Annual Report Analysis

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BI > JUNE 2006
What 's Important in an Annual Report
Running a Faster Paper Chase by Bob Adams
Editor 's note: This article is based on a class taught by Bob Adams at past CompuFest meetings and is just a sample of the excellent education available at the annual event organized by the Computer Group Advisory Board. This year 's meeting will be June 23-25 in Reno, Nev. Bob, a CGAB vice president, will teach sessions titled Advanced SSG Topics:
Judgment Aids; Take the Oops Out of the SSG; and Follow Your Stocks: A Monthly Analysis Tool. CompuFest 2006 details and registration information are available at
Corporate annual reports are important research tools that enable investors to keep current on the
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A company 's financial statements are analogous to your personal finances. The income statement is comparable to your paycheck stub -- a big number at the top and a smaller number at the bottom. The number at the top represents your total pay, and the number at the bottom shows what 's left after taxes and expenses: health insurance, retirement, etc. A company 's income statement lists the same items, and net earnings represents the "little" number at the bottom.
The cash flow statement is similar to your checkbook. You deposit the value of your paycheck after expenses into your checking account. The company "deposits" net earnings (called operating income), along with other income -- income from investing and financing -- into its cash flow statement. The statement is similar to your checkbook balance, which represents your cash on hand after expenses.
The final report is the balance sheet. Cash at the end of the year is transferred to the balance sheet, where it becomes part of the assets that you, or a company, own. That, minus the liabilities, represents your net worth. The same is true of a company, except a company must report its worth at the end of each fiscal year. A company 's total assets and total liabilities will always balance -- mainly the result of the item called stockholders ' equity.
Using a Spreadsheet
Now let 's analyze the financial data in an annual report. My spreadsheet saves time
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