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Understanding Corporate Annual Reports Example

References: www.ibm.com/financial guide


www.aicpa.org/info/Sarbanes-Oxley2002.asp
www.sec.gov

A. What is an annual report? An annual report is a formal report on a


company's performance in the preceding year.
B. Name the federal government agency that requires a publicly held
corporation to keep shareholders informed of its state of business. The
Securities and Exchange Commission (SEC), a government agency, requires
a public company to keep stockholders informed regularly on the state of its
business.
C. What is the purpose of auditing financial statements? The purpose of
auditing financial statements to ensure whether the financial statements are
complete, reasonable, and prepared consistent with generally accepted
accounting principles (GAAP).
D. What is the name of rules and regulations used to prepare financial
statements? The SEC rules, The Companies Act, Federal Laws, GAAP etc.
E. Name two other primary financial information sources. Two other primary
financial information sources include SEC Form 10-K (yearly), and unaudited
SEC Form 10-Q (quarterly).
F. What type of information is provided in the statement of earnings?
Statement of earnings provide information about revenue (sales), gross profit,
net earnings (net income), earnings per share, dividends per share.
G. What type of information is provided in the statement of financial
position? Information about the assets, liabilities, and equity items of an
entity are provided in the statement of financial position.
H. What type of information is provided in the statement of cash flows?
Information about the net cash flows from operating, investing, & financing
activities of an entity is provided in the statement of cash flows.
I. Briefly explain the purpose of Public Company Accounting Oversight Board (PCAOB).
The PCAOB is a nonprofit corporation established by Congress to oversee
the audits of public companies in order to protect the interests of investors
and further the public interest in the preparation of informative, accurate and
independent audit reports. The PCAOB also oversees the audits of broker-
dealers, including compliance reports filed pursuant to federal securities laws,
to promote investor protection.

J. Under the new rules of the Sarbanes-Oxley Act of 2002, to whom does
an auditor report? Under the new rules of the Sarbanes-Oxley Act of 2002,
The accounting firm must report to the audit committee all "critical accounting
policies and practices to be used all alternative treatments of financial
information within [GAAP] that have been discussed with management
ramifications of the use of such alternative disclosures and treatments, and
the treatment preferred" by the firm.
K. What caused the new rule to be created? The Sarbanes-Oxley of 2002 was
the culmination of a stormy period in the financial world, which included
instances of unethical behavior and fraud at major companies, a slump in the
economy, business and audit failures and the pressures for reform that often
occur during an election year.
L. Under the new rules of the Sarbanes-Oxley Act of 2002, name eight
types of services that are "unlawful" if provided to a publicly held
company by its auditor. Under the new rules of the Sarbanes-Oxley Act of
2002, it shall be "unlawful" for a registered public accounting firm to provide
any non-audit service to an issuer contemporaneously with the audit,
including: (1) bookkeeping or other services related to the accounting records
or financial statements of the audit client; (2) financial information systems
design and implementation; (3) appraisal or valuation services, fairness
opinions, or contribution-in-kind reports; (4) actuarial services; (5) internal
audit outsourcing services; (6) management functions or human resources;
(7) broker or dealer, investment adviser, or investment banking services; (8)
legal services and expert services unrelated to the audit.
M. What is the mission of SEC? The mission of the Securities and Exchange
Commission(SEC) is to protect investors, maintain fair, orderly, and efficient
markets, and facilitate capital formation.
N. How many commissioners does SEC have and who appoints them? The
SEC consists of five Commissioners, with staggered five-year terms. They all
are presidentially-appointed.
O. How many divisions and offices does SEC have? The SEC has five
Divisions and 19 Offices, each of which is headquartered in Washington, DC.
The Commission's approximately 3,500 staff are located in Washington and in
11 Regional Offices throughout the country.
P. Briefly explain the Securities Act of 1933 and the Securities Exchange
Act of 1934. The Securities Act of 1933 and the Securities Exchange Act of
1934 were passed by the Congress after seeing the great stock market crash
in 1929. These laws were designed to restore investor confidence in the
capital markets by providing investors and the markets with more reliable
information and clear rules of honest dealing. Consequently, these created
the SEC.

Reference: www.cisco.com/annualreport/2002

1. What is the address of the company's website? Cisco's website is: http://
www.cisco.com.
2. When was the 2011 annual shareholders' meeting? The 2011 annual
shareholders' meeting was held on Wednesday, December 7, 2011, 10:00 am
Pacific Standard Time.
3. Where was the 2011 annual shareholders' meeting? The 2011 annual
shareholders' meeting was held at the Santa Clara Convention Center (Hall A),
5001 Great America Parkway, Santa Clara, CA.
4. Who is the corporation transfer agent? Computershare Investor Services.
5. Where is the agent located? Address of the agent: P.O. Box 43078,
Providence, RI 02940-3078.
6. What is the company's stock ticker symbol? The company's stock ticker
symbol CSCO.
7. Go to http://finance.yahoo.com, type in the Cisco ticker symbol to obtain,
print and state the closing price of the common stock. You may choose
any day you wish in this academic quarter to report the closing price.
October 31, 2012: the closing price of Cisco's stock was $17.15. See Attachment
#1.

8. Click on the CSCO link in the symbol box to obtain, print and state the 52-
week range.

CISCO SYSTEMS (NasdaqNM:CSCO)


Last Trade Change Prev Cls Open Volume
Nov 9 · 16.70 0.01(0.06%) 16.83 16.70 43,089,923

Day's Range Bid Ask P/E(ttm) Mkt Cap Avg Vol(3 month)
16.68 - 17.03 16.79 16.81 11.29 88.98B 39,278,700
52-wk Range Bid Size Ask Size P/S(ttm) Div/Shr Div Date
14.96 - 21.30 7,400 800 1.93 0.56 N/A
1y Target Est EPS (ttm) EPS Est PEG Yield Ex-Div
21.74 1.49 0.59 1.14 3.3% 02-Oct-12

Small: 1d 5d 1y none
Big: 1d 5d 3m 6m 1y 2y 5y max

9. State the stock market on which Cisco's stock is traded. NasdaqNM.


10. When does the company's fiscal year end? July 30.
11. What is the name of the Certified Public Accounting firm that audited the
company's annual report? PricewaterhouseCoopers LLP, San Jose, California.

12. What goals, objectives, and predictions are expressed in the “Letter to the Stockholders”?

The primary goal in the “Letter to the Stockholders” was to become a faster and more agile
partner, with the goal continuing to be to increase its ability to deliver unique value to the
shareholders, customers, partners, and employees.. Some of Cisco’s other goals for the Fiscal
Year 2011 was the positive cash flow, productivity, and global customer satisfaction.

According to John T. Chambers, Cisco’s Chairman & CEO, one of the goals is to "continue to
develop technologies, services, and software platforms that enable the customers to leverage the
network to solve their greatest business challenges, which in turn will drive greater customer and
shareholder value for Cisco and also solidify its leadership position in an ever-evolving network
centric world." The goal includes an idea of "Next Cisco" – less complex, more agile, and
focused.

The prediction was that if it delivers intelligent networks and technology architectures built on
integrated differentiated products, services, and software platforms, it will achieve this goal and
win the next technological transition. And also, it's well positioning to capture market and
technology transitions through the depth and breadth of it's market-leading portfolio.

13. What is the company’s Current Ratio? What does it express?

Cisco’s Current Ratio is calculated by dividing the total current assets by the total current
liabilities:
Total Current Assets = $57,231 million, Total Current Liabilities = $17,506 million
$57,231 million / $17,506 million = 3.27.

The company’s Current Ratio expresses how much liquidity Cisco has.

14. What is the company’s Working Capital? What does it express?

Cisco’s Working Capital is calculated by total current assets less total current liabilities:
Total Current Assets $57,231 million
Total Current Liabilities $17,506 million
Working Capital 39,725 million

The Working Capital expresses how much money has at its disposal to money it needs to pay out
in the near future.

15. What is the company’s debt (total liabilities) to stockholders’ equity Ratio? What does it express?
CISCO’s total liabilities are $39, 836
CISCO’s SE are $47, 226
Debt to SE ratio is 39, 836 / 47, 226 = 84.35%

This ratio shows whether the company raises capital, financing, through debt or equity.
16. What is the company’s Accounts Receivable Turnover?—use net sales (instead of net sales on
account) as numerator. What does it express?

Accounts Receivable Turnover = Sales for period / Average Accounts Receivable for period

2011
Net Sales $43,218 million
Accounts Receivable (net):
Beginning of year $4,929 million
End of year $4,698 million
Total $9,627 million
Average (Total/2) $4,813.5 million

Accounts Receivable Turnover = $43,218 million / $4,813.5 million


Accounts Receivable Turnover = 8.98 times.

Accounts Receivable Turnover is used to measure of how quickly customers pay their bills.

17. Prepare a horizontal analysis, similar to exhibit 8 on page 71 of your textbook for the following
items in the balance sheet:

* All dollar figures are in millions


Cisco Systems, Inc.
Balance Sheets
For the Year ended July 31, 2011 and For the Year ended July 31, 2010
Increase (Decrease)
Current Year* Previous Year* Amount Percent
Total Current Assets $57,231 $51,421 $5,810 11.30%
Property and $3,916 $3,941 ($25) (0.63%)
Equipment (net)
Total Assets $87,095 $81,130 $5,965 7.35%
Total Current $17,506 $19,233 ($1,727) (8.98%)
Liabilities
Total Liabilities $39,836 $36,845 $2,991 8.12%
Total Stockholders’ $47,226 $44,267 $2,959 6.68%
Equity

18. Prepare a vertical analysis in relation to sales, similar to Exhibit 9 on page 115 of your textbook
(total revenue as the denominator) for the following items in the income statement.
* All dollar figures are in millions
Cisco Systems, Inc.
Income Statements
For the Year ended July 31, 2011 and For the Year ended July 30, 2010
Current Year* Previous Year*
Total Revenue $43,218 100.00% $40,040 100.00%
Total Cost $16,682 38.60% $14,397 35.96%
Gross Profit also called $26,536 $25,643
Gross Margin 61.40% 64.04%
Research and $5,823 $5,273
Development 13.47% 13.17%
Sales and Marketing $9,812 22.70% $8,782 21.93%
Selling, General and $1,908 $1,933
Admin. Expenses 4.41% 4.83%
Income Tax Expense $1,335 3.09% $1,648 4.12%
Net Income (Loss) $6,490 15.02% $7,767 19.40%

(In the example you had Sales and Marketing and in the Syllabus you had Selling, General and
Admin. Expenses. I have added both to the vertical analysis.)