Definition: An annual report is a financial summary of a company’s activities during the year along with management’s analysis of the company’s current financial position and future plans. Annual reports are prepared at the end of the fiscal year for external users to gain financial information about the inner workings of the company and what management plans to do in the future.
A typical annual report includes several different sections that help investors and creditors understand the company more than they would by simply looking at a set of general-purpose financial statements. A standard report includes the following sections:
- Letter to Shareholders
- Financial History and Highlights
- Management Discussion and Analysis
- Management’s Report on Financial Statements and on Internal Controls
- Report of Independent Accountants sometimes called the Auditor’s Report including a section on internal controls
- Financial Statements including a:
- Balance Sheet
- Income Statement
- Statement of Stockholders’ Equity
- Cash Flows Statement
- Notes to Financial Statements
- List of Directors and Officers
As you can see, the full report gives external users a much more holistic view of a company’s financial position, market standings, and ability to improve than a simple set of comparative financial statements.
Although the report is directed at external users, it’s often used as an advertising and marketing tool to show the public that the company is doing well. Management can showcase new products and innovations as well as discuss new markets that they expect to enter in future periods.
This report is typically issued with graphics, photos, illustrations, graphs, and diagrams. It’s for more attractive than a simple set of financial statements. In a sense, this is the report where management can brag about its accomplishments and entice new investors to join the company. Even though there are marketing-type elements in the report, the actual purpose of it is to convey financial information to the outside users.