The Home Depot Annual Report 2017 Term Paper

Name:

(last) (First) (Initial)

Student Number:

Date:

Name of

Corporation

Analyzed:

Understanding Corporate

Annual Reports

A Financial Analysis Project

Fourth Edition

William R. Pasewark

University of Houston

REAL WORLD

ACCOUNTING SERIES

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UNDERSTANDING CORPORATE ANNUAL REPORTS: A FINANCIAL ANALYSIS PROJECT

Copyright © 2000, 1998, 1995. 1994 by The McGraw-Hill Companies, Inc. All rights reserved. Printed in the United States of America.

The contents of, or parts thereof, may be reproduced for use with UNDERSTANDING CORPORATE ANNUAL REPORTS

A Financial Analysis Project

William R. Pasewark

provided such reproductions bear copyright notice and may not be reproduced in any form for any other purpose without permission of the publisher.

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ISBN 0-07-238714-9

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CONTENTS

The Purpose of This Practice Set	1
Getting Started	2
Instructions	3
Getting Acquainted With the Annual Report	4
General Information	4
Market Information	7
Internet Information	8
Income Statement	9
Balance Sheet.	14
Cash Flow Statement	17
Statement of Changes in Stockholders' Equity	20
Notes and Supporting Schedules to the Financial Statements	22
Report of Independent Accountants	36
The Management Report	38
Ratio Analysis	39
Analysis of Profitability	39
Analysis of Liquidity	45
Analysis of Solvency	48
Industry or Competitor Comparisons	52
Making Decisions Based on the Annual Report	56
Appendix A : How to Obtain an Annual Reports	60
Appendix B • Obtaining Information for Industry Comparisons	62

PURPOSE OF THIS PRACTICE SET

Communicating information to others is a fundamental human characteristic. Coaches use game statistics to plan strategies for future games. Teachers place grades on examinations so students may use the information to improve performance on future examinations. College graduates prepare resumes to describe their credentials to prospective employers.

You might say an annual report is a "resume" prepared for a corporation. Much of information! In corporate annual reports is dictated by generally accepted accounting principles (GAAP) and by the See1Mities and Exchange Commission (SEC), an agency of the federal government that regulates the trading of publicly­ traded securities. For example, GAAP requires annual reports to disclose four financial statements: an income statement, a balance sheet, a statement of cash flows, and a statement of retained earnings, as well as a multitude of supplemental disclosures (ARB 43, Chapter 2A. Paragraph 2).

Annual reports communicate between corporations and financial statement users. The primary purpose of an annual report is to convince existing stockholders to continue investing in the corporation. However, management may also use the annual report to:

· Persuade prospective stockholders to invest in the corporation.

· Inform security analysts about the investment qualities of the corporation.

· Inform lenders, such as bankers and suppliers, of the credit-worthiness of the corporation,

· Provide evidence to government agencies of compliance with regulations.

As a business student, you will probably use financial statements frequently in your profession. For example, as a manager or corporate strategist you may use financial statements to evaluate the performance of your own company, or your company's competitors, As a bank loan officer you may examine financial statements to determine the credit-worthiness of potential borrowers. If you become a corporate treasurer or fund manager you may use financial statements to choose betw,een alternatives for your investment portfolio. Finally, as an individual investor you may use financial statements to select your personal investments.

Until now, most of what you have learned in accounting focused on preparation of financial statements rather than using those financial statements to make business decisions. The purpose of this practice set is to help you understand and analyze an annual report. When you complete the practice set, you will be familiar with the corporation you have analyzed. Later, you may use the analytical abilities gained to analyze the financial statements of other corporations.

GETTING STARTED

To complete this practice set you must first obtain the most annual report of a publicly-traded corporation. In some cases, your instructor may provide an annual report. If not, choose a corporation that interests you. For example, if you enjoy the latest fashion, you may want to select a corporation that manufactures or sells apparel. You may want to select the corporation that produces a soft drink you enjoy. Or, you may want to select a corporation located in your community or state. However, you should not select the same corporation as one of your classmates. You will enjoy discussing the differences between the companies you have selected.

You may already have a current annual report. If not, you can obtain one from a corporation by writing a short letter similar to that in the Appendix A Most companies will fulfill your request within two to three weeks. You may also want to consider requesting the annual reports of corporations that compete with the company you select. Receiving more than one annual report will only increase your exposure to the financial statements!

When you receive the annual report, familiarize yourself with the contents by reviewing it carefully. Annual reports usually have a contents page to help you locate specific items. After completing your review, read the instructions on the next page and begin the practice set.

Start the practice set as soon as possible. Completion time ranges from five to twenty hours. The average completion time is approximately nine hours.

INSTRUCTIONS

In this practice set, you will answer questions about the operating results and financial position of a corporation. Answers to all questions will be obtained directly from the company's annual report

Unavailable Information

Some reports will not contain information requested in the practice problem. In other words, some annual reports will not "fit the mold." If this is the case, seek the help of your instructor to determine "if you understand the annual report correctly. When the structure of the financial statements make it impossible to answer certain questions, simply indicate why you are unable to answer the question in the practice set.

Chronological Terms

In this practice set, the term "current' refers to the year for which the annual report was prepared. For corporations with December 31 year-ends, annual reports are usually issued in February or March of the following year.

Additional Help

If you need to review terms or accounting principles discussed in the annual report. Refer to the textbook used in your class for details.

GETTING ACQUAINTED WITH THE ANNUAL REPORT

GENERAL INFORMATION

General information may be in several places of annual reports. This information generally appears at the beginning of the report, the end of the annual report. Or on or near the inside back cover.

Answer the following questions about the annual report you have selected:

1. What is the name of the corporation you will analyze?

2. The corporate headquarters is located in what city?

3. When is the fiscal year end of the corporation?

4. What is (are) the primary product(s) or service(s) of the corporation?

5. A publicly-traded corporation is typically operated by managers who are responsible to a board of directors elected by the stockholders. Each year the stockholders meet to elect members of the board of directors and vote on issues specified by the corporate charter. When and where is the next annual stockholders' meeting?

Date

City

6. The corporation must show high and row selling prices of the company's common stock each quarter for the last two years. Chart the common stock prices over the last two years:

a. In the chart, mark the high price of each quarter with an X. Then, mark the low price of each quarter with a •.

b.

Connect the high prices with a line to indicate the trend. Then connect the low prices with a dotted line.

What has been the highest price of the common stock in the last two years?

$ Per share

What has been the lowest price of the common stock in the last two years?

$ Per share

Describe the trend in the price of the common stock over the last two years (for example, was it upward, downward, volatile, constant). Did the stock trade within a narrow or wide range?

7. A transfer agent facilitates the issuance of capital stock and the payment of cash dividends. Who is the corporation's transfer agent and where is the agent located?

Transfer Agent

City where transfer

agent is located

8. A dividend reinvestment plan (DRIP) is sometimes available to stockholders. These plans permit the stockholder to purchase additional shares of common stock instead of receiving dividends in cash. Some plans also permit cash purchases and sales of stock without commission.

Does this corporation have a DRIP?

FORMCHECKBOX Yes

FORMCHECKBOX No

If so, who must be contacted to participate in the DRIP?

DRIP Contact

MARKET INFORMATION

The market price of a publicly-traded stock can be located in several sources such as the Wall Street Journal. the business section of many daily newspapers, or an internet site.

1. Place an X by the security exchange in which the common stock is traded:

FORMCHECKBOX New York Stock Exchange (NYSE)

FORMCHECKBOX American Stock Exchange (ASE)

FORMCHECKBOX National Association of Securities Dealers Automated Quotations (NASDAQ)

FORMCHECKBOX Other, identify

2. What is the current market price of the common stock?

$ per share on (date)

3. The ticker symbol is an abbreviation that identifies the stock of the corporation on the exchange.

What is the ticker symbol used to identify the corporation on the exchange?

INTERNET INFORMATION

1. Many corporations will identify a corporate internet site in the annual report. If so, what is the internet address for the corporation?

Internet Address

Locate the website of your corporation and answer the following questions:

2. The following items normally appear in annual reports sent to the stockholders. Check each of the items that appear in the web site:

___Operating Highlights ___Statement of Stockholders' Equity

___Management Discussion and Analysis ___Notes to the Financial Statements

___Balance Sheet ___Multi-Year Financial Summary

___Income Statement ___Report of the Independent Auditors

___Statement of Cash Flows ___Report of Management Responsibility

3. In terms of gathering accounting information, would you consider this web site to be useful? Is there any additional information you would like to see?

4. What are other purposes of this web site?

___Describe the corporation ___Publicize corporate citizenship

___Publicize recent corporate events ___Provide customer service information

___Advertise corporate products ___Provide product financing information

___Identify the location of retail sales sites ___Provide employment information

INCOME STATEMENT

The income statement (sometimes called the "statement of earnings" or statement of operations") is usually the first major financial statement appearing in the report. The income statement summarizes corporate revenues and expenses for a period of time. Presentation of several years permits comparisons to previous years' results. Income statements for three years (provided the corporation has been in operation for three years) are disclosed.

Growth In Revenues and Profits

1. Revenue growth is determined by the percentage increase (decrease) of revenues in comparison with the previous year:

Current Year Revenue - Previous Year Revenue

Previous Year Revenue

Indicate the growth in revenue during the current year:

- = %

2. Did revenue increase or decrease? An explanation of the change in revenue is often contained in the management discussion and analysis section. What reasons did' management give for the change?

3. Trends in corporate profits are determined by calculating the percentage of increase (decrease) in income from continuing operations over the previous year?, Income from continuing operations is net income without the effects of any discontinued operations, extraordinary items, or cumulative effects of accounting changes.

Current Year Income from Continuing Operations - Previous Year Income from Continuing Operations

Previous Year Income from Continuing Operations

Determine the growth in profits during the current year:

- = %

Common-Size Analysis

Common-size {or percentage} analysis expresses items in a financial statement as a percentage of a single item. This analysis permits comparisons between two or more years, or between two or more corporations. For an income statement, certain items are usually expressed as a percentage of revenue. Perform common-size analysis in relation to revenue for the following items in the income statement for the current and previous years:

	Current Year	Previous year
Revenue	100.0%	100.0%
Cost of Goods I Services
Gross Profit
Operating Expense
Interest Expense
Research and Development Expense
Income Tax Expense
Income from Continuing Operations
Net Income

Based on your common-size analysis, compare current year operating results in terms of cost control, debt servicing. tax burdens, and profitability. Information concerning the reasons for change may be found in the management discussion and analysis.

1. Product or Service Cost Control - Did the percent of product costs (cost of goods or services) to revenue change in the current year in comparison to the previous year? What are possible explanations for changes, if any that may have occurred?

2. Operating Cost Control- Did the percentage of operating costs (selling and administrative expenses) to revenue change in the current year in comparison to the previous year? What are possible explanations for changes, if any, that may have occurred?

3. Debt Servicing - How did the percentage of interest expense to revenue compare to the previous year? What are possible explanations for changes, if any?

4. Tax Burden - Did the tax expense as a percentage of total revenue change in the current year? What are possible explanations for these changes, if any? (Without knowledge of the tax laws applying to the corporation, it may be impossible to determine specific reasons for the change.)

5. Profitability - How did net income as a percentage of revenue change in the current year? What items in the income statement explain the change in income from continuing operations as a percentage of revenue?

6, Other Income Statement Items - Generally accepted accounting principles require amounts related to discontinued operations, extraordinary items, and cumulative effects of accounting changes be shown, net of taxes, at the bottom of the income statement. If any of these items are present, describe the nature and amount.

BALANCE SHEET

The balance sheet summarizes assets and equities (liabilities and stockholders' equity) of a corporation. Assets are usually grouped in one of five categories: current assets, investments, fixed assets (sometimes referred to as property, plant, and equipment), intangible assets, and other assets. Liabilities are typically grouped into current liabilities and long-term liabilities.

Asset Growth

The "size" of a corporation is commonly measured by the amount of total assets on the corporation's balance sheet. A corporation is considered "growing" if total assets increase from one year to the next. The rate of growth is measured by the change in total assets divided by the total assets of the previous year:

Current Year Total Assets - Previous Year Total Assets

Previous Year Total Assets

1. Determine the percentage of growth in assets:

- = %

2. Did total assets increase or decrease? What were the primary reasons for the change in total assets?

Common-Size Analysis

In the balance sheet, common-size analysis is performed by expressing accounts as a percentage of total assets. These percentages are often compared to the percentage of previous years or to the percentages calculated for another corporation in the same industry. Complete common-size analysis for the following items in the balance sheet

	Current Year		Previous year
Current Assets
Investments
Fixed Assets
Intangibles
Other Assets
Total Assets	100%		100%
Current liabilities
Total liabilities
Stockholders' Equity

3. Which balance sheet accounts changed the most in comparison to the previous year? What events might explain the reasons for the changes in these accounts?

Capital Structure

The balance sheet identifies the classes of capital stock and the number of shares for each class.

4. Corporations must disclose the number of shares that are authorized by the state charter. What is the number of common shares authorized by the state?

shares

Write the number of shares outstanding for each class of capital stock for the current year. Place an X in the blank if the corporation does not have the stock classification.

Class of Stock	Outstanding for the Current Year		Outstanding for the Previous Year
Common
Preferred
Other

5. Did the number of outstanding shares of the common stock change from the previous year? If so, what was the reason for the change in the number of shares?

6. Treasury stock is stock that the corporation has repurchased from stockholders, but has not retired. Did the corporation hold treasury stock? If so, how many shares of treasury stock were held by the corporation at the end of the current year?

shares

CASH FLOW STATEMENT

The purpose of the cash flow statement is to provide information about cash receipts, cash disbursements, and cash balances. In addition, the statement summarizes operating, investing, and financing activities of the corporation.

1. Indicate the cash flows resulting from operating, investing, and financing activities. Be sure to identify whether the cash flow was positive or negative. Then indicate the change in cash, and the beginning and ending cash balances:

Cash Flow Activity	Current Year		Previous Year
Operating
Investing
Financing
Increase (decrease) in cash
Beginning cash balance
Ending cash balance

2. Cash flow from operations is the amount of cash derived (or lost) from "income statement activities." Net income (loss), as it appears on the income statement, will often differ significantly from cash flow from operations. What is the dollar difference between "cash flow from operations" in the cash flow statement and "net income" in the income statement?

$

3. Chart the net income and cash flow from operations over the last three years:

a. Label the vertical axis of the following chart with a scale that will accommodate net income and cash flow from operations over the last three years.

b. Mark the level of net income for each year with an X. Then, mark the cash flow from operations for each year with a •

c. Connect the net income amounts with a line to indicate the trend. Then connect the amounts of cash flow from operations with a dotted line.

4. Based on a comparison of the income statement to the statement of cash flows, what accounts explain the greatest differences between net income (loss) and cash flow from operations?

5. What investing activity(ies) provided- the largest source of cash in the current year?

6. What investing activity(ies) used the most cash during the current year?

7. What financing activity(ies} provided the largest source of cash in the current year?

8. What financing activity(ies) used the most cash during the current year?

9. Did any sources or uses of cash now change significantly in comparison with the previous year? If so, what was the impact of the source or use on cash flow?

STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY

The statement of changes in stockholders' equity explains the changes in individual equity balances during the year. If the retained earnings are the only capital account that changed during the fiscal year, a statement of changes in retained earnings is often presented instead.

Most annual reports show the statement of changes in stockholders' equity as a formal financial statement following the balance sheet and income statement; however, some corporations show statement of stockholders' equity in the notes of the financial statements.

1. Record the amounts in the statement of changes in stockholders' equity for the following items:

	Current Year		Previous Year
Beginning Retained Earnings	$		$
Dividends (if any)
Net Income (Net Loss)
Other Items
Ending Retained Earnings	$		$

2. Cash dividends may be paid to more than one class of stock during the year (for example, to common and preferred stock)? If so, identify the dividend amounts each class of stock received.

Class of Stock	Current Year Dividends		Previous Year Dividends
Common	$		$
Preferred	$		$
Other	$		$

3. Were there any items other than income or dividends that changed the amount of retained earnings? If so, describe the nature of these items.

Comprehensive Income

Comprehensive income represents the change in equity (net assets) of a corporation during the year from transactions other than those resulting from investments and distributions to, owners. Comprehensive income usually differs from net income as a result of:

· Changes in the value of certain investments and financial instruments

· Amounts associated with the recognition of a minimum liability of a pension plan

· Certain translation adjustments for foreign currency

Record the items that explain the differences between net income and comprehensive income in the current year. If the corporation does not have any items that make comprehensive income different from net income, enter the same amount for net income and comprehensive income.

Net Income $

Items explaining the difference in net income and comprehensive income:

$

$

$

Comprehensive income $

NOTES AND SUPPORTING SCHEDULES TO THE FINANCIAL STATEMENTS

The notes and supporting schedules to the financial statements are located after the financial statements, in the annual report. Notes, sometimes called "footnotes," provide additional explanations, descriptions, and supporting information not conveniently displayed within the body of the financial statements. Supporting schedules are tables that provide more detailed information about certain items in the primary financial statements.

Inexperienced financial statement users sometimes regard the notes and supporting schedule as unimportant. However, most of the information contained in the notes and schedules are required by GAAP and can make a difference in a decision the financial statement users make concerning the corporation. For example, a contingent liability considered "reasonably possible" may be shown in the notes rather than the liability section of the balance sheet A financial statement user who ignores the notes would not be aware of contingencies that may occur.

The first note in an annual report usually summarizes the significant accounting policies used by the corporation when preparing the financial statements. This note is generally followed by notes addressing more specific topics.

Notes specific to certain accounts appearing in the financial statements usually follow the note: summarizing Significant accounting policies. The disclosure of a particular type of note varies significantly among corporations. These differences can be explained by the distinctions that exist among corporations and the flexibility of reporting permitted by GAAP. For example, a corporation need not disclose segmental data if it operates within only one segment. If the corporation operates within more than one segment, it may disclose segmental data in either a note or a supporting schedule.

It is possible that some of the following topics may not apply to the corporation you have selected. If a note is not applicable, write "NA' in the blank. Examine the notes carefully before deciding the topic does not apply. Answer the following questions concerning the notes to the financial statements.

Cash and Cash Equivalents Corporations often report "cash equivalents" along with cash on the balance sheet (SFAS 95). Cash equivalents usually include short-maturity deposits and liquid savings accounts. How does the corporation define their cash equivalents?

Accounts Receivable Corporations with receivables must disclose the net amount due and annual allowance for amounts deemed to be uncollectible. The percentage of uncollectible may be calculated by dividing the allowance for uncollectible by the gross accounts receivable.

Percent Uncollectible = Allowance for Uncollectible

Gross Accounts Receivable

Determine the percentage of uncollectible for the current and previous year:

Current Year Previous Year

= % = %

The receivables turnover ratio is an indication of the number of times a year the company collects its accounts receivables. It is determined by dividing credit sales by the average accounts receivable. Average accounts receivable is usually determined by dividing beginning and ending accounts receivable by two.

Receivable = Credit Sales

Turnover Average Receivables

Compute the receivables turnover ratio for the company in the current and previous year. If credit sales are not available, assume that all sales are on credit. If the beginning accounts receivable for the previous year is unavailable in the current annual report, you may estimate that amount.

Current Year Previous Year

= times = times

How did the receivable turnover ratio change from the previous year to the current year? What are the implications of this change?

Inventories Material classifications of inventories must be itemized on the balance sheet or in the corresponding notes (ARB 43. Chapter 4. Paragraph 15). Is the inventory classified into more than one category? If so, what are those categories?

The inventory flow method [for example. first-in. first-out (FIFO); average; or last-in. first-out (Llf!O)] selected by a corporation can significantly affect the amount allocated to inventory on the balance sheet and cost of goods sold on the income statement. A corporation is required to disclose flow method(s) used to value its inventory (ARB 43, Chapter 3A, Paragraph 9). In some cases, the corporation will value foreign and domestic inventory groups in different ways. What method(s) is (are) used to account for inventories?

Inventory Group	Inventory Flow Method
Domestic Inventories
Foreign Inventories

If the corporation uses a LIFO flow method, it is required to disclose the effects of the LIFO reserve. The LIFO reserve represents the difference between the LIFO inventory amount and the current value or FIFO inventory amount typically used for internal reporting. If the corporation uses LIFO to value the inventory, determine the following values for the current year:

Inventory using LIFO (as shown on the balance sheet) $

LIFO Reserve $

Inventory at Current Cost I FIFO I Replacement Cost $

The inventory turnover ratio is an indication of the number of times a year the company sells its inventory during a year. It is determined by dividing cost of sales by the average inventory. Average inventory may be determined by dividing the sum of beginning and ending inventory by two.

Inventory = Cost of Sales

Turnover Average Inventory

Compute the inventory turnover ratio for the company in the current and previous year. If the beginning inventory for the previous year is unavailable, you may estimate that amount.

Current Year Previous Year

= times = times

How did the inventory turnover ratio change from the previous year to the current year? What are the implications of this change?

Marketable Securities Investments are classified as trading securities (intended to generate near-term profits). held-to-maturity (debt investments that will be held for the investment life). or securities available for sale (SFAS 115). Does the corporation hold investments? If so, indicate the value of these investments in each of the following categories for the current year. (Do not include the values of equity investments.)

Investment Category	Current Investments		Long-Term Investments
Trading Securities	$		$
Held-to-Maturity Securities	$		$
Securities Available for Sale	$		$

Property and Depreciation If material, separate categories of property, plant, and equipment should be disclosed. Identify the categories of property. Plant and equipment

Corporations must disclose the depreciation method(s) used to value property, plant, and equipment (APB 12). In some cases, the corporations will use more than one depreciation method. What methods(s) is. (are) used to depreciate property, plant, and equipment?

Fixed Asset Group Depreciation Method

SFAS 121 requires losses resulting from impairment of long-lived assets be charged against income. Did the corporation have any assets recognized as impaired during the current year? If so, what was the nature of the impaired assets and the amount charged against income to recognize the impairment?

An approximation of the remaining usefulness of property, plant, and equipment may be determined by computing the percentage that assets are depreciated. The ratio is calculated by dividing accumulated depreciation by the gross depreciable fixed assets. Depreciable fixed assets do not include land or construction in progress.

Percentage of Fixed = Accumulated Depreciation

Asset Depreciation Gross Depreciable Fixed Assets

Calculate the percentage of fixed asset depreciation for the company in the current and previous year.

Current Year Previous Year

= % = %

How did the percentage of fixed asset depreciation change from previous year to the current year? What might be the reasons for this change? What are the implications of this change for the future?

Leased Assets Some corporations lease, rather than purchase, property, or equipment. These leases may be classified as operating, which are expensed, or capital leases, which are recognized as long-term assets with associated liabilities. The assets associated with capital leases are periodically amortized in the same way that owned assets are depreciated.

If the corporation has capital leases, what is the long-term liability associated with the lease{s) recognized on the balance sheet?

$

Assuming the corporation does not enter into additional lease agreements, what will be the amount of the payment associated with capital leases next year?

$

Operating leases are legal obligations that require the corporation to make periodic payments for several years. These leases do not require recording of a long-term asset or liability. However, disclosure of the expected payments over the life of the lease is required by GAAP to be disclosed in the notes. What is the total obligation associated with the operating leases?

$

What was the rent expense associated with the operating leases in the last year?

$

Assuming the corporation does not enter into additional lease agreements, what will be the amount the payment associated with operating leases next year?

$

Long-term Debt Long-term debt is usually organized by type of lender (for example, loans from banks and bond issues are usually grouped separately). Corporations disclose interest rates, due dates, collateral and loan covenants of long-term debt. What type of long-term debt obligations does the corporation has? If the corporation has more than five debt instruments, list the five largest debts.

Instrument		Rate		Amount
		%		$
		%		$
		%		$
		%		$
		%		$

Debt payments for each of the next five years must be disclosed. In which of the next five years is most of the long-term debt due? How much will be paid during that year?

Year Amount to be paid $

Pension Plans A pension plan is usually the most significant of all post-retirement benefits. In general, these plan are classified as:

· Defined Contribution Plans (for example, 401(k) plans) - The employer makes periodic payments to employees to be placed into designated retirement account. No promise is made concerning the amount available at the time of retirement.

· Defined Benefit Plans - The employer promises a specified amount (usually based on ending salaries and years of service) to retired employees.

Both defined benefit and defined contribution plans will have an associated expense. If the corporation has either of these types of plans, what was the pension expense associated with the plan(s) for the current year?

Defined Contribution Pension Expense $

Defined Benefit Pension Expense $

Corporations with defined benefit plans are required to disclose an estimate of the cumulative obligation owed by the pension plan. The projected benefit obligation (PBO) is the present value of the benefits owed to current employees based on their expected future salaries. How much is the PBO at the end of the current year?

$

Corporations with defined benefit plans must also disclose the market value of the assets currently held in the pension fund. What is the fair value of the retirement plan assets at the end of the current year?

$

What was the cash amount contributed to the defined benefit pension plan during the current year?

$

What was the amount of defined benefit pension benefits paid to retirees during the current year?"

$

Based on a comparison of the obligation and the assets of the plan(s), would you say the plan(s) are adequately funded? Why or why not?

What is the prepaid pension cost or accrued pension liability that will be included in the balance sheet of the corporation?

$ Check One:

FORMCHECKBOX Prepaid Pension Asset

FORMCHECKBOX Accrued Pension Liability

Post-Retirement Benefits Other Than Pensions Post-retirement benefits are programs providing cash and services to former employees. In addition to pensions plans, these programs may include health care, dental care, life insurance, and savings plans. The accounting for post-retirement benefits is similar to that of the pension plan (SFAS 106).

What is the expense associated with non-pension post-retirement benefits?

$

What is the benefit obligation for the non-pension post-retirement benefit plan(s)?

$

What is the fair market value of the assets held for non-pension post-retirement benefit plans?

$

What is the non-pension post-retirement benefit liability (asset) included on the balance sheet?

$

What was the cash amount contributed to non-pension post-retirement benefit plans during the current year?

$

What was the amount of non-pension post-retirement benefits paid to retirees during the current year?

$

Income Taxes Income tax expense is often one of the largest expense categories on the income statement Income tax expense is determined by applying a tax rate to the portion of income taxed. However, the federal government will often allow payment of taxes to be deferred to later years. Deferred taxes (a liability on the balance sheet) are a result of differences between the way net income and taxable income are determined. GAAP requires corporations to disclose (either in a note or on the face of the financial statement) the current tax expense and the amount of taxes deferred to a later year (SFAS 109).

What was the income tax expense (or provision for income taxes) for the current year appearing in the income statement?

$

According the note for income taxes, what portion of the current year's income tax expense (federal. state, and international) has been deferred to future periods?

$

What is the effective tax rate for corporation for the current year?

%

Deferred tax assets and liabilities result from differences between corporate accounting and the determination of taxable income. What amount is disclosed in the notes as?

Net deferred tax asset $

Deferred tax liability $

What significant activities resulted in recognition of deferred tax liabilities that are not yet due to a tax authority?

What significant activities led to the recognition of deferred tax assets that will be utilized in the future?

Employee Stock Option Plan(s) Options are an opportunity to purchase shares of stock at a guaranteed price for a specified period of time. They are often issued to employees as an incentive to perform in a manner that increases the value of the company (and, thus, increases the market price of the stock). However, these options potentially dilute the ownership interest of existing stockholders. GAAP requires a description of these securities and their financial effects to be disclosed (SF AS 123).

Options are considered outstanding if they have been granted by the corporation, but have not yet been exercised, cancelled, or expired. What is the current number of options outstanding and the per share weighted average exercise price associated with the outstanding options:

shares outstanding at an average exercise price of $ per share

Options are exercisable when they have been held for an appropriate period of time and currently eligible for purchasing stock at a guaranteed price. What is the current number of options exercisable and the per share weighted average exercise price associated with the exercisable options:

shares exercisable at an average exercise price of $ per share

Corporations may elect to recognize an employee compensation expense based on the fair value of options that have been issued during the year. If they do not recognize this expense, they must disclose a pro forma income amount that recognizes the decrease in net income that would have occurred had an employee compensation expense been recognized. In the blank below indicate either (1) the expense associated with the issuance of the options for the current year, or (2) the difference in pro forma and reported net income that represents the value of the options granted during the year:

$

Segmental and Geographic Information GAAP (SFAS 131) requires identification of key information concerning operating segments. In addition, if the corporation operates in several geographic areas, information concerning the financial results of major geographic area should also be reported. If the corporation discloses disaggregated information. indicate the primary business and/or geographic segments:

Operating Segments Geographic Areas

Contingencies Contingent liabilities· are financial obligations that depend on the Occurrence (or nonoccurrence) of future events. Disclosure of these obligations depends on whether or not the future event is probable, reasonably possible, or remote (SFAS 5). For example, if losing a $2,000,000 lawsuit is probable, the amount is shown as a liability and the lawsuit is describe in a note. If the loss of the lawsuit is reasonably possible, no liability is recognized; however, the lawsuit is described in a note. Remote losses need not be disclosed.

Identify any contingencies that potentially affect the financial position of the corporation. Are these contingencies probable or reasonably possible? Were any of the contingencies reported as an expense on the income statement and a liability on the balance sheet?

Foreign Currency Translation Many corporations buy, sell. or operate in foreign countries. GAAP requires corporations to disclose the economic effects of foreign currency exchange rates on their operations (SFAS 52). For example, payables or receivables will be paid in higher or lower amounts if the exchange rate fluctuates between the sale and the payment dates. In addition, the assets and liabilities of a foreign subsidiary may be restated when included on the parent company's balance sheet Does the corporation have any transactions in a foreign currency that require an adjustment on the balance sheet or in comprehensive income? If so, what was the type of transaction and the amount of the transaction?

Derivative Instruments and Hedging Activities Corporations sometimes use derivative instruments and hedging activities to reduce the risks associated with business. Common examples of these types of activities include:

· Fair value hedges – counteracts potential losses in value of another instrument on the balance sheet

· Option hedges – permit the acquisition of an asset for a guaranteed price over a specified period of time

· Cash flow hedge – guarantees an amount of future cash flow

· Foreign currency hedge – protects against losses associated with changes in foreign currency exchange rates.

· Interest rate swaps – exchanges of variable or fixed interest rates with the intent of minimizing borrowing costs

Identify the primary groups of derivative instruments or hedging activities used by the company. Did the company recognize any gains or losses to determine net income or comprehensive income as a result of these transactions?

Derivative Instrument Effect on the

or Hedging Activity Financial Statements

Subsequent Events GAAP requires that significant events occurring after the fiscal year end, but before the issuance of the financial statements, be disclosed in a note (SFAS 5). For example, suppose a corporation with a December 31 year end decided to acquire a subsidiary on January 15 of the following year. The effects of the acquisition would not appear on the December 31 balance sheet; however, if the annual report was issued after January 15, a description of the acquisition and the pertinent amounts should be disclosed in a note. If the corporation had any events subsequent to the fiscal year end, describe the event and the anticipated effect on the next year's financial statements.

Interim (Quarterly) Financial Data Disclosure of quarterly data aids the financial statement user in determining the seasonality of corporate operations, for example. American manufacturers of confectionery will typically experience much higher sales in the quarter that includes the Halloween and Christmas holidays. Large public companies are required by the SEC (Item 302(a).Reg. S-K) to include quarterly amounts for revenues, gross profit, net income, and net income per share.

Chart the quarterly revenue for the corporation over the current year.

a. Label the vertical axis of the following chart with a scale that will accommodate the quarterly revenue that occurred throughout the current year.

b. Mark the level of revenue for each year with an X.

c. Connect the revenue amounts with a line to indicate the trend.

Quarterly

Sales

Do you detect significant quarterly fluctuations in quarterly data for the corporation? If so explain the reasons for the fluctuation(s)?

REPORT OF THE INDEPENDENT ACCOUNTANTS

Auditing is a process by which an independent accounting firm accumulates and evaluates data to determine whether the financial statements are presented in accordance with GMP. The Securities and Exchange Commission requires an annual audit for all companies whose capital stock is traded on a recognized stock exchange.

The purpose of the audit report is to communicate the findings of the auditor to financial statement users. The auditor's report usually appears immediately after the notes to the financial statement. Who is the corporation's auditor and where is the auditor located?

Auditor

City where auditor is located

An audit report usually consists of three parts tat (1) define the responsibility of management, (2) describe the nature of the audit, and (3) express an opinion on whether the financial statements are fairly presented and in conformity with generally accepted accounting principles. The following are types of audit opinions that commonly in annual reports:

An unqualified opinion state that, in the auditor's opinion, the financial statements are in conformity with generally accepted accounting principles and that the auditor is reasonably assured that the financial statements are free from material misstatement.

A qualified opinion is issued when the auditor detects non-pervasive departures from GAAP non-pervasive scope limitations. A qualified opinion includes the words "except for" in the paragraph in which the auditor expresses an opinion.

Disclaimer of opinion occurs when the auditor experiences severe limitations on the scope of the audit or if a non-independent relationship exists between the auditor and the client. Each of these conditions makes it impossible for the auditor to express an opinion on the financial statements. A disclaimer of opinion will clearly state that the auditor does not render an opinion.

An adverse opinion is given only when the auditor believes the financial statements are materially misstated or misleading. An adverse opinion will state specifically that the financial statements do not conform to GAAP.

Read the auditor's opinion carefully, then answer the following questions concerning the content of the opinion.

1. Place an X by the type of opinion expressed by the auditor:

FORMCHECKBOX Unqualified FORMCHECKBOX Disclaimer of opinion

FORMCHECKBOX Qualified FORMCHECKBOX Adverse opinion

2. An auditor's report will state the responsibility of the auditor. What is the responsibility of the auditor with regard to the financial statements?

3. What guidelines does the auditor use to conduct the audit?

4. Does the auditor believe the financial statements were presented fairly? What statements in the audit opinion support your conclusion?

THE MANAGEMENT REPORT

The purpose of the management report (also called "Responsibility for Financial Reporting" report) is to define management's responsibility in preparation and disclosure of the financial statements. If management gives a report, it is usually located near the auditor's report. Read the management report carefully and answer the following questions concerning its content.

1. According to the management report, who bears responsibility for the integrity and Objectivity of the financial statements?

2. What means does management use to assure that the financial information is reliable?

3. An audit committee is comprised of several members of the board of directors. This committee acts as the liaison between the independent auditor and the corporation. What is the responsibility of the Audit Committee of the Board of Directors?

RATIO ANALYSIS

Ratio analysis is a way to compare current performance and financial position to performance and position of (1) previous years, and (2) other corporations. Calculate the following ratios for your corporation. You should show all of your calculations, In other words, indicate the components of the numerator and the denominator for each ratio.

ANALYSIS OF PROFITABILITY

Ratios of profitability indicate the degree of success of the corporation's operations during the year. Profitability ratios show the amount of resources required to generate profits and. the availability of profits to stockholders. These ratios are often used as a means for stockholders to evaluate the performance of corporate management.

1. Profit Margin

The profit margin on revenue shows the relation of profits to revenue. The percentage is computed by dividing income from continuing operations by net revenue for the year. Income from continuing operations is net income without the effects of any discontinued operations, extraordinary items, or cumulative effects of accounting changes.

Profit = Income from Continuing Operations

Margin Net Revenue

A higher profit margin indicates less revenue is needed to generate a desired level of profit. Compute the profit margin on sales for the current and previous years:

Current Year Previous Year

= % = %

2. Return on Assets

The return on assets (ROA) ratio indicates how well the assets of the corporation are utilized to achieve a profit. The ratio demonstrates potential earning similar to the way a savings account interest rate indicates how much you can earn on money invested in savings. The percentage is computed by dividing income from continuing operations by average total assets held over the year. Average assets are usually computed by adding current year total assets to previous year total assets and dividing by two.

Return = Income from Continuing Operations for Current Year

on Assets (Current Year Total Assets + Previous Year Total Assets) /2

Total assets for the current and previous years appear on the balance sheet; however, because a balance sheet typically shows only two years of data, previous year total assets may appear in another section of the of the annual report. Corporations differ on where they show data concerning previous years. (You may have to examine the annual report closely to find historical data.) Compute the return on assets for the current and previous year:

Current Year Previous Year

= % = %

2. Return on Stockholders' Equity

Return on stockholders' equity is similar to return on assets except it removes the effect of funds the corporation has borrowed. It is calculated by dividing income from continuing operations by the average stockholders' equity through the year.

Return = Income from Continuing Operations for Current Year

on Equity (Current Year Equity + Previous Year Equity) /2

Total equity for the current and previous years appears on the balance sheet; however, because a balance sheet typically shows only two years of data, previous year total equity may appear in another section of the annual report. Compute the return on ‘stockholders'-equity for the current and previous year:

Current Year Previous Year

= % = %

What corporate characteristic causes the return on assets and return on equity percentages to be different?

All three of the preceding ratios indicate profitability by comparing income from continuing operations to another number in the income statement or balance sheet. In comparison to the previous year. has the corporation improved its ability to generate a profit? Justify your answer based on the ratios you have calculated.

Does management offer an explanation for any changes or stability in the profitability of the corporation? (See management discussion and analysis.) Explain.

4. Earnings Per Share

The earnings per share ratio (EPS) represents the amount of earnings attributable to each share of stock in the corporation. The ratio is considered so important that GAAP requires EPS disclosure on the face of the income statement. In its simplest form, EPS is calculated by dividing net income. less preferred stock dividends, by the average number of common shares outstanding. If the corporation has income or losses from discontinued operations, extraordinary items, or cumulative effects of accounting changes, the effects of these items on earning per share must be disclosed separately.

In the spaces below. record the basic earnings per share for continuing operations as it appears on the income statement:

Current Year Previous Year

Dollars per share Dollars per share

Was the amount for the current year better or worse than the ratio of the previous year? Was the change in EPS a result of changes in the numerator or the denominator of the ratio? Explain.

The equity section of a balance sheet may have dilutive securities (such as options, convertible bonds and convertible preferred stock) that can decrease EPS by increasing the number of shares in the denominator. In this case, the corporation may be required to show a diluted EPS in addition to the basic EPS. Were diluted EPS disclosed by the corporation? If so, what equity securities in the balance sheet have the potential of increasing the EPS denominator?

5. Cash Dividends per Share·

Cash dividends per share is similar to earnings per share except the numerator excludes the portion of earnings retained in the corporation. In other words, the ratio indicates the amount of cash dividends the stockholder received during the year for each share of stock owned.

Cash Dividends = Cash Dividends Paid to Common Stockholders

Per Share (Current Year Number of Shares + Last Year Number of Shares)/2

The dividend paid to common stockholders appears on the statement of retained earnings, The number of common stock shares outstanding appears on the balance sheet; however, because a balance sheet typically shows only two years of data, the previous year number of shares may appear in the selected financial data section of the annual report Compute the cash dividends per share for the current and previous year.

Current Year Previous Year

Dollars per share Dollars per share

6. Dividend payout ratio

The dividend payout ratio indicates the percentage of earnings returned to the stockholder rather than retained in the corporation. The ratio is computed by dividing cash dividends paid to common stockholders by the amount of income available for payment of common stock dividends.

Dividend = Cash Dividends Paid to Common Stockholders

Payout Ratio Net Income - Preferred Dividends Paid

The dividend paid to common and preferred stockholders appear on the statement of retained earnings. Net income appears on the income statement. Compute the dividend payout ratio for the current and previous year.

Current Year Previous Year

= % = %

Dividend ratios (such as cash dividends per share and the dividend payout ratio) indicate the amount of dividends paid to the stockholders in relation to other items. Dividend payouts sometimes depend on the maturity of the corporation. For example, the dividend ratios of a newly foimed corporation will typically differ from that of a mature corporation. Would you expect a newly formed corporation to have higher or lower dividend payout ratios? Why?

7. Price/Earnings (P/E) Ratio

The PIE ratio measures the relationship between the earnings of the corporation and the current market price. A corporation with a PIE ratio of 15 is said to be selling at 15 times its current earnings. Some analysts believe the PIE ratio is a good measure of the future earnings power of a corporation. Companies with high PIE ratios have a stock price that reflects the expectation of higher future earnings. A lower PIE ratio may indicate that lower earnings expectations are reflected in the company's stock price.

Price/Earnings = Market Price Per Share

Ratio Earnings Per Share

Calculate the P/E Ratio for the company in the current and previous year. If end of the year market prices of common shares are not available, use an average of the high and low price during the last quarter of the year.

Current Year Previous Year

= times = times

In the past decade, the average P/E ratio for major corporations has ranged from 14 to 25. How does the company's P/E ratio compare to this average? What may be concluded concerning the expected growth of the company?

ANALYSIS OF LIQUIDITY

A common misconception is that corporations become bankrupt because they are unprofitable. However, bankruptcy is declared because a corporation is not able to meet the current obligations to the creditors, not when the corporation lacks profitability.

Assessing Working Capital

Current assets are called "current" because they are converted into cash during the operating cycle. Current liabilities are liabilities liquidated by current assets or other current liabilities within the operating cycle. Working capital is equal to current assets minus current liabilities. In other words, working capital is the amount of current assets remaining after current liabilities have been paid.

Working capital is considered a measure of the solvency of a corporation because a negative working capital indicates the corporation is not able to pay current liabilities maturing in the next operating cycle. Calculate working capital for the corporation as follows:

	Current Year		Previous Year
Current Asset
Minus: Current liabilities
Working Capital

By how much did the amount of working capital increase or decrease compared to the previous year?

%

What balance sheet accounts explain the most significant changes in working capital?

Liquidity Ratios

Liquidity ratios indicate the corporation's ability to meet short-term cash requirements. For this reason, liquidity ratios are important to potential and existing creditors. There are two commonly computed liquidity ratios:

1. Current (or Working Capital) Ratio

The current ratio indicates whether the firm will have enough resources to meet Obligations becoming due during the next period. The current ratio is the quotient of current assets divided by current' liabilities. The ratio is usually expressed in a format in which the denominator is equal to "1", for example, if current assets were twice as much as current liabilities the ratio is expressed as "2: 1"

Current = Current Assets

Ratio Current liabilities

Strictly speaking, a ratio less than one indicate a corporation will not meet obligations due during the next period without additional resources. On the other hand. a ratio of greater than one indicates the corporation is currently is able to meet current liabilities as they become due. All components of the current ratio appear in the current sections of the balance sheet. Compute the current ratio for the current and previous year:

Current Year Previous Year

= :1 = :1

How Based on the current ratio you calculated. Do you believe the corporation able to meet the current obligations as they become due? Why? Has the corporation established lines of credit with lenders to obtain working capital if needed?

2. Quick (or Acid-Test) Ratio

The quick ratio recognizes certain current assets are more liquid than others. For example, inventories are usually not immediately available for the liquidation of current liabilities because the corporation must first sell inventoried items to obtain cash.

The quick ratio is similar to the current ratio except the numerator includes only current assets that may be readily turned into cash. These current assets include cash, marketable securities, and net receivables. .

Quick = Cash + Marketable Securities + Net Receivables

Ratio Current Liabilities

All components of the quick ratio appear in the current sections of the balance sheet. Compute the quick ratio for the current and previous year:

Current Year Previous Year

= :1 = :1

Based on your assessment of the two liquidity ratios you calculated, did the liquidity position of the Corporation strengthen or weaken compared to the previous year? What were the reasons for the change, if any?

ANALYSIS OF SOLVENCY

Coverage ratios measure the corporation's ability to manage debt or the "solvency" of the corporation. The ratios are an indication of risk to long-term creditors and equity investors.

1. Debt to Total Assets

The debt to total assets ratio measures the amount of leverage used by the corporations The ratio indicates what percentage of the assets of the corporation is financed by those other their stockholders of the corporation.

Debt to = Total Liabilities

Total Assets Total Assets

All components of the debt to total assets ratio appear on the balance sheet. Compute the debt to total assets ratio for the current and previous year:

Current Year Previous Year

= % = %

How did the debt position of the corporation change over the last year? What were the sources of these changes if any?

Would potential lenders prefer the debt to total assets ratio to be larger or smaller? Why?

2. Times Interest Earned Ratio

When payment of interest on debt becomes significant in proportion to the corporation's annual income, it is often evidence the corporation is spending too much of its resources servicing debt The times interest earned ratio indicates the relationship of interest expense to income. The ratio is computed by dividing income before tax and interest expense by interest expense.

Times

Interest = Net Income + Interest Expense + Tax Expense

Earned Interest Expense

All of the components of the times interest earned ratio appear on the income statement. Compute the times interest earned ratio for the current and previous year:

Current Year Previous Year

= times = times

Some believe the times interest earned ratio is more appropriately calculated on a cash basis. In this way, the ratio indicates the company's ability to pay interest from the cash from operations. (Cash paid in interest may differ from interest expense to the extent' of accruals are made or a premium or discount is amortize.) In ‘this case, tile numerator includes cash flow from operations as it appears in the cash flow statement. The denominator is cash paid for interest, which may be obtained from the cash flow statement or from the note describing the company's debt obligations.

Times Interest

Earned on the = Cash Flow from Operations + Cash Paid for Interest

Cash Basis Cash Paid for Interest

Compute the times interest earned on the cash basis for the current and previous year:

Current Year Previous Year

= times = times

How does the times interest earned ratio for the current year compare to the previous year? What are the implications of this change, if any, for the corporation? Is the corporation able to service its debt?

3. Book Value per Common Stock Share

Book value per share is an indication of the net worth of the corporation. The ratio is determined by dividing total stockholders' equity by the number. of common stock shares currently outstanding. Stockholders' equity should be adjusted for liquidation capital and dividends in arrears attributed to preferred stockholders.

Book Value = Equity Attributable to Common Stockholders

Per Share Common Stock Shares Currently Outstanding

All of the components of book value per share appear on the balance sheet. Compute the book value per common stock share for current and previous years:

Current Year Previous Year

Dollars per share Dollars per share

The book value per share is often compared to the market value of the stock (the price at which it is trading on the stock market) to determine how the price of the stock compares to the value of the equity determined on the balance sheet. Compare the book value per share to the market price per share you obtained previously in the practice problem. Is the book value per share higher or lower than the current market price of the stock? What factors might explain the difference?

INDUSTRY OR COMPETITOR COMPARISONS

Two qualities of information are consistency and comparability (FAS Concept Statemenf2). "Consistency" ensures accounting information prepared for a specific period relates to, accounting information prepared for a different period for the same corporation. In other words. Financial statements of a corporation for one year can be compared to financial statements of previous years. In previous sections you related ratios from previous years to the current year with "consistent” data.

"Comparability" describes the relationship between corporations. For example, net income of one corporation can be compared to net income of another corporation. In this section you will compare common-size and ratio data you have prepared previously to industry-wide data or with a primary competitor. This information permits an assessment of how a corporation's operations and financial position relate to the other corporations in the same industry.

Industry common-size percentages and ratios are easily obtained in most libraries. (See Appendix S, Obtaining Information for Industry Comparisons.) Most sources of industry wide data are organized by Standard Industrial Classification (SIC) codes and by corporation size within that code. To find the code in which your corporation is classified, use the index provided in the source. Some corporations are not, easily categorized within a specific SIC. For example, the corporation may produce several products that may be categorized in several industries. You may have to determine the industry that best fits your corporation.

Alternatively, you may want to compare your corporation to their closest competitor. Information concerning a primary competitor may be obtained in the annual report of the competitor.

Mark the comparison method you will use:

FORMCHECKBOX Industry Comparison

SIC Code:

Industry Name:

Source of industry-wide data:

All industry comparisons should be made using the same fiscal years. The most current year of operations may not yet be available in the industry source. What is the year of the comparison you will be making?

FORMCHECKBOX Primary Competitor Comparison

Name of Competitor:

In the following table, copy (1) common-size data and ratios calculated earlier for the appropriate year, and (2) the corresponding industry or comparison data. You may need to adjust certain ratios to make them comparable. For example, if the earnings before taxes are used to calculate return ratios for the industry, you should calculate your corporation's ratio in a similar manner. If the data is not available in the sources you have selected, indicate this by writing "NA" in the blank.

Income Statement Common-Size Data	Corporation		Industry or Competitor
Gross Profit/Sales	%		%
Income from Continuing Operations/Sales	%		%
Balance Sheet Common-Size Data
Current Assets/Total Assets	%		%
Current Liabilities/Total Assets	%		%
Liabilities/Total Assets	%		%
Equity/Total Assets	%		%
Profitability Ratios
Return on Assets	%		%
Return on Equity	%		%
Liquidity Ratios
Current Ratio	:1		:1
Quick Ratio	:1		:1
Coverage Ratios
Times Interest Earned	times		times
Operational Ratios
Inventory Turnover	times		times
Receivable Turnover	times		times

1. How do the income statement common-size data and the profitability ratios differ from the industry norms or the primary competitor? Based on your analysis of the annual report, give reasons why these differences might exist.

2. What balance sheet and liquidity ratios differ from the industry norms or the primary competitor? Based on your analysis of the annual report, give reasons why these differences might exist.

3. Do the operational ratios compare favorably to the industry or the primary competitor? Why?

MAKING DECISIONS BASED ON THE ANNUAL REPORT

1. How would you assess the corporation's revenue and income performance over the last two years? What are the reasons for your assessment?

2. What would you predict revenue to be next year? $

3. What factors (such as the economy, consumer demand, new products, etc.) will have the greatest influence on the determination of next year's revenue? In what way would these factor(s) influence revenue?

4. How would you assess the company's total asset growth rate (for example, rapid increase, stable increase, stagnant, declining)? What evidence justifies your answer?

5. Do you expect total assets to increase, decrease, or remain relatively stable next year? Justify your answer.

6. Do you believe the corporation will be able to meet the goals identified by management? In your answer, you should identify specific goals and explain why you believe these goals may or may not be met.

7. Do you believe the corporation will need additional financing in the future to meet its stated goals? Why or why not? If financing is needed, do you believe the corporation would be able to obtain financing easily?

8. Identify what you believe to be the three strongest aspects of the corporation.

Do you believe that the corporation will be able to maintain these strengths over the next few years?

9. Identify what you believe to be the three weakest aspects of the corporation.

In what way might these weaknesses be overcome?

10. Are you optimistic or pessimistic concerning the future of the corporation? What specific corporate or industry characteristics influence your opinion?

11. Would you invest in the capital stock or bonds (if applicable) of this corporation if you had sufficient funds? Would you rather invest in one of the corporation's competitors? What are the reasons for your decision?

APPENDIX A

HOW TO OBTAIN AN ANNUAL REPORT

To complete this assignment, you must first obtain an annual report of a corporation. This appendix explains how to get an annual report. Usually corporations are enthusiastic about complying with requests for annual reports. The recipient may be a potential stockholder in the corporation.

You may request an annual report by letter or email. A short letter or note similar to the one on the next page will suffice. Annual reports may also be obtained by phoning the shareholder service department of the corporation. The following are web sites and directories that will help you in contacting corporations to obtain an annual report:

Web Sites

Site Name	Web Address
Report Gallery by IntraGrafix	www.reportgallery.com
Investor Communications Business Inc.	www.icbinc.com
Hoover's Online	www.hoovers.com

Corporate Directories

Directory of Corporate Affiliations, National Register Publishing Co., Wilmette, IL (updated annually) (Library of Congress Call Number: HG 4057)

Register of Corporations, Directors and Executives: United States and Canada, Standard & Poor's, New York, NY (updated annually) (Library of Congress Call Number: HG 4057.A4)

Thomas Register of American Manufacturers, Thomas Publishing Co., New York, NY (Library of Congress Call Number: T 12.T612)

The ValueLine Investment Survey, ValueLine Publishing Inc., New York, NY (Library of Congress Call Number: HG 5401.V26) (a periodical service providing investors with quarterly updated financial information. The service also includes addresses of corporations.)

Ward's Business Directory of Largest U.S. Companies, Information Access Co., Belmont, CA (updated annually) (Library of Congress Call Number: HG 4057.A46)

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SAMPLE LETTER

APPENDIX B

OBTAINING INFORMATION FOR INDUSTRY COMPARISONS

The following publications are sources of industry-wide data. Most industry comparison services organize data by Standard industrial Classification (SIC codes. You must first determine which SIC code is most appropriate for the corporation you have selected. The services usually provide data for several corporate size categories (usually determined by total assets). Use the most appropriate industry and size for the corporation you have selected.

If you have difficulty determining the SIC code for your corporation, refer to Standard Industrial Classification Manual, Executive Office of the President, Office of Management and Budget, National Technical Information Service, Springfield, Virginia. In addition, the Occupational Safety and Health Administration maintains a Standard Industrial Code Search of the internet at www.osha.gov/oshstats/sicser.html. If your corporation's securities ar registered with the Securities and Exchange Commission (SEC), the primary SIC code(s) will be listed in the 10-K reports filed with the SEC. The 10-K reports may be located on the internet at www.sec.gov.

Sources of Industry-Wide Data

Almanac of Business and Industrial Financial Ratios, Troy, Leo., Prentice Hall, Englewood Cliffs, NJ (Library of Congress Reference: HF5681 R25)

Annual Statement Studies, Robert Morris Associates, Philadelphia, PA, (Library of Congress Reference: HF5681 B2)

Industry Norms and Key Business Ratios, Dun and Bradstreet, Inc., New York, NY, (Library of Congress Reference: HF 5681 R25 I553)

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[Your Address]

[Today's Date]

Stockholder Relations

[Corporation Name]

[Corporate Address]

Director of Stockholder Relations:

I am currently enrolled in a business class at [college or university name]. As a class assignment, students will be examining and analyzing annual reports of corporations.

I would like to use the annual report of your corporation in my class assignment. Will you please send a copy of your most recent annual report to me at the above address?

Thank you,

[Your Name]

� Sometimes total liabilities are not stated explicitly. Total liabilities may be determined by subtracting the total shareholders' equity from total assets.

Three Years Ago

Previous Year

Current Year

Net Income

Cast Flow - Operations

1st Quarter

2nd Quarter

3rd Quarter

4th Quarter