Cautions Needed When Deciphering Firms' Quarterly Sales Patterns

ABSTRACTTo make financial data timely, publicly-held firms must file interim reports on Form 10-Q in addition to their annual-reports (10-Ks) with Securities and Exchange Commission (SEC). In 10-Q filings, firms factor out any seasonality by comparing performance in current interim period and year-to-date with that of same time periods in prior fiscal year. However, because those studying a firm's performance are also interested in sales patterns within a given fiscal year, a table providing quarterly data for past two fiscal years is almost always presented in firms' 10-Ks. In this paper, quarterly sales patterns are first examined for Amazon, Macy's, Target, and Toys R Us, four firms expected to report their highest sales in fourth quarter because they feature merchandise known to sell especially well during end-of-year gift-giving season. Next, quarterly sales patterns are illustrated for three supermarkets and supplier of bread and pastry to supermarkets, firms that would expect to experience fairly even sales throughout year. Surprisingly, only of these firms reports a steady sales pattern. Each of other three firms reports interim period with sales at least 20 percent higher than all other periods. Equally noteworthy is fact that there is variety among three in whether their highest sales occur in first, third, or fourth interim period. The reason for these surprising findings among non-seasonal firms and implications for those examining firms' Forms 10-Q or their quarterly data in Forms 10-K are discussed. In addition, challenges faced by analysts attempting to compare a firm's quarterly sales trends with those of its peers or over time for same firm are illustrated by reference to quarterly-data disclosures of 15 additional companies.INTRODUCTIONTo better ensure availability of timely financial information to investors, creditors, and other users, Securities and Exchange Commission (SEC) requires that publicly-traded firms file interim-period reports on Form 10-Q, in addition to an annual report on Form 10-K. In contrast to 10-K data, 10-Q data need not be audited, but it must be reviewed by firm's independent auditor. The format used in reporting on Form 10-Q is designed to factor out any seasonal sales trends experienced by firm. Nevertheless, knowledge of seasonal trends and changes therein also are of interest to those studying a firm's results of operations. This latter information is typically presented in a firm's 10-K for all four quarters of two most recent years. Because this disclosure includes quarter-four results, firms are not required to file a separate Form 10-Q for their fourth quarter.Although some consider Q to be an abbreviation for one fourth of a (The Free Dictionary, 2013), SEC does not state that each 10-Q must cover an identical period of time (SEC, 1933-34, as amended). In an unofficial response to author, a researcher at SEC expressed view that a 13-week period is what most would associate with a quarter, but she noted that agency has not opined on number of weeks that should be included within each Form 10-Q.As will be illustrated, discretion afforded to firms has enabled reporting periods on Forms 10-Q that range from 12 to 17 weeks. This variability can present difficulties when analysts attempt to interpret a firm's seasonal trends and make inter-company (and even sometimes intra-company) comparisons. As a result, 10-Q disclosures must be viewed carefully since they could be misinterpreted by users who might assume that a firm's fiscal year would be divided into equal quarters for reporting on an SEC filing titled Form 10-Q. Given lack of specific guidance by SEC as to length of quarterly periods, AICPA in its guidance to auditors correctly notes that the term interim financial information means financial information or statements covering a period less than a full (AICPA, 2009). …

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