Read Financial Statements

Last time, I presented a guide to understanding earnings calls. The most anticipated and recognized facet of a company’s financial report during a typical earnings call is its earnings per share (EPS). The EPS (also listed as “net income applicable to common shares on a fully diluted basis”) is referred to as the “bottom line” because it is the bottom line of a company’s profit and loss statement (P&L, also known as the income statement).

While the EPS captures the media headlines and is the most-sought-after metric, it is only part of one of the three major components of a company’s financial documentation that is necessary to understanding both the company’s performance and its financial condition. The other two major financial statements are the balance sheet and the statement of cash flows. In the upcoming weeks, I will highlight each of the individual financial statements. The objective of this series of lessons is to provide the necessary tools to ascertain financial information and understand those reports without having to possess a CPA (certified public accountant) or CFA (chartered financial analyst) designation. (However, it is the role of the CPA to audit and certify the financial statements that will provide the independent account.) This week, let’s kick off this multipart examination of financial statements by looking at the annual report and 10-K for a lesson on financial and regulatory reporting.


Getting Started:

As is often the case with any research project, we start by aggregating information and materials that will provide the basis for our financial investigation. This prompts the questions: What should I look for? and where can I find it? Here is our punch list: — Form 10-K
— Form 10-Q
— Annual Report
These documents can usually be found in the “Investor Relations” section of a company’s Web site.


Form 10-K

This is an official filing made by the company to the Securities & Exchange Commission (SEC). On the face of the 10-K will be a statement to this effect: “Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended 1996 .” The 10-K will contain the following sections: — An overview of the company and selected financial data
— Director and senior management information including executive compensation, as well as signatures by senior management and the directors
— Consolidated financial statement including the Report of Independent Registered Public Accounting Firm
— Notes to the financial statements


Form 10-Q

This is the quarterly and slimmed-down version of the 10-K. It typically only includes unaudited financial statements, notes to the financial statements and a management discussion.


Annual Report

This publication is sent to all shareholders and is available from the company for prospective investors. The annual report varies from company to company. Some companies, such as Ruth’s Chris Steak House, just slap a glossy cover over a 10-K and call that an annual report. On the other hand, some companies, such as Amylin Pharmaceuticals, put together a professionally designed annual report that incorporates a message to shareholders; a business overview featuring (but not limited to) the company’s management, products, operations and new endeavors; the auditors’ report; consolidated financial statements; and notes to all of those statements. Yet another spin is the summary annual report as presented by Duke Energy. Duke issues a summary annual report with plenty of gloss, a business overview and financial statements. However, ultimately, the Duke report refers readers to its 10-K for more details.