Chapter 1
1.1 The types of questions that can be answered include the following:
• Would an investment generate attractive returns?
• What is the degree of risk inherent in the investment?
• Should existing investment holdings be liquidated?
• Will cash flows be sufficient to service interest and principal payments to
support the firm’s borrowing needs?
1.2 The annual report is published primarily for shareholders, while the 10-K
report is filed with the Securities and Exchange Commission and is used by
regulators, analysts, and researchers. The financial statements and much of the
1.3 The analyst should use the financial statements: the balance sheet, the
income statement, the statement of stockholders’ equity, and the statement of cash
1.4 The SEC has the legal authority to write accounting rules in the United
States; however, they choose to delegate writing rules, for the most part, to the
1.5 The annual report or Form 10-K includes the following four financial
statements:
1. The balance sheet or statement of financial position shows the financial
2. The income or earnings statement presents the results of operations—
3. The statement of stockholders’ equity reconciles the beginning and ending
balances of all accounts that appear in the stockholders’ equity section of the
4. The statement of cash flows provides information about the cash inflows and
1.6 The notes are, in fact, an integral part of the statements and must be read in
order to understand the presentation on the face of each financial statement.
1.7 A qualified report is issued when the overall financial statements are fairly
presented “except for” items which the auditor discloses; an adverse opinion is
issued when the financial statements have departures from GAAP so numerous that
1.8 The Management Discussion and Analysis section is of potential interest to
the analyst because it contains information that cannot be found in the financial
1. The internal and external sources of liquidity
2. Any material deficiencies in liquidity and how they will be remedied
3. Commitments for capital expenditures, the purpose of such commitments, and
expected sources of funding
1.9 The proxy statement is a document required by the SEC to solicit
shareholder votes, since many shareholders do not attend shareholder meetings.
1.10 Employee relations with management, employee morale and efficiency, the
1.11
Memorandum
Date: Current Date
To: B.R. Neal, Director of Marketing
From: Student’s Name
Subject: Contents of an Annual Report
The company’s annual report presents financial information about the firm.
This information package is published primarily for shareholders and the general
public. The major components of an annual report are briefly described in this
memo.
1) An annual report contains four financial statements: The balance sheet
shows the financial condition (assets, liabilities, stockholders’ equity) at end of
2) Notes to the financial statements provide additional detail about
particular items in the financial statements. 3) The auditor’s report is prepared by
an independent accounting firm and attests to the fairness of the information
presented. 4) The five year summary shows key financial data including net sales,
income/loss from continuing operations on a dollar and per share basis, assets, long
If staff members would like to learn more about any of the material in the
company’s annual report, the following book is highly recommended:
Understanding Financial Statements by Fraser and Ormiston (Prentice Hall, 20??).
1.12 There is no solution presented as the information will be changing over time.
1.13 The SEC website contains information useful to the financial analyst
including the following sections:*
“Enforcement” provides information on SEC enforcement actions, opinions issued
by the Commission, briefs filed by SEC staff, trading suspensions, and notices
concerning the creation of investors’ claims funds in specific cases.
“Regulation” provides links to releases concerning SEC rulemaking activity.
“Education” allows the analyst to search for information, ask questions, file
complaints, access research tools and calculators, and includes warnings and
updates the SEC may desire to share with the public.
Case 1.1
(a) Intel designs and manufactures advanced integrated digital technology
platforms. A platform consists of a microprocessor and chipset, and may be
enhanced by additional hardware, software, and services. Platforms are used in a
(b) The analyst could learn the following by reading the letters from the CEO
and the chairman:
• Intel delivered revenue of $52.7 billion, net income of $9.6 billion,
$1.89 of earnings per share and $21 billion of cash from operations
in 2013,
• Intel continues to pursue Moore’s Law by developing computing
devices that are smaller, lower cost, and higher performing, and can
also be more mobile,
• Quark technology was introduced in 2013 as Intel continues to
innovate in markets for wearables and “Internet of Things” where
priorities are small size, low power consumption chips,
• Intel returned $6.6 billion in value to shareholders in the form of
$4.5 billion in dividends and $2.1 billion of repurchased common
stock,
benefit armed groups in the Democratic Republic of the Congo
• Andy Bryant, chairman of Intel’s Board acknowledged Intel’s
failure to recognize the potential of the tablet market in a timely
(c) Intel received an unqualified audit opinion. The audit report states that the
audit was conducted in accordance with the standards of the Public Company
Accounting Oversight Board and the financial statements are in conformity with
generally accepted accounting principles. Intel also received an unqualified
opinion on the effectiveness of their internal controls over financial reporting. (pgs.
107-108 of Form 10-K)
1. The company expects the key source of liquidity to be cash from operating
activities. In 2013, Intel generated $20.776 billion of cash from operations. Cash is
2. No material deficiencies of liquidity currently exist. (pgs. 40–43 of Form 10-K)
3. Intel does not share the projections for capital expenditures or the purpose of
any capital expenditures for the 2014 fiscal year. The Business Outlook section
5. No unusual or infrequent transactions were found in 2013.
6. Intel reduced their workforce, certain businesses, and facilities in 2013 as a
result of the business environment. (pg. 38 of Form 10-K) The firm has projected
7. Sales decreased 1% overall due to lower platform unit sales partially offset by
higher average selling prices. The PC Client Group revenues decreased 4%
primarily due to less demand for traditional PC products. Lower notebook and
desktop platform unit sales were down 4% and 2%, respectively. The Data Center
Case 1.2
(a)
Company Name:
Stock Ticker Symbol: AMAT
U.S. Stock Exchange: NASDAQ Variable
12/31/2000
Statement Year-end Dates: 10/27/2013 10/28/2012 10/30/2011
Financial Reports Rounded to : Millions
Supplemental Ratio Requirements: 2013 2012 2011
Rent expense (in millions): 36$ 38$ 44$
Dividends per share: 0.39$ 0.35$ 0.31$
End of year stock price (adjusted for splits): 17.71$ 10.65$ 12.62$
Marketwatch.com URL for stock prices:
http://marketwatch.com/tools/qu
http://marketwatch.com/tools/qu
http://marketwatch.com/tools/qu
Applied Materials
Clear
(b) Each student’s response will differ depending on the news sources used and
the date on which the student completes the assignment. Below is a sample of the
type of article a student could find about Applied Materials in 2013:
If Applied Materials makes it through the antitrust screening and is allowed to
acquire Tokyo Electron, the merger would be one of the largest foreign takeovers
of a Japanese company. If merged, the combined firm will be incorporated in the
Netherlands. The merger has been compared to combining Google and Microsoft.
Applied Materials is No. 1 in sales of chip manufacturing gear and Tokyo Electron
ranks third.
Case 1.3
1. Mattel, Inc. designs, manufactures, and markets a broad variety of toy
products worldwide.
2. a. Balance sheet – pg. 57
b. Income statement – pg. 58 (59 is comprehensive income statement)
3. PricewaterhouseCoopers LLP
4. a. Assets – $6,439,626
b. Liabilities – $3,188,067 ($1,047,440+$2,140,627)
Case 1.4
a. The Management Discussion and Analysis section provides important
information that cannot be found anywhere else in the annual report. The section
covers trends, events, and uncertainties in the areas of liquidity, capital resources,
and operations. Information should include a discussion of:
1. Internal and external sources of liquidity;
2. Any material deficiencies in liquidity and how they will be remedied;
b. The MD&A includes the following discussion of the seven items outlined in
(a) above:
1. The principal sources of liquidity for Biolase are cash and cash
equivalents on hand of $1.4 million, $11.1 million of net accounts
receivable (internal sources) and available borrowings under two
2. While Biolase explains in the MD&A that the financial statements
have been prepared under the assumption that the firm is a going
concern, there is substantial doubt that the firm will be able to
3. Biolase plans to spend approximately $750,000 for capital
4. Based on the information related to the going concern issue it appears
likely that Biolase may take on more debt in the future, assuming they
5. The going concern issue would be unusual and infrequent.
6. It is difficult to determine if there will be any material changes in the
relationship between costs and revenues. It seems likely that any
increases in revenues will be offset by higher costs. For example,
Biolase may be able to increase sales due to a better organized sales
7. Net sales decreased 2% in 2013 due to volume decreases in domestic
laser system revenue, offset by volume increases in imaging systems,
consumable products, services, license fees and royalty revenue.
Domestic laser system sales have higher profit margins than imaging
system sales and international laser system sales.
c. Biolase explained changes in numbers and offered reasons for these
changes. Some forward-looking information was offered in the
d. Answers will vary based on individual students’ reactions to the
MD&A. An example of a possible response follows:
The prospects for Biolase are poor. There is substantial doubt about
whether Biolase can continue as a going concern. Net losses and negative