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Telephone and Data Systems, Inc., (TDS) is a is a telecommunications company that provides wireless, telephone and broadband services to more than 6 million customers in 36 states through its business units U.S. Cellular and TDS Telecom. The annual report of TDS contains detailed financial and business information required by law. The annual report of a company provides very important details of how the company is operating. One important section of the report is the reports of the independent accounting firms.

The purpose of the accountant’s reports is to express an opinion about the financial statements. Reliable financial information is an essential element in making business decisions. Financial statements are relied upon by vendors in granting trade credit, bankers in approving loans, and investors in deciding whether to invest in debt or equity of the company (Understanding Auditor Report).

The independent auditor expresses an opinion as to whether proper accounting principles have been applied by management. This opinion is the result of applying standard auditing procedures deemed applicable under the particular circumstances. The accountant’s report is an opinion and not a certification. It is meant to indicate to the financial statement users that the auditor is providing reasonable assurance and not complete assurance, as to whether or not the financial statements have been prepared in accordance with generally accepted accounting principles and present fairly the results of operations for the period indicated (Abrema).

If the auditor is satisfied that the financial statements fairly present the financial position, the auditor issues an unqualified audit opinion. An unqualified audit opinion does not have any restricting or limiting circumstances (Abrema). If the auditor is not satisfied that the financial statements fairly present the financial position and results of the entity or that they are not consistent with the auditor’s knowledge of the business, the auditor issues a qualified opinion. A qualified audit opinion is an opinion that identifies a restriction or limitation to the auditor’s opinion (Abrema).

TDS did not receive an unqualified opinion because the auditor’s identified material weaknesses. A material weakness is when one or more of a company’s internal control is considered to be ineffective. “A material weakness is a control deficiency that results in a more than remote likelihood that a misstatement of the financial statements will not be prevented” (Annual Report).

The accountants identified four material weaknesses in the company’s financial statements. As stated in the annual report, “the Company did not have personnel with an appropriate level of accounting knowledge, training and experience. Second, the Company did not maintain effective controls over it’s accounting for certain vender contracts. Third, the Company did not maintain effective controls over the completeness, accuracy, presentation and disclosure of its accounting for income taxes, including the determination of income tax expense, income taxes payable, liabilities accrued for tax contingencies and deferred income taxes and liabilities. Last, the Company did not maintain effective control over the complete and accurate recording of leases” (Annual report). The accountant’s determined that TDS did not maintain effective internal control over financial reporting.

Because the auditor’s identified material weaknesses and because they agreed with management that the company did not maintain effective internal control over financial reporting, users of the financial statements are likely to have concerns about the credibility of the financial statements. This could affect the company’s ability to attract and maintain investors, employees and customers and obtain credit. Not only is the accountant’s report vital to the annual report but so are the financial statements.

Four financial statements were included in the annual report. The first is the statement of operations. The statement of operations summarizes business activities for a given period and reports the net income or net loss resulting from operations and from certain other defined activities (Simons 59). It shows important relationships that help in analyzing how well the company is performing (Hermanson et al. 194). The statement of operations includes two main sections: operating and non-operating sections. The operating section includes the revenues and expenses that are directly related to the business operations. For example, the selling and administrative expenses for TDS are operating expenses. Non-operating expenses and revenues are those that do not directly relate to the company’s operations. Interest expense is an example of a non-operating expense for TDS. The statement of operations should help investors and creditors determine the past performance of the enterprise; predict future performance and assess the risks of achieving future cash flows (Wikipedia).

Operating revenues for TDS have increased 6-7% annually in the three year period from 2003-2005. Management’s discussion and analysis indicates that the revenue growth is primarily due to an increase in the number of wireless customers. The operating expenses increased by 9% from 2003-2004 and 2% from 2004-2005 primarily due to the cost to providing service to an expanding customer base and launching new markets. In 2004 and 2005 operating expenses included $29 million and $49 million, respectively in loses in impairment of intangible assets. In 2004 operating expenses include $88 million of impairment of long-lived assets resulting from the write-off of property, plant and equipment of the wire line section of the business. As a result income from operations grew from $262 million in 2003 from $398 million in 2005. Other income and expense consists primary of investment, interest and dividend income offset by interest expense. The significant change in this section is in 2005, TDS recorded dividend income on its Duetsche Telekom investment of $106 million. Primarily as a result of these changes earnings per share doubled from 2003-2004 and more than tripled from 2004-2005.

The statement of cash flows reports the movement of cash into and out of your business in a given year. The cash flow statement reports your business’ sources and uses of cash and the beginning and ending value for cash and cash equivalents each year. It also includes the combined total change in cash and cash equivalents from all sources and uses of cash (Investopdedia).

Cash flows are broken up into three sections: operating activities, investing activities and financing activities. Operating activities include cash receipts from selling goods or providing services as well as income from items such as interest and dividends. Operating activities can also include payments such as inventory, payroll taxes, interest, utilities and rent. Items under operating activities include: net income from income statement, depreciation, non-cash items, deferred tax, interest amortization, accrual items, and working capital. Investing activities included transactions and events involving the purchase and sale of long-term assets that are generally not fore resale such as building, land, etc. These are assets a company needs in order to make and sell its products. Items under investing activities include: capital expenditures, acquisitions and other investments. All financing activities deal with the flow of cash to and from the business owners and creditors. Items under financing activities include: dividends paid, sales purchase of stock and net borrowings (Beginners’ Guide to Financial Statements).

The company’s cash from operating activities decreased from $970 million in 2003 and $797 million in 2004. Significant items contributing to this reduction are gains and losses from sales of assets and investments, increases in accounts receivable and loss on retirement of debt partially offset by increased net income. Cash from operating activities from 2005 was $880 million compared to $797 million in 2004. This increase is due to a $155 million increase in net income offset primarily by an increase in accounts receivable.

Cash used in investing activities was $744, $614 and $914 million in 2003, 2004 and 2005, respectively. These consisted of purchases of property, plant and equipment and acquisitions and divestitures of communications holding and licenses.

Cash used in financing activities was $588 million in 2003 and $41 million in 2005. In 2004 cash generated from financing activities was $48 million. These activities consist primarily of net borrowings on notes payable and long-term debt, retirement of preferred stock, repurchase of common stock and dividends paid.

The balance sheets reports the assets, liabilities and stockholder’s equity of the business at a given date. Assets are probable future economic benefits obtained by a company as a result of past transactions. Liabilities are probable future sacrifices of economic benefits arising from present obligations. The difference between the assets and liabilities is known as the net assets of the company. The net assets are what equal the third part of the balance sheet, stockholder’s equity (Components of Financial Statements).

Assets consisting primarily of cash and cash equivalents, investments and property, plant and equipment totaled $11.0 billion at the end of 2004 and $10.4 billion at Dec. 31, 2005. The reduction is primarily the result of a reduction in marketable equity securities. Liabilities consisting primarily of long-term debt, deferred taxes and forward contracts were $7.3 billion at the end of 2004 and $6.4 billion at the end of 2005. The change is primarily the result of decreases in the current portion of long-term debt and the derivative liability. Stockholder’s equity consists primarily of common stock, capital constributed in excess of par value and retained earnings. Total stockholder’s equity was $3.2 billion at the end of 2004 and $3.4 billion at the end of 2005. The change is primarily a result of an increase in retained earnings.

The statements of common stockholders’ equity present the individual components of stockholder’s equity and the changes therein during the last year. The major elements of stockholders’ equity include capital stock, paid-in capital, retained earnings, treasury stock, unrealized loss on long-term investments, and foreign currency translation gains and losses (Balovich).

Changes in the Company’s common stockholder’s equity during 2004 and 2005 consist primarily of net income and dividends paid. Dividends paid were $36 million in 2003, $38 million is 2004, and $41 million in 2005. Net income was $32 million in 2003, $67 million in 2004 and $223 million in 2005. Stockholder’s equity increased from $1.4 billion at Dec. 31, 2003 to $1.6 billion at Dec. 31, 2005.

The notes to the financial statements are a very important part of the overall report. They include many aspects that are not in the ledgers. There are two types of notes: accounting methods and disclosure. The accounting methods note explains the significance of the accounting polices. It starts off by giving background about the company itself and also will state when the fiscal year starts and ends. In addition, the notes will explain the types of inventory methods used and the depreciation methods. Also included is anything else that they company feels you should be aware of (Investopedia). The second type of note provides additional disclosure that could not be put in the financial statements. The annual report is supposed to be clean and easy to follow so any additional calculations or explanations are put in the notes (Investopedia).

One of the more interesting notes to the financials is note 4- Marketable Equity Securities. This note describes one of the more significant numbers on the Company’s balance sheet. Marketable Securities were $3.4 million in 2004 and $2.5 million in 2005 representing 30% of the Company’s total assets in 2004 and 25% in 2005. These securities are publicly traded and can have volatile movements in share prices. The Company does not make direct investments in publicly traded companies, these interests, were acquired as a result of sales, trades, or reorganization of other assets.

TDS’s two business unit, U.S. Cellular® and TDS Telecom both use different methods of calculating inventory. U.S. Cellular® uses the first-in, first-out (FIFO), method of inventory. Their inventory primarily consists of handsets and accessories. The FIFO method states that the handsets and accessories that are produced first are sold first. TDS Telecom’s materials and supplies are stated at average cost. The average cost method states that the cost of TDS Telecom’s materials and supplies are based on the average of the goods available for sale.

TDS uses the straight-line method of depreciation over the estimated useful lives of the assets. To compute depreciation through this method you would take the cost of the asset minus residual values which is the expected cash value of the asset at the end of its useful life, and divide by the total years the asset can be expected to benefit the company (Investor Words).

Accelerated depreciation is any method of depreciation used for accounting or income tax purposes that allows greater deduction in the earlier years of the life of an asset. The double-declining (DDB) method allows you to deduct far more in the first years after purchase. This method doubles the rate of depreciation of the straight-line method (Hermanson et al. 419).

The amount of depreciation for a period is debited to a depreciation expense account and credited to an accumulated depreciation account. Depreciation expense is reported on the income statement and accumulated depreciation is reported on the balance sheet as a deduction from the related asset (Hermanson et al. 415). Because it increases depreciation in earlier years, accelerated depreciation reduces income tax expense.

These are only a few of the many notes explained in the annual report. The annual report including the financial statements, management reports and the notes to the financial statements are very important for a company. They are imperative because they help the shareholders understand how their investment is doing.