Reading and Using Annual Reports: Financial Statement Analysis
Activity Overview
Purpose of the Activity
The purpose of this activity is to help you synthesize many important aspects of accounting. Just
as the title states, you will read and use financial information presented by a company in the form
of an annual report. This activity helps you learn to gather information and become aware of the
sources of financial information and then interpret, analyze, and use the information to evaluate
the publicly traded company of your choice. You will also be given the opportunity to
demonstrate your presentation skills as you communicate the facts you have uncovered in your a
PowerPoint presentation.
SCANS:
ACC prescribes to the application and integration of skill requirements set forth in the
U.S. Secretary of Labor's Commission on Achieving Necessary Skills (SCANS) as a
measure of the effectiveness of teaching and learning. Of the list of 43 SCANS identified by the
Commission, the following competencies are associated with this project.
Exhibition of Responsibility
Acquisition of information
Use of information skills
Application of data gathering skills
Application of analytical skills
Use of ratio analysis skills
Development of business writing skills
Use of presentation software
Increased familiarity with industry analysis techniques
Activity Summary
This activity requires you to select the publicly traded company of your choice, and prepare a
financial statement analysis consisting of four separate but integrated components. You will
need to gather information and prepare the analysis of your findings from three different
perspectives – that of a short-term creditor, a long-term creditor, and a potential investor. For the
final report, you will be asked to assume the role of an employee of a fictitious company. Your
findings in Parts A-C will then serve as the basis for Part D, an overall financial statement
analysis that includes the three previous reports. Your findings will be presented in the form of
both a written memo (3-5 page) and a brief PowerPoint presentation.
Activity Outcome:
Upon completion of this activity, you will be better prepared to use financial statements to
identify strengths and weaknesses of a company. You will also become familiar with the tools of
analysis that will allow you to conduct future analyses.
Reading and Using Annual Reports: Financial Statement Analysis
PART A: Liquidity
Due Date: ______________________________
You are an analyst for a private company who has been assigned the task of preparing a liquidity
analysis of a new customer. The analysis will be in the form of a Memo to the Files, which the
head of your department will review.
Instructions:
1.
Obtain a copy of the annual report for your selected company. Read the financial
statements, notes to the statements and Management Discussion & Analysis sections. Below are
several recommended sites that should contain such data:
Your company’s homepage. Usually the “investor relations” or “about the company” sections.
Hoover’ Online www.hoovers.com
Yahoo Financials http://finance.yahoo.com/
SEC Electronic Data Gathering and Retrieval http://www.sec.gov/edgar.shtml .
1. Outline a draft of your memo and include the following sections in the body of the memo:
 Introduction
 Ratio Analysis and Interpretation

Recommendations
3.
Calculate the ratios that indicate liquidity: the Current Ratio, Quick Ratio, Net Sales to
Working Capital, Receivable Turnover Ratio and Inventory Turnover Ratio. Prepare the ratios
for the two most recent years.* Note, you may use financial ratios that have been provided by a
reputable financial Web site.
4.
Analyze the trends over time (increasing, decreasing, fluctuating, etc.). Explain what the
numbers might indicate based on the financial statements and your knowledge of accounting.
5.
Prepare a typewritten memo reporting your findings, interpretations, and
recommendations. (Two page MAXIMUM length plus an appendix containing ratio
calculations). The following format is provided an example.
MEMO TO: Credit Files
FROM:
Your Name
DATE: Due Date of Assignment
SUBJECT: Credit Analysis of "Your Company's Name"
Introduction: Describe what you will and will not cover and why it is important to the reader.
Ratio Analysis: In two-five paragraphs, describe the numbers and facts, and interpret them (i.e.,
their impact on the lending decision). Include also in your analysis management’s own view of
its performance according to its Management Discussion and Analysis. Ratio calculations may be
attached as an appendix.
Recommendations: Explain why you should or should not grant credit.

You must use a Web site that has at least two years of comparison data. Otherwise, you will need to find another company. .
Reading and Using Annual Reports: Financial Statement Analysis
PART B – Profitability
Due Date ________________________
You have recently inherited a large sum of money. After enjoying a brief, but intense, spending
spree, you plan to invest $5,000 to purchase the stock of a publicly traded company. You have
decided to prepare a profitability analysis of your prospective purchase. Prepare your analysis in
the form of a Memo to the Files.
Instructions:
1.
Use the same annual report data required in parts A and B above: financial statements,
notes to the statements, and Management Discussion & Analysis sections.
2.
Outline a draft of your memo and include the following sections in the body of the memo:
 Introduction
 Ratio Analysis and Interpretation
 Recommendations
3.
Calculate the ratios that indicate profitability. Sample profitability ratios include Gross
Margin, Before Tax Margin, Net Income, Return on Assets, Return on Equity, Earnings per
Share, and Price-Earnings Ratio. Prepare the ratios for the two most recent years.* Note, you
may use financial ratios that have been reported at a reputable Web site. Your responsibility is to
represent the profitability category of ratios in your memo. If your particular company has other
profitability ratios, choose the ratios that are available. Just be sure to interpret the ratios you
describe.
4.
Analyze the ratios in terms of the trend over time (increasing, decreasing, fluctuating,
etc.) and then explain what the trends might indicate. Explain what the numbers might be based
on the financial statements and your knowledge of accounting.
5.
Prepare a MAXIMUM two-page typewritten memo, reporting your findings,
interpretations and recommendations. Include also in your analysis management’s own view of
its performance according to its Management Discussion and Analysis. The following format isprovided as a sample:
MEMO TO: The Files
FROM:
Your Name
DATE: Due Date of Assignment
SUBJECT: Profitability Analysis of "Company Name"
Introduction: Describe what you will and will not cover and why it is important to the reader.
Ratio Analysis: (2-5 paragraphs) describe the numbers and facts, and interpret them (tell their
impact on your investment decision). Ratio calculations may be attached as an appendix.
Recommendations: Explain why you should or should not invest. .
* You must use a Web site that has at least two years of comparison data. Otherwise, you will need to find another company. .
Reading and Using Annual Reports: Financial Statement Analysis
PART C – Solvency
Due Date _____________________
Assume you are a financial analyst for a private banking group who has been assigned the task of
preparing a long-term solvency analysis of your selected publicly traded company. Assume the
company has applied for long-term financing. The analysis will be reported in the form of a
Memo to the Files, which the head of your department will review.
Instructions:
1.
Use the same annual report data required in part A above, including financial statements,
notes to the statements, and the Management Discussion & Analysis.
2.
Outline a draft of your memo and include the following sections in the body of the
memo:
 Introduction
 Ratio Analysis and Interpretation
 Recommendations
3.
Calculate the ratios that indicate solvency. Suggested solvency ratios include the Debt
Ratio, Total Liabilities to Net Worth Ratio, and Coverage Ratio (times interest earned). Prepare
the ratios for the two most recent years.* Note, you may use financial ratios that have been
reported at a reputable Web site. Your responsibility is to represent the solvency category of
ratios in your memo. If your particular company has other solvency ratios, choose the ratios that
are available. Just be sure to interpret the ratios you describe.
4.
Analyze the ratios in terms of their trend over time (increasing, decreasing, fluctuating,
etc.). Explain what the numbers indicate based on the financial statements and your knowledge
of accounting.
5.
Prepare a MAXIMUM two-page typewritten memo reporting your findings,
interpretations and recommendations. Include also in your analysis management’s own view of
its performance according to its Management Discussion and Analysis. The following format is
provided as an example.
MEMO TO: Bank Files
FROM:
Your Name
DATE: Due Date of Assignment
SUBJECT: Solvency Analysis of "Company's Name"
Introduction: describe what you will and will not cover and why it is important to the reader.
Ratio Analysis: Describe in two-five paragraphs the numbers and facts, and interpret them (tell
their impact on the lending decision). Ratio calculations may be attached as an appendix.
Recommendations: Explain why you should or should not grant credit.
* You must use a Web site that has at least two years of comparison data. Otherwise, you will need to find another company. .
Reading and Using Annual Reports: Financial Statement Analysis
PART D – Complete Company Report
Due Date ____________________
You are an employee of a successful accounting firm and have been asked to prepare a complete
company analysis on a prospective new client for the firm. You should include relevant findings
from the memos you completed in Parts A, B and C. However, you will also need to include
additional research of the industry in which the company operates. Include also critical issues
facing the company. in addition to preparing a written report, you will need to prepare a brief
presentation of your recommendations.
Instructions:
1.
Obtain other news articles about the company. Obtain additional information about the
company's industry. Hoovers Online (www.hoovers.com) is a useful site for company and
industry data. Robert Morse & Associates and Valueline also prepare key ratios by industry
(available at a local library).
2.
Obtain additional business-press articles about the company. For example, Business
Week, Barrons, Forbes, and Fortune are among the business magazines available online. In
order to develop a balanced perspective of the company, it is important to seek the viewpoint of
objective parties outside the company.
3.
Draft the company report. Use the sample table of contents below for guidance:
Sample Table of Contents
Executive Summary: Summarize your results in two-three paragraphs.
Company Background: Summarize the company’s business segments, products, services, and
length of time in business, size, major competitors, etc., in two-three paragraphs.
Industry Trends: 2-3 paragraphs explaining the nature and financial condition of the industry.
Horizontal and Vertical Analysis: (2-3) paragraphs plus financial computations. These are
comparisons across time and across components of the financial statement. Ask your professor
for assistance in downloading the Excel spreadsheet for your company’s horizontal and vertical
analyses.
Financial Analysis: sections covering Liquidity, Solvency & Profitability. Your financial
analysis MUST compare your company to its industry.
Critical Issues: Identify and discuss two major issues facing the company based on article
research: Competition, Regulation, Economy, Politics, Litigation, Public Concerns, etc.
Summary and Conclusion: Take two-three paragraphs to wrap things up. Include your
recommendations.
Reference List: Use and cite at least five sources
Appendix: Charts, graphs, ratio computations, horizontal and vertical analyses, etc. may be
included in the appendix.
4.
Prepare a brief (15-20 slides) PowerPoint presentation describing relevant facts about
your company. Include a financial summary in your presentation.