Understanding Financial Reports

Merrill Lynch and Financial Reporting

• Merrill Lynch believes an informed investing public is crucial for the capital markets and the economy.
• The company is committed to clear and accurate financial reporting, and provides a guide to understanding financial reports to facilitate informed investment decisions.

About Merrill Lynch

• Merrill Lynch is a leading global financial management and advisory company with offices in 36 countries and total client assets of approximately $1.3 trillion.
• The company operates through Global Markets and Investment Banking, and is a leading global underwriter of debt and equity securities.
• Merrill Lynch Investment Managers is one of the world's largest managers of financial assets.

About Addison

• Addison is a creative-services company specializing in business communications, with offices in New York and San Francisco.
• The company has helped the world's most successful companies tell their stories through annual reports for over 40 years.
• Addison simplifies complex business communications for all audiences.

History of Annual Reports

• The annual report originated from the Securities Act of 1933, which required companies to file a Form 10-K with the Securities and Exchange Commission (SEC).
• The SEC later asked companies to publish financial statements with a letter to shareholders explaining the numbers and their impact on the company's prospects.

Consolidated Financial Statements

• Annual financial statements are usually stated at historical cost and accompanied by an independent auditor's report.

• The key components of consolidated financial statements include:

  • Balance sheet
  • Income statement
  • Statement of cash flows

• Assets = Liabilities + Shareholders' Equity, ensuring that the two halves are always in balance.

• The financial statements of ABC Manufacturing, an imaginary company, are provided as an example.### Income Statement

• Income before extraordinary loss is $52,750

• Extraordinary items, net of tax, is ($5,000)

• Net Income is $47,750

• Earnings Per Common Share before extraordinary loss is $3.55

• Earnings Per Common Share is $2.77

Balance Sheet

• The company's balance sheet as of December 31, 2004, shows the following:
  • Assets: $6,000 + $75,000 + $20,000 + $249,000 + $1,000 + $50 = $346,050
  • Liabilities and Equity: $346,050 (since each dollar of assets must be offset by a dollar of liabilities or equity)

Fixed Assets

• Fixed assets, also known as property, plant, and equipment, include long-lived assets with a useful life greater than one year
• These assets are used to manufacture, display, warehouse, and transport products, and include buildings and improvements used in operations
• Examples of fixed assets include land, buildings, leasehold improvements, machinery, equipment, furniture, and automobiles
• Fixed Assets = Cost – Accumulated Depreciation

Depreciation

• Straight-line depreciation method is used to calculate depreciation over time
• Depreciation example: Truck (Cost) = $10,000, with accumulated depreciation of $2,000 in Year 1 and $4,000 in Year 2
• Net Depreciated Cost = $8,000 in Year 1 and $6,000 in Year 2