Reading a Real Annual Report
Chapter Twenty-Three
Syllabus topic 6, "Problems on Trend Analysis , Comparative Statements and Common Size Statements with use of Annual Reports"
Pages 60 to 62 of 162
In one line
A published annual report gives you the two statements in Schedule III form, and the analysis needs them rearranged into the vertical form, with most of the detail taken out of the notes.
What a report contains, in the order it is bound
| Section | Useful for analysis? | |
|---|---|---|
| 1 | Corporate information, directors, bankers | No |
| 2 | Notice of the annual general meeting | No |
| 3 | Board's report, with the management discussion and analysis | Yes: the reasons behind the movements |
| 4 | Corporate governance report | Rarely |
| 5 | Independent auditor's report | Yes, and read it first |
| 6 | Balance sheet | Yes, the primary source |
| 7 | Statement of profit and loss | Yes, the primary source |
| 8 | Cash flow statement | Yes, Module IV |
| 9 | Statement of changes in equity | Sometimes |
| 10 | Notes to accounts | Yes, and most of the detail is here |
| 11 | Consolidated statements, where there are subsidiaries | Only if the question asks for the group |
Read the auditor's report before the figures. A qualification, an emphasis of matter, or a going concern paragraph changes what every later percentage means, and it takes two minutes.
Where each figure the tools need is found
| The analysis needs | Where it is in the report |
|---|---|
| Net sales | Note on revenue from operations, which splits sale of products, sale of services and other operating revenues |
| Cost of goods sold | Not given as a line. Build it: cost of materials consumed, plus purchases of stock-in-trade, plus changes in inventories |
| Operating expenses | Employee benefits expense, depreciation, and the other expenses note, which is where the detail is |
| Non-operating income | The other income note: interest, dividend, net gain on sale of investments |
| Interest | The finance costs note; take interest expense, not the whole of finance costs, if the question distinguishes them |
| Proprietors' funds | Share capital plus reserves and surplus, less any debit balance in surplus |
| Long-term borrowings | The face of the balance sheet, but add the current maturities shown in other current liabilities if you want total debt |
| Working capital | Current assets less current liabilities, both from the face |
| Stock | The inventories note, which also gives the mode of valuation |
| Debtors | The trade receivables note, which gives the over-six-months split |
| Preference capital | The share capital note, since the face shows one figure for share capital |
Two of these rows are where students go wrong.
Cost of goods sold is not printed. Schedule III has no such line. It is built from three lines of the expenses group, and forgetting the change in inventories is the usual slip.
Share capital is one line on the face. Equity and preference are separated only in the note, and the whole of Module III's distinction between the return on proprietors' funds and the return on equity capital depends on separating them.
The rest of this chapter
Module one is free. The rest of this chapter comes with the B.Com. (Accountancy) Semester 3 notes.
You are reading a chapter from a later module. Everything in module one of every subject stays free, and so does the syllabus.
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Free either way: the syllabus, and module one of every subject.
The rest of this subject
These notes are cut from the University's printed syllabus. Open the syllabus itself, or the past papers, for the same subject.