Accounting

Introduction This Guide provides basic information on how to read the financial statements in a company’s annual report. The Guide discusses key numbers in each of three statements common to all annual reports and offers suggestions from experienced investors on making sense of these numbers. Like any new and complex subject, the language of financial statements may at first seem mysterious, even intimidating. This Guide can help you begin to gain a basic financial vocabulary and to understand the subject. Topics cover only the fundamentals of accounting and financial reporting, and the Guide and its Glossary explain the terms and ideas you'll need to understand these topics. So, even if you never take up a permanent residence in the realm of finance, you'll at least be comfortable as an occasional visitor.

What’s an Annual Report? PURPOSE

An annual report is exactly what it sounds like - a formal report on a company’s performance in the preceding year. A public company produces an annual report for its stockholders, the people and institutions that own the company. Other interested parties, such as customers and potential investors, read this report, too. In fact, the Securities and Exchange Commission (SEC), a U.S. government agency, requires a public company to keep stockholders informed regularly on the state of its business. An annual report is one of the most important documents a company produces and is often the first document someone consults when researching a company. It reports how the company did financially and often explains the scope of its business mission and management philosophy. For these reasons (and because the SEC requires publication of much of the information in the annual report), companies take the development of an annual report seriously. They carefully consider its design and construction and even the paper to print it on. Today, many companies also produce Web and CD-ROM versions of their annual reports. ANATOMY OF AN ANNUAL REPORT

While most annual reports contain optional elements, all reports contain information the SEC requires. Optional elements include: Financial highlights. Probably the most often-read section of any annual report, these highlights give a quick summary of a company’s performance. The numbers appear in a short table, usually accompanied by supporting graphs. Chairman’s letter. This letter may be from the chairperson of the board of directors, the chief executive officer, or both. It can provide an analysis and a play-by-play review of the year’s events, including any problems, issues and successes the company had. It usually reflects the business philosophy and management style of the company’s executives and often it lays out the company’s direction for the next year. Corporate message. Some analysts, business executives and stockholders consider this message an advertisement for the company; others find it useful. However, it almost always reflects how a company sees itself, or how it would like others to see it. Here, the company can explain itself to stockholders, using photographs, illustrations and text. This message may cover the company’s lines of business, markets, mission, management philosophy, corporate culture and strategic direction.

Board of directors and management. This list gives the names and position titles of the company’s board of directors and top management team. Sometimes companies include photographs. Stockholder information. This information covers the basics – the company’s corporate office headquarters, the exchanges on which the company trades its stock, the location and time of the next annual stockholder’s meeting, and other general stockholder service information. Stockholder information is usually in the back of the annual report. Auditors’ report. This summary of the findings of an independent firm of certified public accountants shows whether the financial statements are complete, reasonable, and prepared consistent with generally accepted accounting principles (GAAP) at a set time. SEC-required elements include: Report of management. This letter, usually from the board chairperson and the chief financial officer, takes responsibility for the validity of the financial information in the annual report, and states that the report complies with SEC and other legal requirements. The discussion attests to the presence of internal accounting control systems that cover effectiveness of operations, reliability of financial reporting, and compliance with federal laws. Management discussion. This series of short, detailed reports discusses and analyzes the company’s performance. It covers results of operations, and the adequacy of liquid and capital resources to fund operations. Financial statements and notes. These statements provide the raw numbers for the company’s financial performance and recent financial history. The SEC requires three statements — statement of earnings, statement of financial position, and statement of cash flows — all covered in this Guide. (The statement of stockholders’ equity is not addressed here.) These statements include a comprehensive set of related notes that provide explanations, additional detail, and supplementary financial information. Selected financial data. This information summarizes a company’s financial condition and performance over five years or longer. Data for making comparisons over time may include revenue (sales), gross profit, net earnings (net income), earnings per share, dividends per share, financial ratios such as return on equity, number of shares outstanding, and the market price per share. OTHER FINANCIAL REPORTING

The financial statements and related notes in the annual report are primary sources of financial information available to investors, financial analysts, and the public. Other primary financial information sources include SEC Form 10-K, which the SEC requires companies to submit yearly. This audited form contains more detailed information than the financial statements in the annual report. Companies also provide interim financial reports to stockholders and file an unaudited SEC Form 10-Q quarterly. These quarterly reports provide briefer, more aggregated data for the quarter and year to date.

About the Statements? Purpose The financial statements and their accompanying notes explain a company’s financial performance and recent financial history. Financial analysts use these statements in several ways: to evaluate a company’s overall performance, identify strengths and weaknesses, anticipate future successes or problems, and ultimately help them decide if the company is a good investment opportunity. Note: In this Guide, financial statement names are statement of earnings, statement of financial position, and statement of cash flows. For synonyms, visit the Glossary. What’s in them? Annual reports include at least three financial statements: Statement of earnings summarizes results of the company’s business operations (revenue and expenses)

Statement of financial position lists the company’s assets and the claims against them: liabilities and stockholders’ equity Statement of cash flows measures the flow of cash into and out of the company The statements contain the financial information for a publicly held company. If a company is composed of many subsidiaries, divisions, and other companies, it presents the financial information of all its holdings as one “consolidated” company. So IBM, for example, publishes a “consolidated statement of cash flows” and other “consolidated” financial statements, representing all the parts of its very large organization. To learn a little more about other parts of an annual report, visit What’s an annual report? Who prepares them? The people who prepare the statements may differ from company to company. Usually, the accounting staff prepares them, but others, such as investor relations staff, review the statements and related notes. Regardless of who the prepares are, federal securities laws require publicly owned companies to follow a set of rules and financial reporting guidelines. Associations — such as the Financial Accounting Standards Board (FASB), a private organization of accounting professionals, and the Securities and Exchange Commission (SEC), a U.S. government agency — develop the rules and guidelines. These generally accepted accounting principles (GAAP) help ensure that the financial information reported is reliable and consistent in form with the reports all other companies prepare. GAAP also helps safeguard against investor fraud. Although all companies follow common standards and requirements, they report on their financial performance in varied ways. Many decisions — from the statements’ names to the accounts within them and the ways management calculates the numbers — are left to companies’ discretion. What’s the auditors’ report? The auditors’ report is a summary of the results of an audit, or examination, of the financial statements by an independent firm of certified public accountants. The audit is an attempt to determine whether a company’s financial statements report the company’s financial status accurately and reliably. During an audit, for example, the auditors investigate a company’s internal accounting controls, confirm the existence of many assets, and gather supporting information from external sources. The auditors make sure the financial statements are complete, reasonable, and prepared consistent with GAAP at a set time. If the auditors consider the statements are fair presentations of the company’s financial position in relation to GAAP, they issue an “unqualified” opinion. The notes The notes are required reading to understand the financial statements. Companies use notes to explain how they arrived at the numbers in the financial statements and to describe any significant events or changes in procedures that may affect the numbers. Notes also explain items in the statements and report details of the company’s financial performance not shown in the statements. A note might explain, for example, that a company’s accounting methods have changed from the previous year or differ significantly from methods other companies in the same industry use (assuming they follow GAAP). Analysts might examine why the company changed accounting methods, probing, for example, to learn whether the change distorts the company’s financial results. Another note might disclose an acquisition that may have a material effect on the company’s financial condition, both short term and long term. For example, with its acquisition of Lotus in 1995, IBM incurred costs and assumed liabilities associated with this significant event. Finally, a note might provide additional detail on an item in a financial statement. For example, a note on “Investments and sundry assets” on the statement of financial position lists the assets IBM includes in this category. (One listing is the intangible asset called goodwill).

Statement of Earnings Purpose The statement of earnings shows how much revenue a company brings into the business by providing goods or services, or both, to its customers for a set time (usually one year). It also shows the costs and expenses associated with earning that revenue during that time. In an annual report, the statement of earnings shows sales revenue and expenses for at least the last three years. The net earnings (or loss), often literally the "bottom line" on the statement, show how much the company earned (or lost). Key numbers The statement of earnings shows two main categories of information for each year covered: •

the revenue from products and services sold

• the expenses, or costs, of doing business • To interpret this information, analysts look at several key numbers: Revenue Companies earn revenue in one or more of the following ways: • by selling products or services, or both • by leasing and renting equipment or property to others • by receiving interest from loans to other companies or individuals Some companies have only one source of revenue; others have several. For example, IBM reports revenue from its products, such as computer hardware and software. It also reports revenue from its services, which include maintenance, rentals, and financing. Gross profit A rule of business is, "It takes money to make money." Typically, producing goods for sale is the greatest cost of generating revenue. For example, a computer manufacturing company must buy wiring and other raw materials to make computers; pay wages to workers and managers; and spend money on overhead — power, facilities, and maintenance. A company deducts these costs (cost of sales, cost of goods sold) from revenue, showing gross profit (or loss). Operating income In addition to the expenses directly related to producing goods and services, companies incur operating expenses. These include advertising, salaries, rent, research and development, office supplies, and any other administrative amounts spent. A company deducts these operating expenses from gross profit, resulting in operating income (or loss). Operating income represents a company’s revenue minus all expenses required to obtain that revenue. From this key number, companies deduct costs relating to debt financing and tax expenses. The remainder is called net earnings. Net earnings Net earnings are the "bottom line" (often literally the last line on the statement). After a company deducts all costs and expenses from revenue, the statement of earnings shows the net earnings (or loss). When

revenue exceeds costs and expenses, the bottom line shows a profit. When costs and expenses exceed revenue, the bottom line shows a loss. Growth in net earnings usually signals that a company is doing well. Earnings per share Earnings per share (EPS) shows how much money stockholders would receive for each share of stock if the company distributed all net earnings to its stockholders. For example, if the net earnings are $1 million and 500,000 shares are outstanding, the earnings per share are $2 ($1 million ÷ 500,000 shares = $2). Although all net earnings really belong to the stockholders, a company almost never distributes the full amount to them directly. A company needs money to grow, so it takes part of the net earnings and reinvests that money in itself. The total amount of a company’s net earnings since its inception, minus any payments made to stockholders, is called retained earnings. Although the term may suggest a large pool of cash, that image is misleading. Retained earnings is actually part of stockholders' equity and represents the portion of a company’s assets that is financed from profitable operations rather than from selling stock to investors or borrowing from external sources. If the company reinvests those earnings profitably, the stockholders benefit from that reinvestment over the long term. A second way stockholders benefit from retained earnings is through dividends. A company’s board of directors, with the advice of management, decides on the amount of dividends per share to pay. Companies usually pay dividends quarterly; however, many companies don't pay dividends at all, and a few pay dividends irregularly.

Statement of Financial Position Purpose The statement of financial position reports a company’s financial status at a set date noted on the statement. The statement is like a snapshot because it shows what the company is worth at that set date. The statement shows: •

what the company owns

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what the company owes

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what belongs to the owners

Analysts often call the statement of financial position a balance sheet because of the way one part — assets — is in balance with the sum of the other two parts — liabilities and stockholders' equity. In an annual report, the statement of financial position includes information for at least the last two years to allow comparison of changes between years. Key Numbers The statement of financial position shows three main categories of information for each year covered. To interpret this information, analysts look at three key numbers related to these categories: Assets (what the company owns) Companies own things, called assets. These things might be physical assets such as buildings, trucks, inventories of products, equipment, and cash. Or things might be intangible assets such as goodwill, trademarks, and patents. Assets are either current or noncurrent. Current assets are things a company expects to convert to cash within one year. Examples are accounts receivable or inventories of products to sell. Finally, current assets include cash and securities such as treasury bills and certificates of deposit the company expects to convert to cash within the year.

Noncurrent assets are things a company does not intend to convert to cash or that would take longer than a year to convert. Noncurrent assets include fixed assets, often listed as "Property, plant, and equipment" because that’s what they usually are. Companies use fixed assets to manufacture, display, store, and transport products. The amounts of fixed assets vary by company and industry. For example, manufacturing companies generally have a large investment in fixed assets because making things requires property, plant, and equipment. Service companies usually have fewer fixed assets. Liabilities (what the company owes) On the statement of financial position, debts are called liabilities. All companies have liabilities. Examples of liabilities include: •

money owed to banks and other lenders

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money owed to suppliers of goods and services (accounts payable)

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taxes owed to government authorities

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rents owed to owners of land and buildings

Liabilities are either current (short term) or long term. Current liabilities are due within one year. Long-term liabilities are due after one year. Although liabilities are a necessary part of doing business, companies must manage their liabilities carefully. If a company cannot make interest payments on time and repay the principal when due, the company can be forced to declare bankruptcy and either reorganize or disband. Stockholders' equity (what belongs to the owners) Stockholders' equity is the amount owners invested in new stock plus the earnings the company retained since it started. (Retained earnings is the amount of profit kept after dividends are paid). On the statement of financial position the amount of stockholders' equity always equals the value of all the assets minus all the liabilities. For example, if a company’s assets are valued at $10,000 and liabilities total $6,000, the equity is $4,000.

Statement of Cash Flows Purpose The statement of cash flows reports the flow of cash into and out of a company in a given year. Cash is a company’s lifeblood. Cash includes currency, checks on hand, and deposits in banks. Cash equivalents are short-term, temporary investments — such as treasury bills, certificates of deposit, or commercial paper — that can be quickly and easily converted to cash. A company uses cash to pay bills, repay loans, and make investments, allowing it to provide goods and services to customers. If all goes well, a company uses cash to generate even more cash as a result of higher profits. Key numbers The statement of cash flows reports the company’s sources and uses of cash and the beginning and ending values for cash and cash equivalents each year. It also includes (near the bottom of the statement) the combined total change in cash and cash equivalents from all sources and uses of cash.

Key numbers in this statement show results of transactions in three categories that are sources and uses of cash: Net cash provided (or used) by operating activities A company generates cash just from operating its business. Therefore, the first key number is net cash provided from operating activities. This total includes some items from the statement of earnings; for example:

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net earnings, showing the company’s profit (or loss)

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depreciation expense This key number also includes changes in some items from the statement of financial position:

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Inventory changes. (Increases in inventories use cash and reductions provide cash).

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Changes in accounts receivable, the sales the company has not yet been paid for. (Again, increases use cash and decreases provide cash).

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Changes in accounts payable, the cash a company owes its vendors and suppliers. (In this area, increases provide cash and decreases use cash). The statement of cash flows adds the net cash from each type of operating activity and reports the company’s total net cash provided (or used) by all operating activities. Net cash provided (or used) by investing activities The second key number might include investments in property (land), plant (factories and assembly plants), and equipment (machines, trucks, computer systems, telephone systems). Investing in such assets is a use of cash. Selling them is a source of cash. Examples of investing activities are overhauling trucks to extend their years of use or renovating factories and assembly plants to be more highly productive. The statement of cash flows adds the net cash from each type of investing activity and reports the company’s total net cash provided (or used) by all investing activities. Net cash provided (or used) by financing activities The third key number includes the sources and uses of cash for financing activities. Sources of cash include what a company raises by selling stocks and bonds and by borrowing from banks. Uses of cash include buying back stock from stockholders, paying dividends to share profits with stockholders and repaying borrowed cash. The statement of cash flows adds the net cash from each type of financing activity and reports the company’s total net cash provided (or used) by all financing activities.

Analyzing the Statements Overview When financial analysts evaluate a company for possible investment, they look both at the information in the

financial statements and at other information that puts these numbers into a larger context. Analysts can make more reliable investment decisions by taking the basic information in the financial statements and extending it to identify:

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a company’s internal strengths and weaknesses

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company and industry trends

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performance in the larger business environment Brokerage firms offer the results of their analysts’ research to individual investors as part of their service. Additionally, many professional analysts sell their evaluations and recommendations. Examples of sources of financial analysis are Moody’s, Standard & Poor’s, and Value Line. Interpreting the numbers Analysts usually begin evaluating a company by studying its financial statements. These sources present recent financial history in a concise format, making it easy to see short-term changes in key numbers. Financial statements are also fairly standard within an industry, making it easy to compare the performance of a company to that of its competitors. Analysts interpret the numbers on each financial statement using a variety of ratios and other comparative measures. Analysis covers:

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Statement of earnings

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Statement of financial position

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Statement of cash flows Analysis: statement of earnings Analysts use the statement of earnings to examine a company’s profitability. For example, analysts look at trends in revenue, operating income, and gross profit rates (or margins). Other measures include calculation of return on assets and return on equity. To view IBM’s performance over recent years, see the Historical Charts. Analysis: statement of financial position Analysts use the statement of financial position to examine a company’s liquidity and to gain insight into the state of the company’s debt and inventory. One measure analysts use is the current ratio, a comparison of current assets with current liabilities. Analysts also look at the relationship of this statement with the statement of earnings. For example, they may explore the relationships of accounts receivable with sales, and of inventory with the costs of sales. Collection of accounts receivable is a task financial analysts also watch closely. If customers take long to pay for goods and services, accounts receivable may become large, forcing the company to borrow money (and pay interest) to finance these receivables. The longer it takes to collect accounts receivable the less valuable they are. Analysis: statement of cash flows

Analysts use the statement of cash flows to determine how effectively a company generates and manages cash. Analysts look most closely at the cash from operating activities in evaluating a company’s potential for long-term success because this figure shows how efficiently the company can produce and sell its primary product or service. Analysts also evaluate cash flows in relation to earnings figures (from the statement of earnings). For example, in some cases, a company can report positive earnings on the statement of earnings and still report a negative net cash flow on the statement of cash flows. This situation may occur when a company is unable to meet the current demand for its products and consequently invests its profits, or even borrows additional money, to expand its manufacturing capability (for example, by purchasing equipment or new facilities). When such a situation occurs, analysts look for the implications. They try to determine if the prospective demand for the company’s product is great enough to justify the expenditures and new debt. Looking at other information Most analysts agree that the financial statements, financial ratios, and other comparative measures offer the best starting points for evaluating a company. However, they look at these items to provide only a portion of the information required to adequately evaluate a company for investment. Analysts begin to put the key numbers into a larger context by looking at two other critical parts of the annual report itself:

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The notes to the financial statements offer further explanation of the numbers on the statements. For example, for the statement of earnings, notes might describe changes in a company’s investment in research and development (R and D). For the statement of financial position, notes might describe significant liabilities and contingencies.

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The management discussion section provides management’s perspective on the company’s financial operation and performance. Reading this section in consecutive annual reports also allows analysts to gather more subjective information about a company, such as its ability to articulate and consistently pursue long-term goals. For company financial information not contained in the annual report, such as that in copies of Form 10-K or Form 10-Q filed with the Securities and Exchange Commission, analysts and investors frequently contact the company’s investor relations department for copies of those forms. Finally, analysts extend the scope of their financial information comparisons beyond the two to three year figures in a single set of financial statements. Instead, they look at the same ratios and performance measures over five to ten year periods. To see changes in IBM’s financial record over time, visit the Historical Charts. Analysts also compare these figures with several other numbers from other sources of business and economic information. For example, they:

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Compare many growth figures, such as growth in sales, with the rate of inflation, and look for rates that exceed that of inflation.

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Look at figures for competing companies to determine a company’s strength in its industry.

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Examine industry averages to gain a historical perspective in order to evaluate a company’s chances for long-term success.

A accounts payable. Amounts companies owe suppliers for goods and services. Listed in the current liabilities section on the statement of financial position. accounts receivable. Amounts customers owe a company from sales of goods or services that the company expects to collect within one year. Listed in the current assets section on the statement of financial position. annual report. A report a company publishes for its stockholders at the end of each fiscal year. The report includes required elements such as an auditors’ report and the company’s statement of earnings, statement of financial position and statement of cash flows. The report also includes elements such as letters and articles by the company’s executives, information on its financial condition and significant events. assets. Anything companies own. These things might be physical assets such as buildings, trucks, inventories of products, equipment, and cash. Or these things might be intangible assets such as goodwill, trademarks and patents. Listed as a category on the statement of financial position. See also accounts receivable, current assets, fixed assets, noncurrent assets. auditor. A firm of certified public accountants a company hires as an independent third party to review its financial information. The auditor’s main purpose is to make sure the statement of earnings, statement of financial position and statement of cash flows fairly present the company’s financial condition, and that they comply with GAAP. auditors’ opinion. A summary of the findings of a firm of certified public accountants that audits, or examines, a company’s financial statements. This report is included in the company’s annual report. Also called auditors’ report and report of independent accountants. auditors’ report. A summary of the findings of a firm of certified public accountants that audits, or examines, a company’s financial statements. This report is included in the company’s annual report. Also called auditors’ opinion and report of independent accountants.

B backlog. The amount of a company’s unfilled orders at the end of the year. When the company fills the orders the following year, it records the revenue on the statement of earnings. Frequently, a company will give its perspective on backlog in the management discussion section in the annual report. balance sheet. A financial statement that reports a company’s assets and the claims against them — liabilities and stockholders’ equity — at a set date noted on the statement. Also called statement of financial position. bond. A form of debt security a government or corporation issues, promising payment of the original investment plus interest on specifiedfuture dates. See also marketable securities. book value. The value of an asset, a liability, or a stockholders’ equity account. For a fixed asset, it is typically the cost of the asset minus accumulated depreciation. As companies continue to use fixed assets to generate revenue, the book values lessen, and sometimes ultimately reach zero. See also depreciation. C

cash. Currency and checks on hand and deposits in banks. Listed in the current assets section on the statement of financial position. See also cash equivalents. cash equivalents. Short-term, temporary securities that can be quickly and easily converted to cash. Listed in the current assets section on the statement of financial position. See also cash. consolidated statements. Financial statements of a company that presents the financial information of all its holdings as one company. current assets. Assets a company can convert to cash within one year. Examples are accounts receivable and inventories of products to sell. Listed in the assets category on the statement of financial position. See also accounts receivable, assets, fixed assets. current liabilities. Obligations a company has to others, such as creditors, suppliers, and tax authorities, payable within one year. Listed in the liabilities category on the statement of financial position. See also accounts payable, debt, income taxes. D debt. Money a company has borrowed and must repay, frequently with interest. Listed in the liabilities category on the statement of financial position. depreciation. An allowance for wear or age made to the value of a fixed asset, allocating its cost over its estimated useful life. Listed in the assets category on the statement of financial position. See also book value. dividends. Cash or stock payments from a company’s profits distributed to stockholders, an equal amount for each share of stock owned. Listed as dividends on the statement of stockholders’ equity. E earnings per share (EPS). The portion of a company’s profit assigned to each share of stock. For example, if the profit is $1 million and 500,000 shares are outstanding, the earnings per share would be $2 ($1 million ÷ 500,000 shares = $2). Listed in the per share of common stock amounts category on the statement of earnings. earnings report. A financial statement that reports the results of a company’s business operations (revenue and expenses) for a set period, usually one year. Also called an income statement, statement of earnings, statement of operations and statement of profit and loss. equity. The part of a company’s assets that belongs to the stockholders. In other words, the amount that would remain if a company sold all of its assets and paid off all of its liabilities. Listed as stockholders’ equity on the statement of financial position and on the statement of stockholders’ equity. expenses. Costs such as salaries, rent, office supplies, advertising and taxes. Listed in the operating expenses category on the statement of earnings. F Financial Accounting Standards Board (FASB). An association of accounting professionals that decides, maintains and communicates generally accepted accounting principles (GAAP). fixed assets. Anything companies use for more than one year to manufacture, display, store and transport products. Often called “Property, plant, and equipment” because that’s what fixed assets usually are. Listed after current assets in the assets category on the statement of financial position. See also assets, noncurrent assets. footnotes. An annual report section that provides information essential to fully understanding the financial statements. Notes explain the financial statements’ numbers and any significant events affecting them. Notes also provide additional detail and provide supplementary financial information. Also called notes. Form 10-K. A financial report the SEC requires companies to submit yearly. This audited form contains more

detailed information than the financial statements in the annual report. Form 10-Q. A financial report the SEC requires companies to submit quarterly. This unaudited form includes briefer, less detailed financial statements than those in the annual report. G generally accepted accounting principles (GAAP). A set of rules and financial reporting guidelines companies must follow to prepare and present the financial information on the statements. See also Financial Accounting Standards Board (FASB). goodwill. An intangible asset that adds value to the worth of a company; for example, the reputation of its products, services, or personnel. Listed in the assets category (sometimes as “Investments and sundry assets”) on the statement of financial position. See also asset, intangible assets, noncurrent assets. gross income. The difference between a company’s total sales and its cost of sales. Listed as a category on the statement of earnings. Also called gross profit. gross profit. The difference between a company’s total sales and its cost of sales. Listed as a category on the statement of earnings. Also called gross income. I income statement. A financial statement that reports the results of a company’s business operations (revenue and expenses) for a set period, usually one year. Also called an earnings report, statement of earnings, statement of operations and statement of profit and loss. income taxes. Fees placed by federal, state, local and foreign governments on a company’s earnings. Listed on the statement of earnings. intangible assets. Anything nonphysical, such as goodwill, trademarks and patents, that have value for a company. Listed in the assets category (sometimes as “Investments and sundry assets”) on the statement of financial position. See also asset, fixed assets, goodwill. inventories. All goods and materials available for sale (in the case of wholesalers, retailers, and distributors) or raw materials and supplies, work in process and finished goods (in the case of manufacturers). Listed in the current assets section on the statement of financial position. investments. A company’s equity ownership in unconsolidated subsidiaries and affiliates. Listed in the category of assets (for example, “Investments and sundry assets”) on the statement of financial position. investor relations. The division of a company that answers stockholders’ questions and sends them regular updates about the company’s performance. L leverage. A company’s use of debt, instead of its equity, to support its assets and grow. liabilities. A company’s debts to a lender, a supplier of goods and services, a tax authority, a landlord and others. Listed as a category on the statement of financial position. liquid asset. An asset that can be quickly converted into cash. Examples include cash and marketable securities. See also cash equivalents. long-term debt. Debt a company will repay after one year. Listed in the liabilities category on the statement of financial position. M market value. The amount two unrelated parties agree one of them will pay for something the other has. Also, the value of a company determined by multiplying the total number of outstanding shares by the market price per share. For example, if a company has 4,000,000 shares of stock outstanding and the current price per share is $50, the company’s market value is 4,000,000 x $50 or $200 million.

marketable securities. Financial assets, such as stocks and bonds, that companies can convert to cash. Listed as assets on the statement of financial position. N net earnings. A company’s total revenue less total expenses, showing what a company earned (or if lost, called net loss) for a set period, usually one year. Listed often literally as the “bottom line” on the statement of earnings. Also called net income and net profit. net income. A company’s total revenue less total expenses, showing what a company earned (or lost, called net loss) for a set period, usually one year. Listed often literally as the “bottom line” on the statement of earnings. Also called net earnings and net profit. net profit. A company’s total revenue less total expenses, showing what a company earned (or lost, called net loss) for a set period, usually one year. Listed often literally as the “bottom line” on the statement of earnings. Also called net earnings and net income. net sales. A company’s total sales less returned merchandise and discounts. Listed on the statement of earnings. net worth. The amount of a company’s stockholders’ equity. Listed as total stockholders’ equity on the statement of financial position. non current assets. Anything of long-term value to a company, including fixed assets and intangible assets. Listed in the assets category (after current assets) on the statement of financial position. See also fixed assets, goodwill, intangible assets. notes. An annual report section that provides information essential to fully understanding the financial statements. Notes explain the financial statements’ numbers and any significant events affecting them. Notes also provide additional detail and provide supplementary financial information. Also called footnotes. O operating expenses. Costs related to a company’s operations. Examples are salaries, advertising, sales commissions, travel and entertainment. Listed as a category on the statement of earnings. operating income (or loss). The result of deducting the cost of all sales and operating expenses from a company’s net sales. Listed on the statement of earnings. P price earnings ratio (P/E ratio). A ratio used to evaluate the relationship between a company’s price per share and the earnings per share (EPS). For example, if a company’s stock is selling for $12 per share and the earnings per share is $2, the P/E ratio is 6 (12 ÷ 2 = 6). R ratio. A measure of the relative size of two numbers. Usually, financial ratios are expressed as a times multiple (x) or a percentage (%). Ratios provide a quick way to compare a company to its performance over time, to other companies in the same industry, and to the industry average. report of independent accountants. A summary of the findings of a firm of independent certified public accountants that audits, or examines, a company’s financial statements. This report is included in the company’s annual report. Also called auditors’ report and auditors’ opinion. retained earnings. The total amount of a company’s net earnings since its inception, minus any payments made to stockholders. Retained earnings is actually part of stockholders’ equity and represents the portion of a company’s assets that are financed from profitable operations rather than from selling stock to investors or borrowing from external sources. Listed on the statement of financial position. revenue. The total flow of funds into a company, mostly for sales of its goods or services. Listed as the first category on the statement of earnings.

S SEC. Abbreviation for Securities and Exchange Commission. A U.S. government agency responsible for, among other things, ensuring publicly held companies report financial information to stockholders regularly. SEC Form 10-K. A financial report the SEC requires companies to submit yearly. This audited form contains more detailed information than the financial statements in the annual report. SEC Form 10-Q. A financial report the SEC requires companies to submit quarterly. This unaudited form includes briefer, less detailed financial statements than those in the annual report. Securities and Exchange Commission (SEC). A U.S. government agency responsible for, among other things, ensuring publicly held companies report financial information to stockholders regularly. securities. Investments, including stocks and bonds. Listed as assets on the statement of financial position. share. A certificate of ownership in a company. Also called stock. statement of cash flows. A financial statement that reports the flow of cash in and out of a company for a set period, usually one year. It reports the operating activities, investing activities and financing activities of the company. statement of earnings. A financial statement that reports the results of a company’s business operations (revenue and expenses) for a set period, usually one year. Also called an earnings report, income statement, statement of operations, and statement of profit and loss. statement of financial position. A financial statement that reports a company’s assets and the claims against them — liabilities and stockholders’ equity — at a set date noted on the statement. Also called the balance sheet. statement of operations. A financial statement that reports the results of a company’s business operations (revenue and expenses) for a set period, usually one year. Also called an earnings report, income statement, statement of earnings, and statement of profit and loss. statement of owners’ equity. A financial statement that reports the changes in the owners’ interests (equity); for example, by detailing changes in net earnings or dividends paid to stockholders. This statement is usually separate but a company may prepare a statement of retained earnings instead. Also called statement of stockholders’ equity. statement of profit and loss. A financial statement that reports the results of a company’s business operations (revenue and expenses) for a set period, usually one year. Also called an earnings report, income statement, statement of earnings, and statement of operations. statement of stockholders’ equity. A financial statement that reports the changes in the owners’ interests (equity); for example, by detailing changes in net earnings or dividends paid to stockholders. This statement is usually separate but a company may prepare a statement of retained earnings instead. Also called statement of owners’ equity. stock. A certificate of ownership in a company. Also called share. stockholder. An owner of part of a company. Also called a shareholder. T trend. A pattern in a company’s financial performance over time. For example, if a company’s sales have been increasing over many months or years, analysts would describe this pattern as a sales growth trend.