Writing Assignment

Understanding Corporate Annual Report, CISCO

Financial Accounting 1B - Online
Srikanth Mamidanna

Report Completed By:

Michelle Carroll (Group Leader, A-P)
Kristin Hightower (1-11)
Davis Barillas (12-19)
Kelsey Campbell (20-31)

Annual Report

A.

What Is An Annual Report?

An annual report provides information about a companys financial condition. They help
investors make informed investment decisions. Publicly traded corporations that have their
stock listed on the stock exchanges are required by the Securities and Exchange Commission
to file annual and quarterly reports. Typically, reports begin with a company overview,
including the industry, growth strategies, and an overview and the companys brands. It also
includes the companys competitors, and the possible risks related to the companys business.

B.

Name the Federal Government Agency that Requires a Publicly Held

Corporation to Keep Shareholders Informed of Its State of Business?

The Securities and Exchange Commission (SEC) is a government agency that oversees the
US financial markets. The mission of the SEC is to protect investors, maintain fair, orderly
and efficient markets, and to facilitate capital formation.

C.

What is the Purpose of Auditing Financial Statements?

An audit is an examination of a companys financial statements and records performed by

independent accountants. The Securities and Exchange Commission requires publicly held
companies to have their financial statements audited. Investors and creditors need relevant
and faithful information about a companys financial condition in order to make informed
decisions about investing into a company.

D.

What is the name of rules and regulations used to prepare financial

statements?

The guidelines for accounting information are called Generally Accepted Accounting
Principles, also known as GAAP. GAAP is the main US rulebook and is created and
governed by the Financial Accounting Standards Board (FASB).

E.

Name two other primary financial information sources.

10-Q and 10-K, these filings reflect information that is filed to the SEC by the reporting
company.

F.

What type of information is provided in the statement of earnings (also called

income statement or profit and loss statement)? Please be as brief as possible.

The information found on the statement of earnings are revenue, cost of goods sold, gross
profit/margin, sales expenses, operating expenses, other income, other expenses, and total
loss or total profit.

G.

What type of information is provided in the statement of financial position

(also called balance sheet)? Please be as brief as possible.

The information found on the statement of financial position are assets (cash, accounts
receivable, supplies, prepaid expenses, fixed assets), liabilities (accounts payable, note
payable, salaries payable, unearned revenue, etc.) and equity (capital).

H.

What type of information is provided in the statement of cash flows? Please

be as brief as possible.
This report provides operating, investing and financing activities (cash receipts, cash
payments, and the net change resulting from operating activities).

I.

Briefly explain the purpose of Public Company Accounting Oversight Board

(PCAOB).
The public company accounting oversight board (PCAOB) is a private sector corporation
created by the Sarbanes Oxley of 2002 to oversee the audits of public companies and other
issuers to protect the public interest and investors and to prepare informative and accurate
audit reports.

J.

Under the new rules of the Sarbanes-Oxley Act of 2002, to whom does an

auditor report?
Under the new rules an auditor reports to an audit committee, who are made of individuals
that are not associated with the affiliated person of the issuer.

K.

What caused the new rule to be created?

It was made because of the high-profile business failures of businesses. Which resulted in the
establishment of the new rule to reinforce investment confidence and to improve accuracy
and reliability of corporate financial disclosures.

L.

Under the new rules of the Sarbanes-Oxley Act of 2002, name eight types of

services that are "unlawful" if provided to a publicly held company by its auditor?
A registered public accounting firm may not provide any non-audit services such
bookkeeping or other services related to accounting records, financial information system

design and implementation, appraisal or valuation services, actuarial services, internal audit
outsourcing, management functions or human resources, legal services and expert services
unrelated to the audit.

M.

What is the mission of SEC?

U.S. Securities and Exchange Commission (SEC) is a federal government agency that
oversees and enforces financial securities laws and regulations. Securities Exchange Act of
1934 established SEC and its mission is to protect investors; maintain fair, orderly, and
efficient markets; and facilitate capital formation.1 SEC maintains publics trust1 by
protecting those who invest in stock and commodities markets and upholds regulatory
standards to provide fraud-free market environment.1 Securities and Exchange Commission
responsibility continues to evolve as it protects the public and investors interests by
proposing changes to the financial laws and practices.
N.

How many commissioners does SEC have and who appoints them?

Securities and Exchange Commission is composed of five commissioners who are appointed
by the President of the United States with Senate oversight. Existing appointed
commissioners are Mary Jo White, Kara M. Stein, and Michael S. Piwowar with two open
vacancies. Mary Jo White is the SECs Chairman or the top executive.

O.

How many divisions and offices does SEC have?

Securities and Exchange Commission has five divisions and twenty three offices. Each
division and office assists SEC in overseeing, developing, regulating, and executing federal
laws associated with financial regulations and acts passed by Congress. The below
organizational chart lists each division and office.2

Divisions and Offices reporting to the Office of the Chairman:

Five Divisions

Corporation Finance

Enforcement

Investment Management

Risk, Strategy, and Financial Innovation

Trading and Markets

Twenty-three Offices

Administrative Law Judges

Chief Accountant
Chief Operating Officer

Acquisitions

Financial Management

Human Resources

Information Technology

Support Operations
Compliance Inspections and Examinations
Credit Ratings
Equal Employment Opportunity
Ethics Counsel
General Counsel
Inspector General
International Affairs
Investor Advocate
Investor Education and Advocacy
Legislative and Intergovernmental Affairs
Minority and Women Inclusion
Municipal Securities
Public Affairs
Secretary

P. Briefly explain the Securities Act of 1933 and the Securities Exchange Act of 1934.
Securities Act of 1933 or the Securities Act was enacted by Congress and signed into law by
President Franklin D. Roosevelt. The market crash of 1929 resulted in federal intervention to
regulate the sale of securities in the primary market. The 1933 Act was the first financial law
that established financial regulatory requirements and required investors to obtain financial
information on securities being offered for sale. It also prohibit falsification and fraud in the
sale of securities.3

Securities Exchange Act of 1934 or the Exchange Act established the Securities Exchange
Commission and granted additional powers to oversee the securities industry. Act of 1934
enabled SEC the authority to regulate transactions in the secondary market, the purchase of
securities from investors or national exchanges. The Exchange Act addresses market
manipulation, institutes antifraud provisions, and permits legal course of action against
misinformation of financial statements.

1. What is the address of CISCOs website?

www.cisco.com

2. When does the companys fiscal year end?

July

3. When was the 2013 annual shareholders meeting?

November 19, 2013

4. Where was the 2013 annual shareholders meeting?

Cisco Systems, Inc.
Building 9
260 East Tasman Drive
San Jose, CA 95134

5. Who is the corporation's transfer agent?

Computershare Investor Services

6. Where is the agent located?

P.O. Box 43078
Providence, RI 02940-3078

7. What is the companys stock ticker symbol (Sym)?

CSCO
Close July 26, 2016:
52wk Range:

30.53

22.46 - 31.15

8. Does CISCO sell bonds? If yes, state the types of bonds sold and the market price of one
of the bonds on any day of this quarter.
Cisco is not currently selling bonds.

9. State the number of authorized, outstanding, and treasury shares for each class of capital
stock.
Preferred stock: 5 shares authorized; none issued and outstanding
Common stock: 20,000M shares authorized; 5,389M and 5,298M shares issued and
outstanding at July 27, 2013 and July 28, 2012, respectively.
Treasury stock: none issued and outstanding

10. What is the name of the Certified Public Accounting firm that audited the companys
annual report?
PricewaterhouseCoopers LLP

11. What goals, objectives, and predictions are expressed in the Letter to the
Stockholders?
The pillars of Cisco's innovation strategy are build, buy, partner, and integrate. Cisco
planned to drive growth through the cloud and unified data center, the mobility market
transition, and next-generation video, as well as investing in services, security, emerging
markets, and software offerings. Another goal was to become a leading security partner
by acquiring Sourcefire and focus on the Internet of Everything.

12. State the stock market on which company's stock is traded.

NASDAQ

13. What type of inventory valuation system (LIFO, FIFO, WA, etc.) is used for tax and
reporting purposes? Please note if LCMV is used with any of these methods.
United States (LIFO), Foreign (FIFO)

14. Name the categories of long-term assets (property, plant, and equipment; natural
resources; intangible assets; etc.) is used.
Long Term Investments, property, equipment, purchased intangible assets, deferred tax
assets, and other assets.
15. Name the method used to depreciate property, plant, and equipment.

Straight-line Method.

16. Name the categories of short-term liabilities reported by the company.

Accounts payable, current portion of long-term debt, accrued salaries and benefits,
accrued member rewards, accrued sales, other taxes, other current liabilities, and deferred
membership fees.

17. State the amount of cash flows provided and used by operating, investing, and financing
activities in the years 2011 and 2012.

*amounts are in millions

July 27, 2013

July 28, 2012

Net cash provided by operating activities

12,894

11,491

Net cash used in investing activities

(11,768)

(3,815)

Net cash used in financing activities

(3,000)

(5,539)

18. Has the company ever paid cash dividends? If yes, state the amount and the last year
the company paid cash dividends.
Yes. Our quarterly cash dividends paid during fiscal 2013, paid cash dividends of $0.62
per common share. During fiscal 2012, our company declared and paid cash dividends of
$0.28 per common share.

19. Has the company ever issued stock dividends? If yes, state the number of shares and
the last year the company issued stock dividends.
We returned to shareholders cash dividends paid of $3.3 billion, the repurchase of
common stock of $2.8 billion in 2013.

FOR QUESTIONS 20-31 ALL ANSWERS ARE IN MILLIONS, EXCEPT PAR VALUE

20. What is CISCOs Current Ratio? What does it express?

Current Ratio = Current Assets / Current Liabilities
Current Ratio = $65,521/$22,192
Current Ratio= 2.95
Ciscos current ratio is pretty high as the average tends to be around 1.5. Their current
assets outweigh their current liabilities by a lot more than normal. This could indicate that
they are not using the current assets on the balance sheet, such as inventory, properly.

21. What is CISCOs acid-test ratio? What does it express?

Acid-Test Ratio = Cash +cash equivalents + Short-Term Investments + Net current Receivables
Total Current Liabilities
Acid-Test Ratio = $7,925 +$42,685 + $5,470 +$4037
$22,192
Acid-Test Ratio = 2.71
Typically an acid-test ratio above 1 is a good acid-test result, so Ciscos the acid-test ratio
of 2.71 is also a good ratio. It shows that Cisco can quickly pay off all of their liabilities
if needed. While a good ratio is over 1, the best one tends to be between 1 and 1.2, the

ratio of over 2 could also reflect what the current ratio showsthey need to better use
their assets.

22. What is CISCOs debt (total liabilities) to stockholders equity Ratio? What does it
express?
Debt to equity = Total Liabilities / Total Equity
Debt to Equity = $42,063/$59,128
Debt to Equity = .71
Ciscos debt-to-equity ratio shows that their assets are being purchased and financed
more with cash and less with liabilities.

23. What is CISCOs Accounts Receivable Turnover Ratio? --use total revenue instead of
net sales on account as the numerator. What does it express?
Accounts Receivable Turnover Ratio = Total Revenue / Average net accounts receivable
A/R Turnover Ratio = $48,607 / [($5470 + $4369)/2]
A/R Turnover Ratio = 9.88
As the textbook says in chapter 17 the higher the ratio, the faster the cash collections.
Ciscos A/R ratio is pretty good compared to the market. The A/R ratio of 9.88 means that
almost 10 times a year Cisco collects the average receivables balance. This shows that
about every 36 days (365/10) Cisco was able to collect all of their A/R receivables.

24. What is CISCOs Inventory Turnover Ratio? What does it express?

Inventory Turnover Ratio = Cost of Goods Sold / Average Merchandise Inventory

Inventory Turnover Ratio = $19,167/ [($1,476 + $1,663)/2]

Inventory Turnover Ratio = 12.21
Ciscos Inventory Turnover Ratio of 12.21 means that 12.21 times a year they have
enough inventory to cover sales for 30 days (365/12.21). A higher Inventory Turnover
Ratio means they are selling more inventory.

25. What CISCOs rate of return on net sales Ratio? What does it express?
Rate of Return on Sales = Net Income/ Net Sales
Rate of Return on Sales = $9983/$48,607
Rate of Return on Sales = 20.54%
This ratio shows that on every dollar CISCO makes in revenue, 20.54% or $0.22 is profit.

26. What is CISCOs Earnings per Share? What does it express?

Earnings Per Share = Net Income Preferred Dividends
Weighted Average number of common shares outstanding
Earnings Per Share = $9983 - 0
[(5389 +5298)/2)]
Earnings Per Share = 1.86
The earnings per share ratio expresses that for every common share outstanding, they
each produce $1.86 of net income.

27. What is CISCOs Price-Earnings Ratio? What does it express?

Price/ Earnings Ratio = Market price per share of common stock / Earnings per share
Price/ Earnings Ratio = $22.65/1.86
Price/Earnings Ratio = $12.17

The stock market places $12.17 of value on $1 of Ciscos stock.

28. What is CISCOs Dividend Yield Ratio? What does it express?

Dividend Yield = Annual dividend per share
Market Price per share
Dividend Yield = $0.62/$.22.65
Dividend Yield = 2.87%
This shows that 2.87% of the market price per share is returned in annual dividends per
share.
29. What is CISCOs number of times the interest charges earned ratio? What does it
express?
Times- Interest Earned = Net Income + Income Tax Expense + Interest Expense
Interest Expense
Times- Interest Earned = $9.983 + 1244 + 583
583
Times- Interest Earned = 20.25
This high times-interest earned shows that CISCO has no difficulty paying any interest
expense.

30. Prepare a horizontal analysis, similar to Exhibit 15-3 on page 725 of your textbook for
the following items in the balance sheet:
*amounts are in millions

Increase (Decrease)
Current Year

Previous Year

Amount

Percent

Total Current Assets

$65,521

$61,933

$3,588

5.79%

Fixed Assets (Property,

$28,644

$22,360

$6,284

28.1%

Goodwill, Intangible)
Total Assets

$101,191

$91,759

$9,432

10.28%

Total Current Liabilities

$22,192

$17,731

$4,461

25.16%

Total Liabilities

$42,063

$40,458

$1,605

3.97%

Total Equity

$59,128

$51,301

$7,827

15.26%

31. Prepare a vertical analysis in relation to sales, similar to Exhibit 15-4 on page 727 of
your textbook (total revenue as the denominator) for the following items in the income
statement.
Current Year
*amounts are in millions

Previous Year

Amount

Percent

Amount

Percent

Total Revenue

$48,607

100%

$46,061

100%

Cost of Sales

$19,167

39.43%

$17,852

38.76%

Gross Profit

$29,440

60.57%

$28,209

61.24%

S, G & A Expenses

$18,244

37.53%

$18,144

39.39%

Interest Expense

($583)

(1.19%)

($596)

(1.29%)

Income Tax Expense

$1,244

2.56%

$2,118

4.60%

Net Income

$9,983

20.54%

$8,041

17.46%

The main objective of the company is to provide the best quality of services and products to its
customers. The importance Cisco places on innovation shows that this company is looking
towards the future, a huge draw to potential investors. Cisco is in a very secure financial
position, having achieved sufficient profit over the past few years. The long term solvency
position of the company is very good. By examining the vertical analysis in question 31, one can

see that net income percentage of revenue increased from 2012 to 2013. A company that is
steadily increasing net income is one worth investing in.