An annual report is a document issued by publicly traded companies to enlighten the shareholders about their activities and financial situation during the previous fiscal year.
Key Takeaways
What is included in the Annual Report?
It includes various financial statements such as
- balance sheets
- income statements
- cash flow statements
- statements of shareholders’ equity
- management discussion and analysis (MD&A),
- notes and other reports summarising the company’s operations.
Importance Of The Annual Report
Transparency
Aids in boosting shareholders’ confidence by providing actual company figures of the company’s financial health.
Compliance
Safeguards the company from violation of the law and other legal requirements and standards.
Decision-Making
Helps the investors, analyst and other stakeholder in assessing the performance of the business and the prospects of the organization.
Example
For example, a Hong Kong company’s annual report includes its balance sheet, financial performance, assets, liabilities, and shareholders’ equity. If there is an increase in the figure of the net income reported compared to the previous financial year, the company has moved up in its financial health, this may be due to increased sales revenue or efficient cost control.
How Does An Annual Report Help Stakeholders?
The annual report specifies where the information complies with the generally accepted accounting principles (GAAP). This confirmation will also be highlighted as an ‘unqualified opinion’ in the auditor’s report section.
Fundamental analysts can gain insights into the future prospects of a firm by analyzing the information given in its annual report. The annual report contains key information on a company’s financial position that can be used to measure:
- The ability of a company to pay debt when they are due
- Whether the company had made a profit or incurred a loss in the immediately preceding fiscal year
- Growth of a company over several years
- How much of the earnings is reinvested by the firm to expand its operations
- The ratio of operational costs to the total revenue generated
How Do Companies Write an Annual Report?
An annual report is a document with a few parts and procedures that must provide certain information, which are obligatory for such entities. It is common for most public companies to use auditing services to prepare their annual reports. An annual report starts with a letter from the directors to the shareholders, followed by an overview of the business and the sector. The report should include the audited financial statements: balance sheet, income statement and statement of cash flow. The last part will normally be notes to the financial statements, giving reasons for some of the figures and entries.
Summary
- Annual reports are official documents which aim to supply readers with information on the business’s activities in the previous year.
- They include information like performance reviews, a letter from the CEO, financial data, and aims and targets for years ahead.
- Annual reports have many users which include shareholders and potential investors, employees, and customers.