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Why and What of Income Statement, Balace Sheet, Cash Flow Essay

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1.2 What is the difference between an annual report and a 10-K report? An annual report although could be consider as shorter version of 10k but the key difference lies in approach and intention of reporting, meaning with what point of view the document is prepared an annual report is persuasive in nature and persuade investors to invest with the corporation, printed on a glossy paper with attractive graphic and contains management spin, management could chose the level of detail to be provided and language it could be anything which is on management’s discretion, also a annual report contains letters of the CEO and chairman generally talking about the present performance and future of the company while on the other hand Publicly traded companies have a large roster of reporting and regulatory obligations to fulfill. Corporations must report to their shareholders, and also to financial regulatory authorities that collect data for the public record. Each publicly traded company must file an annual report, and also a report known as a 10-K. Although these have similarities, they also have key differences.

Purpose * An annual report is used to represent the state of the company to shareholders, and give them an insight into the company’s activities in the past year. It’s unofficial, and its purpose is mainly to communicate, so it serves something of a public relations function. A Form 10-K report is an official document that publicly traded companies must file with the Securities and Exchange Commission. In contrast to the annual report, it is filed to fulfill a regulatory requirement for transparency. It cannot contain any of the management “spin” which is often a feature of the annual report.

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* The annual report is an informal document, so the content will vary from company to company, what is most important to communicate to shareholders. Typically though, each annual report will include at least a balance sheet and a list of company officers. Extra information is at the discretion of the company. Some will give a very full financial picture; others will give only key pieces of information. A Form 10-K by contrast always contains a comprehensive financial picture of the company, portrayed in set types of information mandated by regulators. These include executive compensation, legal proceedings, property holdings, subsidiaries, a business summary and many other requirements.

1.4 What organization has legal authority to set accounting policies in the United States? Does this organization write most of the accounting rules in the US? Explain. The Financial Accounting Standards Board (FASB) a non-profit organization primarily developed for purpose of establishing United States Generally Accepted Accounting Principles (USGAAP) for public companies in the U.S created in 1973 by Security and Exchange Commission, is the agency legally responsible for writing most of the accounting rules in United States.

1.5 Describe the financial statements that are contained in an annual report or Form 10-K. Following are the financial statements that are contained in an annual report on form 10k 1. Independent Auditor’s Report 2. Consolidated Statements of Operation 3. Consolidated Balance Sheets 4. Other accounting reports and notes.

1. This report contains the expression of an opinion as t the fairness of the financial statement presentation. Most auditor’s reports are “unqualified” which means in the opinion of the auditor the financial statements presents fairly the financial position. A “qualified” report is a signal that the auditors are for some reason, not completely satisfy with the financial statements. Qualified reports results from failure to use generally accepted accounting principal, inconsistency in the application of accounting principles or uncertainty regarding the outcome of significant factors that will affect he ongoing operations of the firm.

2. “Consolidated statements of operation”- the statement is self explainatory what it contains although there is no particular format prescribed but basically it is a statement which do have a column for all the earnings and gains while another column for all the expenditure and losses thereby deducting expenses form income profits are arrived, depending on practice EBT or EBITA or EBITDA is found. A statement of operation show how well or how bad company performed during the year

3. The balance sheet represents a record of a company’s assets, liabilities and equity at a particular point in time. The balance sheet is named by the fact that a business’s financial structure balances in the following manner:

Assets = Liabilities + Shareholders Equity|

Assets represent the resources that the business owns or controls at a given point in time. This includes items such as cash inventory, machinery and buildings. The other side of the equation represents the total value of the financing the company has used to acquire those assets. Financing comes as a result of liability or equity. Liabilities represent debt (which of course must be paid back), while equity represents the total value of money that the owners have contributed to the business – including retained earnings, which is the profit made in previous years.

4. Other accounting or notes: a auditor issue qualified or unqualified report depending upon supporting documents or in accordance to the adherence of the GAAP looking into the financial statement but sometimes an auditor find something which are significant to report to the shareholders which doesn’t come under the realm of financial reports the he could report those significant matter like important event in corporation or questions regarding to going concern into this section.

1.7 What causes an auditor’s report to be qualified? adverse? a disclaimer of opinion? Unqualified with explanatory language?

An Unqualified report is also known as clear or unmodified reports also an auditor issue an unqualified report when he/she is satisfied with the financial statement and feel they are free from any material misstatement and financial statement reflects true and fair position of the business and accounting practices of client adhere to the generally accepted accounting principles. An qualified report is issued when auditor is not satisfied with the financial account and feel that financial accounts are not in adherence of GAAP or not free from misstatement, but depending upon the level of fault he could issue Adverse report: An Adverse Opinion is issued when the auditor determines that the financial statements of an auditee are materially misstated and, when considered as a whole, do not conform to GAAP.

It is considered the opposite of an unqualified or clean opinion, essentially stating that the information contained is materially incorrect, unreliable, and inaccurate in order to assess the auditee’s financial position and results of operations. Investors, lending institutions, and governments very rarely accept an auditee’s financial statements if the auditor issued an adverse opinion, and usually request the auditee to correct the financial statements and obtain another audit report. Generally, an adverse opinion is only given if the financial statements pervasively differ from GAAP.

A Disclaimer of Opinion, commonly referred to simply as a Disclaimer, is issued when the auditor could not form and consequently refuses to present an opinion on the financial statements. This type of report is issued when the auditor tried to audit an entity but could not complete the work due to various reasons and does not issue an qualified opinion.

1.8 Why is the management discussion and analysis useful to the financial analyst?

Management Discussion and Analysis of financial condition is results of operations is a section of annual report that is required and monitored by SEC. this section is also useful for any financial analyst because there are many topics which are not covered in financial reports yet are of pivot importance to a company for its future performance like listed as under * A description of the company’s primary business segments and future trends * A review of the company’s revenues and expenses

* Discussions pertaining to the sales and expense trends * Review of cash flow statements and future cash flow needs including current and future capital expenditures * A review of current significant balance sheet items and future trends, such as differed tax liabilities, among others * A discussion and review of major transactions (acquisitions, divestitures) that may affect the business from an operational and cash flow point of view * A discussion and review of discontinued operations, extraordinary items and other unusual or infrequent events Therefore it is of importance to an analyst to pay attention to management discussion.

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