An annual report is unfamiliar terrain to many people. For those who are not accountants, analysts or financial planners, this booklet can help them to better understand such reports and possibly become more informed investors.

This booklet was written and designed to help educate and guide its readers so they might:

• Better understand the data included in financial reports and how to analyze it.
• Learn more about companies that offer employment or provide investment opportunities.

A good starting point for achieving these goals is to become familiar with the main components of a company’s annual report.

Most annual reports have three sections: (1) The Letter to Shareholders, (2) the Business Review and (3) the Financial Review. Each section serves a unique function:

• The Letter to Shareholders gives a broad overview of the company’s business and financial performance.
• The Business Review summarizes a company’s recent developments, trends and objectives.
• The Financial Review presents a company’s business performance in dollar terms and consists of the “Management’s Discussion and Analysis” and “Audited Financial Statements.” It may also contain supplemental financial information.

In Management’s Discussion and Analysis (MD&A), a company’s management explains significant changes from year to year in the financial statements. Although presented mainly in narrative format, the MD&A may also include charts and graphs highlighting the year-to-year changes. The company’s operating results, financial position, changes in shareholders’ equity and cash flows are numerically captured and presented in the audited financial statements.

The financial statements generally consist of the balance sheet, income statement, statement of changes in shareholders’ equity, statement of cash flows and footnotes. The annual financial statements usually are accompanied by an independent auditor’s report (which is why they are called “audited” financial statements). An audit is a systematic examination of a company’s financial statements; it is typically undertaken by a Certified Public Accountant (CPA). The auditor’s report attests to whether the financial reports are presented fairly in keeping with generally accepted accounting principles, known as GAAP for short.

Download How to Read a Financial Report

PDF version, 5MB, 52Pages.

INTRODUCTION

Known “from Wall Street to Main Street”—and worldwide—Merrill Lynch is a global leader in the financial services industry. As a public service, Merrill Lynch wants to share some of its expertise in, and knowledge of, financial reporting through this booklet.

We hope this booklet will serve as a valuable resource to help readers learn how to read and analyze a company’s annual report. Through it, readers can learn that an annual report is not just a jumble of numbers and mind-numbing data. Read with understanding and analytical insight, the numbers and data in an annual report can tell an interesting, meaningful and fascinating story.

TABLE OF CONTENTS

INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . INSIDE FRONT COVER
HOW TO READ A FINANCIAL REPORT . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
A FEW WORDS BEFORE BEGINNING . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
CONSOLIDATED FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . 4
THE BALANCE SHEET . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
JUST WHAT DOES THE BALANCE SHEET SHOW? . . . . . . . . . . . . . . . . . . . . 22
THE INCOME STATEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
ANALYZING THE INCOME STATEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
THE STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY . . . . . . . . . . . . . 36
THE STATEMENT OF CASH FLOWS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
ADDITIONAL DISCLOSURES AND AUDIT REPORTS . . . . . . . . . . . . . . . . . . . 40
THE LONG VIEW . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
SELECTING STOCKS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
GLOSSARY OF SELECTED TERMS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44

To learn more about Merrill Lynch and its services, be sure to visit us on the Internet at http://www.ml.com., or if you would like additional copies of this booklet write to:

Merrill Lynch Response Center
How to Read a Financial Report, Code 051PM-0700
P.O. Box 20200
New Brunswick, NJ 08968-0200

or call (800) 637-7455, ext. 1745.

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