Reference no: EM133183860

A horse called "Read The Footnotes" ran in the 2004 Kentucky Derby. He finished seventh, but if he had won, it would have been a victory for financial literacy proponents everywhere. It's so important to read the footnotes. The footnotes to financial statements are packed with information. Here are some of the highlights: Significant accounting policies and practices - Companies are required to disclose the accounting policies that are most important to the portrayal of the company's financial condition and results. These often require management's most difficult, subjective or complex judgments. Income taxes - The footnotes provide detailed information about the company's current and deferred income taxes. The information is broken down by level - federal, state, local and/or foreign, and the main items that affect the company's effective tax rate are described. Pension plans and other retirement programs - The footnotes discuss the company's pension plans and other retirement or post-employment benefit programs. The notes contain specific information about the assets and costs of these programs, and indicate whether and by how much the plans are over- or under-funded. Stock options - The notes also contain information about stock options granted to officers and employees, including the method of accounting for stock-based compensation and the effect of the method on reported results. You can find a narrative explanation of a company's financial performance in a section of the quarterly or annual report entitled, "Management's Discussion and Analysis of Financial Condition and Results of Operations." MD&A is management's opportunity to provide investors with its view of the financial performance and condition of the company. It's management's opportunity to tell investors what the financial statements show and do not show, as well as important trends and risks that have shaped the past or are reasonably likely to shape the company's future. The SEC's rules governing MD&A require disclosure about trends, events or uncertainties known to management that would have a material impact on reported financial information. The purpose of MD&A is to provide investors with information that the company's management believes to be necessary to an understanding of its financial condition, changes in financial condition and results of operations. It is intended to help investors to see the company through the eyes of management. It is also intended to provide context for the financial statements and information about the company's earnings and cash flows. You've probably heard people banter around phrases like "P/E ratio," "current ratio" and "operating margin." But what do these terms mean and why don't they show up on financial statements? Listed below are  just some of the many ratios that investors calculate from information on financial statements and then use to evaluate a company. As a general rule, desirable ratios vary by industry. If a company has a debt-to-equity ratio of 2 to 1, it means that the company has two dollars of debt to every one dollar shareholders invest in the company. In other words, the company is taking on debt at twice the rate that its owners are investing in the company. Inventory Turnover Ratio = Cost of Sales / Average Inventory for the Period If a company has an inventory turnover ratio of 2 to 1, it means that the company's inventory turned over twice in the reporting period. Operating Margin = Income from Operations / Net Revenues Operating margin is usually expressed as a percentage. It shows, for each dollar of sales, what percentage was profit. P/E Ratio = Price per share / Earnings per share If a company's stock is selling at $20 per share and the company is earning $2 per share, then the company's P/E Ratio is 10 to 1. The company's stock is selling at 10 times its earnings. Working Capital = Current Assets - Current Liabilities Debt-to-equity ratio compares a company's total debt to shareholders' equity. Both of these numbers can be found on a company's balance sheet. To calculate debt-to-equity ratio, you divide a company's total liabilities by its shareholder equity, or Inventory turnover ratio compares a company's cost of sales on its income statement with its average inventory balance for the period. To calculate the average inventory balance for the period, look at the inventory numbers listed on the balance sheet. Take the balance listed for the period of the report and add it to the balance listed for the previous comparable period, and then divide by two. (Remember that balance sheets are snapshots in time. So the inventory balance for the previous period is the beginning balance for the current period, and the inventory balance for the current period is the ending balance.) To calculate the inventory turnover ratio, you divide a company's cost of sales (just below the net revenues on the income statement) by the average inventory for the period, or Operating margin compares a company's operating income to net revenues. Both of these numbers can be found on a company's income statement. To calculate operating margin, you divide a company's income from operations (before interest and income tax expenses) by its net revenues, or P/E ratio compares a company's common stock price with its earnings per share. To calculate a company's P/E ratio, you divide a company's stock price by its earnings per share, or Working capital is the money leftover if a company paid its current  liabilities (that is, its debts due within one-year of the date of the balance sheet) from its current assets. Although this brochure discusses each financial statement separately, keep in mind that they are all related. The changes in assets and liabilities that you see on the balance sheet are also reflected in the revenues and expenses that you see on the income statement, which result in the company's gains or losses. Cash flows provide more information about cash assets listed on a balance sheet and are related, but not equivalent, to net income shown on the income statement. And so on. No one financial statement tells the complete story. But combined, they provide very powerful information for investors. And information is the investor's best tool when it comes to investing wisely.

Based on the above para, please help to understand below questions:

• Identify at least one important piece of information found in the footnotes of a company's financial statements and explain why that information would likely be useful for an investor.
• Identify at least one important piece of information found in the "MD&A" section of a company's financial statements and explain why that information would likely be useful for an investor.
• Describe at least two financial ratios that are in the reading. Why might these financial ratios be useful for an investor?