What Is an Annual Report? Definition, Purpose & Components
What an annual report is, who uses it, and what it includes. Guide covering financial statements, Form 10-K differences, and compliance steps for businesses.
An annual report is a document that public companies must give to shareholders each year. It describes their operations and financial health. This requirement became standard after legislation was enacted following the 1929 stock market crash.
Public companies use annual reports to share detailed financial and operational information with shareholders and other stakeholders. In contrast, small businesses usually file simpler documents with their state to stay in good standing.
Who Uses an Annual Report, and Why It Matters
Annual reports cater to a large external audience and serve multiple purposes:
- Investors and potential investors analyze annual reports to assess a company's financial health, profitability, and growth potential before making decisions about buying, holding, or selling stock. The report provides the quantitative data and management insights needed to evaluate investment risk and potential returns.
- Management teams use annual reports to evaluate their own performance, identify operational strengths and weaknesses, and make informed strategic decisions about resource allocation, investments, and future planning. These reports help executives track progress against goals and communicate direction to stakeholders.
- Regulators and compliance authorities require annual reports to protect investors and maintain orderly markets. Regulatory bodies like the SEC use these filings to ensure companies meet disclosure requirements and provide accurate financial information to the public.
What an Annual Report Includes
Annual reports typically include detailed financial and operational information. The key sections provide a comprehensive view of how a company performed during the fiscal year.
Financial statements form the core of any annual report. The balance sheet reports a company's assets, liabilities, and shareholders' equity at a specific point in time. It shows what the company owns and owes.
The income statement displays revenue and expenses over the period, revealing whether the company made a profit or loss.
The statement of cash flows shows a reconciliation of beginning and ending cash in three sections:
1. Operations
2. Investing
3. Financing
For example, you would check the current ratio on the balance sheet to assess short-term liquidity, the profit margin on the income statement to evaluate profitability, and cash from operations on the cash flow statement to determine if the business generates positive cash flow.
Management Discussion and Analysis
The MD&A provides an overview of how the company performed in the prior period, its current financial condition, and management's future projections and outlook. This section gives context to the numbers in the financial statements. Management explains significant revenue changes, discusses challenges and opportunities, and addresses risks that may affect future performance.
Check the MD&A to understand the story behind revenue growth or decline, such as whether increases came from higher prices, new products, or market expansion.
Auditor's Report and Notes
The auditor's report determines whether the information conforms to generally accepted accounting principles (GAAP). An independent CPA firm examines the financial statements and provides an opinion on their accuracy. Auditors perform test work to determine if the financial statements are materially correct. The notes to financial statements provide detailed explanations of accounting policies, significant transactions, and other information not apparent from the statements themselves.
Look for an "unqualified opinion" in the auditor's report, which indicates clean financial statements with no material issues.
Letter to Shareholders and Highlights
The letter from the CEO or board chair summarizes the company's performance and outlines strategic direction. This section often includes performance highlights such as key achievements, goals reached, awards received, and significant initiatives. The letter communicates management's vision and priorities to shareholders in accessible language.
Annual Report VS Form 10-K
The annual report on Form 10-K is distinct from the often-glossy annual report to shareholders, though some companies combine these documents.
Aspect
Annual Report
Form 10-K
Audience
Shareholders and public with marketing elements
SEC, regulators, serious investors
Legal Filing
Not required with SEC
Required SEC filing for public companies
Level of Detail
Narrative storytelling with graphics and photos, may be less detailed
Comprehensive detail including history, structure, executive pay, complete audited financials
Most states throughout the country require that companies file an annual report every year that the business is operational, while other states require a biennial report every other year. The annual report contains basic information about your LLC, such as your physical business address, registered agent information, mailing address, and other contact information.
State requirements vary significantly. Missing the annual report deadline can result in late fees, penalties, loss of good standing designation, loss of liability protection, or even business dissolution by the state.
Five-Step Compliance Checklist for Small Business Owners:
1. Verify state requirements: Check your Secretary of State website to determine if you need to file annually, biennially, or have other requirements. Confirm your specific due date and filing fee.
2. Gather required information: Collect your business's legal name, EIN, physical address, registered agent details, and information about managers, members, or officers.
3. Complete the forms accurately: Fill out your state's annual report form (which may have different names like Statement of Information or Periodic Report). Double-check all information for accuracy.
4. Submit on time with payment: File electronically if your state allows it for faster processing, or mail paper forms if required. Include the filing fee, which typically ranges from under $100 to several hundred dollars depending on your state.
5. Keep confirmation records: Save your filing confirmation, payment receipt, and a copy of the submitted report. Mark your calendar for next year's filing deadline.
How to Read an Annual Report, Step by Step
Follow this reading plan to efficiently extract key information:
1. Start with the CEO letter to understand management's perspective on the past year's performance and future direction.
2. Review the auditor's report to confirm the financial statements received an unqualified opinion and have no material issues.
3. Examine the income statement to see revenue trends, expense patterns, and overall profitability, paying attention to year-over-year changes.
4. Analyze the balance sheet to assess the company's assets, liabilities, and equity position, calculating key ratios like current ratio and debt-to-equity.
5. Study the cash flow statement to determine if the company generates positive cash from operations and how it uses cash for investing and financing activities.
6. Read the MD&A thoroughly to find risk disclosures, understand trends affecting the business, and learn about management's assessment of liquidity and capital resources.
Real-World Example
Microsoft's Annual Report 2025 provides an excellent example of comprehensive corporate reporting. The report shows Microsoft's revenue reached $281.7 billion with operating income of $128.5 billion. The shareholder letter from CEO Satya Nadella explains how AI transformation drives the company's strategy, while the financial review provides detailed segment performance.
Three-Year Financial Summary:
Year
Revenue (billions)
Net Income (billions)
Operating Cash Flow (billions)
2023
$211.9
$72.4
$87.6
2024
$245.1
$88.1
$118.6
2025
$281.7
$101.8
$136.2
This table demonstrates consistent growth across all key metrics. Revenue grew 15% from 2024 to 2025, while operating cash flow increased by 15%, showing the company's ability to convert revenue into cash.
View Microsoft's complete annual report their investor relations siteto see how a leading public company presents financial information, strategic initiatives, and forward-looking statements.
Common Mistakes and How to Avoid Them
- Filing late or missing deadlines: Set calendar reminders well before your due date and consider using automated reminder services or compliance services that track deadlines for you.
- Providing outdated or incorrect information: Always verify current addresses, registered agent details, and officer or member information before submitting, as inaccurate information can lead to compliance issues.
- Confusing annual reports with other filings: Small business annual reports to the state are different from financial reports, Form 10-K filings, or shareholder reports. Understand which documents your business needs to file.
- Ignoring state-specific requirements: Each state has unique forms, fees, and deadlines. Research your specific state's requirements rather than assuming all states follow the same process.
- Failing to maintain good standing: Use annual report filing as an opportunity to update business information and ensure your business maintains active status, as losing good standing can affect contracts, banking relationships, and legal protections.
Bottom Line
Annual reports serve as essential tools for transparency and accountability in both public corporations and small businesses. For public companies, they provide comprehensive financial information and strategic insights to shareholders and investors. For small businesses, they maintain compliance with state requirements and preserve good standing.
Understanding how to read and use annual reports empowers you to make informed decisions whether you're investing in stocks, managing a business, or evaluating potential business partners. The key is knowing what information to look for and how to interpret it in context.
Access annual reports and corporate filings API in one place. Use our standardized API to speed up research and analysis. You can check out the pricingor feel free to contact us.
It gives investors and stakeholders a clear view of a company’s financial results and operations for the year. It supports informed decisions.
Do all businesses need to file annual reports?
Public companies must file with the SEC. LLCs and corporations usually file annual or biennial reports with their state to stay active, but rules differ by state.
What is the difference between an annual report and a 10-K?
An annual report is a shareholder document with summaries and visuals. A 10-K is a detailed SEC filing with full financial disclosures.
How long does it take to prepare an annual report?
Public companies spend months preparing full reports. Small businesses often finish state filings in under thirty minutes once information is ready.
What happens if a company does not file its annual report?
Public companies risk SEC action and potential delisting. Small businesses face fees, loss of good standing, and possible dissolution.
Can I access annual reports for free?
Yes. They are available on the SEC EDGAR database and company investor relations pages.
What should investors focus on when reading an annual report?
Check trends in financial statements, cash flow strength, and management comments in the MD&A. Compare results with past years and peers.
Are annual reports audited?
Public company financial statements in annual reports are audited by an independent CPA. Narrative sections are not audited. Small business state reports are not audited.
An annual report is a document that public companies must give to shareholders each year. It describes their operations and financial health. This requirement became standard after legislation was enacted following the 1929 stock market crash.
Public companies use annual reports to share detailed financial and operational information with shareholders and other stakeholders. In contrast, small businesses usually file simpler documents with their state to stay in good standing.
Who Uses an Annual Report, and Why It Matters
Annual reports cater to a large external audience and serve multiple purposes:
- Investors and potential investors analyze annual reports to assess a company's financial health, profitability, and growth potential before making decisions about buying, holding, or selling stock. The report provides the quantitative data and management insights needed to evaluate investment risk and potential returns.
- Management teams use annual reports to evaluate their own performance, identify operational strengths and weaknesses, and make informed strategic decisions about resource allocation, investments, and future planning. These reports help executives track progress against goals and communicate direction to stakeholders.
- Regulators and compliance authorities require annual reports to protect investors and maintain orderly markets. Regulatory bodies like the SEC use these filings to ensure companies meet disclosure requirements and provide accurate financial information to the public.
What an Annual Report Includes
Annual reports typically include detailed financial and operational information. The key sections provide a comprehensive view of how a company performed during the fiscal year.
Financial statements form the core of any annual report. The balance sheet reports a company's assets, liabilities, and shareholders' equity at a specific point in time. It shows what the company owns and owes.
The income statement displays revenue and expenses over the period, revealing whether the company made a profit or loss.
The statement of cash flows shows a reconciliation of beginning and ending cash in three sections:
1. Operations
2. Investing
3. Financing
For example, you would check the current ratio on the balance sheet to assess short-term liquidity, the profit margin on the income statement to evaluate profitability, and cash from operations on the cash flow statement to determine if the business generates positive cash flow.
Management Discussion and Analysis
The MD&A provides an overview of how the company performed in the prior period, its current financial condition, and management's future projections and outlook. This section gives context to the numbers in the financial statements. Management explains significant revenue changes, discusses challenges and opportunities, and addresses risks that may affect future performance.
Check the MD&A to understand the story behind revenue growth or decline, such as whether increases came from higher prices, new products, or market expansion.
Auditor's Report and Notes
The auditor's report determines whether the information conforms to generally accepted accounting principles (GAAP). An independent CPA firm examines the financial statements and provides an opinion on their accuracy. Auditors perform test work to determine if the financial statements are materially correct. The notes to financial statements provide detailed explanations of accounting policies, significant transactions, and other information not apparent from the statements themselves.
Look for an "unqualified opinion" in the auditor's report, which indicates clean financial statements with no material issues.
Letter to Shareholders and Highlights
The letter from the CEO or board chair summarizes the company's performance and outlines strategic direction. This section often includes performance highlights such as key achievements, goals reached, awards received, and significant initiatives. The letter communicates management's vision and priorities to shareholders in accessible language.
Annual Report VS Form 10-K
The annual report on Form 10-K is distinct from the often-glossy annual report to shareholders, though some companies combine these documents.
Aspect
Annual Report
Form 10-K
Audience
Shareholders and public with marketing elements
SEC, regulators, serious investors
Legal Filing
Not required with SEC
Required SEC filing for public companies
Level of Detail
Narrative storytelling with graphics and photos, may be less detailed
Comprehensive detail including history, structure, executive pay, complete audited financials
Most states throughout the country require that companies file an annual report every year that the business is operational, while other states require a biennial report every other year. The annual report contains basic information about your LLC, such as your physical business address, registered agent information, mailing address, and other contact information.
State requirements vary significantly. Missing the annual report deadline can result in late fees, penalties, loss of good standing designation, loss of liability protection, or even business dissolution by the state.
Five-Step Compliance Checklist for Small Business Owners:
1. Verify state requirements: Check your Secretary of State website to determine if you need to file annually, biennially, or have other requirements. Confirm your specific due date and filing fee.
2. Gather required information: Collect your business's legal name, EIN, physical address, registered agent details, and information about managers, members, or officers.
3. Complete the forms accurately: Fill out your state's annual report form (which may have different names like Statement of Information or Periodic Report). Double-check all information for accuracy.
4. Submit on time with payment: File electronically if your state allows it for faster processing, or mail paper forms if required. Include the filing fee, which typically ranges from under $100 to several hundred dollars depending on your state.
5. Keep confirmation records: Save your filing confirmation, payment receipt, and a copy of the submitted report. Mark your calendar for next year's filing deadline.
How to Read an Annual Report, Step by Step
Follow this reading plan to efficiently extract key information:
1. Start with the CEO letter to understand management's perspective on the past year's performance and future direction.
2. Review the auditor's report to confirm the financial statements received an unqualified opinion and have no material issues.
3. Examine the income statement to see revenue trends, expense patterns, and overall profitability, paying attention to year-over-year changes.
4. Analyze the balance sheet to assess the company's assets, liabilities, and equity position, calculating key ratios like current ratio and debt-to-equity.
5. Study the cash flow statement to determine if the company generates positive cash from operations and how it uses cash for investing and financing activities.
6. Read the MD&A thoroughly to find risk disclosures, understand trends affecting the business, and learn about management's assessment of liquidity and capital resources.
Real-World Example
Microsoft's Annual Report 2025 provides an excellent example of comprehensive corporate reporting. The report shows Microsoft's revenue reached $281.7 billion with operating income of $128.5 billion. The shareholder letter from CEO Satya Nadella explains how AI transformation drives the company's strategy, while the financial review provides detailed segment performance.
Three-Year Financial Summary:
Year
Revenue (billions)
Net Income (billions)
Operating Cash Flow (billions)
2023
$211.9
$72.4
$87.6
2024
$245.1
$88.1
$118.6
2025
$281.7
$101.8
$136.2
This table demonstrates consistent growth across all key metrics. Revenue grew 15% from 2024 to 2025, while operating cash flow increased by 15%, showing the company's ability to convert revenue into cash.
View Microsoft's complete annual report their investor relations siteto see how a leading public company presents financial information, strategic initiatives, and forward-looking statements.
Common Mistakes and How to Avoid Them
- Filing late or missing deadlines: Set calendar reminders well before your due date and consider using automated reminder services or compliance services that track deadlines for you.
- Providing outdated or incorrect information: Always verify current addresses, registered agent details, and officer or member information before submitting, as inaccurate information can lead to compliance issues.
- Confusing annual reports with other filings: Small business annual reports to the state are different from financial reports, Form 10-K filings, or shareholder reports. Understand which documents your business needs to file.
- Ignoring state-specific requirements: Each state has unique forms, fees, and deadlines. Research your specific state's requirements rather than assuming all states follow the same process.
- Failing to maintain good standing: Use annual report filing as an opportunity to update business information and ensure your business maintains active status, as losing good standing can affect contracts, banking relationships, and legal protections.
Bottom Line
Annual reports serve as essential tools for transparency and accountability in both public corporations and small businesses. For public companies, they provide comprehensive financial information and strategic insights to shareholders and investors. For small businesses, they maintain compliance with state requirements and preserve good standing.
Understanding how to read and use annual reports empowers you to make informed decisions whether you're investing in stocks, managing a business, or evaluating potential business partners. The key is knowing what information to look for and how to interpret it in context.
Access annual reports and corporate filings API in one place. Use our standardized API to speed up research and analysis. You can check out the pricingor feel free to contact us.
It gives investors and stakeholders a clear view of a company’s financial results and operations for the year. It supports informed decisions.
Do all businesses need to file annual reports?
Public companies must file with the SEC. LLCs and corporations usually file annual or biennial reports with their state to stay active, but rules differ by state.
What is the difference between an annual report and a 10-K?
An annual report is a shareholder document with summaries and visuals. A 10-K is a detailed SEC filing with full financial disclosures.
How long does it take to prepare an annual report?
Public companies spend months preparing full reports. Small businesses often finish state filings in under thirty minutes once information is ready.
What happens if a company does not file its annual report?
Public companies risk SEC action and potential delisting. Small businesses face fees, loss of good standing, and possible dissolution.
Can I access annual reports for free?
Yes. They are available on the SEC EDGAR database and company investor relations pages.
What should investors focus on when reading an annual report?
Check trends in financial statements, cash flow strength, and management comments in the MD&A. Compare results with past years and peers.
Are annual reports audited?
Public company financial statements in annual reports are audited by an independent CPA. Narrative sections are not audited. Small business state reports are not audited.
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