The annual report helps the investors and other company stakeholders get a better picture of the company’s economic position and performance than what may be possible through an analysis of financial statements such as balance sheet, income statement, and statement of cash flows. Accounting rules provide considerable flexibility to organizations, thus, accompanying notes and management opinions are helpful in learning about the assumptions used in preparing the financial statements.
Main Sections of the Financial Report
The annual report is divided into several parts for the sake of organization and convenience. As far as Smith & Wesson is concerned, the first section in the 2012 10-K report (Smith & Wesson Holding Corporation, 2012) dealt with the internal and external environment of the company such as its operations, strategies, core competencies, product lines, regulations, and SWOT. The management gave its opinion on existing and future events that may or may not have material impact on the economic position of the company. Another section was commentary on the financial statements of the company which helps the readers better understand the factors that influenced the company’s performance. The management also compared the recent performance with those of the past years to highlight the progress or challenges.
The financial statements section had balance sheet, income statement, and cash flow statement. A supplementary section called notes to the financial statements helps readers understand the assumptions utilized as well as the accounting rules used in preparing the individual statements. There is also a section dedicated to discussion of the company’s management including executive compensation.
Factors That Influenced Annual Financial Performance
As far as the key factors that influenced the company’s financial performance during the year are concerned, the first was significantly higher net sales volume which resulted from both higher demand as well as production capacity. The higher demand also resulted from introduction of new products and would have been even higher were it not for production capacity limitation. As a result, the company’s gross profit was also the highest over the last three years. The company’s net income would have been about two-third higher were it not for the loss from discontinued security solutions division. Total operating expenses were almost same as last year. Discontinuing operations made it seem like the company didn’t do as well as it actually did Smith & Wesson’s net income from continuing operations was more than three times the amount in 2011.
As far as Smith & Wesson’s assets are concerned, one of the primary assets is cash and cash equivalents which is more than fifth of the company’s totals assets or about $56.7 million. This is a very positive sign because cash is the most liquid of all the assets and helps improve operating liquidity. But at the same time, the company also has high levels of accounts receivables at little over $48.3 million. High levels of accounts receivables also increase the probability of high bad debt levels and negatively affect operating liquidity. It also tells us that Smith & Wesson might also have achieved higher sales by offering more generous terms to its creditors. Inventories is another primary asset and may even increase in the future in order to avoid order backlog. Smith & Wesson’s only significant long term asset is property, plant & equipment at little over $60.5 million.
Management Opinion on Internal Control
Smith & Wesson’s management claims that the company’s CEO and CFO evaluated the company’s internal control system and concluded the management receives the relevant information in a timely fashion as required by the applicable regulations. The management also reports that it didn’t make any change in the internal control system that caused or may cause a material impact on the internal control over financial reporting.
The management does caution that it doesn’t consider its internal control system to be perfect and be able to prevent all instances of errors and frauds. It further adds that internal control systems, no matter how well-designed they are, can only provide reasonable and not absolute assurance of meeting system’s objectives. The management argues that the costs of the internal system should be weighed against the expected benefits due to resource constraints. In addition, internal control systems are also affected by internal and external factors such as changes in policies or regulations that may render the system less effective.
The company’s independent auditor, BDO USA, LLP does indicate its confidence on the effectiveness of the internal control system at Smith & Wesson in meeting its objectives.
Smith & Wesson Holding Corporation. (2012). Form 10-K. Springfield, MA: Smith & Wesson.