Disclosure Analysis

Disclosure Analysis

One not only must understand and analyze a company’s financial statements but also do the same for the notes that accompany the financial statements. This papers uses the 2011 10-k report of Hancock Fabrics Inc. provided by Securities and Exchange Commission’s EDGAR database system as the primary example. The analyzation of the notes covers the company’s inventories, receivables, cash, and cash equivalents. One would think that 10-k report from a smaller company would easily show this aspects this will become apparent as the paper progresses.

The cash and cash equivalents proved to be one of the more difficult areas to analyze from Hancock’s 10-k report. Part of the problem with analyzing cash or cash equivalents stems from both of these reported together as one number throughout the financial statements, which serves as hint in of itself. Luckily the notes do supply a few hints to the activity involving these aspects. Initially the notes only define what cash and cash equivalents are but little to what they have in amount and type, which forced the analyzation from an unexpected direction. By looking at the concentration of credit risk under notes three section states that shows that Hancock does have cash in more than one bank. With this in mind Hancock could have accounts with different branches of banks considering the FDIC only insures a max amount of 250,000 dollars per branch ("FDIC", 2010). A statement under the risk factors regarding the possibility of “cash resources might not be sufficient to meet expected near-term cash needs” (EDGAR, 2012) offers an additional hint.

These three clues lead a theory that Hancock has a small amount in cash form and a more significant amount in short-term investments. Lumping cash and cash equivalents prevent external users from seeing this, which become even more important if the company wants to hide this fact from competitors. The reference to insured institutions adds to the theory of Hancock’s availability of cash would be material if an event were to occur that did shut down one of these institutions, which would only last until the FDIC can provide Hancock with the insured amount. The last clue referring the possibility of insufficient cash resources shows two situations involving the company’s cash and cash equivalents. The first is that neither the company’s cash or cash equivalents would be enough to support the company with significantly impaired inflows from operating activities. The second is that the company could not access its cash equivalents fast enough if the company’s inflow from operating activities were suddenly affected.

Information on accounts receivables is a little more forward in analysis. Credit card sales that have not been fully processed, credit offered to select clients, and amounts