Tips on How to Read an Annual Report

An annual report is the summary of an organization business performance over the last 12 months, otherwise called the fiscal year of financial year.

An annual report reveals the summary of the assets, liabilities, equity position, profits as well as the cash flows of the entity.

As a vital document, the information is usually in stipulated format to enable all the stakeholders to examine and make quality decisions.

Format for the Presentation of Annual Reports

Ideally, Annual Reports comprises of 7 standard reporting formats as itemized below:

  • Letter addressing the shareholders
  • Salient points of the past year
  • Analysis of Management discussion
  • Auditor’s report
  • The Financial statements which comprises of income statement, balance sheet and cash flow statements
  • Note to the accounts
  • Corporate information.

Essentially, investors and most stakeholders are more concerned about the financial statements part of the annual statement.

Hence, a good understanding of this part is the most important for taking quality decisions as follow:

Introduction Section:

It is noteworthy to state that any annual report must start with introductory part which offers a short analysis of the organization’s business operations during the year under review.

This enables the entity to carry along respective stakeholders like investors, government agencies, creditors, financial analysts and shareholder.

Meanwhile some of the details usually outlined in this section are operating and financial results, summaries of historical trends in addition to non financial information.

If it is a corporate entity, then the chairman’s statement and director’s report will be included in the section.

Income Statement:

This is an integral part of any annual financial report because it shows the comprehensive breakdown of the profits or losses achieved by the business during its fiscal year.

  • Profit or Loss is the foremost sub-section here: it represents the net of total revenues and the cost of goods sold. Be informed that cost of goods sold is calculated by adding the opening stock to net purchases and then deduct the closing stock.
  • The next sub-section of income statement displays the net profit or loss of an entity. This is arrived at by deducting total operational costs from the total or gross profit or loss. Some items expected to see in operational cost of a business entity include: provision for depreciation, salaries and wages, taxes, stationeries, utilities and other expenses.

Balance Sheet:

This section of annual financial reports expresses the capacity of a business to pay its debts and obligations when due. As a matter of fact, it is the summaries of the assets and liabilities of the organization. In preparing balance sheet, it follows thus:

  • Fixed assets: Items here include land and properties, machineries and equipments, furniture etc.
  • Current assets: this subsection comprises of cash, account receivable and inventory.
  • Noncurrent Liabilities: This covers debt financings
  • Current Liabilities: These are short-term entity obligations like bank overdrafts, trade payables and the rest. Again balance sheet is the summaries of the equity position which is the analysis of share capital and retained earnings of the business in question.

Statement of cash flows:

Being a vital component of financial statement, it is the summaries of the inflows and outflows of cash in an entity. It reveals the inward and outward movement of money that is generated from business operations, investments and also the financing activities.

  • The operational cash flow includes daily activities like sales and inventory purchased.
  • Investment cash flow covers income and expenses which came from long term projects
  • Financing cash flow reveals potential changes in capital base of the business via sales of share, dividend distributions, borrowing and debt repayments.

Notes to the financial statements:

This is the elaborations of fact and figures within the financial reports for the purpose of clarifications. It states the accounting policies employed and possible uncertainties relating to assets and liabilities.

 

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