

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You should answer all of the questions listed below as they relate to the financial statements of any U.S. public company of your choice in its latest annual report. Please use the Securities and Exchange Commission web site as your primary source for financial statements. All publicly traded U S companies have their annual reports called the 10-K available through the Securities and Exchange Commission web site. https://www.sec.gov/

NOTE: Not all companies traded on the New York Stock Exchange are U S Companies. Please request permission from the professor before choosing a non-US company. For Example, Sony is not a US company.

Instructions for use of the site are as follows: About half way down the home page is a box titled Search EDGAR, free access to over 21 million filings. Enter the company name or ticker symbol. That brings up a page called EDGAR Search Results. In the line “filter results” enter “10-K” in filing type and hit search. That will bring up recent company annual reports. Note: You have a choice of “Documents” or “Interactive Data.” Both contain all the information. “Interactive Data” uses Excel and provides the best access to information for questions 1, 2, and 3. “Documents” provides information that is easy to read for questions 4 through 8. After you click on Documents, click on the red letters and numbers to the right of the “10-K” heading.

Also you can find the financial statements of any U.S. public company by visiting Morningstar, Yahoo Finance or MSN Money, and using the stock market symbol for your chosen company (which can be looked up on Morningstar, Yahoo Finance or MSN Money). Please be aware that sometimes these services omit some numbers in order to fit their preferred formats. Many companies have links to the Annual Report as filed with the SEC. It can be found on the Investor relations page of the company web site.

If you work for a U.S. public company, you may want to use the financial statements of your company – but the choice is up to you.

1) What 3 items of important information does the income statement reveal about the financial performance of the company over the last three years?

2) What 3 items of important information does the balance sheet reveal about the financial position of the company over the last two years?

3) Can you identify the major sources of funding used by the company from the information presented in the company’s annual report? Please look at the Statement of Cash Flows, formerly called the Source and Uses of Funds Statement.

4) Who is responsible for:

a) the issuance, and

b) the content

of the company financial statements? (Note: this information may be difficult to find. Look for statements by management and the independent auditing firm.)

5) What assurance, if any, is there that the financial statements are in compliance with GAAP, and are free of material misstatements?

6) Of what use, if any, are the notes to the financial statements? Give an example of something learned from the footnotes of your company.

7) What can you learn from the Business Section of the 10-K? Give two facts learn from reading this section.

8) What can you learn from the Management Discussion and Analysis of Financial Condition and Results of Operations (MD&A)? Give two facts learned from reading this section.

Week 2 – Financial Accounting

In Week 1 we discussed economics and management decisions. We focused on how choices could be analyzed and decisions made. Now we turn to evaluating the success of those choices and decisions, which is the scorecard known as Financial Reporting.

For those of you who would like more background on financial reporting, some files are attached.

A Power Point presentation that clearly explains financial statements, and shows you what to look for in them (Financial Statements.ppt)

A Word file showing financial statements as diagrams (FinancialStatementDiagrams.doc)

A file that describes some key features of financial statements (Week2.xls)

A Word file describing the main SEC filings (Guide to SEC Filings.doc) IMPORTANT

With all of this information, where does one begin?

Start with the Power Point presentation (Financial Statements.ppt)

Next view the Word file (FinancialStatementDiagrams.doc)

Then read the attached Excel file (Week2.xls) Week2.xls

Next go to https://www.baruch.cuny.edu/tutorials/statements/

It is strongly recommended that you use the file provided in the section of this discussion titled “A Sample Answer To Our Assignment.”

If you wish to know more about financial statements visit these helpful web-sites:

https://www.sec.gov/investor/pubs/begfinstmtguide.htm

https://www.investopedia.com/university/financialstatements/

If you wish to find financial statements on the internet, bear in mind that financial statements for public companies can be found in their required reports to the U.S. Securities and Exchange Commission (SEC), which are Form 10-K (annual) and Form 10-Q (quarterly). You can find the financial statements of all public companies in the U.S. and their Forms 10-K and 10-Q in Morningstar, MSN Money and Yahoo Finance.

Finally, the U.S. was planning to switch its financial reporting standards from Generally Accepted Accounting Principles (GAAP) to International Financial Reporting Standards (IFRS) by the year 2015. GAAP is a very detailed rules-based system, whereas IFRS is a very summarized, non-detailed, principles-based approach. For more visit this link:https://www.ifrs.com/video.html
Please post your answers in the week 2 Discussion area. Each student is expected to make a significant contribution to the overall discussion.

Reminder

In all your assignments, make sure that you:

1. Show all your calculations, by using Excel formulas and functions to do all your calculations.If you simply use a financial calculator to get the answers, that does not show us your calculations. And if you simply type out the algebra, like: X = P(1 0.07)5 that does not show us your calculations either, because we have to actually perform the calculation of P(1 0.07)5 in order to check your results. Always use Excel to actually do the calculations, so that Excel will let us see the actual calculations in the viewing window.

2. Describe and justify each assumption you have made,

3. Explain, support and justify every statement you make (for example: don’t say “U.S. airlines are inefficient” because (a) it doesn’t clarify what you mean by “inefficient” and (b) there is no way to prove that this statement is true or false. It would be better to say “Two of the five biggest U.S. airlines are in Chapter 11, and two more are regarded as weak by Forbes Magazine (issue of 8/12/05)”

4. Support your conclusions with evidence (such as facts and statistics from reliable sources, quotes from the readings, or a well-reasoned logical argument, or an example from your own experience).

We are just as interested in HOW you got your answer as in the answer itself. We need to understand how well you have grasped the key concepts in order to grade your assignments:

If you give a right answer without support, we cannot tell if its just a lucky guess, or genuine understanding plus good analysis.
If you give a wrong answer without support, then we cannot track where you went wrong, and what it is that you do not understand. Then we have no way to guide and support you if you need a little assistance.
Please bear in mind that:

Analyses and conclusions are only as good as the data and assumptions that they are based on;

If you present conclusions or assumptions unsupported by reasoning and explanations, or if you fail to provide sources of the related data, a reader has no basis to accept your presentation as valid;

Without proper support, the reader is likely to disregard your analysis and/or conclusions;

So ALWAYS support all of your numbers or calculations with reasoning, explanations and be sure to provide sources for all of your data.