Understanding Financial Reports

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Questions and Answers

What is the relationship between assets and liabilities/equity from an economic viewpoint?

Assets must be greater than liabilities and equity

Equity must be greater than liabilities and assets

Assets must be offset by a dollar of liabilities or equity (correct)

Liabilities and equity must be equal to assets

What is the net income of the company before considering the extraordinary loss?

$52,750 (correct)

$42,750

$47,750

$40,500

What is the effect of the extraordinary loss on net income?

It increases net income by $50

It increases net income by $5,000

It has no effect on net income

It decreases net income by $5,000 (correct)

What is the purpose of separating cash movements in financial reports?

To provide a clear picture of the company's cash flows Signup and view all the answers

What is the balance of the company's equity as of December 31, 2004?

$346,050 Signup and view all the answers

What is the earnings per common share before considering the extraordinary loss?

$3.55 Signup and view all the answers

What is the extraordinary loss, net of tax?

$5,000 Signup and view all the answers

What is the purpose of presenting earnings per common share in financial reports?

To provide investors with a basis for valuation Signup and view all the answers

What is the main goal of Merrill Lynch's Guide to Understanding Financial Reports?

To provide a clear and practical explanation on how to read and interpret a corporate report Signup and view all the answers

What is the profession of Ahmass Fakahany?

Chief Financial Officer Signup and view all the answers

What is the total amount of client assets managed by Merrill Lynch?

Approximately $1.3 trillion Signup and view all the answers

What is the primary focus of Addison's business communications?

Simplifying complex business communications for all audiences Signup and view all the answers

What is the role of Merrill Lynch's Investment Managers?

To manage financial assets for corporations and institutions Signup and view all the answers

What is the primary focus of Merrill Lynch's Global Markets and Investment Banking division?

To underwrite debt and equity securities and act as a strategic advisor Signup and view all the answers

How many countries does Merrill Lynch have offices in?

36 countries Signup and view all the answers

What is the length of time Addison has been specializing in business communications?

40 years Signup and view all the answers

What is the primary reason why the average investor finds it difficult to understand the financial information in an annual report?

The information is written in a way that makes it hard to communicate with the average investor Signup and view all the answers

What was the main purpose of the Securities Act of 1933?

To prohibit financial and business excesses Signup and view all the answers

What did the Securities and Exchange Commission initially ask companies to file in 1933?

A Form 10-K with financial statements only Signup and view all the answers

What was added to the annual report in 1934?

A financial statement with a CEO's letter Signup and view all the answers

What is the primary purpose of the booklet prepared by the authors?

To make financial information more easily understood by the average investor Signup and view all the answers

What is the description of the financial statements in an annual report?

Audited financial statements with an independent auditor's report Signup and view all the answers

What is the primary focus of the new emphasis on annual reports?

On the front end of the report with a focus on clarity Signup and view all the answers

What is the term used to describe the financial statements due to the presence of an independent auditor's report?

Audited financial statements Signup and view all the answers

What type of assets are classified as fixed assets?

Long-lived assets not intended for sale Signup and view all the answers

What is the purpose of fixed assets in a company?

To be used for daily operations Signup and view all the answers

What is included in the category of fixed assets?

Land, buildings, leasehold improvements, machinery, equipment, furniture, and automobiles Signup and view all the answers

What is the formula to calculate fixed assets in standard accounting?

Fixed Assets = Cost - Accumulated Depreciation Signup and view all the answers

What is the purpose of accumulated depreciation in standard accounting?

To decrease the value of fixed assets Signup and view all the answers

What does the total property, plant, and equipment figure on a balance sheet represent?

The original cost of the assets minus accumulated depreciation Signup and view all the answers

What is the purpose of straight-line depreciation?

To calculate the accumulated depreciation of fixed assets over time Signup and view all the answers

What is the difference between the cost of a truck and its net depreciated cost?

The accumulated depreciation Signup and view all the answers

What is the total of Net sales and Cost of sales in 2004?

$1,290,050 Signup and view all the answers

What is the amount of Gross margin in 2003?

$208,000 Signup and view all the answers

What is the amount of Preferred Stock in 2003?

$6,000 Signup and view all the answers

What is the amount of Retained Earnings in 2003?

$219,600 Signup and view all the answers

What is the amount of Operating income in 2004?

$105,196 Signup and view all the answers

What is the amount of Dividend and interest income in 2004?

$10,000 Signup and view all the answers

What is the amount of Net unrealized gain on available-for-sale securities in 2004?

$2,000 Signup and view all the answers

What is the amount of Income tax expense in 2004?

$41,446 Signup and view all the answers

What is the total of Assets and Liabilities in 2003?

$765,050 Signup and view all the answers

What is the amount of Translation Adjustments in 2003?

$(1,000) Signup and view all the answers

Study Notes

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

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Description

Learn about financial reporting and its importance in the capital markets and economy. This guide provides a clear and practical explanation of financial reports.