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Course 105
Financial Reports and How to Read Them


The Securities Act of 1933 requires publicly traded companies to issue reports at regular intervals, providing financial data along with other information relevant for investors or potential investors. These documents have always been available to the public, but the Internet has made them more accessible than ever before. The SEC's Web site allows anyone to download any company's filings for free. So does, via our stock reports. Various other sites provide search functions and other services that make it easier to navigate the alphabet soup of forms.

Even so, it's easy to suffer from information overload. Here's a quick guide to the most important reports that companies are required to file and what you can get from them.

Annual Reports

Every public company issues an annual report, which it sends to shareholders (and anyone else who requests one). These reports are usually professionally designed with lots of color and slick graphics, intended to put the best possible face on the company and its activities over the past year. All this propaganda needs to be taken with a grain of salt, but the annual report does have value, since it tells you what the company considers important about what it's doing and where it's planning to go.

The real meat of an annual report is in the financial statements and notes found at the back. In fact, it's often said, with good reason, that annual reports should be read from back to front. All of the financial information in a company's annual report can also be found in its 10-K filing with the SEC, but it's generally presented much more legibly in the annual report. It's always a good idea to look over these financials and notes with a critical eye and to compare them with what the company says in the front of the report. For example, problems such as declining revenues or cash flows will probably be downplayed in the puffery part of the report, but they can't be hidden in the financial statements. (We'll cover the nitty-gritty of reading these statements in a later course.)

Accompanying the financial statements is a section labeled "management’s discussion and analysis," which summarizes the company’s results for the year. This section comes halfway between the glowing optimism of the front of the report and the stark reality of the financial statements; it presents the management’s spin on the numbers. It generally contains lots of valuable information, such as discussion of risks, year-to-year comparisons, and breakdowns of results according to sectors and geographic locations.

10-K Reports

Every company also has to file a 10-K report each year to the SEC, which is similar to the annual report but without the flashy graphics and PR hype. A company's 10-K will sometimes have more complete financial statements than its annual report, as well as a more complete management’s discussion section, offering more details and discussion of such minutiae as pensions and taxes. If you are looking for that kind of information, the 10-K is for you. But for most people, the most valuable parts of the 10-K are the sections that are required by the SEC, which often aren’t discussed in the annual report.

  • A detailed description of the company’s business, including breakdowns of its performance by geographical region and business segment. If you want to know exactly what a company does, this is the best place to find it. The business description is always at the beginning of a 10-K, so it’s hard to miss.
  • A description of any legal proceedings in which the company is involved. This information can be important, especially for companies in controversial industries such as tobacco.
  • A list of all the company’s executives, including how much they are paid.
  • A detailed discussion of the risks involved in the company’s business and the major competitors it faces. This information is especially important regarding small businesses in rapidly changing industries.
  • The bylaws of the company, and sometimes other legal documents.

10-Q Reports

In each of the three quarters that they don't file a 10-K, companies have to file a quarterly report, or 10-Q, with the SEC. A 10-Q doesn’t contain the often-lengthy preliminary matter that leads off a 10-K; instead, the financial statements and management’s discussion are front and center. This information is similar to what is available in the 10-K, except it covers a single quarter rather than a full year; also, there isn’t as much detail and the financial numbers aren't audited. The management’s discussion and analysis section is usually where you can find information about any material changes in the company during the quarter, such as acquisitions, spin-offs, or new products.

After the financial statements and management’s discussion comes a section labeled "other information," which is generally a short section containing information about legal proceedings, stock offerings, defaults on bonds, and any matters being submitted to a vote of shareholders. It also lists any 8-K forms that the company filed during the quarter.

Other Forms

There are literally dozens of SEC forms that companies can file, and below is an overview of some of the more common ones.

8-K -- The 8K form announces any material events or corporate changes that occur between quarterly reports; it’s a type of interim report until the company issues its 10-K or 10-Q. Such events include stock splits, mergers, spin-offs, bond issuances, and secondary stock offerings. Companies generally also file an 8-K report announcing preliminary financial results each quarter, soon after the end of the quarter but before the full 10-Q or 10-K is issued.

S-1 -- An S-1 form is a prospectus for a stock offering. It’s most useful when the offering in question is an initial public offering, or IPO, since the prospectus often presents the first opportunity for the public to see a company’s financials. Such a document announces the amount of stock being offered for sale and what the company plans to do with the proceeds, describes in detail the risk factors the company faces (which in the case of startup companies can be considerable), and gives basic financial data and management’s discussion.

20-F -- For foreign companies, the 20-F is the annual report filed with the SEC and is akin to the 10-K.

13-D -- Useful in finding information about insider holdings, the 13-D discloses beneficial ownership of a firm's shares. Any person or people who acquire a beneficial ownership of more than 5% of a class of equity securities must file a Schedule 13-D within 10 days of the acquisition.

All these forms may seem intimidating when you first encounter them, but if you know how to separate the wheat from the chaff, they can be a gold mine of information.

The front part of a company's annual report generally contains:

  • Lots of graphics and discussion designed to put the best possible face on the company.
  • The company's financial statements for the previous year.
  • The management's discussion and analysis section.
The front of an annual report is generally propaganda meant to make the company look as good as possible; the nitty-gritty details are found further back.

Quiz 105
There is only one correct answer to each question.

1 The front part of a company's annual report generally contains:
a. Lots of graphics and discussion designed to put the best possible face on the company.
b. The company's financial statements for the previous year.
c. The management's discussion and analysis section.
2 Companies have to file a 10-Q report:
a. Every year.
b. Every six months, except when they file a 10-K.
c. Every quarter in which they don't file a 10-K.
3 If you want a detailed description of a company's business, the best place to find it is generally:
a. In the company's 10-Q report.
b. In the company's 8-K report.
c. In the company's 10-K report.
4 For which of the following would a company not typically have to file an 8-K form?
a. A merger.
b. A 25% drop in its stock price.
c. A stock split.
5 An S-1 form:
a. Is generally the best place to find information about a company planning to go public.
b. Has to be filed at least once a year with the SEC.
c. Does not generally discuss the risk factors faced by a company.
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