Question

• Describe how investors can use the Securities and Exchange Commission’s (SEC) EDGAR | Search tools  (Links to an external site.)web page to quickly research a company’s financial information filed on Forms 10-K and 10-Q.
• Identify the differences between the Annual Report sent to shareholders and the Annual Report on Form 10-K, which must be filed with the SEC.
• Describe the contents of the Form 10-K SEC filing include the following elements:
  • Management Discussion and Analysis
  • Auditors’ Report
  • Selected Financial Data
• Discuss how the SEC’s requirement for domestic and foreign companies using US GAAP to provide their financial statements in the XBRL format can improve financial reporting?
• Most publicly traded companies are examined by numerous analysts. Locate analysts’ ratings about a company of your choice by visiting a website such as Yahoo Finance (Links to an external site.). Provide a comparison over time and across companies in the same industry by answering the following questions:
  • How many analysts rated the company?
  • What are analysts predicting in terms of earnings and revenues?
  • How do the estimates compare against historical results?
  • How do the growth projections for the company compare with the average projections for the S&P 500?

Answer 1

Solution:

The US government gives investors the ability to assess a company's history and progress, as well as make reasonable assumptions about its future through a set of required filings. These filings are registration statements, formal and periodic reports and other forms that are provided to the U.S. Securities and Exchange Commission (SEC).

The SEC, created in the 1930s to help stop stock manipulation and fraud, is a regulatory watchdog. It collects documents detailing the financial and operational health of domestic and foreign companies that have stock owned and traded by the public.

The SEC checks the quality of the information provided in those forms and makes sure the information meets certain requirements. Many investors look at these filings and often select a particular form over another. They study the forms for clues, a snapshot of the company's performance, or a more comprehensive description of its activities. Let's take a look at the SEC filings available to investors and what they tell you about a company.

Some of the major ways are here..

Investors can assess the health of a company and make assumptions about its future by reviewing its required SEC filings.
Registration statements provide details about security offerings and a company's profitability.
A 10-K report provides a comprehensive annual summary of a company's financial performance.
Proxy statements are required before soliciting investors and include voting procedures, directors' background information, managers' salaries, and other useful information not readily accessible in other statements.

Registration statements provide investors with an understanding of the offered securities and the profitability of the company. All companies, foreign and domestic, must file these statements or qualify for an exemption.

The 10-K provides investors with a comprehensive analysis of the company. It's similar to a prospectus and contains more information than an annual report. For instance, financial statements are more detailed. Companies must submit this lengthy annual filing within 90 days of the end of their fiscal year.

A truncated version of the 10-K is the 10-Q. The 10-Q is provided within 45 days of the end of each of the first three quarters of the company's fiscal year. It details the company's latest developments and provides a preview of the direction it plans to take. Major differences from the 10-K include unaudited financial statements and less detailed reports.

the most essential components of the annual 10-K filing include:

Item 1: Business (a description of the company's operation)
Item 1A: Risk Factors
Item 3: Legal Proceedings
Item 6: Selected Financial Data
Item 7: Management's Discussion and Analysis of the Financial Condition
Where to Start
There is an efficient way to tackle annual 10-K reports. Read Item 1 first, which is the business description. Item 1 explains what the company does, who its customers are, and the primary industry in which it operates.

Next, Items 6 and 7 explain the financial data. A potential investor should assess how the company has performed over a period. Also, the financial statements should indicate whether the balance sheet has become stronger or weaker over time.

The cash flow statement should show whether the business has been a generator of cash or a user of cash. It is possible for firms to report net income while, at the same time, having negative cash flow. Compare the income statement with the cash flow statement for any red flags. For example, steady cash flows are indicative of a healthy and thriving company, whereas large fluctuations in cash flows could signal that a company is experiencing trouble. Large amounts of cash on hand could indicate that more accounts are being settled than work received.

Major developments that investors should know about are described in the 10-K or 10-Q, but if those developments don't make the two filings in time, they are presented in the 8-K. This unscheduled document addresses specific events and provides further detail and exhibits, such as data tables and press releases.

Events that lead to the filing of the 8-K include bankruptcies or receiverships, material impairments, completion of acquisition or disposition of assets, departures or appointments of executives. and other events of importance to the investor.

In the proxy statement, investors can view management's salaries, any conflicts of interest that might exist, and other perks received. It's presented prior to the shareholder meeting and must be filed with the SEC before soliciting a shareholder vote on the election of directors and approval of other corporate actions.
In Forms 3, 4 and 5, investors watch how ownership and purchases are shifted by the company's officers and directors.

Form 3, the initial filing, tells the ownership amounts.
Form 4 identifies the changes in ownership.
Form 5 is an annual summary of Form 4 and includes any information that should have been reported.
The Schedule 13D form not only reveals who owns most of the company's shares but also introduces the owner(s) to investors and provides contact information. It's filed within 10 days of any entity acquiring 5% or more of any class of a company's securities. It provides the following information:
With Form 144, investors get clues to a corporate insider's pattern of selling securities and pressure to sell. It's a notice of the intent to sell restricted stock, typically acquired by corporate insiders or affiliates in a transaction not involving a public offering. The stock is restricted because it must meet certain conditions before becoming transferable. The transaction, or at least part of it, is made within 90 days of filing. Form 144 is required when the amount sold during any three-month period exceeds certain sales thresholds. US investors' participation in cross-border securities has eased as a result of a 2008 rule change. The SEC recognized global and technological changes by eliminating the need for foreign companies without SEC-registered securities to submit paper disclosures and instead allowing investors to access them in English on the Internet. Investors will also receive more timely annual reports because the companies will have to submit them to the SEC two months prior. Understanding the information submitted by companies involves taking some extra steps to read between the lines. Review SEC documents together as opposed to separately to get a better view of the overall picture, especially with the financial forms. Financial ratios are often used in the statements to identify the company's short- and long-term financial strength.
Finally, the SEC wants investors to know the facts so that they can make informed decisions about when they buy, sell, or hold a company's securities. Obtaining the available material and interpreting it correctly can provide any investor with valuable guidance when making investment decisions.

Differences:

The 10-K is generally more detailed than the annual report but lacks photos and graphics.
Publicly traded companies will complete both an annual report and 10-K yearly.
Both should include information about the company and the financial performance over the last year.
The 10-K can be found on the SEC website, while the annual report should be readily available on the company’s website.

Potential investors should also consider any risk factors associated with the company. One risk factor is legal proceedings that the company might be facing. Litigation activities should be disclosed in the company information in a section called Legal Proceedings. The United States has regulations that require companies to report any litigation, especially if it affects income.

Risk factors are filing to the SEC, and the company reports might include statements such as, and "our industry is highly fragmented with many competitors" or "our stock price may experience periods of volatility." While these are important risks to consider, they are common and should not significantly reduce the desirability of the business. Unusual risk factors that require greater attention are, for example, if the company generates a substantial portion of its revenue from just one or two customers.

In addition, the Legal Proceedings section will reveal any significant lawsuits affecting the company. While legal issues should be assessed, they may not be as severe as they seem. For a billion-dollar company, a pending lawsuit for damages of $10 million is often an unavoidable part of doing business.

For example, Pfizer, one of the largest drug companies in the world, may have pending patent lawsuits and drug liability claims that may exceed hundreds of millions of dollars. But that's par for the course for any major pharmaceutical company and a drop in the bucket for Pfizer, which had over $19 billion in cash and short-term investments on the balance sheet at the end of December 2018
There are different ways of interpreting financial information. Read the annual report in a way that works for you, but learn to concentrate on the most important aspects of a company's 10-K filing.

The S&P 500 is a capitalization-weighted index and the performance of the 10 largest companies in the index account for 21.8% of the performance of the indexis a stock market index that measures the stock performance of 500 large companies listed on stock exchanges in the United States. It is one of the most commonly followed equity indices, and many consider it to be one of the best representations of the U.S. stock market. The average annual total return of the index, including dividends, since inception in 1926 has been 9.8%; however, there were several years where the index declined over 30%.The index has posted annual increases 70% of the timeThe S&P 500 is maintained by S&P Dow Jones Indices, a joint venture majority-owned by S&P Global and its components are selected by a committee.To calculate the value of the S&P 500 Index, the sum of the adjusted market capitalization of all 500 stocks is divided by a factor, usually referred to as the Divisor. For example, if the total adjusted market cap of the 500 component stocks is US$13 trillion and the Divisor is set at 8.933 billion, then the S&P 500 Index value would be 1,455.28. Although the adjusted market capitalization of the entire index can be accessed from Standard & Poor's website, the Divisor is considered to be proprietary to the firm. However, the Divisor's value is approximately 8.9 billion.

The formula to calculate the S&P 500 Index value is:225–226

INDEX LEVEL =∑(Pi-Qi)/DIVISOR
where P is the price of each stock in the index and Q is the number of shares publicly available for each stock.

The Divisor is adjusted in the case of stock issuance, spin-offs or similar structural changes, to ensure that such events do not in themselves alter the numerical value of the Index.