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Annual Reports: Users, Advantages, Effectiveness, Decisions

The annual report is considered by some to be the single most important printed document that companies produce. In recent years, annual reports have become large documents.They now include such sections as letters to the stockholders, descriptions of the business, operating highlights, financial review, management discussion and analysis, segment reporting, and inflation data as well as the basic financial statements. The expansion has been due in part to a general increase in the degree of sophistication and complexity in accounting standards and disclosure requirements for financial reporting.

The expansion also reflects the change in the composition and level of sophistication of users. Current users include not only stockholders but also financial and securities analysts, potential investors, lending institutions, stockbrokers, customers, employees, and (whether the reporting company likes it or not) competitors. Thus, a report that was originally designed as a device for communicating basic financial information now attempts to meet the diverse needs of an expanding audience.Users hold conflicting views on the value of annual reports. Some argue that annual reports fail to provide enough information, whereas others believe that disclosures in annual reports have expanded to the point where they create information overload. The future of most companies depends on acceptance by the investing public and by their customers; therefore, companies should take this opportunity to communicate well-defined corporate strategies.

1. The goal of preparing an annual report is to communicate information from a company to its targeted users. (a) Identify and discuss the basic factors of communication that must be considered in the presentation of this information. (b) Discuss the communication problems a company faces in preparing the annual report that result from the diversity of the users being addressed.

2. Select two types of information found in an annual report, other than the financial statements and accompanying footnotes, and describe how they are useful to the users of annual reports.

3. Discuss at least two advantages and two disadvantages of stating well-defined corporate strategies in the annual report.

4. Evaluate the effectiveness of annual reports in fulfilling the information needs of the following current and potential users: (a) shareholders, (b) creditors, (c) employees, (d)customers, (e) financial analysts.

5. Annual reports are public and accessible to anyone, including competitors. Discuss how this affects decisions about what information should be provided in annual reports.

Solution Preview

1. The goal of preparing an annual report is to communicate information from a company to its targeted users. (a) Identify and discuss the basic factors of communication that must be considered in the presentation of this information. (b) Discuss the communication problems a company faces in preparing the annual report that result from the diversity of the users being addressed.

The basic factors are nature of the audience and the material to be presented. The level of technical knowledge of the reader various considerably from the customer to the stockholders to the professional analyst. Further, while GAAP requires a minimum level of disclosures, firms often with to add voluntary disclosures to reveal more specifics or to help clarify their standing. For instance, Home Depot routinely disclosures sales per square foot, not a GAAP disclosure, but one that they feel the analysts use to compare them to others in the retail space. If your audience has minimal technical training, putting in too much information or too many details will actually reduce the effectiveness of the report. Failing to include critical reconciling item details such as interest capitalized or contingent rentals, while making it easier for less technical audiences, will reduce the ability to forecast competently.

2. Select two types of information found in an annual report, other than the financial statements and accompanying footnotes, and describe how they are useful to the users of annual reports.

Two things found in annual reports in addition to the typical GAAP reports are graphs ...

Solution Summary

Your tutorial is 805 words and discusses voluntary and required disclosures, what various user groups need and want, and communication issues with the annual report.

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