What is an Annual Report for a Corporation?
An annual report is a document provided to the public corporations shareholders on a yearly basis describing financial conditions and operations.4 min read
What is an annual report for a corporation? An annual report is a document that public corporations are required to provide to its shareholders on a yearly basis describing financial conditions and operations. Public corporations are required to file this comprehensive report in order to disclose the corporation's activities during the prior year. The annual report is also a means of communication with the corporation's investors and other stakeholders.
Where is the Annual Report Submitted?
The corporation issues its annual reports to its shareholders and any other investors so they can evaluate the corporation's financial performance. Annual reports must be given to shareholders when annual meetings are held to elect new directors. Proxy rules require reporting companies to post these on their corporations' websites. There is also a requirement to submit annual reports to the Securities and Exchange Commission (SEC).
What Items are Included in Annual Reports?
The initial part of the report provides narratives, photos, and graphics that help tell the story of the corporations' activities during the past year. The end of the report is where you'll find operational and financial information. Typical sections in an annual report include:
- Corporation general information
- Financial and operating highlights
- CEO letter to the shareholders
- Narrative text, photos, and graphics
- Important financial documents like income statement, balance sheet, and cash flow statement
- Notes on the financial statements
- Report from the auditor
- Financial data summary
- Description of accounting policies
There is also a management discussion section that is a narrative written by the executive-level management that summarizes the company's financial position. It's referred to as the Management Discussion and Analysis section. One focus area is the corporation's ability to cover current debts and expenses. An important part of this section is about sales revenue, capacity and ability to expand and grow, and it will summarize any potential threats or new opportunities.
The financial statements are the main heart of an annual report. The balance sheet will detail the corporation's assets, liability, and stockholders' equity. The statement of cash flow details how much a business earns from its operational, investment, and financing activities. On the income statement, the preparer will note whether the business is making income or operating at a net loss. Your retained earnings statement discusses how much net income managers pay out through dividends and what is being retained.
The auditor's report is completed by an independent auditor. His or her job is to verify the accuracy of the financial statements. Their report will indicate whether submitted financial statements follow generally accepted accounting principles (GAAP). The auditor will add his or own statement that confirms the corporation's financial statements are accurate and fair, which is known as an “unqualified opinion.” If no unqualified opinion is given, you are smart to be suspicious.
Purpose of the Annual Report
An annual report assesses the corporation's operations and projections for the upcoming year. Current and any prospective investors, plus employees, analysts, creditors, and other interested parties, use the annual report to analyze a company. The annual report can measure a number of things:
- A corporation's ability to pay debts as they are due
- Whether a corporation has turned a profit or operated at a loss during the prior fiscal year
- A corporation's growth over the years
- Amount of earnings retained by a business to grow its operations
- The proportion of operating expenses to the revenue generated during the prior fiscal year
Using an Annual Report for Marketing Purposes
The primary purpose for most companies is to meet legal requirements, but other public corporations use it as a tool for getting information out to potential investors. Some medium and large corporations create very attractive and informative annual reports because they are a tool that the company can use to influence others, teach, drive the formation of opinions, and discuss.
The annual report will always be for current shareholders and potential investors, but there are some other people that preparers keep in mind when working on the new document:
- Employees: Opportunity to praise innovation, teamwork, and commitment, and it can be used to relay information about various successes like developing a new product or signing a contract.
- Customers and Suppliers: Annual reports can help a business promote its image by focusing on its core values and corporate mission. Suppliers are put on notice of internal measurements of quality and expectations.
- Community: Companies want to keep a good reputation in their community, and annual reports can discuss community initiatives and charitable contributions.
If you need help with understanding annual reports, you can post your legal need on UpCounsel's marketplace. UpCounsel only accepts the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.