Dealing with Information Overload in Financial Reports

Investors in a business must deal with the information overload of annual financial reports. In general, the larger a business, the longer its financial report. The annual reports of large, publicly owned business corporations are typically 30-50 pages (or more). You would need two hours to do a quick read of the entire annual financial report, without trying to digest its details.

If you did try to digest the details of an annual financial report, which is a long, dense document not unlike a lengthy legal contract, you would need many hours (or an entire day) to do so. Also, to get the complete picture, you should read the company’s filings with the SEC in conjunction with its annual financial report. There are many, many numbers in an annual financial report.

Browsing financial reports based on your interests

Very few people take the time to plow through every detail and every number on every page of financial reports — except for those professional accountants, lawyers, and auditors directly involved in the preparation and review of the financial report.

Most investors likely read annual financial reports like they read Sunday newspapers. The complete information is there if you really want to read it, but most readers pick and choose which information they have time to read.

Annual financial reports are designed for archival purposes, not for a quick read. Instead of addressing the needs of investors and others who want to know about the profit performance and financial condition of the business, accountants produce an annual financial report that is a voluminous financial history of the business.

Accountants leave it to the users of annual reports to extract the main points. So, financial statement readers use relatively few ratios and other tests to get a feel for the financial performance and position of the business.

Recognizing condensed versions of financial reports

Many public businesses and nonprofit organizations don’t send a complete annual financial report to their stockholders or members. They know that few persons have the time or the technical background to read the full-scale financial statements, footnotes, and other disclosures in their comprehensive financial reports. So, they present relatively brief summaries that are boiled-down versions of their complete financial reports.

Typically, these summaries — called condensed financial statements — do not provide footnotes or the other disclosures that are included in the comprehensive annual financial reports. If you really want to see the official financial report of the organization, you can ask its headquarters to send you a copy (or, for public corporations, you can go to the EDGAR database of the SEC.

Most public companies put their financial reports on their Web sites. Each company’s Web site is a little different, but usually you can figure out fairly easily how to download its annual and quarterly financial reports.

Alternatively, you can go to the EDGAR (Electronic Data Gathering, Analysis, and Retrieval) database, maintained by the Securities and Exchange Commission (SEC). Each company makes many filings with the SEC so you have to know which one you want to see. The annual financial report is form 10-K. Go to the EDGAR company search site to locate this information.

Using other sources of business information

Annual financial reports are only one of several sources of information to owners, creditors, and others who have a financial interest in a business. Annual financial reports usually come out two months or so after the end of the company’s fiscal (accounting) year.

You have to keep abreast of developments during the year by reading financial newspapers or through other means. Also, annual financial reports present the sanitized version of events; they don’t divulge scandals or other negative news about the business.

Not everything you may like to know as an investor is included in the annual financial report. For example, information about salaries and incentive compensation arrangements with the top-level managers of the business are disclosed in the proxy statement, not in the annual financial report.

A proxy statement is the means by which the corporation solicits the vote of stockholders on issues that require stockholder approval — one of which is compensation packages of top-level managers. Proxy statements are filed with the SEC and are available on its EDGAR database.

blog comments powered by Disqus
Advertisement

Inside Dummies.com