Purpose of Project: The Annual Report Project is designed to help you learn to read and evaluate the annual report and financial statements of a publicly traded corporation. A publicly traded corporation is required by law to provide an audited annual report, including financial statements, to each of its stockholders (owners). “Publicly traded” means that members of the public can purchase ownership in the company by purchasing its stock on a stock exchange.
Your Assignment: From your analysis of the company, write your report as if you were advising a relatively informed investor who is considering purchasing stock in your company. Your objective is to inform the investor of those attributes of your company that you believe the investor should consider in making an investment decision. Your objective is not necessarily to be an advocate of the company. It is to be totally objective since your advice could cause an investor to make or lose money on his/her investment.
Company and Annual Report: The teacher will provide each team with an annual report of a well-known company.
Teams: You will be assigned to work on this project in teams of three to four people. It is important that you work as a team and benefit from each team member’s unique perspective. At the end of the quarter, each team member will complete a confidential evaluation of the other team member’s contribution to the success of the team.
Contents of Annual Report Project: The report should be prepared in good form, using proper grammar, paragraph, and sentence structure. It should be typed, double-spaced, with approximately one inch margins. Number the pages. Use a word processor, spellchecker, etc. Use heading and subheadings to separate major sections of the report. Include citations for sources of information. A reference should be provided for any information that is not your own idea. Write it in your own words and use quotations sparingly. Staple your report in the upper left-hand corner. You may put it in a binder but it is not necessary to do so. Use charts and graphs to demonstrate key points or to emphasize a particularly important issue. Keep a copy of your report because it may not be returned to you.
Title Page: The title page should contain the name of the company and the name of each member of the team.
Body of Report: The body of the report should contain the following sections, numbered and with proper headings:
1. Summary. The first page should summarize those attributes you believe are most important to a prospective investor. This is a very important part of your report and should present the major strengths and weaknesses of the company, along with your recommendations as to whether you would invest your money in this company. Assume that this paragraph will have a significant impact on whether the prospective investor will actually make an investment in your company.
2. Company Description. Identify major products and segments (product lines), where the stock is traded. Indicate how each of the segments contribute to the sales and profitability of the company.
3. Industry Attributes. Briefly describe any attributes of the industry that have a major effect on the performance of your company. For example, what factors affect demand for the company’s products? What is the future outlook for demand? Is your company a major or minor player in the industry? Is the industry changing in important ways (new products, technology, competition), or is it stable? Who are the major competitors of the company? How is your company doing in comparison to the major competitors?
4. Current Year Developments. In performing sections 5 through 11, incorporate into your report what has happened to your company since the date of the last year end.
5. Profitability. Review the company’s sales and profitability over the past 3-5 years. Discuss any noticeable trends and offer an explanation for changes. Profitability should be measured by sales, net income, earnings per share, return on assets, and return on equity. Were there any accounting issues such as mergers, changes in accounting methods, or adoption of new accounting standards that affect the profitability analysis?
6. Operating Cash Flows. Have operating cash flows over the last 3-5 years been positive? Have they increased or decreases? Are the cash flows sufficient to pay principal and interest on debt and meet other cash requirements?
7. Growth. Is the company growing? In what ways is it growing? Consider changes in total assets, current assets, long-term assets and capital expenditures. What is the company’s dividend payout rate? What does this information tell you about the company’s investment opportunities? Is the company reinvesting its earnings to fund growth or is it paying them out in the form of dividends? Has growth led to increased profitability (return on assets)?
8. Capital Structure. How is the company financed? Consider the debt to equity ratio. Has the ratio changed over the last 3-5 years? Is the company’s capital structure becoming more or less risky? What has caused any changes in the capital structure?
9. Asset Structure. Is the company capital intensive? You can measure this by the ratio of long-term assets to total assets. Has the company had any major increases in its capital structure in the last 3-5 years? How were these changes financed? Has the company had any significant disposals of assets in recent years? Why were these disposals made? Does the company have any significant assets such as brand names, trademarks, goodwill, etc. that are not recorded on the balance sheet?
10. Risk. Has the company taken on too much risk in order to achieve its profitability and attempt to grow? Excessive risk may be indicated by a high debt ratio, low liquidity, slow collections or other information.
11. Stock Price. What has happened to the company’s stock price over the last 3-5 years and in the two months that you have been following the stock? Compare this return with the major competitors and stock market in general. What do you think has accounted for the change in the company’s stock price?
12. Social and Environmental Issues. What are the company’s policies toward social and/or environmental issues? Does the company seem to be ethical in its approach to business? How might these policies affect potential investors? This may be especially important to Christians or other ethical investors who may want their investments to do more than just earn money, but also to reflect their ethical and moral views. Some examples to consider are: (1) unhealthy products such as alcohol or tobacco, (2) gambling, (3) military weapons and services, (4) effects on the environment, (5) company relations with the community, (6) product quality and attitudes toward consumers.
13. Employment. Is the company a good place to work? How do they treat their employees? Does their workforce represent employees who are diverse in gender, race and ethnic groups?
14. Other Important Issues. Report anything you find important or interesting that does not fit under any of the prior headings.
Include a list of references used in preparing your report, including your company’s annual report, S&P Industry Surveys, news articles, etc.
The Teacher will put two sample reports on Blackboard – copies of reports prepared by teams in previous Financial Accounting classes. The purpose of providing the sample reports is to show your team a sample of reports that received a 100% score. Your team should prepare your report in a way that represents your team and only use the sample report as a guide. Please pay attention to the note on the cover page titled Important Consideration for Teams.
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