Question

1-22.  Organizational Reports to Stakeholders

The annual report is considered by some to be the single most important printed document that companies produce. In recent years, annual reports have become large documents. They now include such sections as letters to the stockholders, descriptions of the business, operating highlights, financial review, management discussion and analysis, segment reporting, and inflation data as well as the basic financial statements. The expansion has been due in part to a general increase in the degree of sophistication and complexity in accounting standards and disclosure requirements for financial reporting.

The expansion also reflects the change in the composition and level of sophistication of users. Current users include not only stockholders, but financial and securities analysts, potential investors, lending institutions, stockbrokers, customers, employees, and (whether the reporting company likes it or not) competitors. Thus, a report that was originally designed as a device for communicating basic financial information now attempts tomeet the diverse needs of an expanding audience.

Users hold conflicting views on the value of annual reports. Some argue that annual reports fail to provide enough information, whereas others believe that disclosures in annual reports have expanded to the point where they create information overload. The future of most companies depends on acceptance by the investing public and by their customers; therefore, companies should take this opportunity to communicate well-defined corporate strategies.

Requirements

The mission of the US Securities and Exchange Commission (SEC) is to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation. Identify several ways that the SEC accomplishes its mission.

The goal of preparing an annual report is to communicate information from a company to its targeted users. (a) Identify and discuss the basic factors of communication that must be considered in the presentation of this information. (b) Discuss the communication problems a company faces in preparing the annual report due to the diversity of the users being addressed.

Select two types of information found in an annual report, other than the financial statements and accompanying footnotes, and describe how they are useful to the users of annual reports.

Discuss at least two advantages and two disadvantages of stating well-defined corporate strategies in the annual report.

Evaluate the effectiveness of annual reports in fulfilling the information needs of the following current and potential users: (a) shareholders, (b) creditors, (c) employees, (d) customers, and (e) financial analysts.

Annual reports are public and accessible to anyone, including competitors. Discuss how this affects decisions about what information should be provided in annual reports.

Answer 1

1)Some ways the Securities Exchange Commission accomplishes its mission is to require public companies to disclose meaningful financial and other information to the public; providing a common pool of knowledge for all investors. The Securities Exchange Commission also oversees the key participants in the securities world, including securities exchanges, securities brokers, dealers, investment advisors, and mutual funds.

2(a)There are three main financial Statements that are found in the Annual report that a company sends out at the end of each year reporting its financial activities for the year.

• Income Statement
• Cash flow statement
• Balancesheet

Although these are three very large parts of the Annual report it is only a small percentage of it. These financial reports show how the company has done business in a financial way. What the Annual report also shows it why it performed that way wither it was because they were changing its product line or if they had another large difference from other years. They can also show where they are going in the future along with new investment ideas. It also gives a brief history of the company along with where it stands now in terms of how many stores, where they are located, how many people are employed part time or full time.

2(b)A problem that might accrue with sending out a Annual report is the fact that a corporations competition will be able to see how they have done for the year, if their were any new changes in products along with where they see themselves going in the future. Although you want to make the shareholders along with potential shareholder feel that the corporation is in a good place to keep their investment or invest into you need to be careful just how much information you give out for everyone to read.

C.Other than the financial statements and accompanying footnotes, an annual report provides information concerning

• Management's discussion and analysis of results.
• Organizational objectives, strategies, and management's outlook for the future.
• Board of Directors members and the officers and top management of the organization
• Segment data and performance information.
• New initiatives and research information.
• Recent stock price history and stock information

d)

Stating well-defined corporate strategies in a company's annual report accomplishes the following:

Advantages:

• Communicates the company's plan for the future and resolves any disparate issues.
• Provides a vehicle for communicating the company's strengths
• Builds investor confidence and portrays a positive image.

Disadvantages:

• Locks management into fulfilling stated objectives and strategies, causing inflexibility.
• Communicates to unintended users who could put the company at risk (i.e., competitors).

e)

Annual reports fulfill users' information needs as discussed below.

• Shareholders: Annual reports meet the statutory requirement that publicly held corporations are to report annually to stockholders and report on the stewardship of management to both current and potential stockholders. The annual report gives shareholders financial and operating information such as income from operations, earnings per share, the Balance Sheet, Cash Flow Statement, and related footnote disclosure that potential shareholders need to evaluate the risks of and potential returns on investment. However, the volume of data presented in annual reports can result in information overload that reduces the value of the reports. Confusion can result from reducing technical concepts to common concepts or by the presentation of duplicate messages by different forms of media

• Creditors: The annual report of public companies provides financial information as well as trend information. This allows creditors to project financial solvency and to evaluate the company’s ability to repay loans.

• Employees: The annual report gives the employees information such as a description of the company's pension plan and the employee stock incentive plan. This gives employees a base from which to compare their benefits program to those of other companies. Annual reports also provide employees with a year-end review of the results to which they have contributed during the year. In this sense, the annual report provides reinforcement and rewards. The annual report also informs or reminds employees of the organization's values and objectives and sensitizes them to the aspects of the organization with which they are not familiar. On the other hand, the employee already knows how the organization is performing so the annual report does not provide any substantive additional information.

• Customers: The annual report provides customers with trend information and management performance information. They can use this to assess the company's past and current performance.

• Financial analysts: The set of audited comparative financial statements provides the basis for analysis done by financial analysts. Notes, which are an integral part of the statements, describe or explain various items in the statements, present additional detail, or summarize significant accounting policies.Financial analysts are the most sophisticated class of users of annual reports. However, some data may be too condensed. Analysts may also need information in addition to that provided in annual reports to facilitate their analyses.

f)An annual financial report is a one-way communication device. It emphasizes clarity and conciseness, but there is often no immediate feedback from readers about the messages they receive from it. Thus, preparers must attempt to identify the users/audience of the report, and estimate therein formational needs. Only then can preparers determine the content and language of the report—i.e., the words and phrases that is most familiar and appropriate to users or readers.

The preparer must also consider the length, content, and organization of the material in the annual report. For example, a report that is too long or contains too much detail can detract from the overall goal of communicating important financial information (as opposed to data) to readers. Conversely, a report that is too succinct might trigger reader suspicions that the company is hiding important information

Finally, a logical ordering and an attractive format can also help transmit ideas.At one point, some businesses (e.g., Disney Corporation) traditionally included Finally, a logical ordering and an attractive format can also help transmit ideas. At one point, some businesses (e.g., Disney Corporation) traditionally included personal messages from the company’s CEO in order to personalize the report and perhaps make it more appealing. Similarly, companies that put the basic financial information required of them in small print at the end of a yearly report might convey the message that they don’t want readers to see it.

b)The different users of annual reports have differing information needs, backgrounds, and abilities. For some users, the annual report may serve as an introduction to the company and/or the only source of information about it. But other users read annual reports from cover to cover, searching for clues about the firm’s future prospects, hidden problems or strengths, and other information useful for evaluating the company’s investment potential. Because the same annual report must communicate with all its users, the problems the corporation faces include the following:

In attempting to reach several audiences, companies try to include information for each audience. As a consequence, the annual report may grow in size and complexity to the point where it contains more information than many users want or are able to digest.