All of the Professors's additonal information you may need to answer questions #1-8 are below for the Southwest material.

Southwest Airlines Company: Stock Symbol (LUV) Website: HYPERLINK "http://WWW.SEC.gov" WWW.SEC.gov

10-K Annual Report for year ending December 31, 2015, filed February 2, 2016

Question 1

What 3 items of important information does the income statement reveal about the financial performance of the company over the last three years? Answer: The majority of revenues come from the sale of passenger tickets. That revenue has grown nicely: up 3.6% in 2015 and 5.6% in 2014. The costs for fuel and oil were down substantially (likely due to oil from fracking). These costs declined from $5.3 billion to $3.6 billion from 2014 to 2105. Salaries and wages were up over 17% from 2014 to 2015. Maintenance was up 2.7% and landing fees were up 4.9%. Both taxes and net income were up 91%. Cash dividends to shareowners were up 29%. Net Income divided by Total Revenues was 11.0% in 2015, up from 4.3% in 2013. All in all, it was a very successful year for the company. You will note that my answer included 10 interesting things that I learned. You need to find at least 3. A note on SEC Data My data came from the SEC web site. I used the Interactive Data to create an Excel spreadsheet, and used that sheet to calculate the percentages. I copied that sheet into this document below. Go to HYPERLINK "http://www.sec.gov" www.sec.gov and look for the box that says Search EDGAR, Free access to over 21 million filings. There is a place to enter the company name or stock market ticker symbol. Enter the name and click the search icon. When I typed in Southwest A, the search box filled in Southwest Airlines Co. (LUV). Under search results, enter 10-K in the box for filing type. Then you will have the choice between annual reports for the last 20 years or so. For Southwest, there is data available on an Excel spreadsheet for the last 7 years. Choose documents to see the 10-K as filed or Interactive Data to get the Excel spreadsheets. Most company web sites have their annual reports available on the investor relations page. One can obtain summary financial statements on Morningstar, Yahoo Finance, and MSN Money. Unfortunately, in cases where company data does not fit standard formats, some numbers may be omitted. The SEC web site does not have this problem. Most line items are self-explanatory. The Financial Statement Power Point may help with explanations. Also under Course Resources, Webliography, SEC guide to Financial Statements, may be helpful. The webliography contains other useful information. The Excel sheets will have several minor statements that you can ignore. Southwest Data for Question 1:

Southwest Airlines Company Consolidated Statement of Income - USD ($) $ in Millions	12 Months Ended
	12/31/15	12/31/2014	12/31/2013
OPERATING REVENUES:
Passenger	$ 18,299	$ 17,658	$ 16,721		103.6%	105.6%
Freight	179	175	164		102.3%
Special revenue adjustment	172	0	0
Other	1,170	772	814		151.6%
Total operating revenues	19,820	18,605	17,699		106.5%
OPERATING EXPENSES:
Salaries, wages, and benefits	6,383	5,434	5,035		117.5%
Fuel and oil	3,616	5,293	5,763		68.3%
Maintenance materials and repairs	1,005	978	1,080		102.8%
Aircraft rentals	238	295	361		80.7%
Landing fees and other rentals	1,166	1,111	1,103		105.0%
Depreciation and amortization	1,015	938	867		108.2%
Acquisition and integration	39	126	86		31.0%
Other operating expenses	2,242	2,205	2,126		101.7%
Total operating expenses	15,704	16,380	16,421		95.9%
OPERATING INCOME	4,116	2,225	1,278		185.0%
OTHER EXPENSES (INCOME):
Interest expense	121	130	131		93.1%
Interest Costs Capitalized Adjustment	(31)	(23)	(24)		134.8%
Interest income	(9)	(7)	(6)		128.6%
Other (gains) losses, net	556	309	(32)		179.9%
Total other expenses (income)	637	409	69		155.7%
INCOME BEFORE INCOME TAXES	3,479	1,816	1,209		191.6%
PROVISION FOR INCOME TAXES	1,298	680	455		190.9%
NET INCOME	$ 2,181	$ 1,136	$ 754		192.0%
NET INCOME PER SHARE, BASIC (in dollars per share)	$ 3.30	$ 1.65	$ 1.06		200.0%
NET INCOME PER SHARE, DILUTED (in dollars per share)	3.27	1.64	1.05		199.4%
Cash dividends declared per common share (in dollars per share)	$ 0.2850	$ 0.2200	$ 0.1300		129.5%
	11.0%	6.1%	4.3%

Question 2:

What 3 items of important information does the balance sheet reveal about the financial position of the company over the last two years?

Answer: First we note that Total Assets grew 8.1% from 2014 to 2015. Current assets of $4 billion are significantly less than Current Liabilities of $7.4 billion in 2015. In a manufacturing company this would indicate a weakness, but at Southwest most customers pay in advance for air fare so accounts receivable are low at $0.5 billion. Inventories of Parts and Supplies, at cost are also low at $0.3 billion. I would have to look in the footnotes to find out that Southwest does not keep a big supply of jet fuel; it buys fuel as is uses fuel. Flight equipment of $19.5 billion makes up the majority of the $24.7 billion property and equipment at cost. Depreciation of $9.1 billion suggests that the majority of the life of the airplanes and other property is still to come. Under current liabilities, we see that Air Traffic Liability was $3.0 billion. This is the amount of money customers paid to Southwest for tickets before flying. At Dec 31, 2015, this says that total tickets bought for 2016 was $3 billion. Total shareholders equity grew 8.6%.

You will note that my answer included 10 interesting things that I learned. You need to find at least 3.

Southwest Data for question 2

Southwest Airlines Company
Consolidated Balance Sheet - USD ($) $ in Millions	Dec. 31, 2015	Dec. 31, 2014
Current assets:
Cash and cash equivalents	$ 1,583	$ 1,282
Short-term investments	1,468	1,706
Accounts and other receivables	474	365
Inventories of parts and supplies, at cost	311	342
Prepaid expenses and other current assets	188	232
Total current assets	4,024	3,927
Property and equipment, at cost:
Flight equipment	19,462	18,473	105.4%
Ground property and equipment	3,219	2,853
Deposits on flight equipment purchase contracts	1,089	566
Assets constructed for others	915	621
Property and equipment, at cost	24,685	22,513
Less allowance for depreciation and amortization	9,084	8,221
Property and equipment, net	15,601	14,292
Goodwill	970	970
Other assets	717	534
Total assets	21,312	19,723	108.1%

Current liabilities:
Accounts payable	1,188	1,203	98.8%
Accrued liabilities	2,591	1,565	165.6%
Air traffic liability	2,990	2,897	103.2%
Current maturities of long-term debt	637	258	246.9%
Total current liabilities	7,406	5,923
Long-term debt less current maturities	2,541	2,434	104.4%
Deferred income taxes	2,490	2,782
Construction obligation	757	554
Other noncurrent liabilities	760	1,255
Stockholders' equity:
Common stock, $1.00 par value: 2,000,000,000 shares authorized; 807,611,634 shares issued in 2015 and 2014	808	808
Capital in excess of par value	1,374	1,315
Retained earnings	9,409	7,416
Accumulated Other Comprehensive Income (Loss), Net of Tax	(1,051)	(738)
Treasury stock, at cost: 160,010,017 and 132,017,550 shares in 2015 and 2014 respectively	(3,182)	(2,026)
Total stockholders' equity	7,358	6,775	108.6%
Total liabilities and stockholders' equity	$ 21,312	$ 19,723

Question 3

3) Can you identify the major sources of funding used by the company from the information presented in the company's annual report? Please look at the Statement of Cash Flows, formerly called the Source and Uses of Funds Statement.

Answer: First here is an explanation: There are 4 main parts to the Statement of Cash Flows: 1. Net cash provided by operating activities. 2. Net cash used in investing activities. 3. Net cash used in financing activities and 4. NET CHANGE IN CASH AND CASH EQUIVALENTS. (Yes, it is a bit strange to see all capital letters in this last category.) Cash inflows show as positive numbers. Cash outflows show as negative numbers with parentheses around them.

Cash Flow Net cash provided by operating activities was $3.2 billion in 2015. The majority of that came from $2.2 billion of net income and $1.0 billion of depreciation and amortization. (Note: Depreciation is a non-cash charge. The company has to pay cash soon after it purchased the airplanes and other property.) Net cash used in investing activities was ($1.9) billion. That was essentially the same as the amount of capital expenditures ($2.0) billion. The purchase and sale of short term investments were similar to each other. Net cash used in financing activities was ($1.0) billion. Southwest spent ($1.2) billion on the repurchase of common stock. It borrowed $0.5 billion and had other payments. NET CHANGE was positive $0.3 billion.

So in sum, Southwest Airlines Company had 3 Net cash from operating activities as the primary source of funding. Net income provided the most at $2.2 billion with depreciation next at $1 billion. The company did borrow $0.5 billion.

Southwest Data for Question 3:

Southwest Airline Company
Consolidated Statement of Cash Flows - USD ($) $ in Millions	12 Months Ended
	Dec. 31, 2015	Dec. 31, 2014	Dec. 31, 2013
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$ 2,181	$ 1,136	$ 754
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization	1,015	938	867
Unrealized (gain) loss on fuel derivative instruments	113	279	(5)
Deferred income taxes	(109)	501	50
Changes in certain assets and liabilities:
Accounts and other receivables	(88)	54	(17)
Other assets	103	142	(46)
Accounts payable and accrued liabilities	961	36	343
Air traffic liability	94	326	400
Cash collateral received from (provided to) derivative counterparties	(570)	(233)	57
Other, net	(462)	(277)	74
Net cash provided by operating activities	3,238	2,902	2,477
Net cash used in investing activities
Capital expenditures	(2,041)	(1,748)	(1,433)
Assets constructed for others	(102)	(80)	(14)
Purchases of short-term investments	(1,986)	(3,080)	(3,135)
Proceeds from sales of short-term and other investments	2,223	3,185	3,198
Other, net	(7)	(4)	0
Net cash used in investing activities	(1,913)	(1,727)	(1,384)
Net cash used in financing activities
Proceeds from issuance of long-term debt	500	300	0
Proceeds from Employee stock plans	46	110	96
Reimbursement for assets constructed for others	24	27	0
Proceeds from termination of interest rate derivative instrument	12	0	0
Payments of long-term debt and capital lease obligations	(213)	(561)	(313)
Payments of cash dividends	(180)	(139)	(71)
Repayment of construction obligation	(10)	(11)	(5)
Repurchase of common stock	(1,180)	(955)	(540)
Other, net	(23)	(19)	(18)
Net cash used in financing activities	(1,024)	(1,248)	(851)
NET CHANGE IN CASH AND CASH EQUIVALENTS	301	(73)	242
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD	1,282	1,355	1,113
CASH AND CASH EQUIVALENTS AT END OF PERIOD	1,583	1,282	1,355
CASH PAYMENTS FOR:
Interest	105	128	133
Income taxes	1,440	155	346
SUPPLEMENTAL DISCLOSURE OF NONCASH TRANSACTIONS:
Flight equipment under capital leases	193	153	26
Assets constructed for others	$ 192	$ 88	$ 105

Question 4 4) Who is responsible for

a) the issuance, and

b) the content

of the company financial statements? (Note: this information may be difficult to find. Look for statements by management and the independent auditing firm.)

Answer: I looked in Documents not the Interactive Data. On page 108 I learned that These financial statements are the responsibility of the Companys management. This was in the Report of the Independent Registered Public Accounting Firm. On page 111, I learned about the responsibility of management for internal controls in section 9A. On page 199 I learned that the primary signature was from Tammy Romo, Executive Vice President and Chief Financial Officer. On page 120 I saw the signatures of Gary C. Kelly, Chairman and Chief Executive Officer; Tammy Romo; Ron Ricks, Vice Chairman of the Board; and all directors.

Southwest information from:

HYPERLINK "https://www.sec.gov/Archives/edgar/data/92380/000009238016000175/luv-12312015x10k.htm#s33F2C1321617BA7BB9B30236ED8E4834" https://www.sec.gov/Archives/edgar/data/92380/000009238016000175/luv-12312015x10k.htm#s33F2C1321617BA7BB9B30236ED8E4834

Question 5

5) What assurance, if any, is there that the financial statements are in compliance with GAAP, and are free of material misstatements?

Answer: On page 108, we see a Report of Independent Registered Public Accounting Firm from Ernst & Young LLP in which they provide reasonable assurance that the financial statements are free of material misstatement. Further on page 109 in a second, Report of Independent Registered Public Accounting Firm, we see that they write. In our opinion, Southwest Airlines Co. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2015, based on the COSO criteria. And We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Southwest Airlines Co. as of December 31, 2015 and 2014, and the related consolidated statements of income, comprehensive income, stockholders equity, and cash flows for each of the three years in the period ended December 31, 2015 and our report dated February 2, 2016 expressed an unqualified opinion thereon.

Southwest information from:

HYPERLINK "https://www.sec.gov/Archives/edgar/data/92380/000009238016000175/luv-12312015x10k.htm#s33F2C1321617BA7BB9B30236ED8E4834" https://www.sec.gov/Archives/edgar/data/92380/000009238016000175/luv-12312015x10k.htm#s33F2C1321617BA7BB9B30236ED8E4834

6) Of what use, if any, are the notes to the financial statements? Give an example of something learned from the footnotes of your company.

Answer: The notes to the financial statements contain useful information. They explain what terms mean and expand information. If you want to find out what is in inventories or property and equipment, there are explanations in the notes on page 73. An explanation of the liability for the frequent program can be found on page 75. Financial Derivative Instruments are described on page 77 and in more detail on page 91. Note 10 describes the use of hedging to control fuel costs and the assessment of risk of this program. In note 4, commitments including leases and aircraft on order are described on pages 80 through 83. Note 6 describes long term debt including interest rates on pages 84 through 87. And Note 14, Income Tax explains the difference between accrued tax and tax paid. It is found on pages 106 and 107.

Southwest information from:

HYPERLINK "https://www.sec.gov/Archives/edgar/data/92380/000009238016000175/luv-12312015x10k.htm#s33F2C1321617BA7BB9B30236ED8E4834" https://www.sec.gov/Archives/edgar/data/92380/000009238016000175/luv-12312015x10k.htm#s33F2C1321617BA7BB9B30236ED8E4834

7) What can you learn from the Business Section of the 10-K? Give two facts learn from reading this section.

Answer: Item 1 Business describes the companys business. It starts with the sentence, Southwest Airlines Co. (the Company or Southwest) operates Southwest Airlines, a major passenger airline that provides scheduled air transportation in the United States and near-international markets. For the 43rd consecutive year, the Company was profitable, earning $2.2 billion in net income. The business model is one of point to point service rather than hub and spoke that defines most of the industry. There is information on International Service, cost structure and even fuel strategy. Among many other facts, the fare structure is described (Wanna Get Away, Fly Anytime and Business Select). There is information about competition and long descriptions of regulation. In Item 1A, Risk, there are description if 16 major risks and some lesser risks including the effect of the economy and the threat of war, terrorist attacks and political instability. The business section begins on page 4 and ends on page 28.

Southwest information from:

HYPERLINK "https://www.sec.gov/Archives/edgar/data/92380/000009238016000175/luv-12312015x10k.htm#s33F2C1321617BA7BB9B30236ED8E4834" https://www.sec.gov/Archives/edgar/data/92380/000009238016000175/luv-12312015x10k.htm#s33F2C1321617BA7BB9B30236ED8E4834

8) What can you learn from the Management Discussion and Analysis of Financial Condition and Results of Operations (MD&A)? Give two facts learned from reading this section.

Answer: Item 7 is Management's Discussion and Analysis of Financial Condition and Results of Operations. It starts with a comparison between management accounting used to run the business and GAAP accounting. It describes in detail the difference between results in 2014 and 2015. The most significant difference was, Fuel and oil expense for 2015 decreased by $1.7 billion, or 31.7 percent, compared with 2014. However, the amount of the decrease wasnt predicted perfectly so, As a result of the Company's fuel hedging program, the Company recognized losses totaling $254 million in Fuel and oil expense for 2015, compared with net gains totaling $28 million for 2014 This means Southwest didnt keep all of the benefits of the reduction in fuel costs. Also, there is a comparison between 2013 and 2014.

Another significant item was about income tax. The Company's effective tax rate was approximately 37.3 percent for 2015, compared with 37.4 percent for 2014.

Southwest information from:

HYPERLINK "https://www.sec.gov/Archives/edgar/data/92380/000009238016000175/luv-12312015x10k.htm#s33F2C1321617BA7BB9B30236ED8E4834" https://www.sec.gov/Archives/edgar/data/92380/000009238016000175/luv-12312015x10k.htm#s33F2C1321617BA7BB9B30236ED8E4834

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