Let’s Look at an Annual Report

by Laura King and Ellen Sweatt

Students in our accounting principles courses have varying degrees of business and accounting experience. However, they all have an interest in evaluating companies and perusing their annual reports. They understand the importance and skill involved in the ability to interpret the results of companies.

We have developed an exercise that challenges students on all levels to explore the annual report of a company of their choice and answer basic questions. We stock our classroom with annual reports of numerous well-known companies. On the first day of class we hand out this exercise and allow students to select the annual report of a company they like or with which they are familiar.

It is exciting to watch students flip back and forth through these reports, learning the end result of the financial accounting process. We actively circle the room fielding questions and helping them find items in question to keep them up to speed and prevent undue frustration.

At the beginning of the second 75-minute class, we go over the answers. Students are impressed by the similar answers they hear throughout the class for the majority of these questions—first asset on the balance sheet, categories of the management discussion and analysis, categories of liabilities, relationship among the financial statements, to name a few. But what is the most surprising to them arises as we get students to read through the auditor’s report sentence by sentence. They are stunned to hear that this report is exactly the same for all companies.

While this exercise does require about 90 minutes of class time, we find it is a “profitable” investment. As the course unfolds, students exhibit a strong foothold on concepts we cover, as they relate them back to the company they researched. Accounting jargon is also better understood, as students have encountered it immediately.

This exercise can be dressed up or down to be rigorous or less challenging. We prefer to keep it rigorous. We explain to students that we know we are putting the cart before the horse, but the outcome is well worth it!