The annual report is considered by some to be the single most important printed document that companies produce. In recent years, annual reports have become large documents. They now include such sections as letters to the stockholders, descriptions of the business, operating highlights, financial review, management discussion and analysis, a discussion of company internal controls, segment reporting, inflation data, and the basic financial statements. The expansion has been due in part to a general increase in the degree of sophistication and complexity in accounting standards and disclosure requirements for financial reporting.

The expansion also is reflective of the change in the composition and level of sophistication of users. Current users include not only stockholders but also financial and securities analysts, potential investors, lending institutions, stockbrokers, customers, employees, and—whether the reporting company likes it or not—competitors. Thus, a report that was originally designed as a device for communicating basic financial information now attempts to meet the diverse needs of an ever-expanding audience.

Users hold conflicting views on the value of annual reports. Some argue that they fail to provide enough information, whereas others believe that disclosures in annual reports have expanded to the point where they create information overload. Others argue that the future of most companies depends on acceptance by the investing public and by its customers; therefore, companies should take this opportunity to communicate welldefined corporate strategies.

REQUIRED

a. Identify and discuss the basic factors of communication that must be considered in the presentation of the annual report.

b. Discuss the communication problems a corporation faces in preparing the annual report that result from the diversity of the users being addressed.

c. Select two types of information found in an annual report, other than the financial statements and accompanying footnotes, and describe how they are helpful to the users of annual reports.

d. Discuss at least two advantages and two disadvantages of stating well-defined corporate strategies in the annual report.

e. Evaluate the effectiveness of annual reports in fulfilling the information needs of the following current and potential users: shareholders, creditors, employees, customers, and financial analysts.

f. Annual reports are public and accessible to anyone, including competitors. Discuss how this affects decisions about what information should be provided in annual reports. (CMA Examination, adapted)