Evaluation of an Annual Report
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Objectives: This project using an Annual Report will provide you the opportunity to analyze a corporate annual report. You will obtain the annual report of a publicly traded company and respond to the questions below regarding the application of concepts studied in our class. The Annual Report Project is meant to:
-Increase your interest in finance and accounting by allowing you to personally choose the annual report you will review
-Provide hands-on exposure to financial statements of real-world companies
-Emphasize the importance of the notes to the financial statements
-Provide an opportunity to examine the application of procedures and methods discussed in your textbook
A written summary for the questions must be submitted by end of day on Sunday of Week 6 using the assignment link in Blackboard. Late projects will not be accepted. The link or file to your annual report must be submitted with your final project (PDF file or website link). Please proofread your work for spelling and grammatical errors. You should use APA format and include an abstract. Each section below should be addressed in your paper. When citing, use the page numbers you found the information, for example (Annual report, p.2)
1. Choose a company – IKEA
Choose a publicly traded company in which you are interested. To determine if it is publicly traded you should be able to go to their website and find an investor relations section and look for their most current annual report. This annual report will be your primary source for the project. No other sites or sources should be used unless approved by the instructor.
You need a company that sells a product to have inventory such as a manufacturer or a retailer. Maybe the company has been featured in the news lately. Perhaps you own stock in the company. Perhaps you would like to own stock in the company. If you want need ideas, see the discussion board. Each company can only be chosen once. Once you have a company in mind, submit your choice in the discussion board using this link for approval. This should be done by Thursday of Week One.
2. General Outline of Final Project
I. Description of the Company.
a. Review the annual report and identify the major parts of the report. (i.e. letter to stockholder, financial statements, etc.). While doing so, identify the Company name, the services or products they provide, the major industries in which they compete, geographical locations in which they do business, and major competitors, if known.
b. For this next part, you will use Yahoo! Finance. You need to indicate the exchange on which the company’s shares are traded, the company’s ticker symbol, the current price of the stock and the 52 week high and low.
II. Income Statement What is the trend of each of the following? Sales (or Revenues), Cost of Goods Sold, Expenses, and Net Income. You may wish to calculate percentage change in each element, or draw graphs showing trends. Did the company have an increase or decrease in revenues? Read the management discussions and other parts of the annual report to determine what management has to say about revenues. Was this company profitable during the most current year of operations? How do you know? What does the management of the company have to say about the future earnings of the company?
III. Balance Sheet What have been the trends in growth/decline of assets, liabilities and stockholders’ equity? When looking at the trends, look at the following accounts: Cash, Accounts receivable, inventory, current liabilities, long term liabilities, Common stock. How many shares of stock the company has the company issued? What is the par value of the stock? Do they have preferred stock? Has the company paid dividends? Do they have treasury stock?
IV. Statement of Cash Flows The cash flow statement is divided into 3 areas: operations, financing, and investing. Detail whether each section had a positive or negative cash flow in the most current year. What are the major cash flow items in each area? Did they have positive cash from operations?
V. Common Size Income Statement Using the financial statements in your annual report prepare a common size income statement for two years. Each line that is listed in the income statement in your annual report should also be listed in the common size income statement. You do not have to list anything below net income. After preparing the common size income statement, evaluate the changes from one year to another like Table 3.9. Remember, some things increasing would be better and some would be worse. It depends on what kind of account it is. For example, expenses increasing would be worse but gross profits increasing would be better. There is no written portion for this section, just the common size statement. If you are unsure of how to prepare a common size income statement, please refer to section 3.6 in your book or the video in Week 2 materials.
VI. Ratio Analysis of Financial Statements Apply the analysis techniques discussed in Chapter 3 to evaluate the Liquidity, Activity, Debt, Profitability, and Market ratios of this company. The ratios that you should provide are: current ratio, quick ratio, inventory turnover, average collection period, total asset turnover, debt ratio, times interest earned, gross profit margin, net profit margin, earnings per share, return on equity, and earnings ratio. You will need to calculate two years of ratios. Then after calculating, provide an analysis of the ratios using the categories above and include an overall discussion as well. (You will show the formula, calculations, and answer for each ratio in the appendix of your paper.)
VII. The Auditor’s Opinion Who is responsible for the preparation and integrity of the financial statements? What is the name of the independent public accountant that issued the audit opinion? Does the company maintain a system of internal controls? Why? What type of audit opinion does this annual report contain? (Unqualified, Qualified, Disclaimer of opinion, Adverse) What does it mean? How do you know? Hint: This is not discussed in the text so search online to see what each kind of opinion means.
IX. Conclusions In your opinion, what is the most interesting part of the annual report and why? What is your prognosis for this company? Do you foresee success, failure, market leadership, stagnation, improvement, decline? Why? You may point to economic, political, regulatory, resource, market, or other factors that will have an impact on the success of this company.