What Is an Annual Report?

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What Is an Annual Report?

Let me explain what an annual report really is. As someone who's delved into corporate finance, I can tell you it's a yearly document that public companies must provide to shareholders, summarizing their business performance and financial health. It covers the past year's operations, offers future projections, and delivers detailed financial and operational data directly to you, the reader.

Key Takeaways

You should know that an annual report outlines a company's financial condition and operations from the previous year for shareholders. It became a standard part of corporate reporting after the 1929 stock market crash. Also, registered mutual funds are required to send a full annual report to their shareholders each year.

What's Included

Annual reports were made mandatory for public companies after the 1929 crash to ensure standardized financial reporting. This document publicly discloses a company's operating and fiscal activities over the past year. It's issued to shareholders and stakeholders who rely on it to assess financial performance and make investment decisions.

Typical Sections in an Annual Report

General corporate information
Operating and financial highlights
Letter to the shareholders from the CEO
Narrative text, graphics, and photos
Management's discussion and analysis (MD&A)
Financial statements, including the balance sheet, income statement, and cash flow statement
Notes to the financial statements
Auditor's report

Important Note on U.S. Requirements

In the U.S., the detailed annual report is known as Form 10-K, which companies submit to the SEC. They can file it electronically via the EDGAR database, and they must send these reports to shareholders during annual meetings for electing directors.

Information for Stakeholders

The report confirms if the information follows generally accepted accounting principles (GAAP), often noted as an 'unqualified opinion' in the auditor's section. As a fundamental analyst, you'd use this to gauge a company's future direction. It helps measure debt repayment ability, profits or losses from the prior year, multi-year growth, retained earnings for operations, and the ratio of expenses to revenue.

Mutual Fund Reports

Mutual fund annual reports detail the fund's operations and financial condition, but they're straightforward compared to corporate ones. Along with the prospectus and additional information, they provide multi-year data and performance for shareholders and potential investors. All SEC-registered mutual funds must send a full annual report to shareholders, showing fiscal year performance.

Key Information in Mutual Fund Reports

Table, chart, or graph of holdings by category
Audited financial statements, including a complete or summary list of holdings
Condensed financial statements
Table showing returns for one-, five-, and 10-year periods
Management’s discussion of fund performance
Management information about directors and officers
Remuneration paid to directors, officers, and others

Sections of an Annual Report

Now, let's dive deeper into the main sections, using Microsoft's 2024 annual report as an example where it fits.

General Corporate Information

This section gives you a quick overview of the company, including its history, structure, mission, and core operations. It's helpful if you're new to the business, and it often covers recent changes like mergers.

Operating and Financial Highlights

Here, the company presents its key performance areas with year-over-year comparisons. Remember, this is mostly commentary and not audited. It aims to show the company's health quickly—for instance, Microsoft highlighted AI advancements and client successes like Coles and Unilever.

Letter to the Shareholders from the CEO

The CEO discusses performance, strategies, challenges, and future outlook in this letter. It sets the report's tone. In Microsoft's case, Satya Nadella called fiscal 2024 pivotal and ended inspirationally about shaping the future.

Narrative Text, Graphics, and Photos

This part adds stories, visuals, and images to the data, including success stories and employee photos. Microsoft used a graphic to show its five-year stock return.

Management's Discussion and Analysis

This covers strategy, environment, challenges, and financial changes. It's explanatory—Microsoft noted increases in cloud revenue by 23%, Office products by 16%, and LinkedIn by 9%.

Financial Statements

These are the core documents: balance sheet for assets and liabilities, income statement for revenue and profits, and cash flow statement for cash usage.

Notes to the Financial Statements

These explain line items in detail, covering accounting methods. Microsoft detailed its long-term debt by issuance, rate, and maturity.

Auditor's Report

An independent auditor assesses if the statements fairly represent the company's condition per GAAP.

How Do Companies Write an Annual Report?

Public companies often hire auditors to prepare these reports. They start with a shareholder letter, describe the business and industry, include audited statements like balance sheet, income, and cash flows, and end with explanatory notes.

Is an Annual Report the Same As a 10-K Filing?

They're similar in reporting company activity, but annual reports are visually engaging with graphics, while 10-K focuses on numbers and qualitative info.

What Is a 10-Q Filing?

It's a quarterly SEC filing reporting earnings and financial position.

The Bottom Line

Public companies produce annual reports to display their financial conditions and operations. You can use them to evaluate positions and future plans, while mutual funds use them differently for performance reporting.

What Is an Annual Report?

Highlights