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Chapter One | Overview of Financial Statement Analysis 27

Management Report. The purposes of this report are to reinforce: (1) senior
management’s responsibilities for the company’s financial and internal control
system and (2) the shared roles of management, directors, and the auditor in
preparing financial statements. Colgate’s report, titled Report of Management, dis-
cusses its policies and procedures to enhance the reliability of its financial records.
Its report also highlights the role of its audit committee of the board of directors in
providing added assurance for the reliability of financial statements.
Auditor Report. An external auditor is an independent certified public accountant
hired by management to provide an opinion on whether or not the company’s fi-
nancial statements are prepared in conformity with generally accepted accounting
principles. Financial statement analysis requires a review of the auditor’s report to
ascertain whether the company received an unqualified opinion. Anything less than
an unqualified opinion increases the risk of analysis. Colgate’s Report of Independent
Accountants, prepared by PricewaterhouseCoopers, is reproduced in Appendix A.
Colgate received an unqualified opinion. We discuss audit reports in Appendix 2A. DOUBLE TROUBLE
Explanatory Notes. Explanatory notes that accompany financial reports play an PricewaterhouseCoopers
integral part in financial statement analysis. Notes are a means of communicating earned $13 million from
audit fees and $18 million
additional information regarding items included or excluded from the body of the from tax fees it charged
statements. The technical nature of notes creates a need for a certain level of ac- to scandal-ridden Tyco
counting knowledge on the part of financial statement analysts. Explanatory notes International Ltd. in 2001.
include information on: (1) accounting principles and methods employed, (2) de- The Sarbanes-Oxley Act
tailed disclosures regarding individual financial statement items, (3) commitments now limits the consulting
work that may be
and contingencies, (4) business combinations, (5) transactions with related parties, performed by a company’s
(6) stock option plans, (7) legal proceedings, and (8) significant customers. The auditors.
notes for Colgate follow its financial statements in Appendix A.
Supplementary Information. Supplemental schedules to the financial statement
notes include information on: (1) business segment data, (2) export sales, (3) mar-
ketable securities, (4) valuation accounts, (5) short-term borrowings, and (6) quar-
terly financial data. Several supplemental schedules appear in the annual report of
Colgate. An example is the information on segment operations included as note 14
in Colgate’s annual report.
Proxy Statements. Shareholder votes are solicited for the election of directors
and for corporate actions such as mergers, acquisitions, and authorization of secu- GREEN
rities. A proxy is a means whereby a shareholder authorizes another person to act REPORT CARD
for him or her at a meeting of shareholders. A proxy statement contains infor- About one-half of the 250
mation necessary for shareholders in voting on matters for which the proxy is largest global companies
produce corporate
solicited. Proxy statements contain a wealth of information regarding a company
responsibility reports.
including the identity of shareholders owning 5% or more of outstanding shares,
biographical information on the board of directors, compensation arrangements
with officers and directors, employee benefit plans, and certain transactions with
officers and directors. Proxy statements are not typically part of the annual report.

FINANCIAL ST A TEMENT
ANAL YSIS PREVIEW
A variety of tools designed to fit specific needs are available to help users analyze
financial statements. In this section, we introduce some basic tools of financial analysis
and apply them to Colgate’s annual report. Specifically, we apply comparative financial
statement analysis, common-size financial statement analysis, and ratio analysis. We