Financial statements course · Lesson 1 of 10
The 10-K is where the numbers are.
A public company in the United States files a full report each year and a shorter one each quarter. All the figures in this course come from statements of the same kind.
Two reports
The Form 10-K is the annual report. It gives a full view of the business and its financial condition, and its financial statements are audited.
The Form 10-Q is the quarterly report. The company files it after each of the first three quarters. Its financial statements are not audited.
| Company size | 10-K due after year end | 10-Q due after quarter end |
|---|---|---|
| Large accelerated filer | 60 days | 40 days |
| Accelerated filer | 75 days | 40 days |
| All other companies | 90 days | 45 days |
The size of the company sets the deadline. The largest companies file first. Both reports are free on the SEC website, EDGAR, and on the investor page of most companies.
The four items to read first
| Item | Name | What it tells you |
|---|---|---|
| Item 1 | Business | What the company sells, to whom, and against which competitors |
| Item 1A | Risk factors | The risks that management thinks matter most |
| Item 7 | Management’s discussion and analysis (MD&A) | Why the results changed, cash and debt, known trends |
| Item 8 | Financial statements and notes | The audited statements and the notes that explain them |
Start with Item 1, so that you know what the numbers describe. Then read Item 8. Read Item 7 last, and compare what management says with what the statements show.
The notes
The notes follow the statements in Item 8. They explain how the company counts revenue, how long its equipment lasts, when its debt is due, and how much it pays in stock. Many warning signs are in the notes, not in the statements.
The auditor’s report
An independent auditor checks the annual statements and writes a report. Most reports give an unqualified opinion: the statements fairly present the company’s position under the accounting rules.
Read the first paragraph of the report. If the opinion is not unqualified, or if the report has a paragraph about doubt that the company can continue, stop and find out why.
Example Co. in this course
| Line | $ millions |
|---|---|
| Revenue | 1,000.0 |
| Net income | 137.5 |
| Cash from operations | 185.1 |
| Total assets, end of year | 760.0 |
| Shareholders’ equity, end of year | 400.0 |
Example Co. is the made-up company from the valuation course. That course shows a short version of its statements. This course shows each line, as a 10-K would. The totals are the same, and the model checks that they agree.
Key points
- The 10-K is the annual report, with audited statements. The 10-Q is the quarterly report, without an audit.
- Read Item 1, then Item 8 and its notes, then Item 7.
- Read the first paragraph of the auditor’s report.
Sources
- Investor.gov, How to Read a 10-K/10-Q, for the items of the 10-K, the audited statements in Item 8 and the auditor’s report.
- SEC, Form 10-K, General Instructions, for the deadlines of 60, 75 and 90 days.
- SEC, Form 10-Q, General Instructions, for the deadlines of 40 and 45 days.
- Investor.gov, Form 10-Q, for the unaudited statements in the quarterly report.