Reading Financial Reports for Dummies (28 page)

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2.21

1.87

1.64

Per-share

amounts

—

net

earnings

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2.18

2.00

1.58

DIVIDENDS DECLARED PER SHARE

$ 1.15

$ 1.03

$ 0.91

Consolidated Statement of Changes in Shareowners’ Equity (in millions)

2007

2006

2007

CHANGES IN SHAREOWNERS’ EQUITY (note 22)

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$111,509

$108,633

$110,181

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(23,102)

(17,983)

(13,249)

Changes other than transactions with shareowners

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(1,484)

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27,278

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Figure 10-2:
Cumulative effect of changes in accounting principles (a)

(126)

(3,819)

—

GE income

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$115,559

$111,509

$108,633

statement. (a) The effect of the 2006 accounting change was previously included in the caption “Benefit plans — net.”

See accompanying notes.

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Part II: Checking Out the Big Show: Annual Reports
GE

GECS

2007

2006

2005

2007

2006

2005

$ 60,374

$ 53,221

$ 48,268

$ 718

$ 2,384

$ 2,528

39,422

36,698

33,139

—

—

—

3,371

2,307

1,754

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—

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12,428

10,255

9,004

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—

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71,468

59,242

52,679

115,595

102,481

92,165

72,186

61,626

55,207

47,103

41,501

36,869

628

2,204

2,369

26,382

23,863

20,915

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—

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1,993

1,668

1,319

22,731

17,857

14,045

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3,647

3,419

3,574

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4,546

3,130

3,239

14,148

12,893

12,316

26,661

23,125

21,628

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624

714

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238

202

90,333

80,549

72,133

58,422

49,973

45,057

25,262

21,932

20,032

13,764

11,653

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(2,794)

(2,552)

(2,678)

(1,336)

(1,398)

(1,146)

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19,380

17,354

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(260)

1,362

(634)

(2,127)

403

(1,427)

$ 22,208

$ 20,742

$ 16,720

$10,301

$10,658

$ 7,577

In the consolidating data on this page, “GE” means the basis of consolidation as described in note 1 to the consolidated financial statements; “GECS” means General Electric Capital Services, Inc. and all of its affiliates and associated companies. Transactions between GE and GECS have been eliminated from the “General Electric Company and consolidated affiliates” columns.

Most companies play a game of cat-and-mouse, hiding relevant data in the notes to the financial statements, hoping that you won’t take the time to find it in the small print. Look at the statements for Hasbro and Mattel on their Web sites. Neither statement mentions which notes are relevant to the line items on their balance sheets or income statements. Hasbro does highlight key notes on Consolidated Statement of Cash Flows. Other than that, you have to scour the notes to find out which material is relevant to which parts of each of their financial statements.

Looking at Methods of Buying

Up Companies

One of the most common ways companies grow is by buying up smaller companies. These smaller companies get completely gobbled up with no outward sign that they ever existed, or they become subsidiaries operating under the umbrella of the firm that bought them.

Chapter 10: Considering Consolidated Financial Statements
145

A company can take control over another company by using any of three different methods: statutory merger, statutory consolidation, and stock acquisition. Only when a company buys another using the stock-acquisition method does it become a subsidiary. Here’s a brief overview of the ways one company can buy another:

✓

Statutory merger:
This merger occurs when one company acquires all the assets of another and accepts the responsibilities of all its liabilities.

The company that’s taken over goes out of business and is no longer a separate legal entity. The financial results of the business that disappeared become part of the consolidated financial results of the company that remains.

✓

Statutory consolidation:
In this situation, two companies agree to combine to form one new entity; one company does
not
take over the other. When the transaction is complete, only one legal entity survives, either under one of the original names of the two companies or under a completely new name. Their financial results are combined in a consolidated financial statement.

✓

Stock acquisition:
In this case, two companies combine, but both remain separate legal entities after the transaction. The company that buys the stock emerges as the parent firm, and the other company becomes the subsidiary. The parent company takes on all the subsidiary’s responsibilities and liabilities, and the financial statements of the two are consolidated into the parent company’s financial statements.

Two types of stock acquisition exist:

•

Majority interest:
When a company buys more than 50 percent of another company’s stock, this represents a
majority interest.

When a company buys 100 percent of another company’s stock but the two businesses don’t merge, the subsidiary is called a
wholly
owned subsidiary.

•
Minority interest:
When a company or individual owns less than 50

percent of a corporation’s voting stock, that’s a
minority interest.
A consolidated balance sheet that indicates minority interest shows the interests of minority shareholders as a liability, an equity, or between the liabilities and equities sections.

Subsidiaries are the entities left in place after a company is acquired by another company using the stock-acquisition method. If you were a shareholder in the subsidiary before it was bought out, you won’t find tracking the company that you originally owned easy. Instead, you’ll find that most of the financial detail is now just part of the consolidated financial statements of the larger firm.

Stock acquisition is the most common method for taking control of another company because it’s cheaper than paying for all the company’s assets. To control another company, a parent company needs to buy more than 50

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Part II: Checking Out the Big Show: Annual Reports
percent of its stock. This type of acquisition doesn’t require the difficult and more time-consuming negotiations that are necessary to take control of 100

percent of a company. Sometimes, after a parent company takes control of another business, it continues buying stock over the next few years until it owns 100 percent of the stock.

Acquiring a company through stock acquisition is also easier than using the other takeover methods because the company’s shares are sold on the open market. One company can take over another simply by buying up those open-market shares.

Reading Consolidated

Financial Statements

Most major corporations are made up of numerous companies bought along the way to create their empires. The financial statement for such a corporation reflects the financial results for all these entities it bought, as well as the original assets of the company.

After a stock acquisition by the parent company, the subsidiary continues to maintain separate accounting records. But in reality, the parent company controls the subsidiary, so it no longer operates completely independently.

By accounting rules, the parent company must present its subsidiary’s and its own financial operations in a consolidated manner (even though the two companies may be separate legal entities). The parent company does so by publishing
consolidated financial statements,
which combine the assets, liabilities, revenue, and expenses of the parent company with those of its affiliates (that is, its subsidiaries, associates, and joint ventures).

If you hold a minority interest (see the previous section for more information on minority interest) in the subsidiary of a parent company, the consolidated financial statements won’t give you the information you need to make decisions about your holdings. But in addition to having its report included in the consolidated financial statements, a subsidiary with minority shareholders must also report its financial results separately from its parent company.

When a company owns all the common stock of its subsidiaries, it doesn’t need to publish reports about the subsidiaries’ individual results for the general public to peruse. Shareholders don’t even need to know the results of these subsidiaries.

In preparing consolidated financial statements, the parent company must eliminate numerous transactions between itself and its affiliates before presenting the statements to the public. For example, the parent company must eliminate such transactions for accounts receivable and accounts payable
Chapter 10: Considering Consolidated Financial Statements
147