Any company’s annual report is a comprehensive document of its financial and operational condition. These reports are heavily regulated, and they have to strictly follow the set of rules set forward by the regulating bodies. To make sure that the companies follow these rules, they have to conduct an external audit by law. Following are some of the important sections of an annual report.
Balance Sheet
Also known as the statement of financial position, the balance sheet reports, in detail, all the assets that the company owns, all the liabilities that the company is liable for, and the owners’ equity that the owners of the company have pooled in. All the working of the balance sheet is based upon the following formula, which is known as the accounting equation:
Assets = Liabilities + Shareholder Equity
Assets are the items on the balance sheet that represent something owned by the company. Assets are the resources owned by the company, and they are expected to generate revenues in the future periods. Assets can be further divided into current and non-current assets.
On the other hand, Liabilities are the items on the balance sheet that represent something that the company owes to someone else. Liabilities need to be paid back to the owner either in the short-term or the long term. Liabilities are also further divided into short-term and long-term liabilities. Owners’ equity represents all the money that the owners of the company have invested in the business. It is somewhat similar to liabilities in theory, but it is different because the company is not supposed to pay it back to the owners, unlike liabilities.
Income Statement
The income statement is another important segment of the annual report. It shows the number of profits or losses that the company incurs during the year. It starts with the revenues, adds all sorts of incomes, and deletes all sorts of expenses.
Then after adjusting for tax, the annual figure of loss or profit is obtained. It is a very important part of the annual report because it tells about the profitability of the company. From an investor’s point of view, the income statement is probably the single most important financial information because it represents the profitability of the company and shows whether the investors would get any profits on their investments or not.
Statement of Cashflows
It is one of the most important statements from an analyst’s point of view. Rather than showing the accounting profit or loss for the period, it shows the amount of cash that came into the company and the amount of cash that the company spent, i.e.
The Cash Inflows and Outflows
This is very important because it shows the liquidity of the company. In case the company has to meet a liability requirement in the near future, the profits of the company may misguide the management because they are mere accounting profits and not liquid cash. In such a situation, the statement of cash flows can be used to check whether the company will be able to meet its short-term money requirements or not. Furthermore, analysis of free cash flows is very important for the valuation purposes of the company.
Statement of Owners’ Equity
This statement shows the components of the owners’ equity in detail, i.e., How many ordinary or preferred shares are outstanding, whether there is any treasury stock or not, etc.
Notes to the Financial Statements
These notes are not the most popular part of the financial statements, but to understand the other parts correctly, these notes are of vital importance. They mention all the detail which cannot be mentioned on the face of the other statements.