Resource: pp. 192-193 (Ch. 6) of Understanding Financial Statements
Read the scenario in Problem 6.9 on p. 234 (Ch. 6).
Compose a 350- to 500-word response that includes a paragraph about the main ideas of the annual report and an explanation of how you might present these ideas to stakeholders.
Refer to the questions in the Objectives of Analysis section on pp. 192-193 (Ch. 6) for guidance on tailoring ideas to present to stakeholders.

Individual

Presenting to Stakeholders

Resources:pp. 192 and 193 (Ch. 6) of Understanding Financial Statements

Read the scenario in Problem 6.9 on p. 234 (Ch. 6).

Compose a 350- to 500-word response that includes a paragraph about the main ideas of the annual report and an explanation of how you might present these ideas to stakeholders.

Refer to the questions in the Objectives of Analysis section on pp. 192 and 193 (Ch. 6) for guidance on tailoring ideas to present to stakeholders.

Format your paper consistent with APA guidelines.

Post your paper as a Microsoft® Word attachment.

6.9. Writing Skills Problem

R.E.C. Inc.’s staff of accountants finished preparing the financial statements for 2007 and

will meet next week with the company’s CEO as well as the Director of Investor Relations

and representatives from the marketing and art departments to design the current year’s

annual report.

Required

Write a paragraph in which you present the main idea(s) you think the company should

present to shareholders in the annual report.

Objectives of Analysis

Before beginning the analysis of any firm’s financial statements, it is necessary to specify

the objectives of the analysis.The objectives will vary depending on the perspective

of the financial statement user and the specific questions that are addressed by the

analysis of the financial statement data.

A creditoris ultimately concerned with the ability of an existing or prospective

borrower to make interest and principal payments on borrowed funds. The questions

raised in a credit analysis should include:

• What is the borrowing cause? What do the financial statements reveal about the

reason a firm has requested a loan or the purchase of goods on credit?

• What is the firm’s capital structure? How much debt is currently outstanding?

How well has debt been serviced in the past?

• What will be the source of debt repayment? How well does the company manage

working capital? Is the firm generating cash from operations?

The credit analyst will use the historical record of the company, as presented in the

financial statements, to answer such questions and to predict the potential of the firm

to satisfy future demands for cash, including debt service.

The investorattempts to arrive at an estimation of a company’s future earnings

stream in order to attach a value to the securities being considered for purchase or

liquidation.The investment analyst poses such questions as:

• What is the company’s performance record, and what are the future expectations?

What is its record with regard to growth and stability of earnings? Of cash flow

from operations?

• How much riskis inherent in the firm’s existing capital structure? What are the

expected returns, given the firm’s current condition and future outlook?

• How successfully does the firm compete in its industry, and how well positioned is

the company to hold or improve its competitive position?

The investment analyst also uses historical financial statement data to forecast the

future. In the case of the investor, the ultimate objective is to determine whether the

investment is sound.

Financial statement analysis from the standpoint of management relates to all of

the questions raised by creditors and investors because these user groups must be satisfied

in order for the firm to obtain capital as needed. Management must also consider

its employees, the general public, regulators, and the financial press. Management

looks to financial statement data to determine:

• How wellhas the firm performed and why? What operating areashave

contributed to success and which have not?

• What are the strengths and weaknessesof the company’s financial position?

• What changesshould be implemented in order to improve future performance?

Financial statements provide insight into the company’s current status and lead

to the development of policies and strategies for the future. It should be pointed

out, however, that management also has responsibility for preparing the financial

statements.The analyst should be alert to the potential for management to influence

the outcome of financial statement reporting in order to appeal to creditors,

investors, and other users. It is important that any analysis of financial statements

include a careful reading of the notes to the financial statements, and it may be helpful

to supplement the analysis with other material in the annual report and with

other sources of information apart from the annual report.