BUS103: Introduction to Financial Accounting

Item 5 - "Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities" requires information about the company's equity securities, including market information, the number of holders of the shares, dividends, stock repurchases by the company, and similar information.

Item 6 - "Selected Financial Data" provides certain financial information about the company for the last five years. You can find much more detailed financial information on the past three years in a separate section – Item 8, "Financial Statements and Supplementary Data".

Item 7 - "Management's Discussion and Analysis of Financial Condition and Results of Operations" gives the company's perspective on the business results of the past financial year. This section, known as the MD&A for short, allows company management to tell its story in its own words. The MD&A presents: 

The company's operations and financial results, including information about the company's liquidity and capital resources and any known trends or uncertainties that could materially affect the company's results. This section may also discuss management's views of key business risks and what it is doing to address them.

Discussion of Risk in the MD&A

Here are examples of how an MD&A may discuss risks that the company faces.

• A consumer company might discuss ways in which it seeks to meet changing tastes.
• A manufacturing company that relies on natural resources may discuss how it assesses commodity risks and conducts resource management programs.
• A financial institution may discuss ways that management monitors liquidity and assures adequate capital under various scenarios, such as a rise in interest rates or a ratings downgrade.
• A global company may discuss how it handles exchange rate risks.
• Companies may discuss how they handle competition, build their brands, or manage in an economic downturn.
• Companies also may discuss how they ensure compliance with laws and regulations, or how they are addressing the impact of new or anticipated laws and regulations.

Material changes in the company's results compared to the prior period, as well as offbalance sheet arrangements and the company's contractual obligations.

Critical accounting judgments, such as estimates and assumptions. These accounting judgments – and any changes from previous years – can have a significant impact on the numbers in the financial statements, such as assets, costs, and net income.

Item 7A - "Quantitative and Qualitative Disclosures about Market Risk" requires information about the company's exposure to market risk, such as interest rate risk, foreign currency exchange risk, commodity price risk, or equity price risk. The company may discuss how it manages its market risk exposures.

Item 8 - "Financial Statements and Supplementary Data" requires the company's audited financial statements. This includes the company's income statement (which is sometimes called the statement of earnings or the statement of operations), balance sheets, statement of cash flows, and statement of stockholders' equity. The financial statements are accompanied by notes that explain the information presented in the financial statements.

U.S. companies are required to present their financial statements according to a set of accounting standards, conventions, and rules known as Generally Accepted Accounting Principles, or GAAP. An independent accountant audits the company's financial statements. For large companies, the independent accountant also reports on a company's internal controls over financial reporting. The auditor's report is a key part of the 10-K. Most audit reports express an "unqualified opinion" that the financial statements fairly present the company's financial position in conformity with GAAP. If, however, an auditor expresses a "qualified opinion" or a "disclaimer of opinion," investors should look carefully at what kept the auditor from expressing an unqualified opinion. Likewise, investors should carefully evaluate material weaknesses disclosed on internal controls over financial reporting.

In addition, the Sarbanes-Oxley Act of 2002 requires the company's CEO and CFO to certify that the 10-K is both accurate and complete. These are called Sections 302 and 906 certifications, and you can usually find them in Exhibits 31 and 32.

You may also find "non-GAAP financial measures" in the 10-K. That means that the numbers do NOT conform to GAAP. While companies are permitted to present nonGAAP measures, they must also show how they differ from the most comparable corresponding GAAP financial measure. As an investor, it is up to you to decide how much weight to give to non-GAAP measures.

Item 9 - "Changes in and Disagreements with Accountants on Accounting and Financial Disclosure" requires a company, if there has been a change in its accountants, to discuss any disagreements it had with those accountants. Many investors view this disclosure as a red flag.

Item 9A - "Controls and Procedures" includes information about the company's disclosure controls and procedures and its internal control over financial reporting.

Item 9B - "Other Information" includes any information that was required to be reported on a different form during the fourth quarter of the year covered by the 10-K, but was not yet reported.