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INTRODUCTION TO THE CORPORATE ANNUAL
REPORT:
A Business Application with IFRS Content
3rd edition
Copyright 2011 by Applied Accounting Analytics. All rights reserved. Reproduction or
translation of this book beyond that permitted by the applicable copyright law without Applied
Accounting Analytics permission is prohibited. Requests for permission to reprint or for further
information should be directed to [e-mail] or [e-mail].
ISBN: 978-0-9841839-2-0
To be completed by the student and submitted with the completed annual
report project according to your instructors requirements.
Complete the following before you submit your assignment. This step is required to
validate your compliance with sections 107 or 108 of the 1976 United States Copyright Act.
1. Remove the front cover of the workbook and identify:
Student Name: Sheri Canada
Term: Spring Term 2
Selected Company: Johnson & Johnson
Instructor: Dr. Mauldin
2. Print your completed electronic template.
3. Attach the following:
This page completed with all required information.
Completed Word template. Template boxes expand as you input responses.
Adjust page breaks as necessary to submit a professional representation of
your work.
CHAPTER 1 - INTRODUCTION
Select a Company and Gather Documents
Chapter 1: Select a Company and Gather Documents Question 1
Identify with an X the primary source of data for this project.
X
Annual report to shareholders
Annual report to shareholders with a letter from Chief
Executive Officer and SEC Form 10-K as part of the annual
report to shareholders. The annual report may include
additional general company information.
SEC Form 10-K and the company website.
Fill in the page numbers from the annual report where the following are located.
Required information for this
workbook project.
Page
No.
Required information for this
workbook project.
Financial Highlights
Chief Executive Officer Letter
Page No.
Not absolutely necessary, but very common
in annual report to shareholders.
Not in SEC Form 10-K. May be posted on
company website. If so put WEB in Page
No. box.
If not available, put N/A in Page No. box.
Managements Discussion and
Analysis (MD&A)
3
Not in SEC Form 10-K. Likely posted on
company website if SEC Form 10-K used
to satisfy the annual report to shareholders
reporting requirement. If so put WEB in
Page No. box.
3
Notes to Financial Statements
28
40
Report of Independent
Accountants or Independent
Auditors Report
Income Statement
May be labeled Statement of Earnings
May be labeled Presidents, CEOs or
other top officials message or letter to the
shareholders
Put range of pages, for example, 47 to 58.
43-69
70
Balance Sheet
May be labeled Statement of Financial Position
39
Five- or Ten-Year Summary of
Operating Results
72
Item 6 in SEC Form 10-K
Statement of Change in
Stockholders Equity
41
Managements Report
(Responsibility) on Internal
Control over Financial
Reporting
71
Item 9A. Control and Procedures in SEC 10-K
Statement of Cash Flows
42
Investor and Company
Information or Shareholder
Information
73
Identify Why You Selected This Company
Chapter 1: Identify Why You Selected This Company Question 1
A) What is/are your motivation(s) or interest(s) in selecting this company?
[See above for examples.]
B) What question(s) are you seeking to answer?
[For example, is the company profitable? Can the company change and develop new products
and services to be competitive? Would I invest in this company? Will the company provide
rewarding career opportunities? In chapter 5 you will have pulled together the financial and
nonfinancial information to answer these question(s).]
A) I chose Johnson & Johnson because I use a lot of their product and though it would be interesting to
learn more about them.
B) I would like to know how much this company makes in each of the many segments
they have. I would like to know how many countries J&J operates in and what
percentage of the revenue comes from these other countries. Also would I invest in this
company?
Company and Annual Report Essentials
Chapter 1: Company and Annual Report Essentials Question 1
What is the companys complete name?
Johnson & Johnson
4
Chapter 1: Company and Annual Report Essentials Question 2
What is the address of your companys corporate headquarters?
One Johnson & Johnson Plaza, New Brunswick, NJ 08933
Chapter 1: Company and Annual Report Essentials Question 3
Identify the companys website address.
http://www.jnj.com
Chapter 1: Company and Annual Report Essentials Question 4
Identify the telephone number and e-mail address of the companys Investor Relations
Department.
Telephone number: 732-524-0400
E-mail address: N/A
Chapter 1: Company and Annual Report Essentials Question 5
Which stock exchange lists your company?
NYSE
Chapter 1: Company and Annual Report Essentials Question 6
What is your companys stock exchange trading symbol?
JNJ
Chapter 1: Company and Annual Report Essentials Question 7
What is your companys Standard Industrial Classification (SIC) and sector? Run a
search on Standard Industrial Classification, and the classification and code will be
identified. Your company may list more than one SIC code number. The first listed is
considered the primary SIC for the company.
For example, search The Home Depot SIC brings up a listing of sources. InvestorWords is
one website location option - http://www.investorwords.com/cgi-bin/stocksymbol.cgi?
ticker=HD. Move down the page and you will find:
SIC Code: 5211
5
Sector: Basic Materials, Construction, Retail
Industry: Lumber and other building materials
2676, Sanitary Paper Products
Chapter 1: Company and Annual Report Essentials Question 8
Locate the board of directors listing. How many board members does your company
have?
There are 12 board members at Johnson and Johnson
Chapter 1: Company and Annual Report Essentials Question 9
How many of the directors are company employees, labeled inside directors? And how
many are non-company directors, labeled outside directors? Why does a company want
and need outside directors?
(Inside and outside directors are typically identified as such by their title and company.)
There are 2 directors in this company that are labeled inside directors and there are 10
outside directors. Outside directors are needed because they can see things differently
than the insiders and also have little conflict of interest.
Chapter 1: Company and Annual Report Essentials Question 10
Leadership addresses the stockholders, typically, once a year at the annual stockholders
meeting. Identify where and when this occurred, as reported in your annual report.
The annual meeting of shareholders will be on April 26, 2012 at the Hyatt Regency New
Brunswick, 2 Albany St, New Brunswick, NJ at 10 AM
Company Strategy and Business Environment
Chapter 1: Company Strategy and Business Environment Question 1
Review the chairmans message of your companys annual report. Does it appear to be
uplifting or somewhat apologetic? Identify phrases that support your position.
Mr. Weldons message of J&Js annual report was both uplifting and apologetic. It was
uplifting because he spoke about how JNJs products helped a woman to make a full
recovery after having a stroke because of JNJs blood clot and removal device. Also he
spoke about sales increasing 5.6% due to new products in their pharmaceutical segment
as well as that 70% of their sales were from products with No.1 or 2 global market share
positions. It seemed apologetic because he spoke about the quality issues at McNeil
6
Consumer Healthcare as well as the recall of the DePuy Hip system. He mentioned that
2011 had a lot of hurdles including patent expirations, hard portfolio choices, litigation
issues and OTC product quality issues.
Chapter 1: Company Strategy and Business Environment Question 2
Check below the one primary company strategy identified in the chairmans message.
Support your answer with phrases found in the chairmans message that pointed you to
the identified corporate strategy.
Growth: Vertical
Stability
Horizontal
Retrenchment
X
Concentric
Conglomerate
.
.
Phrases to support your above conclusion:
I think that the Mr. Waldens message was about stability because he said things like:
we made necessary restructurings to our business to manage our cost structure, simplify
our operations, and ensure the most efficient use of our capital for long term benefit of
patients and shareholders
Chapter 1: Company Strategy and Business Environment Question 3
Briefly summarize the companys discussion found in Item 1 of SEC Form 10-K.
Type of business:
Human health and well being
Major business segments:
Consumer, Pharmaceutical, and Medical Devices and Diagnostics
Primary customers:
J&J has a very broad range of customers because the offer many products
Primary products and/or services:
J&Js primary products are baby care, skin care, oral care, wound care, womens
healthcare fields, nutritional and OTC pharmaceutical products
Other:
7
Chapter 1: Company Strategy and Business Environment Question 4
Identify broad-based social, political, economic, and technological concerns that may
affect your company. Put N/A if one of the categories does not apply.
Social:
Political:
Economic:
Technological:
Other:
Wrap-up
Chapter 1: Wrap-up Question 1
After further review of additional information you should now be confident in
identifying the one primary company strategy, beyond the insight provided by the
chairmans message?
Check below the one primary company strategy identified in the chairmans message
and all other supporting documents. Support your answer with phrases.
Growth: Vertical
Stability
Horizontal
Retrenchment
Concentric
Conglomerate
.
Phrases to support your conclusion from information gathered from the chairmans
message, Item 1 of the SEC Form 10-K and other insight gained from completing
Chapter 1.
8
.
CHAPTER 2 - ANNUAL REPORT STRUCTURE
Financial Highlights
Chapter 2: Financial Highlights Question 1
Review the financial highlights of your companys annual report to the shareholders.
Identify net sales or revenues, net income, basic earnings per share (BEPS), and total
assets for the current and preceding years. These are the most common values included
in financial highlights. If your company reports something different, simply cross out an
item here and recap what is reported. SEC Form 10-K does not provide financial
highlights. You may find this information on the company website. If not available put
N/A in the first row of boxes.
Categories
Current Year
One Year Prior
Two Years Prior
Net sales or revenues
Net income
Basic EPS
Total Assets
Based on your preliminary review, is your company performing better than, equal to, or
less favorably than in the prior year? Briefly explain.
General Company and Marketing Information
Chapter 2: General Company and Marketing Information Question 1
Look for pictures of product and people that are colorful and send a positive company
signal to the reader.
Category
Example: Volunteer Activities
9
Message
Ongoing and contributing to the success of
the community
What is the broader message from this information?
Managements Discussion and Analysis
Chapter 2: Managements Discussion and Analysis Question 1
Results of Operations:
Identify the primary drivers/issues that explain current and future results of operations
discussed in the MD&A. For example, the gross profit percentage increased because of
improved buyer/supplier relations resulting in greater overall operating performance. Or
an increase in operating expenses because of increased fuel costs reduced profits. List
the six major drivers/issues of performance you find in the MD&A section of the annual
report.
1.
2.
3.
4.
5.
6.
Liquidity:
Recap what you find about your companys liquidity in the MD&A section of the
annual report. Look for information about the ability of the company to satisfy shortterm cash needs and the ability to generate operating cash flows, for example.
Capital Resources:
Recap what you find about your companys capital resources in the MD&A section of
the annual report. Look for information about cash reserves and credit availability. For
example, your companys MD&A section may have a disclosure about an established
lined of credit to fund future growth.
10
Reports by Management
Chapter 2: Reports by Management Question 1
Review the Managements Report (Responsibility) on Internal Control over Financial
Reporting in your companys annual report. Answer the following questions.
Who is responsible for maintaining the
internal controls designed to provide
reasonable assurance that the books and
records reflect the transactions of the
company?
Record the statement that identifies
managements conclusion about internal
controls.
Who audited managements assessment of
the effectiveness of your companys
internal control over financial reporting?
Independent Auditors Report
Chapter 2: Independent Auditors Report Question 1
Review the Independent Auditors Report of your companys annual report and answer
the following questions.
Who was the companys
auditor and where is it
located?
What is the responsibility
of the auditor?
Who is responsible for the
preparation of and
information within the
companys financial
statement?
The audit was conducted
in accordance with what?
What was the opinion of
the auditor?
11
Five- or Ten-Year Summary of Operating Results
Chapter 2: Five- or Ten-Year Summary of Operating Results Question 1
Identify the major components provided in the five- or ten-year summary. Summarize
the insight provided by each. Look for stable, increasing, or decreasing trends.
Consistent, slightly improving performance signals management has control of the
business. Inconsistent performance signals management does not have control of the
business.
Component
Example: The Home Depot
Statement of Earnings Data
12
Summary of Insight
Sales and earnings have grown significantly over time.
Operating expenses are growing at an increasing rate.
CHAPTER 3 - FINANCIAL STATEMENTS
The Balance Sheet
Chapter 3: Balance Sheet Question 1
Identify the date shown at the top of your selected companys balance sheet.
Current Year
Prior Year
Does the companys fiscal year follow the calendar year? Yes _____ No ___
If not, why do you think it is different?
Chapter 3: Balance Sheet Question 2
Review the current asset section of your selected companys balance sheet. Explain why
the order of individual items begins with cash. In your opinion, would it be more or less
appropriate to order these items according to dollar magnitude? Explain.
Chapter 3: Balance Sheet Question 3
Review your companys balance sheet (or SEC Form 10-K) and compare accumulated
depreciation to the historical cost of Plant and Equipment (PE) using the following ratio.
Compute the following:
Percentage of Asset Life Remaining
Accumulated depreciation /
High percentage means older assets
Plant and Equipment
Low percentage means newer assets
Is the investment in fixed assets, on average, relatively recent? If not, can we assume
that these assets will be replaced shortly?
13
Chapter 3: Balance Sheet Question 4
Since property, plant, and equipment (PPE) and long-term investments in stock
represent a companys investment, why do we distinguish between them in the balance
sheet?
Chapter 3: Balance Sheet Question 5
Review the noncurrent asset section of your companys balance sheet. Are any
intangible assets listed? If so, identify the types of intangible assets and the percent of
total assets that the intangible assets represent.
Intangible Asset 1:
Intangible Asset 2:
Intangible Asset 3:
Total Intangible Assets Total Assets =
If this company were to be acquired by another company, would the intangible assets
influence the purchase price? Explain your answer.
Chapter 3: Balance Sheet Question 6
Now review your companys total assets for the most recent year. What percentage of
total assets is current? Noncurrent?
Current
Noncurrent
Should companies have a greater investment in current assets or noncurrent assets, or
does it depend on the nature of their business? Explain your answer.
Chapter 3: Balance Sheet Question 7
Review your companys balance sheet. Does it report a deferred tax asset? A deferred
tax liability? If so, are the deferred tax assets and/or liabilities reported as current or
noncurrent?
14
Deferred tax asset? Yes or No
Current or Noncurrent*
Deferred tax liability? Yes or No
Current or Noncurrent*
Chapter 3: Balance Sheet Question 8
Identify the information that relates to the stockholders equity section of your
companys balance sheet.
Par value per share of common stock?
Number of common shares authorized?
Number of common shares issued?
Number of common shares outstanding?
Number of treasury shares held by the company?
Chapter 3: Balance Sheet Question 9
Answer the following questions relative to the stockholders equity section of the
balance sheet.
By what amount did retained earnings
increase or decrease from the prior year?
Was the increase or decrease in retained
earnings equal to the companys current
year net income or net loss?
Yes or No*
* If No, then dividends were paid (or declared) by your selected company or certain
events took place during the year where the accounting for the events directly affected
the retained earnings account.
Chapter 3: Balance Sheet Question 10
List (write-in) each financial statement element as shown in your companys balance
sheet.
Assets
15
Liabilities
Stockholders Equity
Chapter 3: Balance Sheet Question 11
Identify the combined carrying values (dollar amounts) of the following selected
account groups taken from your companys balance sheet:
Account Groups
Current
Year
Prior Year
Increase or
Decrease
(in dollars)
Current Assets
Net Fixed Assets
Intangible and Other Noncurrent Assets
Current Liabilities
Long-term Liabilities
Common Stock
Additional Paid in Capital*
Retained Earnings
Other Equity Components
Chapter 3: Balance Sheet Question 12
Identify the three major balance sheet accounts, for example accounts receivable,
accounts payable, inventory, etc. that changed the most from the prior year. What events
might explain these changes? Working to explain why these changes occurred
contributes to a greater understanding about a company.
Account
Explanation
Example:
Example:
Account
Receivable
An increase in accounts receivable should coincide with an increase
in sales, i.e., a 10% increase in sales would explain a 10% increase
in accounts receivable. If accounts receivable are increasing and
sales decreasing, the signal is unfavorable.
16
Chapter 3: Balance Sheet Question 13
Prepare a common-sized balance sheet (expressed in percentages) using the following
account groups shown in your selected companys balance sheet.
Account Group
Current
Year
Prior Year
Increase or
Decrease
(current year
percent minus
prior year percent)
Current Assets
Net Fixed Assets
Intangible and Other Noncurrent Assets
Total Assets
100%
100%
100%
100%
Current Liabilities
Long-term Liabilities
Common Stock
Additional Paid in Capital
Retained Earnings
Other Equity Components
Total Liabilities and Stockholders
Equity
Example provided because of common student error in completing this report. All
accounts groups divided by total assets, in dollars.
Account Group
Current
Year
Prior Year
Increase or
Decrease
Current Assets
40%
35%
5%
Net Fixed Assets
40%
45%
-5%
Intangible and Other Noncurrent Assets
20%
20%
100%
100%
Current Liabilities
60%
50%
10%
Long-term Liabilities
10%
15%
-5%
Common Stock
20%
20%
Additional Paid in Capital
5%
5%
Retained Earnings
5%
10%
Total Assets
Other Equity Components
17
-5%
Total Liabilities and Stockholders
Equity
100%
100%
Chapter 3: Balance Sheet Question 14
Identify the three balance sheet groups from question 13 above that changed most
significantly. Within each of these groups, identify the primary balance sheet drove element
that this change. What events might explain these changes?
Group Name:
Current Assets
Explanation:
(Example sales increased by 22%, thus accounts receivable
increased by approximately 22%)
Chapter 3: Balance Sheet Question 15
Did your company become more or less liquid when comparing this year to last year?
Current Year:
Prior Year:
Current Assets minus Current Liabilities =
Current Assets minus Current Liabilities =
Explain why?
Chapter 3: Balance Sheet Question 16
Did your company increase or decrease its financial leverage when comparing total debt
to total stockholders equity from this year to last?
Current Year:
Prior Year:
Total debt Total stockholders equity =
Total debt Total stockholders equity =
Explain why:
18
The Income Statement or Statement of Earnings
Chapter 3: Income Statement Question 1
Review the heading of your companys income statement. Does the
companys income statement provide two or three years of comparative
information? (Insert number to the right.)
___ yrs.
Why do you think the SEC requires that balance sheets provide two years of
comparative financial information and income statements provide three years of
comparative financial information?
Chapter 3: Income Statement Question 2
Review the middle section of your companys income statement. Did operating income
(loss) increase or decrease from the prior year and by how much? You may have to
compute operating income (loss).
Increased by $
Decreased by $
Chapter 3: Income Statement Question 3
Does the middle section of your companys income statement show a nonoperating
income (loss) increase or decrease from the prior year and by how much? You may have
to compute nonoperating income (loss).
Increased by $
Decreased by $
Chapter 3: Income Statement Question 4
In reference to why you are studying this company, is it important to know the different
sources of incomeoperating or nonoperating?
19
Chapter 3: Income Statement Question 5
If any of the irregular events are shown on your companys income statement, describe
the nature and the amount. Select the most current year affected by the event if multiple
years are affected.
Irregular Event
Amount
Nature of the Change
Restructuring charge?
Discontinued operation?
Extraordinary event?
Chapter 3: Income Statement Question 6
Review the lower section of your selected companys income statement. Did net income
(loss) increase or decrease from the prior year and by how much?
Increased by $
Decreased by $
Chapter 3: Income Statement Question 7
Prepare a common-sized income statement for the categories below.
Account/Category
Current
Year
Prior Year
Increase or
Decrease
(current year
percent minus
prior year percent)
Net Sales (revenues)
100%
100%
Cost of Goods/Services (if applicable)
Gross Profit
Operating Expenses
Operating Income (Loss)
Nonoperating Income (Loss)
Income Tax Expense
Net Income
Example provided because of common student error in completing this report. All
account categories divided by net sales (revenue), in dollar.
20
Account/Category
Current
Year
Prior Year
Net Sales (revenues)
100%
100%
Cost of Goods/Services (if applicable)
(35%)
Increase or
Decrease
(36%)
(1%)
cost of goods
sold decrease
Gross Profit
65%
64%
1%
gross profit
increase
Operating Expenses
(25%)
(23%)
2%
expenses
increased
Operating Income (Loss)
40%
41%
(1%)
operating
income
decreased
Nonoperating Income (Loss)
Income Tax Expense
5%
5%
(20 %)
(17%)
3%
taxes
increased
Net Income
25%
29%
(4%)
Chapter 3: Income Statement Question 8
Identify the three income statement accounts/categories that changed the most in
Question 7. What events might explain these changes?
Account or
Category:
21
Explanation:
(Hint the MD&A section will provide good information to answer
this question.)
Chapter 3: Income Statement Question 9
Identify your companys Basic and Diluted EPS amounts. Place a N/A in Diluted EPS if
not reported.
Basic EPS
Diluted EPS
Current year
Preceding year 1
Preceding year 2
Why is diluted EPS always equal to or less than basic EPS?
Statement of Cash Flows (SCF)
Chapter 3: SCF Question 1
Is the SCF dated in the title for a period of time similar to the income statement or for a
point in time similar to the balance sheet? Why?
22
Chapter 3: SCF Question 2
Identify the following sections of the SCF and record the amounts. Check the math by
summing to the cash balance at end of year. Verify that the ending cash balance
reported on the SCF is the same as reported on the balance sheet.
Section
Current
Year
Prior Year
Yes / No
Second
Prior Year
Yes / No
Net operating cash flows
Net investing cash flows
Net financing cash flows
Net increase (decrease) in cash flows
Cash balance at beginning of year
Cash balance at end of year
Does the total match balance sheet cash?
Chapter 3: SCF Question 3
Record net sales, net income and net operating cash flows below. All three should be
trending in approximately the same direction. If so, this is a sign of a well-run business.
If one or more are going in a different direction, or random, then you must keep an eye
open for an explanation why.
Item
Current Year
Prior Year
Second Prior Year
Net Sales
Net Income
Net Operating
Cash Flows
Explain why net sales, net income and net operating cash flows are trending together or
differently. (Hint: Look at depreciation expense and substantial changes in inventory,
accounts receivable and accounts payable balances. Explaining why is a key learning
point.)
Chapter 3: SCF Question 4
Identify the primary cash outflows and inflows from investing activities.
23
Description of Activity
Amount
Cash outflow:
Cash inflow:
Consider three key issues at this point. Is the company adding assets? This is a sign of
growth. Is the company replacing assets? This is a sign of growth and stability. Is the
company only selling assets? This is a sign of retrenchment.
Chapter 3: SCF Question 5
Identify the primary cash inflow and outflow from financing activities.
Description of Activity
Amount
Cash inflow:
Cash outflow: (Note: cash dividends paid
are reported here.)
Consider two key issues at this point. How is the company being financed, through debt
or equity? Can you determine which is growing faster and why? A sound corporate
strategy is to finance a company with debt during stable times, because this demands
regular payment of principal and interest, and to finance a company with equity during
unstable times, because leadership can elect to pay or not pay dividends.
The Statement of Stockholders Equity (SSE)
Chapter 3: SSE Question 1
Identify the elements that comprise the statement of stockholders equity section of your
company. Hint: These items are generally illustrated across the top of the page using a
columnar format. (Example. Common stock shares and dollar amount.)
24
Chapter 3: SSE Question 2
Identify the cash dividends per share.
Determine the dividend payout percentage.
A companys dividend payout percentage
is computed by dividing dividend per
common share by net income or earnings
per common share. (Hint: If your company
reported a net loss for the year, the answer
lacks meaning.)
Compute dividend yield. A companys
dividend yield is computed by dividing
dividend per common share by market
price per common share. (Hint: Use the
current per share price for your selected
company.)
Is your companys dividend yield a reasonable return given current market conditions?
Notes to the Financial Statements
Chapter 3: Notes to the Financial Statements Question 1
How does your company define cash and cash equivalents?
Chapter 3: Notes to the Financial Statements Question 2
How does your company value its inventories? Explain the meaning of the inventory
valuation method. Are domestic and international inventories valued the same? Service
companies will typically not have inventory.
25
Chapter 3: Notes to the Financial Statements Question 3
Does your company report any investments in marketable securities? Identify the
respective amount(s) invested.
Category
Current Year Amount
Trading Securities
Available-for-Sale Securities
Held-to-Maturity Debt Securities
Chapter 3: Notes to the Financial Statements Question 4
Note 1 and a separate note on income taxes should provide the information to answer
this question.
What was your companys income tax
expense for the current year?
How much cash was paid for income taxes
in the current year? (Hint: Review the
SCF. The difference generally relates to
the accrual basis of accounting.)
Identify the three major elements, such as depreciation or other post employment
benefits, that gave rise to deferred tax assets or deferred tax liabilities:
Deferred Tax Assets
Deferred Tax Liabilities
What is this years effective tax rate for
your company? What is the current year
statutory rate?
Effective Tax Rate: %
Statutory Tax Rate: %
Chapter 3: Notes to the Financial Statements Question 5
Reviewing note #1, any related supporting notes, and/or the 10-K, identify the fixed
asset group(s), depreciation methods used, and the estimated useful lives of these fixed
assets.
Fixed Asset Group
26
Depreciation Method
Estimated Lives (range)
Chapter 3: Notes to the Financial Statements Question 6
Review the balance sheet, note #1, and any related notes and identify the amount of
goodwill reported in the current year.
Amount reported in current year.
$
Identify the amount of any significant write-down of
goodwill that occurred during the current year.
$
How does management describe how it accounts for goodwill as disclosed in the note(s)
to the financial statements?
Chapter 3: Notes to the Financial Statements Question 7
Given present executive compensation packages, why would the user of financial
information prefer a company follow SFAS #123(R) instead of APBO #25? Explain.
Chapter 3: Notes to the Financial Statements Question 8
Review your companys lease note (and related balance sheet information), then identify
the following amounts:
Minimum lease payments under operating leases
Minimum lease payments under capital leases
Ratio of operating lease payments to capital lease
payments
As a user of reported financial information, would you be concerned about a significant
amount of operating leases that are not reported in the balance sheet? Explain.
27
Chapter 3: Notes to the Financial Statements Question 9
Review your companys long-term debt note and identify the following (consider the
three most significant liabilities only):
Instrument
Maturity Date
Rate
Amount Due
How much interest
expense was
recognized in the
current year?
How much cash
was paid for interest
in the current year?
(Hint: Look in the
SCF.*)
*The difference between interest expense and cash paid for interest is due to the accrual
basis of accounting (and in some cases, the capitalization of interest).
Chapter 3: Notes to the Financial Statements Question 10
Review your companys pension and OPEB note (if applicable) and answer the
following questions.
Pensions
How much is the Projected Benefit
Obligation (PBO) and Accumulated
Postretirement Benefit Obligation
(APBO) for your company at the
end of the current year?
What was the amount of pension or
OPEB benefits paid to plan
participants during the current
year?
What amount of cash did the
company contribute to the
respective funds during the current
year? This is known as employer
contributions.
What is the value of the plan assets
at the end of the current year?
28
OPEB
Based on your review of the plan assets and the projected benefit obligation (or
accumulated postretirement benefit obligation), has your company sufficiently funded
its employee benefit plans (this is known as funded status)?
An expected average return on invested plan assets is used to reduce the volatility in the
reporting of pension or OPEB expense. Higher expected average returns reduce pension
or OPEB expense, and lower expected returns increase pension expense. What rate of
return on plan assets does your company use to compute pension or OPEB expense?
Does this appear reasonable, given present market conditions?
Rate employed?
Response:
Chapter 3: Notes to the Financial Statements Question 11
Based on your review of the contingencies note, briefly identify specific events that have
led to the accrual of contingent liabilities in your selected companys the balance sheet.
Chapter 3: Notes to the Financial Statements Question 12
Based on your review of the segment-reporting note to the financials, identify the
reported operating segments, their related revenues, and operating income. Identify the
largest three if more than three are disclosed.
Reportable Operating Segments
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Net Sales Revenue
Net Operating Income
Chapter 3: Notes to the Financial Statements Question 13
Based on your review of the segment-reporting note to the financials, identify the
geographical segments and their related revenues. Identify the largest three if more than
three are disclosed.
Country
Net Sales Revenue
Chapter 3: Notes to the Financial StatementsQuestion 14
Based on your review of the notes to the financials or the statement of stockholders
equity, identify the components (no more than four) that comprise Other Comprehensive
Income for your company.
Component
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Amount
CHAPTER 4 - FINANCIAL ANALYSIS
Summary Financial Analysis Report
Profit Margin %
Answers
how well
the
business
performed.
Gross Margin
Pre-Tax
Margin
Net Profit
Margin
Sales
Operating
Income
Operating
Cash Flows
Company
Two Years
Prior
Gross Profit /
Total
Revenue
Operating
Income /
Total
Revenue
Net Income /
Total
Revenue
Financial
Statement
Financial
Statement
Financial
Statement
Company
One Year
Prior
Company
*
*
Industry
S&P 500
Not required
Not required
Not required
Not required
Not required
Not required
Evaluate Profitability (Think about the corporate strategy in providing a response. Following
are general guidelines, yet each company situation is unique. For a company with a growth
strategic focus you will likely find increasing performance, above or below industry average. For
a company with a stability strategic focus you will likely find stable performance, above or
below industry average. For a company in a retrenchment strategic focus you will likely find
poor performance, below industry average with efforts to improve and approach industry
average. Note: Sales, operating income and operating cash flows should trend in approximately
the same direction. This signals a stable operating business environment. If the three measures
are not trending together, this signals lack of control by management.)
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Financial Condition
Signals
ability to
Company
take on
Two Years
additional
Prior
debt and
liquidity.
Debt/ Equity
Ratio
Current Ratio
Quick Ratio
Interest
Coverage
Company
One Year
Prior
Company
(Total
Liabilities
Current
Liabilities)
/ Total equity
Current assets
/
Current
liabilities
(Cash and
Short Term
Investments +
Short Term
Investments +
Total
Receivables,
Net) /
Current
Liabilities
*
*
Data not
readily
available
*
*
Industry
S&P 500
Evaluate Financial Condition (often labeled liquidity and solvency analysis) (Think about the
corporate strategy in providing a response. Following are general guidelines, yet each company
situation is unique. For a company with a growth strategic focus you will likely find stable or
slightly decreasing liquidity, above or below industry average. Debt to equity often is increasing
in a growing company. For a company with a stability strategic focus you will likely find stable
liquidity, above or below industry average. Debt to equity often is stable as well. For a company
with a retrenchment strategic focus you will likely find poor liquidity, below industry average
with efforts to improve and approach industry liquidity. Debt to equity often is decreasing in a
company during retrenchment.)
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Investment Return %
Signals
performan
ce for
managers
and
owners.
Return On
Equity
Company
Two Years
Prior
Company
One Year
Prior
Company
*
*
Return On
Equity
(5-Year Avg.)
Not required
Not required
Return On
Assets
(5-Year Avg.)
Not required
S&P 500
*
*
Industry
Not required
Return On
Assets
Net Income /
Total Equity
Net Income /
Total Assets
Evaluate Investment Return (Think about the corporate strategy in providing a response.
Following are general guidelines, yet each company situation is unique. For a company with a
growth strategic focus you will likely find increasing returns. For a company with a stability
strategic focus you will likely find stable investment returns. For a company in a retrenchment
strategic focus you will likely find poor and stable investment solvency, below industry average.)
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Management Efficiency
Signals
how well
the
company
was run by
manageme
nt.
Company
Two Years
Prior
Company
One Year
Prior
Company
Not required
Not required
Not required
Not required
Income/
Employee
Revenue/
Employee
Receivable
Turnover
Total
Revenue /
Average
Accounts
Receivable Trade, Net
Average is defined: (beginning of the year + end of the year) / 2
Inventory
Turnover
Asset
Turnover
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Cost of
Revenue,
Total /
Average Total
Inventory
Total
Revenue /
Average Total
Assets
Industry
S&P 500
Evaluate Management Efficiency (Think about the corporate strategy in providing a response.
Following are general guidelines, yet each company situation is unique. For a company with a
growth strategic focus you will likely find improving efficiency, above or below industry
average. For a company with a stability strategic focus you will likely find stable efficiency,
above or below industry average. For a company in a retrenchment strategic focus you will likely
find poor efficiency, below industry average with efforts to improve and approach industry
average.)
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CHAPTER 5 - DECISION-MAKING PROCESS
Chapter 5: Decision-making Process Question 1
Based upon your review, do the numbers support the companys explicit strategic focus: a
growth, stability or retrenchment focus? Why or why not?
Chapter 5: Decision-making Process Question 2
Return to the first question in this project.
Chapter 1: Identify Why You Selected This CompanyQuestion 1
A) What is/are your motivation(s) or interest(s) in selecting this company?
B) What question(s) are you seeking to answer?
You were asked to explain why you were investigating this companys annual report. You have
likely uncovered numerous pieces of information, some with conflicting insight. This may
involve both financial and nonfinancial information. In addition, you may have found certain
information to be incomplete for decision-making purposes. This is real world analysis. Most
business decisions are made with as much reliable information as possible, yet common to the
decision-maker is a desire for more information.
Prepare a thorough, yet concise answer to your original questions A and B above. For example,
would you work for this company, why or why not? Support your response with the information
gathered throughout your annual report study.
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Chapter 5: Validate Your Conclusion Question 1
The Altman Z-score is a predictive model created by Edward Altman in the 1960s. The score
combines and weights five financial ratios to estimate the likelihood of a company going
bankrupt. The lower the Altman Z-score the higher the odds of bankruptcy. Research findings
suggest the Z-score predicts 72 - 80% of corporate bankruptcies two years prior to the actual
filing.
Z-score > than 3 = considered healthy
Z-score between 1.8 and 3 = considered a warning sign
Z-score < than 1.8 = could be headed for bankruptcy
Computing the Z-score for your company is very simple. Go to one of the Websites listed below
and compute the Z-scores for the respective years identified below. Print out your results and
turn them in with this workbook.
www.jaxworks.com/calc2a.htm
www.ironwoodadvisory.com/zscore.htm
Two Years Prior
One Year Prior
Current Year
Zscore
Z-score interpretation compared to the financial analysis. Does the Z-score agree or disagree
with your analysis?
Congratulations.
Now submit to your instructor your completed workbook per the instructions
provided at the beginning of this document.
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