INTRODUCTION TO THE CORPORATE ANNUAL REPORT: A BUSINESS APPLICATION
CHAPTER 1
Chapter 1: Select a Company and Gather Documents—Question 1
Fill in the page numbers on the annual report where the following are located.
Required information for this workbook project. Page No. Required information for this workbook project. Page No.
Financial Highlights (not absolutely necessary, but very common in annual reports) Statement of Change in Stockholders Equity 11
Management’s Discussion and Analysis (MD&A) Statement of Cash Flows 12
Chairman’s Message (President’s, CEO’s or other top official’s message) or letter to the shareholders Notes to Financial Statements 13 onwards
Report of Independent Accountants or Independent Auditors’ Report 1 to 7 Five- or Ten-Year Summary of Operating Results
Income Statement (Statement of Earnings) 8 and 9 Investor and Company Information or Shareholder Information
Balance Sheet (Statement of Financial Position) 10

Chapter 1: Identify Why You Selected This Company—Question 1
Assume that you selected the firm you are analyzing, what is/are your motivation(s) or interest(s) in selecting this company? What question(s) are you seeking to answer?
We wanted to have a look at the utility & energy industry in the UAE and how they are working, hence we selected one of the most important companies in the UAE ” Tabreed” – National Central Cooling Company. Moreover, we wanted to analyze the numbers of an important service industry like air conditioning here in the UAE, where the temperatures are high for more than two-thirds of the year.

Chapter 1: Company and Annual Report Essentials—Question 1
What is the company’s complete name?
National Central Cooling Company – Tabreed

Chapter 1: Company and Annual Report Essentials—Question 2
What is the address of your company’s corporate headquarters?
Abu Dhabi – Masdar City

Chapter 1: Company and Annual Report Essentials—Question 3
Identify the company’s Internet site.
https://www.tabreed.ae/

Chapter 1: Company and Annual Report Essentials—Question 4
Identify the address and telephone number of the Investor Relations office. Include an email address if available.
Abu Dhabi -Masdar City
Telephone: 800-Tabreed (8227333)
Bijay Sharma
Executive Director – Churchgate Partners
Email: [email protected]

Chapter 1: Company and Annual Report Essentials—Question 5
Which stock exchange lists your company?
Dubai Financial Market (DFM)

Chapter 1: Company and Annual Report Essentials—Question 6
What is your company’s stock exchange trading symbol?
TABREED

Chapter 1: Company and Annual Report Essentials—Question 7
What is your company’s Industrial Classification (main business)? Your company may have more than one industry. List all the industries that your corporation is involved in.
SIC Code 3580 – Refrigeration & Service Industry Machinery
SIC Code 3585 – Air Conditioning & Warm Air Heating Equipment & Commercial & Industrial Refrigeration Equipment
Business Services

Chapter 1: Company and Annual Report Essentials—Question 8
Locate the board of directors listing. How many board members does your company have?
Tabreed has 9 board members. They are:

• Khaled Abdulla Al Qubaisi CHAIRMAN OF THE BOARD, TABREED
• Paulo Almirante Vice-Chairman of the Board
• H.E. Dr. Ahmad Bin Abdullah Humaid Belhoul Al Falasi Board Member
• Saeed Ali Khalfan Al Dhaheri Board Member
• Mohammed Al Huraimel Al Shamsi Board Member
• Frédéric Claux Board Member
• Musabbeh Al Kaabi Board Member
• Pierre Cheyron Board Member
• Anne-Laure de Chammard Board Member

Chapter 1: Company and Annual Report Essentials—Question 9
How many of the directors are company employees, labeled inside directors? And how many are non-company directors, labeled outside directors? Are there more inside or outside directors?
4 insiders (from ENGIE – who has acquired 40% of Tabreed)
5 outsiders
More outsiders than insiders

Chapter 1: Company and Annual Report Essentials—Question 10
Why would outside directors be important to the long-term success of a company? Are any of the directors Certified Public Accountants (CPA) or Certified Management Accountant (CMA), or any other certificate (CFA, CIA)? Hint: The designation would follow their name.

• Outside directors can reduce the problem of principal agent costs. It helps in management not manipulating numbers for their benefit at the cost of the investors. External interference acts like a layer of governance and avoids shareholders from not being unhappy.
• Mr. Al Shamsi holds an MBA from the HEC School of Management – Paris, France, and a Bachelor of Finance degree in Finance from the American University of Sharjah, UAE
• Mr. Aldhaheri holds a Bachelor of Finance degree from the American University in Dubai.
• H.E. Dr. Ahmad Bin Al Falasiholds a Ph.D. from Sir John Monash University in Australia, a Master of Science from the University of Melbourne and a BSc in Telecommunications Engineering from Khalifa University.
• Paulo Almirante olds a Master of Science degree in Mechanical Engineering Production Management and a Master of Science degree in Mechanical Engineering Thermodynamics from the Instituto Superior Técnico in Lisbon, Portugal.
• Mr. Al Qubaisi holds a Bachelor of Arts degree in Finance and Operations Management from Boston University, a Master of Science from George Washington University and is a Chartered Financial Analyst Institute member (CFA)
• Anne-Laure de Chammard holds a Master’s in Public Policy from Harvard University (Kennedy School)
• Musabbeh holds a Bachelor of Science degree in Geophysical Engineering from Colorado School of Mines and a Master of Sciences in Petroleum Geoscience from Imperial College, London

Chapter 1: Company and Annual Report Essentials—Question 11
Leadership addresses the stockholders, typically, once a year at the annual stockholders meeting. Identify where and when this occurred, as reported in your annual report.
It was held virtually, on Sunday, 21st March 5pm (UAE Time)

Chapter 1: Learning More about Your Company and Its Industry—Question 1
Briefly summarize the following about the corporation.
Type of business: Business Services

Major business segments: Cooling Developer

Primary customers: Corporations/ facility owners/managers

Primary products and/or services: Cooling Systems

Other:

Other:

Chapter 1: Learning More about Your Company and Its Industry—Question 2
Summarize your findings from three articles or industry search activities.
Article/Industry search 1: Emerging technologies to deliver energy-efficient HVAC systems – https://www.coolingindia.in/emerging-technologies-to-deliver-energy-efficient-hvac-systems/

Article/Industry search 2: Pandemic Induced HVAC Trends Impel New Technology Into 2021 – https://www.coolingindia.in/pandemic-induced-hvac-trends-impel-new-technology-into-2021/

Article/Industry search 3: Energy Efficient Technologies for HVAC Systems – https://www.coolingindia.in/energy-efficient-technologies-for-hvac-systems/

All three articles mentioned above look into the area of how the increased usage of cooling systems and electric resources during the pandemic has made consumers more aware of their resource consumption and the bills that come with the consumption. The articles have focused on innovation that will help improve the sustainability and cost efficiency of these cooling systems, which will benefit the industry and the consumers overall.

Chapter 1: Learning More about Your Company and Its Industry—Question 3
Recap of press release findings
Press release 1: Tabreed acquires additional stake in exclusive district cooling scheme at Abu Dhabi’s Al Maryah island –
https://www.tabreed.ae/news/tabreed-acquires-additional-stake-exclusive-district-cooling-scheme-abu-dhabis-al-maryah-island/

Expansion of business provided in Abu Dhabi, taking over one of the most lucrative areas in Abu Dhabi
Press release 2: Tabreed expands its R&D funding commitment to boost efficiency and sustainability –
https://www.tabreed.ae/news/tabreed-expands-rd-funding-commitment-boost-efficiency-sustainability/
Provides an indication of the company wanting to invest and improve its products and service provided in order to stay ahead of competitors.
Press release 3: Tabreed and Masdar expand collaboration efforts –
https://www.tabreed.ae/news/tabreed-masdar-expand-collaboration-efforts/
Another indication of the company’s improvement in strategic alliances in the region showcasing the increased potential for business opportunities and potential growth in the region.
Chapter 1: Learning More about Your Company and Its Industry—Question 4
Identify broad-based social, political, economic, and technological concerns that may affect your company.
Social: there is more focus on environment sustainability, and the cooling systems provided by Tabreed would be under constant scrutiny for its emissions and resource consumption.
Political: rules for emissions and consumption of electricity and other non-renewable resources can make the business environment challenging for Tabreed
Economic: with improving economic conditions after COVID, and with EXPO 2020, there are more development projects, which opens up potential business opportunities for Tabreed.
Technological: Technological advancements means constant investments in R&D.

Chapter 1: Learning More about Your Company and Its Industry—Question 5
What are the company’s strategic focuses, i.e., goals and objectives, and how does it plan to meet them? Use information that you have gathered so far to make a decision. Support your conclusion with a few statements.
The company and the industry overall plays a critical role in supporting economic growth and the development of modern infrastructure, commercial and residential development through the provision of essential cooling solutions that reduce electricity consumption and CO2 emissions. Over the next decades, population growth and economic diversification in Tabreed’s target markets will further the demand for sustainable cooling. Its goals and objectives are to provide sustainable cooling systems in the long term.

CHAPTER 2
Chapter 2: Financial Highlights—Question 1
Review the financial highlights of your company’s annual report. Identify net sales or revenues, net income, and basic and/or diluted earnings per share (EPS) for the current and preceding years. These are the most common values included in financial highlights. If your company reports something different, simply cross out an item here and recap what is reported.
Current Year (2020) Prior Year (2019)
Net sales or revenues 1,740,715,000 1,520,103,000
Net income 573,470,000 480,804,000
Basic EPS 0.20 0.17
Diluted EPS 0.20 0.17
Based on your preliminary review, does your company appear to be performing better than, equal to, or less favorably than in the prior year? Briefly explain.
The company has increased their profit by 93 Million (19%) due to the Group acquisition of 8% additional shares purchased from an existing shareholder of Tabreed District Cooling Company (Saudi). The transaction resulted in an increase in the Group’s shareholding in Tabreed District Cooling Company (Saudi) from 20% to 28% in 2020 (Note 12).

Chapter 2: General Company and Marketing Information—Question 1 Noora
Identify other types of general information found within the annual report. Look for pictures of products and people that are colorful and send a positive signal to the reader. Exclude the specific components listed in Chapter 1: Select a Company and Gather Documents—Question 1.
Category
Example: Volunteer Activities Message
Ongoing and contributing to the success of the community

Broader message from this information:

Chapter 2: Mission Statements—Question 1 Noora
Review the first few pages of your company’s annual report. Does a statement of corporate mission exist? If yes, what component of the mission statement stands out the most? If no, then move to the next section titled the Chairman’s Message. What does the chairman’s message say explicitly or implicitly about the company’s mission?
Vision: to be the leading cooling provider by Utilizing sustainable, reliable and cost efficient energy solutions.
Mission: Creating value through optimizing, innovating and striving for operational excellence to exceed stakeholder expectations, whilst protecting people, assets and environment.

Chapter 2: Chairman’s Message—Question 1 Noora
Review the chairman’s message of your company’s annual report. Does it appear to be uplifting or somewhat apologetic? Identify some phrases that support your position. What does the message say about the company’s future goals and objectives?

Chapter 2: Management’s Discussion and Analysis—Question 1 Noora
Review management’s discussion and analysis of results of operations and financial condition of your company’s annual report. Identify key strengths and weaknesses with regard to capital resources, liquidity, and results of operations.
Category Current Year Prior Year
Capital resources
(fixed assets and sources of long-term financing)

Liquidity
(ability to pay short-term obligations)

Results of operations

Chapter 1: Learning More about Your Company and Its Industry— From your study up to this point, what appears to be the company’s strategic focus? Support your conclusion with a few statements.

Chapter 2: Report of Management—Question 1 Azrah
Review the management report of your company’s annual report and answer the following questions. If this report is not included in the annual report, simply answer N/A.
Who is responsible for the preparation of and information within the company’s financial statement? N/A
Who is responsible for maintaining the internal controls designed to provide reasonable assurance that the books and records reflect the transactions of the company? N/A
Who is responsible for ensuring that management fulfills its responsibilities in the preparation of the financial statements? N/A

Who comprises the Audit Committee? N/A

Does the Audit Committee regularly meet with? N/A

Chapter 2: Independent Auditors’ Report—Question 1
Review the Independent Auditors’ Report of your company’s annual report and answer the following questions.
Who was the company’s auditor and where is it located? PwC- Abu Dhabi
What is the responsibility of the auditor? Audit the consolidated financial statements
Who is responsible for the preparation of and information within the company’s financial statement? Management
The audit was conducted in accordance with what? International Standards on Auditing (ISAs)
What was the opinion of the auditor? The financial statement are fairly presented in all material aspects

Chapter 2: Five- or Ten-Year Summary of Operating Results—Question 1 Azrah
Identify the major components provided in the five- or ten-year summary. Summarize the insight provided by each. Look for trends, increases or decreases. Consistent performance signals management has control of the business. Inconsistent performance signals management does not have control of the business.
Category
Example: The Emir corp. Statement of Earnings Data Summary of Insight
Sales and earnings have grown significantly over time. Operating expenses are growing at an increasing rate.

CHAPTER 3
Chapter 3: Balance Sheet—Question 1
Identify the date shown at the top of your selected company’s balance sheet. Does the company’s fiscal year follow the calendar year? Yes
Current Year Prior Year
31 December 2020 31 December 2019
If not, why do you think it is different? Best for the company to close their fiscal year during a slow period when inventory holdings are down and the holiday revenues have been realized.

Chapter 3: Balance Sheet—Question 2
Review the current asset section of your company’s balance sheet. Explain why the order of individual items begins with cash. In your opinion, would it be more or less appropriate to order these items according to dollar magnitude? Explain.
The accounts are listed in the descending order of their liquidity (how quickly and easily they can be converted to cash). cash is always presented first, followed by receivables, then finance lease receivables, then inventory, and then fixed assets. Goodwill is listed last. The approximate amount of time required to convert each type of asset into cash.
According to ISA-1 “ the presentation on financial statements” A presentation of assets and liabilities in increasing or decreasing order of liquidity provides information that is reliable and relevant for some entities, such as financial institutions.

Chapter 3: Balance Sheet—Question 3 Azrah
Review your company’s balance sheet and compare accumulated depreciation to the historical cost of Plant and Equipment (PE) using the following ratio.
1 – (Accumulated depreciation  PE) = Percentage of Asset Life Remaining
Low percentage means older assets
High percentage means newer assets
Is the investment in fixed assets, on average, older or newer? If not, can we assume that these assets will be replaced shortly?
1- (1,544,295,000/6,983,250,000) = 0.779
Tabreed has comparatively newer assets as it is continuously investing in new plants and equipment to keep with demand and also sustainability awareness.

Chapter 3: Balance Sheet—Question 4
Since both property, plant, and equipment (PPE) and long-term investments in stock represent a company’s investment, why do we distinguish between them in the balance sheet?
Reasons to distinguish PPE from investment is mainly because of accounting rules. Norms such as the U.S. Securities and Exchange Commission guidelines and generally accepted accounting principles require that a business separates investment items from PPE. Usually Fixed assets ( PPE) is deprecated over a period of time and it is used in the company’s operation.
While equity investment (long term investment) does not depreciate over time and the company receives income and dividends for their investments.

Chapter 3: Balance Sheet—Question 5
Review the noncurrent asset section of your company’s balance sheet. Are any intangible assets listed? If so, identify the types of intangible assets and the percent of total assets that the intangible assets represent.
Intangible Asset 1: GoodWill ( acquisition of Downtown District Cooling LLC)
Intangible Asset 2: Customer contracts ( balance Zero for this year)

Total Intangible Assets ÷ Total Assets = 0.177
If this company were to be acquired by another company, would the intangible assets influence the purchase price? Explain your answer.
Investors react differently to every situation. No strong or clear-cut evidence links goodwill to stock price movement. But in general, news of an acquisition, which means expansion for a company, tends to boost stock prices. Overall, it is best to conclude that investors tend to look at companies beyond the “goodwill factor” and focus on cash flows, revenue generation, and dividends.

Chapter 3: Balance Sheet—Question 6 Azrah
Now review your company’s total assets for the most recent year. What percentage of total assets is current? Noncurrent?
Current Noncurrent
AED 2,569,362,000 AED 10,413,694,000
Should companies have a greater investment in current assets or noncurrent assets, or does it depend on the nature of their business? Explain your answer.
Current assets make 19.29% of total assets, whereas noncurrent assets make 78.22% of total assets.
Generally, a company should have a greater investment in current assets to meet obligations, to be liquid, and to get a return on investment, but it also depends on the nature of the business. As Tabreed is a manufacturing company, work in progress inventory and property, plant, and equipment can take a huge amount of noncurrent assets, thus for a company like Tabreed, noncurrent assets can be higher.

Chapter 3: Balance Sheet—Question 7 Azrah
Identify the information that relates to the stockholders’ equity section of your company’s balance sheet.
Par value per share of common stock? 1.00 AED
Number of common shares authorized? 2,775,874,215
Number of common shares issued? 2,775,874,215
Number of common shares outstanding? 2,713,514,000
Number of treasury shares held by the company? 2,016,000

Chapter 3: Balance Sheet—Question 8 Azrah
Answer the following questions relative to the stockholders’ equity section of the balance sheet.
By what amount did retained earnings increase or decrease from the prior year? Increase by AED 210,657,000
Was the increase or decrease in retained earnings equal to the company’s current year net income or net loss? No, the difference is not equal to the net income.

• If No, then dividends were paid (or declared) by your company during the current year.

Chapter 3: Balance Sheet—Question 9 Azrah
Identify the financial statement elements as shown in your company’s balance sheet.
Assets Liabilities Stockholders’ Equity
Capital work in progress Trade and other payables Issued Capital
Property, plant and equipment Interest bearing loans and borrowings Treasury shares
Right-of-use assets Islamic financing arrangements Statutory reserve
Intangible assets Non-convertible Bonds and Sukuks Retained earnings
Investments in associates and joint ventures Lease liabilities Foreign currency translation reserve
Advance toward s investment in an associate Employees’ end of service benefits Cumulative changes in fair value of derivatives in cash flow hedges
Finance lease receivables Trade and other payables Non-controlling interests
Inventories Interest bearing loans and borrowings
Trade and other receivables Lease liabilities
Finance lease receivables
Cash and bank balances
Assets held for sale
Chapter 3: Balance Sheet—Question 10
Identify the carrying values of the financial statement elements as shown in your company’s balance sheet.
Account
(Add rows as needed) Current year
(AED’000) Prior Year
(AED’000) Increase or Decrease
(Current year – prior year)
Capital work in progress 299,489 66,956 Increase
Property, plant and equipment 4,437,282 3,940,360 Increase
Right-of-use assets 165,469 136,267 Increase
Intangible assets 2,360,127 28,527 Increase
Investments in associates and joint ventures 358,258 605,708 Increase
Advance towards investment in an associate – 126,274 Decrease
Finance lease receivables 2,793,069 2,836,547 Decrease
Inventories 42,420 34,673 Increase
Trade and other receivables 898,467 593,424 Increase
Finance lease receivables 315,581 307,984 Increase
Cash and bank balances 1,312,894 226,902 Increase
Assets held for sale 329,885 – Increase
Issued Capital 2,715,529 2,715,529 No change
Treasury shares (2,016) (2,016) No change
Statutory reserve 413,020 358,466 Increase
Retained earnings 2,133,906 1,923,249 Increase
Foreign currency translation reserve (1,480) (1,686) Decrease
flow hedges (94,078) (48,553) Increase
Non-controlling interests 710,289 70,666 Increase
Trade and other payables 116,727 95,261 Increase
Interest bearing loans and borrowings 2,132,930 870,477 Increase
Islamic financing arrangements 630,681 – Increase
Non-convertible Bonds and Sukuks 3,639,348 1,828,843 Increase
Lease liabilities 219,599 247,495 Decrease
Employees’ end of service benefits 36,486 31,390 Increase
Trade and other payables 593,722 620,013 Decrease
Interest bearing loans and borrowings 23,477 147,234 Decrease
Lease liabilities
44,801
47,254 Decrease

Chapter 3: Balance Sheet—Question 11 Azrah
Identify the three balance sheet accounts that changed the most from the prior year. What events might explain these changes? Working to explain why these changes occurred contributes to a greater understanding about a company.
Account Explanation

Example:
Accounts Receivable Example:
An increase in accounts receivable should coincide with an increase in sales, i.e., a 10% increase in sales would explain a 10% increase in accounts receivable. If accounts receivable are increasing and sales decreasing, the signal is unfavorable.

Chapter 3: Balance Sheet—Question 12
Prepare a common-sized balance sheet using the elements below. Modify where necessary to meet your needs. Add or delete elements that are or are not relevant to your company. (Nc means no change)
Account Current Year
(AED’000) Prior Year
(AED’000) Percentage point change
(Current year – prior year)
Capital work in progress 299,489 66,956 347%
Property, plant and equipment 4,437,282 3,940,360 13%
Right-of-use assets 165,469 136,267 21%
Intangible assets 2,360,127 28,527 8173%
Investments in associates and joint ventures 358,258 605,708 -41%
Advance toward s investment in an associate – 126,274 -100%
Finance lease receivables 2,793,069 2,836,547 -2%
Inventories 42,420 34,673 22%
Trade and other receivables 898,467 593,424 51%
Finance lease receivables 315,581 307,984 2%
Cash and bank balances 1,312,894 226,902 479%
Assets held for sale 329,885 – –
Issued Capital 2,715,529 2,715,529 0%
Treasury shares (2,016) (2,016) 0%
Statutory reserve 413,020 358,466 15%
Retained earnings 2,133,906 1,923,249 11%
Foreign currency translation reserve (1,480) (1,686) -12%
flow hedges (94,078) (48,553) 94%
Non-controlling interests 710,289 70,666 905%
Trade and other payables 116,727 95,261 23%
Interest bearing loans and borrowings 2,132,930 870,477 145%
Islamic financing arrangements 630,681 – –
Non-convertible Bonds and Sukuks 3,639,348 1,828,843 99%
Lease liabilities 219,599 247,495 -11%
Employees’ end of service benefits 36,486 31,390 16%
Trade and other payables 593,722 620,013 -4%
Interest bearing loans and borrowings 23,477 147,234 -84%
Lease liabilities 44,801

47,254  - 5%

Chapter 3: Balance Sheet—Question 13 Azrah
Identify the three balance sheet accounts that changed the most in Question 12. What events might explain these changes? Are your responses similar to or different from Question 11? Why?
Account Explanation
(Note: An acceptable answer is “need more information.”)

Chapter 3: Balance Sheet—Question 14 Azrah
Did your company become more or less liquid when this year’s and last year’s current assets and current liabilities are compared?
Current Assets less Current Liabilities
Current Year Current Assets less Current Liabilities
Prior Year
2,569,362,000 – 662,000,000 = 1,907,362,000 1,162,983,000 – 814,501,000 = 348,482,000
Explain why?
Tabreed became more liquid compared to last year, as both current assets increased and current liabilities decreased. This is due to the fact that liquid cash has increased, and many short term debts and loans have been paid off by Tabreed.

Chapter 3: Balance Sheet—Question 15 Azrah
Did your company increase or decrease its financial leverage when comparing total debt to total stockholders’ equity from this year to last?
Total debt  Total stockholders’ equity
Current year Total debt  Total stockholders’ equity
Prior year
7,437,771,000/5,875,170,000 = 1.26 3,887,967,000/5,015,655,000 = 0.775
Explain why:
Tabreed increased or worsened its financial leverage for the current year. This is because it took on islamic financing arrangements and also long term loans. Also, changes in fair value of derivatives in cash flow hedges have decreased total equity, further deteriorating the leverage.

Chapter 3: Income Statement—Question 1 Azrah
Review the heading of your company’s income statement. Does the company’s income statement provide two or three years of comparative information? Tabreed’s income statement provides two years of comparative information.
Why do you think the regulatory agency in GCC requires that balance sheets provide two years of comparative financial information and income statements provide three years of comparative financial information?

Chapter 3: Income Statement—Question 2 Azrah
Review the middle section of your company’s income statement. Did operating income (loss) increase or decrease from the prior year and by how much? You may have to compute operating income (loss).
Increased by AED 97,757,000 Decreased by

Chapter 3: Income Statement—Question 3 Azrah
Does the middle section of your company’s income statement show a non operating income (loss) increase or decrease from the prior year and by how much? You may have to compute non operating income (loss).
Increased by AED 92,666,000 Decreased by

Chapter 3: Income Statement—Question 4 Azrah
In reference to why you are studying this company, is it important to know the different sources of income—operating or nonoperating?

Chapter 3: Income Statement—Question 5 Azrah
If any of the irregular events are shown on your company’s income statement, describe the nature and the amount. Select the most current year affected by the event if multiple years are affected.
Irregular Event Amount Nature of the Change
Restructuring charge?
Discontinued operation?
Extraordinary event?
Cumulative effect of accounting change?

Chapter 3: Income Statement—Question 6 Azrah
Review the lower section of your selected company’s income statement. Did net income (loss) increase or decrease from the prior year and by how much?
Increased by $ __
Decreased by $ __

Chapter 3: Income Statement—Question 7 Azrah
Prepare a common-sized income statement for the elements below. Modify the table to meet your needs. Add or delete elements that are or are not important to your company.
Account Current Year Prior Year Percentage point change
(Current year – prior year)
Net sales (revenues)
Cost of goods/services
Gross profit
Operating expenses
Operating income
Non Operating income (loss)
Income tax expense
Net income

Chapter 3: Income Statement—Question 8 Azrah
Identify the three income statement accounts that changed the most in Question 7. What events might explain these changes?
Account Explanation
(Note: An acceptable answer is “need more information.”)

Chapter 3: Income Statement—Question 9 Azrah
Fill-in your company’s EPS amounts. Place a N/A in Diluted EPS if not reported.
Basic EPS Diluted EPS Percentage Decrease
(Basic EPS – Diluted EPS) /
Basic EPS
Current year 0.20 0.20 0%
Preceding year 1 0.17 0.17 0%
Preceding year 2 0.16 0.16 0%

Chapter 3: Income Statement—Question 10 Azrah
Identify the dilutive instruments that give rise to the reporting of diluted earnings per share (see the EPS note to the financial statements).
Current year N/A
First preceding year N/A
Second preceding year N/A

Chapter 3: SCF—Question 1 Noora
Is the SCF dated in the title for a period of time similar to the income statement or for a point in time similar to the balance sheet? Why?

Chapter 3: SCF—Question 2 Noora
Identify the following sections of the SCF and record the amounts. Check the math by summing to the cash balance at end of year. Verify that the ending cash balance reported on the SCF is the same as reported on the balance sheet.
Account Description Current Year Prior Year Second Prior Year
Net operating cash flows
Net investing cash flows
Net financing cash flows
Net increase (decrease) in cash flows
Cash balance at beginning of year
Cash balance at end of year
Does the total match balance sheet cash? Not available

Chapter 3: SCF—Question 3 Noora
Record net sales, net income, and net operating cash flows below. All three should be trending in approximately the same direction. If so, this is a sign of a well-run business. If one or more are going in a different direction, or appear random, then you must keep an eye open for an explanation why.

Amount
Current Year Prior Year Second Prior Year
Net Sales
Net Income
Net Operating Cash Flows
Explain why net sales, net income and net operating cash flows are trending together or differently. (Hint: Look at depreciation expense and substantial changes in inventory, accounts receivable, and accounts payable balances. Explaining why is a key learning point.)

Chapter 3: SCF—Question 4 Noora
Identify the primary cash outflows and inflows from investing activities.
Description of Activity Current Year Prior Year Second Prior Year
Cash outflow:
Cash inflow:
Consider three key issues at this point. Is the company adding assets? This is a sign of growth. Is the company replacing assets? This is a sign of growth and stability. Is the company only selling assets? This is a sign of retrenchment.

Chapter 3: SCF—Question 5 Noora
Identify the primary cash inflow and outflow from financing activities.
Description of Activity Current Year Prior Year Second Prior Year
Cash inflow:
Cash outflow: (Note: cash dividends paid are reported here.)
Consider two key issues at this point. How is the company being financed, through debt or equity? Can you determine which is growing faster and why? A sound corporate strategy is to finance a company with debt during stable times, because this demands regular payment of principal and interest, and to finance a company with equity during unstable times, because leadership can elect to pay or not pay dividends.

Chapter 3: SSE—Question 1 Noora
Identify the elements that comprise the statement of stockholders’ equity section of your company. Hint: These items are generally illustrated across the top of the page using a columnar format.
Example. Common stock (shares and dollar amount)

Chapter 3: SSE—Question 2 Noora
Review the SSE of your company and answer the following questions.
How many additional shares of common stock were issued during the most recent year?
By how much did the amount of common stock increase?
Divide the amount of common stock by the additional shares of common stock.*
The answer should be equal (some rounding error may be present) to the company’s par value per share of common stock. By how much did “paid-in-capital” related to the shares issued increase during the year? Divide the amount of common stock plus the paid-in-capital by the additional shares of common stock issued.*
**The answer shown above is the average selling price of the additional shares of common stock.

Chapter 3: SSE—Question 3 Noora
Identify the cash dividends per share.
Determine the dividend payout percentage. A company’s dividend payout percentage is computed by dividing dividend per common share by net income per common share. (Hint: If your company reported a net loss for the year, the answer lacks meaning.)
Compute dividend yield. A company’s dividend yield is computed by dividing dividend per common share by market price per common share.
Is your company’s dividend yield a reasonable return given current market conditions? Explain.

Chapter 3: Notes to the Financial Statements—Question 1 Jawahir
How does your company define “cash and cash equivalents”?

Chapter 3: Notes to the Financial Statements—Question 2 Jawahir
How does your company value its “inventories”? Explain the meaning of the inventory valuation method. Are domestic and international inventories valued the same? Service companies will typically not have inventory.

Chapter 3: Notes to the Financial Statements—Question 3 Jawahir
Does your company report any investments in marketable securities? If so, identify the categories and their value.
Category Current Year Amount
Trading
Available-for-sale
Held-to-maturity

Chapter 3: Notes to the Financial Statements—Question 4 Jawahir
Note 1 and a separate note on income taxes should provide the information to answer this question.
What was your company’s income tax expense for the current year?
How much cash was paid for income taxes in the current year? (Hint: Review the SCF. The difference generally relates to the accrual basis of accounting.)
What portion of the income tax expense was deferred to future accounting periods?
Identify the elements that gave rise to:

Chapter 3: Notes to the Financial Statements—Question 5 Jawahir
Reviewing note #1 and any related notes, identify the fixed asset group(s), depreciation methods used, and the estimated useful lives of these fixed assets.
Fixed Asset Group Depreciation Method Estimated Lives

Do the assets appear relatively new or old? If relatively new assets are found, management should discuss their intended use in the MD&A section. If relatively old assets are found, management should discuss a replacement plan. Go back to the MD&A section and note what you find under capital resources.

Chapter 3: Notes to the Financial Statements—Question 6 Jawahir
Reviewing note #1 and any related notes, identify the amount of goodwill presently reported.
Identify the amount of any significant write-down of goodwill that occurred during the current year.
How does management describe its accounting for goodwill as disclosed in the note(s) to the financial statements?

Chapter 3: Notes to the Financial Statements—Question 7 Jawahir
Review your company’s lease note (and related balance sheet information), then identify the following:
Minimum lease payments under capital leases
Minimum lease payments under operating leases
Ratio of operating lease payments to capital lease payments
As a user of reported financial information, would you be concerned about a significant amount of operating leases that are not reported in the balance sheet? Explain.

Chapter 3: Notes to the Financial Statements—Question 8 Jawahir
Review your company’s long-term debt note and identify the following:
Instrument Maturity Date Rate Amount Due

How much interest expense was recognized in the current year?
How much cash was paid for interest in the current year? (Hint: Look in the SCF.*)
*The difference between interest expense and cash paid for interest is due to the accrual basis of accounting.

    OPEB

Chapter 3: Notes to the Financial Statements—Question 9 Jawahir
Based on your review of the contingencies note, identify any contingent liabilities that were probable and estimable and have been accrued for in the balance sheet.

Chapter 3: Notes to the Financial Statements—Question 10 Jawahir
Based on your review of the segment-reporting note to the financials, identify the reported operating segments and their related revenues, as well as the geographical segments and their related revenues. Identify the largest three if more than three are disclosed for the most recent period.
Operating (or Business) Segments Net Sales/Revenues Operating Income

Geographical Segments

Chapter 3: Notes to the Financial Statements—Question 13 Jawahir
Based on your review of the notes to the financials or the statement of stockholders’ equity, identify the components that comprise Other Comprehensive Income for your company.
Component Amount

Wrap-up
You have now completed a careful study of the company’s financial statements and related notes. This study, along with Chapters 1 and 2, has provided the building blocks necessary to help you understand annual report information. In Chapter 4, you will use these building blocks and complete a systematic company financial analysis. As you work through Chapter 4, keep in mind why you are investigating the company and the company’s strategic focus.
CHAPTER 4
Chapter 4: Liquidity Analysis—Question 1 Jawahir
Measure or Ratio Ratio Computation Current Year Prior Year
Working capital Current assets – Current liabilities
Evaluation:

Current ratio Current assets ÷ Current liabilities
Evaluation:

Quick (acid-test) ratio (Cash + Accounts receivable + Short-term investments) ÷ Current liabilities
Evaluation:

Cash ratio Cash ÷ Current liabilities
Evaluation:

Operating cash flows ratio Net operating cash flows ÷ Average current liabilities
Evaluation:

Liquidity Interpretation:

Conclusion:

Chapter 4: Profitability Analysis—Question 2 Jawahir
Measure or Ratio Ratio Computation Current Year Prior Year
Return on equity (ROE) Net income ÷ (Average shareholders’ equity – Preferred stock)
Evaluation:

Return on assets (ROA)
Net income ÷ Average total assets

Operating ROA Operating income ÷ Average total assets
Evaluation:

Financial leverage
Average total assets ÷ Average shareholders’ equity
Evaluation:

Return on sales (ROS) Net income ÷ Net sales
Operating ROS Operating income ÷ Net sales
Evaluation:

Asset turnover Net sales ÷ Total assets
Evaluation:

Gross profit margin Gross profit ÷ Net sales
Evaluation:

Net sales
Net income

Evaluation:

Profitability Interpretation:

Conclusion:

Chapter 4: Solvency Analysis—Question 3 Jawahir
Measure or Ratio Ratio Computation Current Year Prior Year
Net financing cash flows
Evaluation:

Debt to total assets Total liabilities ÷ Total assets
Evaluation:

Debt to equity Total liabilities ÷ Shareholders’ equity
Evaluation:

Solvency Interpretation:

Conclusion:

Chapter 4: Other Analysis—Question 4 Shahad
Measure or Ratio Ratio Computation Current Year Prior Year
Earnings per share (EPS)
Basic*
Diluted* (Net Earnings – Preferred stock dividends) ÷ Weighted average # of common shares

• No computation is necessary. Basic and Diluted EPS is provided at the bottom of the income statement.
  Evaluation:

Price to earnings (P/E) Market price per share ÷ Basic EPS
Evaluation:

Dividend payout Annual dividends per share ÷ EPS
Evaluation:

Other Interpretation:

Conclusion:

Chapter 4: Cash flows, dividends and earnings – Question 5 Shahad
Measure Computation Current Year Prior Year
Levered cash flows from Operations
Unlevered cash flows from Operations
Cash Investments in Operations
Free cash flows
Residual Earnings
Return on Common Equity (ROCE)
Price to book (P?B)
Price to earnings
Price to earnings (P/E)
Dividend payout
Interpretation:

Note: 1) Assume that growth rate for all the future period after 2007 is the same as the growth rate between 2006 and 2007.
2) Assume that the cost of capital is 7% for all the years.

CHAPTER 5
Chapter 5: Decision-making Process—Question 1
Based upon your review, do the numbers support the company’s explicit strategic focus, i.e., goals and objectives?

Chapter 5: Decision-making Process—Question 2
Prepare a thorough, yet concise answer to your original question(s) and issue(s) relying upon the information gathered throughout your annual report study. For example, upon completing your analysis, Would you want to invest in the common of stocks of this company? Explain why. (This part of the project requires an extensive analysis of what you have gathered in the previous parts. Models building and analysis should be conducted here.