Page 677 - Accounting Principles (A Business Perspective)

17. Analysis and interpretation of financial statements

balance sheet and income statement). The only limiting factor in choosing ratios is the requirement that the items
used to construct a ratio have a logical relationship to one another.

Sources of information
Financial information about publicly owned corporations can come from different sources such as published

reports, government reports, financial service information, business publications, newspapers, and periodicals.
Public corporations must publish annual financial reports. The Annual report appendix gives such data for The
Limited, Inc.. The major sections of an annual report are (not necessarily in this order):
• Consolidated financial statements Consolidated financial statements include a balance sheet
containing two years of comparative data; an income statement containing three years of comparative data; a
statement of cash flows containing three years of comparative data; and a statement of shareholders' equity
containing three years of comparative data. For examples of each statement, refer to the annual report booklet.
• Notes to consolidated financial statements Notes to consolidated financial statements provide an in-
depth look into the numbers contained in the financial statements. The notes usually contain sections on

significant accounting policies, long-term debt, leases, stock option plans, etc. These explanations allow
stockholders to look beyond the numbers to the events that triggered the dollar amounts recorded in the
financial statements.
• Letters to stockholders Most annual reports are introduced with a letter to the stockholders. The letter
often includes information about the company's past history, its mission, current year operating results, and
the company's future goals.
• Reports of independent accountants The Securities and Exchange Commission (SEC) requires the

financial statements of certain companies to be audited. The report of independent accountants, found at the
end of the financial statements, provides assurance that the financial statements prepared by the company
have been audited and are free of material misstatements. The report also may include a paragraph
highlighting the significant accounting policies that the company has changed recently.
• Management discussion and analysis The management discussion and analysis section of the annual
report provides management's view of the performance of the company. The analysis is based on the financial
statements, the conditions of the industry, and ratios.
Publicly held companies must file detailed annual reports (Form 10-K), quarterly reports (Form 10-Q), and
special events reports (Form 8-K) with the Securities and Exchange Commission. These reports are available to the

public for a small charge and sometimes contain more detailed information than the published reports.
Financial statement information is often more meaningful when users compare it with industry norms. Two
firms that provide information on individual companies and industries are Moody's Investors Service and Standard
& Poor's. Dun & Bradstreet Companies, Inc., publishes Key Business Ratios and Robert Morris Associates publishes
Annual Statement Studies; both provide information for specific industries. Standard & Poor's Industry Surveys
contains background descriptions and the economic outlook for different industries.
Business publications such as The Wall Street Journal, Barron's, Forbes, and Fortune also report industry

financial news. Because financial statement users must be knowledgeable about current developments in business,
the information in financial newspapers and periodicals is very valuable to them.

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