This study source was downloaded by 100000789352206 from CourseHero com on 01 08 2022 04 06 36 GMT 06 00 https www coursehero com file 83664395 Corporate Governance Notes Chapter 7pdf Chapter 7 ANNUAL REPORT OF A COMPANY For legal and necessity reasons companies publish a formal report at the end of each financial year This annual document has three board sections Directors Report Financial statements and audit report DIRECTORS REPORT The first Section of the annual report called Directors Report is a narrative often in the form of a letter from the company s chairman to its shareholders giving thee important pieces of information Firstly a comment on the performance of the company during the year to which the report relates This part is often referred to as OFR i e Operational and Financial Review Secondly an assessment of what lies in the immediate future and Thirdly a statement about the company s policies principles and strategies developed to meet the challenge of the future The narrative part of annual report is prepared with great care Quite often professional writers and designers are hired to touch it up and ensure its acceptability and appeal to the shareholders A number of graphs charts and photographs are inserted Careful use is made of selected positive data and ratios to send across the desired message Only those issues are talked about which the management feels will be of interest of and appreciated by the shareholders Financial Statements The second section of the report comprises of four financial statements namely a Balance Sheet an income Statement a Funds Flow Statement and a Statement showing movement in Equity Each statement is accompanied with a large number of notes providing explanation of the items contained therein notes to the accounts are considered to be as important as the accounts themselves as they provide an insight into the company s accounting policies and manner of treating various financial Items This study source was downloaded by 100000789352206 from CourseHero com on 01 08 2022 04 06 36 GMT 06 00 https www coursehero com file 83664395 Corporate Governance Notes Chapter 7pdf Notes to the financial statements 1 An explanation of accounting methods or policies used For Example companies are generally free to choose the method of computing depreciation on their fixed assets While Ali Ltd may calculate Depreciation on its plant and machinery using the straight line method Bakr ltd may well opt to write down its plant and machinery using the diminishing balance method It is important that notes to the financial statements clearly state the method that has been used so that analysts can draw correct conclusions 2 Greater Details regarding certain figures in the financial statements Most figures given in the financial statements are totals or aggregate figures Frequently it is necessary to provide the details of these aggregate figures For example in income statement only one figure of Cost of Goods sol is given Details of the various figures making up the cost of goods sold during the year are given in Notes to the Accounts Similarly balance sheet shoes only the net book value of fixed assets 3 Statutory Disclosures The law requires companies to disclose certain information in their annual accounts which may not find place in the main body of any financial statements For example details of remuneration paid to directors and senior managers must be disclosed 4 Changes in accounting policies methods or nature of business during the year If a company changes any of its accounting policies or methods or starts a new line of business or abandons a part of its operations or if there is any other significant change in the manner in which company conducts its business information about such changes must be given in the Notes to the accounts so that persons using the financial statements are correctly informed Audit Report The third section of the annual report contains an annual report from the external auditors which essentially gives his opinion on the financial statements THE NEED FOR PUBLISHING FINANCIAL STATEMENTS The financial statements published by a company at the end of every financial year for more frequently serve three main purposes they inform they help control and they help plan This study source was downloaded by 100000789352206 from CourseHero com on 01 08 2022 04 06 36 GMT 06 00 https www coursehero com file 83664395 Corporate Governance Notes Chapter 7pdf 1 The information functions A large number of people have an interest in the affairs of a company these persons are called stakeholders and include shareholders lenders suppliers customers managers employees relevant governmental departments and the public at large Except for the managers and employees other stakeholders have no access to the detailed records maintained by the company Their only source of information about the financial performance and published by the company 2 The control Function On the basis of information contained in the financial statements shareholders who have the voting rights can control the conduct of directors who manage the company Shareholders can use the information provided by annual accounts to make such important decisions as how much divided to declare what operations to expand or shrink etc These financial statements when compared with others from similar companies in the same or similar industries can also help the investors set important benchmarks for measuring the efficiency of managers 3 The Planning Function The financial statements of one year provide a basis on which to plan or budget for the next one or next few years Detailed analysis of financial statements helps to set targets and make attainable plans in light of already achieved standards LIMITATIONS OF FINANCIAL STATEMENT Financial Statements are very useful source of information to all those people who have an interest or stake in the company Companies take great care in preparation of these statements Law also prescribes certain disclosure requirements making sure that these judgments convey all the requisite information to satisfy the various stakeholders Again there is legal requirement that all public limited companies must get their Books of accounts and financial statements audited by a duly authorized external auditor 1 Most balance sheets show values of assets in particular the fixed assets a cost less accumulated depreciation These values may be vastly different from