Corporate Annual Report Workbook1

INTRODUCTION TO THE CORPORATE ANNUAL REPORT:
A BUSINESS APPLICATION
2cd edition
Complete the following before you submit your assignment. This step is required to
validate your compliance with sections 107 or 108 of the 1976 United States Copyright
Act.
1. Remove the front cover of the workbook and identify:
o Name: Josh Simmons .
o Term: Fall 2 2009 .
o Company: General Dynamics Corporation .
o Instructor: Dr. Donny Bagwell .
2. Print out your completed electronic template.
3. Attach the following:

• This front cover (completed)
• Electronic solution template
• Company annual report
CHAPTER 1 - INTRODUCTION
Chapter 1: Select a Company and Gather Documents—Question 1

Fill in the page numbers on the annual report where the following are located.
Required information for this Page Required information for this Page
workbook project. No. workbook project. No.
Financial Highlights (Not absolutely I-1 Statement of Cash Flows 38
necessary, but very common in annual reports.)
Chairman’s Message (President’s, I-3 Notes to Financial Statements 40

CEO’s or other top official’s message or letter
to the shareholders)
Management’s Discussion and 19 Report of Independent 64

Analysis (MD&A) Accountants or Independent
Auditors’ Report
Income Statement 36 Five- or Ten-Year Summary of 40
(Statement of Earnings) Operating Results
Balance Sheet 37 Management’s Report 63
(Statement of Financial Position) (Responsibility) on Internal
Control over Financial
Reporting
(Item 9A. Control and Procedures in SEC 10K)
Statement of Change in 39 Investor and Company 69

Stockholder’s Equity Information or Shareholder
Information
Chapter 1: Identify Why You Selected This Company—Question 1

A) What is/are your motivation(s) or interest(s) in selecting this company?
[See above for examples.]
B) What question(s) are you seeking to answer?
[For example, is the company profitable? Can the company change and develop new products
and services to be competitive? Would I invest in this company? Will the company provide
rewarding career opportunities? In chapter 5 you will have pulled together the financial and
nonfinancial information to answer these question(s).]
A)
I work in the defense industry and think GD will have a big contract win.
2
3
B)
How big of an impact will the win the LCS fly off have on GD?
Company and Annual Report Essentials

Chapter 1: Company and Annual Report Essentials—Question 1
What is the company’s complete name?
GENERAL DYNAMICS CORPORATION

What is the address of your company’s corporate headquarters?
2941 Fairview Park Drive, Suite 100,

Falls Church, Virginia 22042-4513

Identify the company’s Internet site.
www.generaldynamics.com

Identify the telephone number and e-mail address of the company’s Investor Relations
Department.
Telephone number: (703) 876-3000
E-mail address: agilliland@generaldynamics.com
4
Which stock exchange lists your company?
NYSE

What is your company’s stock exchange trading symbol?
GD

What is your company’s Standard Industrial Classification (SIC) and code? You can
identify this information by searching SEC Form 10-K. Recall that you saved this in an
electronic format. Run a search on “Standard Industrial Classification,” and the
classification and code will be identified. Your company may list more than one SIC
code numbers. The first listed is considered the primary SIC for the company.
For example: The Home Depot: Standard Industrial Classification: Retail-Lumber & Other
Building Materials Dealers [5211]
Not found in report?

Locate the board of directors listing. How many board members does your company
have?
There are 13 board members.

How many of the directors are company employees, labeled inside directors? And how
many are non-company directors, labeled outside directors? Why does a company want
and need outside directors?
(Inside and outside directors are typically identified as such by their title and company.)
GD has 2 inside and 11 outside directors. Companies have outside directors to have
independent thought, because these board members do not directly depend on the
company financially. It also gives the board more influence because of the outside ties
of these members.
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Leadership addresses the stockholders, typically, once a year at the annual stockholders
meeting. Identify where and when this occurred, as reported in your annual report.
The annual meeting of General Dynamics shareholders will be held on Wednesday, May
6, 2009, at the General Dynamics Corporation headquarters, 2941 Fairview Park Drive,
Falls Church, Va.
Company Strategy and Business Environment

Chapter 1: Company Strategy and Business Environment—Question 1
Review the chairman’s message of your company’s annual report. Does it appear to be
uplifting or somewhat apologetic? Identify phrases that support your position.
The chairman’s message was very uplifting. It included statements such as: “strong
order intake”, “unprecedented year-end backlog”, “superb result is consistent with
company’s track record”, “improving what was already a very good yield”,

Check below the one primary company strategy identified in the chairman’s message.
Support your answer with phrases found in the chairman’s message that pointed you to
the identified corporate strategy.
Growth: Vertical Horizontal Concentric Conglomerate .

Stability Retrenchment X .
Phrases to support your conclusion:

“Improvements to the groups business model”, “fight its way through this downturn”,

Briefly summarize the company’s discussion found in Item 1 of SEC Form 10-K.
Type of business:
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Aerospace and Defense
Major business segments:
Aerospace, Combat Systems, Marine Systems, and Information Systems and
Technology
Primary customers:
US Government
Primary products and/or services:
Aircraft, armored vehicles, weapon systems, ships, submarines, communications
equipment
Other:

Identify broad-based social, political, economic, and technological concerns that may
affect your company. Put N/A if one of the categories does not apply.
Social:
People are against the war and may adversely affect military orders.
Political:
Obama may cut military spending.
Economic:
The economic downturn makes it hard to borrow money
Technological:
Success depends on ability to develop new technology that meets customer needs.
Other:
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Wrap-up
Chapter 1: Wrap-up—Question 1
After further review of additional information you should now be confident in
identifying the one primary company strategy, beyond the insight provided by the
chairman’s message?
Check below the one primary company strategy identified in the chairman’s message
and all other supporting documents. Support your answer with phrases.
Growth: Vertical Horizontal Concentric Conglomerate .

Stability Retrenchment X .
Phrases to support your conclusion from information gathered from the chairman’s message,
Item 1 of the 10K and other insight gained from completing chapter 1.
“Survive economic downturn”, “gains coming from process improvements”, “decline in

contacts”, “discontinue non-profitable operations”; “disciplined capital deployment”;
“focusing on our core platforms”
CHAPTER 2 - ANNUAL REPORT STRUCTURE

Chapter 2: Financial Highlights—Question 1
Review the financial highlights of your company’s annual report. Identify net sales or
revenues, net income, basic earnings per share (BEPS), and total assets for the current
and preceding years. These are the most common values included in financial highlights.
If your company reports something different, simply cross out an item here and recap
what is reported.
Current Year One Year Prior Two Years Prior
Example: 2007 2006 2005
Net sales or revenues 29,300 27,240 24,063

Net income 6.17 5.08 4.56
Basic EPS 6.26 5.17 4.24
Total Assets 28,373 25,733 22,376
Based on your preliminary review, is your company performing better than, equal to, or
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less favorably than in the prior year? Briefly explain.
General Dynamics is doing better than in the prior year. General Dynamics consistently
raised all fundamental indicators of financial status.
General Company and Marketing Information

Chapter 2: General Company and Marketing Information—Question 1
Identify other types of general information found within the annual report. Look for
pictures of product and people that are colorful and send a positive signal to the reader.
Exclude the specific components identified in Chapter 1: Select a Company and Gather Documents—Question 1.
Category Message
Example: Volunteer Ongoing and contributing to the success of the community
Activities
Company Overview Shows each business segment and major their
accomplishments for the year
Customers Shows that the company is not dependant on one
customer base
Research and Development Shows the company is reinvesting for future success
Backlog Shows that the company has future work and revenue
What is the broader message from this information?

General Dynamics is a large diverse company with many sources of revenue and should
be able to generate profits in a variety of economic conditions.
Management’s Discussion and Analysis

Chapter 2: Management’s Discussion and Analysis—Question 1
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Results of Operations:
Identify the primary drivers/issues that explain current and future results of operations
discussed in the MD&A. For example, the gross profit percentage increased because of
improved buyer/supplier relations resulting in greater overall operating performance. Or
an increase in operating expenses because of increased fuel costs reduced profits. List
the six major drivers/issues of performance you find in the MD&A section of the annual
report.
1. The nation’s engagement in the global war on terror, coupled with the need to modernize U.S.
military forces, has driven steady Department of Defense funding increases since 2001.
2. Our future growth potential in the U.S. defense market is driven by the size of the defense budget,
the allocation of that budget to investment accounts, the diversity of our exposure to different
programs and customers within the budget, and our successful execution of the contracts we are
awarded.
3. continued support for the warfighter from the administration and the Congress in the face of threats
posed by an uncertain global security environment;
4. the number of troops deployed in Afghanistan and Iraq, coupled with the increase in the overall
size of the U.S. military;
5. the need to reset and replenish equipment and supplies damaged and consumed during the war;
6.the need to modernize that infrastructure to address the evolving requirements of modern-day
warfare.
Liquidity:
Recap what you find about your company’s liquidity in the MD&A section of the annual
report. Look for information about the ability of the company to satisfy short-term cash
needs and the ability to generate operating cash flows, for example.
Over the past five years, General Dynamics has generated free cash flow from operations well in
excess of their earnings from continuing operations during the period, an average 115 percent
conversion rate. General Dynamics expects to continue to generate funds in excess of our short- and
long-term liquidity needs. General Dynamics has adequate funds on hand and sufficient borrowing
capacity to execute their financial and operating strategy.
Capital Resources:
Recap what you find about your company’s capital resources in the MD&A section of
the annual report. Look for information about cash reserves and credit availability. For
example, your company’s MD&A section may have a disclosure about an established
lined of credit to fund future growth.
GD has approximately $1.6 billion in cash and $2 billion in bank credit facilities that have not been
drawn upon.
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Reports by Management
Chapter 2: Reports by Management—Question 1
Review the Management’s Report (Responsibility) on Internal Control over Financial
Reporting in your company’s annual report. Answer the following questions.
Who is responsible for maintaining the GD maintains a system of internal
internal controls designed to provide accounting controls
reasonable assurance that the books and
records reflect the transactions of the
company?
Record the statement that identifies We maintain and monitor an environment
management’s conclusion about internal that establishes an appropriate level of
controls. control consciousness.
Who audited management’s assessment of Management’s assessment is audited by an

the effectiveness of your company’s internal audit program and an independent
internal control over financial reporting? audit firm, KPMG LLP
Independent Auditors’ Report

Chapter 2: Independent Auditors’ Report—Question 1
Review the Independent Auditors’ Report of your company’s annual report and answer
the following questions.
Who was the company’s auditor and KPMG LLP McLean, Virginia
where is it located?
What is the responsibility of the auditor? We conducted our audits in accordance with the
standards of the Public Company Accounting
Oversight Board (United States). Those
standards require that we plan and perform the
audit to obtain reasonable assurance about
whether the financial statements are free of
material misstatement. An audit includes
examining, on a test basis, evidence supporting
the amounts and disclosures in the financial
statements. An audit also includes assessing the
accounting principles used and significant
estimates made by management, as well as
evaluating the overall financial statement
presentation. We believe that our audits provide
a reasonable basis for our opinion.
Who is responsible for the preparation of These consolidated financial statements and
financial statement schedule are the
and information within the company’s responsibility of the company’s management.
financial statement?
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The audit was conducted in accordance the Public Company Accounting Oversight Board
(United States).
with what?
What was the opinion of the auditor? In our opinion, the consolidated financial
statements referred to above present fairly, in all
material respects, the financial position of
General Dynamics Corporation and subsidiaries
Financial Statements and the Related Notes

Chapter 2: Five- or Ten-Year Summary of Operating Results—Question 1
Identify the major components provided in the five- or ten-year summary. Summarize
the insight provided by each. Look for stable, increasing or decreasing trends.
Consistent, slightly improving performance signals management has control of the
business. Inconsistent performance signals management does not have control of the
business.
Component Summary of Insight
Example: The Home Depot Sales and earnings have grown significantly over time.
Statement of Earnings Data Operating expenses are growing at an increasing rate.
Summary of Operations GD has steadily had positive improvements in all
indicators over the last 5 years. These indicators are net
sales, net earning, ROS, EPS, and operating margins.
Cash Flow GD has increased its cash flow and has raised its
dividends every year for the last 5 years.
Financial Position GD has consistently increased assets, paid down debt,

and increased book value.
Other Info GD has increased free cash flow, ROI, and backlog.
Summary GD’s management has very tight control over the

company. They grow the company at a consistent pace
and get good returns on the capital resources.
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CHAPTER 3 - FINANCIAL STATEMENTS
The Balance Sheet
Chapter 3: Balance Sheet—Question 1
Identify the date shown at the top of your selected company’s balance sheet.
Current Year Prior Year
2008 2007
Does the company’s fiscal year follow the calendar year? Yes __X__ No ___
If not, why do you think it is different?

Review the current asset section of your selected company’s balance sheet. Explain
why the order of individual items begins with cash. In your opinion, would it be more
or less appropriate to order these items according to dollar magnitude? Explain.
On the balance sheets of US companies, assets are listed in order of liquidity. Since cash
is the most liquid (or immediate) financial resources it is listed first. The current credit
crisis is a good example of why assets are listed in liquidity order. If a company can not
covert the assets to cash in time to meet obligations the company goes out of business no
matter how many long term assets it holds.

Review your company’s balance sheet (or SEC Form 10-K) and compare accumulated
depreciation to the historical cost of Plant and Equipment (PE) using the following ratio.
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Compute the following: Percentage of Asset Life Remaining
Accumulated depreciation / • High percentage means older
Plant and Equipment assets
• Low percentage means newer
assets
Is the investment in fixed assets, on average, relatively recent? If not, can we assume
that these assets will be replaced shortly?
Total Property Plant and Equipment = 5340

Accumulated Depreciation of property plant and equipment = 2468
PE= 2468/5340= 46.2% The items are at about half their useful life.

Since property, plant, and equipment (PPE) and long-term investments in stock represent
a company’s investment, why do we distinguish between them in the balance sheet?
PPE items depreciate, while investments in stock hopefully appreciate. Also, PPE is
directly used in the revenue generation of a company, while stock is not.

Review the noncurrent asset section of your company’s balance sheet. Are any
intangible assets listed? If so, identify the types of intangible assets and the percent of
total assets that the intangible assets represent.
Intangible Asset 1: Contract and program = 967
Intangible Asset 2: Other intangible assets = 650
Intangible Asset 3:
Total Intangible Assets ÷ Total Assets = 1617 / 28373 = 5.7%
If this company were to be acquired by another company, would the intangible assets
influence the purchase price? Explain your answer.
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The 5.7% intangible amount is mostly due to a backlog of contracted work which speaks to the
strength of the company, but as a relative portion of assets would not greatly affect the
purchase price.

Now review your company’s total assets for the most recent year. What percentage of
total assets is current? Noncurrent?
Current Noncurrent
11,950 16,423
Should companies have a greater investment in current assets or noncurrent assets, or
does it depend on the nature of their business? Explain your answer.
It really depends on the nature of their business. Companies that sell product will have higher
current asset ratios, while service companies will have almost all non-current assets.
Chapter 3: Balance Sheet— Question 7

Review your company’s balance sheet. Does it report a deferred tax asset? A deferred
tax liability? If so, are the deferred tax assets and/or liabilities reported as current or
noncurrent?
Deferred tax asset? Yes or No Current or Noncurrent*
Deferred tax liability? Yes or No Current or Noncurrent*
*Note: If your company reports a current deferred tax asset (liability), it will realize an
income tax benefit (obligation) in the next accounting period because of a previously
reported event.
If your company reports a noncurrent deferred tax asset (liability), it will realize an
income tax benefit (obligation) in future accounting periods (beyond the next) because
of a previously reported event.

Identify the information that relates to the stockholders’ equity section of your
company’s balance sheet.
Par value per share of common stock? $1
Number of common shares authorized? 500 million
Number of common shares issued? 481,880,634
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Number of common shares outstanding? 386,710,589
Number of treasury shares held by the company? 95,170,045

Answer the following questions relative to the stockholders’ equity section of the
balance sheet.
By what amount did retained earnings increase or 1908
decrease from the prior year?
Was the increase or decrease in retained earnings Yes or No*

equal to the company’s current year net income or net
loss?
* If No, then dividends were paid (or declared) by your selected company or certain
events took place during the year where the accounting for the events directly affected
the retained earnings account.

List (write-in) each financial statement element as shown in your company’s balance
sheet.
Assets Liabilities Stockholders’ Equity
Cash and equivalents Short and current long debt Common stock
Accounts receivable Accounts payable Surplus
Contracts in process Customer advances Retained earnings
Inventories Other current liabilities Treasury stock
Other current assets Long-term debt Accumulated other
PPE, net Other liabilities
Intangible assets, net Commitments and conting.
Goodwill
Other assets

Identify the combined carrying values (dollar amounts) of the following selected
account groups taken from your company’s balance sheet:
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Account Groups Current Prior Year Increase or
Year Decrease
(in dollars)
Current Assets 11950 12298 (348)
Net Fixed Assets 2872 2472 400
Intangible and Other Noncurrent Assets 13551 10963 2588
Current Liabilities 10360 9164 1196
Long-term Liabilities 7960 4801 3159
Common Stock 1346 1141 205
Additional Paid in Capital - - -
Retained Earnings 13287 11379 1908
Other Equity Components (5062) (1234) (3828)

Identify the three major balance sheet accounts, for example accounts receivable,
accounts payable, inventory, etc. that changed the most from the prior year. What events
might explain these changes? Working to explain why these changes occurred
contributes to a greater understanding about a company.
Account Explanation
Example: Example:
Account An increase in accounts receivable should coincide with an increase
Receivable in sales, i.e., a 10% increase in sales would explain a 10% increase
in accounts receivable. If accounts receivable are increasing and
sales decreasing, the signal is unfavorable.
Long Term The company nearly doubled its long term liabilities. The biggest
Liabilities factor is an increase in the cost of retirement benefits.
Net fixed assets GD had an increase in net assets while having a decrease in current
assets, which suggests the company invested in PPE.
Other Equity This was due to losses from stocks from the global downturn in the
Components stock market.

Prepare a common-sized balance sheet (expressed in percentages) using the following
account groups shown in your selected company’s balance sheet.
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Account Group Current Prior Year Increase or
Year Decrease
(current year
percent minus
prior year percent)
Current Assets 42.1 47.8 (5.7)

Net Fixed Assets 10.1 9.5 .5
Intangible and Other Noncurrent Assets 47.8 42.6 5.2
Total Assets 100% 100% -
Current Liabilities 36.5 35.6 .9
Long-term Liabilities 28.1 18.7 9.4
Common Stock 4.7 4.4 .3
Additional Paid in Capital 0 0 0
Retained Earnings 46.8 44.2 2.6
Other Equity Components (17.8) (4.8) (13.0)
Total Liabilities and Stockholders’ 100% 100% -
Equity

Identify the three balance sheet groups from question 13 above that changed most
significantly. Within each of these groups, identify the primary balance sheet element
that drove this change. What events might explain these changes?
Group Name: Explanation:
Current Assets (Example – sales increased by 22%, thus accounts receivable
increased by approximately 22%.)
Other Equity Treasury stock losses and other accumulated losses drive this.
Components
Long Term Liabilities Retirement benefits accounted for this change
Current Assets This was driven by an increase in inventory due to slowing

sales.

Did your company become more or less liquid when comparing this year to last year?
Current Year: Prior Year:
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Current Assets minus Current Liabilities = Current Assets minus Current Liabilities =
11950-10360=1590 12298-9164= 3134
Explain why?
The company became less liquid because of a decrease in currents assets and increase
in current liabilities.

Did your company increase or decrease its financial leverage when comparing total debt
to total stockholders’ equity from this year to last?
Current Year: Prior Year:
Total debt ÷ Total stockholders’ equity = Total debt ÷ Total stockholders’ equity =
28373/10053=2.82 25733/11768= 2.19
Explain why:
The company increased its financial leverage. The owners’ equity will cover less
percentage of the total liability.
The Income Statement or Statement of Earnings

Chapter 3: Income Statement—Question 1
Review the heading of your company’s income statement. Does the _3_ yrs.
company’s income statement provide two or three years of comparative
information? (Insert number to the right.)
Why do you think the SEC requires that balance sheets provide two years of
comparative financial information and income statements provide three years of
comparative financial information?
The SEC requires more years on the income statement because it changes faster than the
balance sheet, but both require multiple years to help display trends in the data.

Review the middle section of your company’s income statement. Did operating income
(loss) increase or decrease from the prior year and by how much? You may have to
compute operating income (loss).
Increased by $ ___540__________ Decreased by $ ______________
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Does the middle section of your company’s income statement show a nonoperating
income (loss) increase or decrease from the prior year and by how much? You may have
to compute nonoperating income (loss).
Increased by $ ___142___________ Decreased by $ ______________

In reference to why you are studying this company, is it important to know the different
sources of income—operating or nonoperating?
Yes since most of this companies revenue is highly coupled to operations.

If any of the irregular events are shown on your company’s income statement, describe
the nature and the amount. Select the most current year affected by the event if multiple
years are affected.
Irregular Event Amount Nature of the Change
Restructuring charge? 0
Discontinued operation? (19) Discontinued operations, net of tax
Extraordinary event? 0
Importance of the Income Statement

Creditors, employees, suppliers, investors, and others use the income statement. The report
serves as a measuring stick of how a company has performed, where it appears to be heading,
and what future cash flows are likely to be. The first question most users want answered is what
is net income? Next, they want to know how that figure compares to the prior years.
Review the lower section of your selected company’s income statement. Did net income
(loss) increase or decrease from the prior year and by how much?
Increased by $ ____387M_________ Decreased by $ ______________

Prepare a common-sized income statement for the categories below.
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Account/Category Current Prior Year Increase or
Year Decrease
(current year
percent minus
prior year percent)
Net Sales (revenues) 100% 100%

Cost of Goods/Services (if applicable)
Gross Profit 2653 3113 1
Operating Expenses 25647 24127 -1
Operating Income (Loss) 3604 3047 .8
Nonoperating Income (Loss) (49) (66) .1
Income Tax Expense 1126 967 -.3
Net Income 2459 2072 .8

Identify the three income statement accounts/categories that changed the most in
Question 7. What events might explain these changes?
Account or Explanation:
Category: (Hint – the MD&A section will provide good information to answer
this question.)
Gross Profits All three of these are tied together. GD experienced an 1% increase
in Gross Profits through a 1% decrease in operating expenses,
Operating Exp
which translated into an 0.8% increase in Net Income.
Net Income

Identify your company’s Basic and Diluted EPS amounts. Place a N/A in Diluted EPS if
not reported.
Basic EPS Diluted EPS
Current year 6.21 6.17
Preceding year 1 5.12 5.08
Preceding year 2 4.60 4.56
Why is diluted EPS always equal to or less than basic EPS?
Diluted EPS is always equal to or less than basic EPS because diluted EPS is a worst
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case if everyone who could receive shares without directly purchasing them did so. This
includes employee stock options, retirement accounts, etc. Therefore there will always
be a higher number of diluted shares then basic shares in the EPS calculation.
Statement of Cash Flows (SCF)

Chapter 3: SCF—Question 1
Is the SCF dated in the title for a period of time similar to the income statement or for a
point in time similar to the balance sheet? Why?
The SCF is dated similar to the income statement since the numbers from income
statement and the SCF are heavily dependant on each other. The SCF affects the
balance sheet, but the balance sheet includes more long-term assets.
Identify the following sections of the SCF and record the amounts. Check the math by
summing to the cash balance at end of year. Verify that the ending cash balance
reported on the SCF is the same as reported on the balance sheet.
Section Current Prior Year Second
Year Prior Year
Net operating cash flows 3110 2925 2128
Net investing cash flows (3662) (852) (2316)
Net financing cash flows (718) (786) (539)
Net increase (decrease) in cash flows (1270) 1287 (727)
Cash balance at beginning of year 2891 1604 2331
Cash balance at end of year 1621 2891 1604
Does the total match balance sheet cash? Not available Yes / No Yes / No
Record net sales, net income and net operating cash flows below. All three should be
trending in approximately the same direction. If so, this is a sign of a well-run business.
If one or more are going in a different direction, or random, then you must keep an eye
open for an explanation why.
Item Current Year Prior Year Second Prior Year
Net Sales 2459 2072 1856
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Net Income 3124 2952 2156
Net Operating 3110 2925 2128
Cash Flows
Explain why net sales, net income and net operating cash flows are trending together or
differently. (Hint: Look at depreciation expense and substantial changes in inventory,
accounts receivable and accounts payable balances. Explaining why is a key learning
point.)
All three indicators are smoothly trending upward together. This means that GD
suggests that GD is managing cash very well. The SCF is where an investor or auditor
can catch the legal cash flow manipulation techniques used by firms to either sandbag or
inflate the financial data for a specific purpose.
Identify the primary cash outflows and inflows from investing activities.
Description of Activity Amount
Cash outflow: Business acquisitions, purchase of securities, and (5180)
capital expenditures
Cash inflow: Sales of securities 1423
Consider three key issues at this point. Is the company adding assets? This is a sign of
growth. Is the company replacing assets? This is a sign of growth and stability. Is the
company only selling assets? This is a sign of retrenchment.
GD is acquiring businesses and purchasing securities. This indicates growth and a strong
financial position.
Identify the primary cash inflow and outflow from financing activities.
Description of Activity Amount
Cash inflow: Proceeds from fixed-rate notes and commercial paper 1899
Cash outflow: (Note: cash dividends paid are reported here.) (2555)
Purchase of common stock, dividends paid, repayment of fixed-
rate notes
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Consider two key issues at this point. How is the company being financed, through debt
or equity? Can you determine which is growing faster and why? A sound corporate
strategy is to finance a company with debt during stable times, because this demands
regular payment of principal and interest, and to finance a company with equity during
unstable times, because leadership can elect to pay or not pay dividends.
GD is purchasing stock and has relatively little debt, but the financing that it is doing is
through debt.
The Statement of Stockholders’ Equity (SSE)

Chapter 3: SSE—Question 1
Identify the elements that comprise the statement of stockholders’ equity section of your
company. Hint: These items are generally illustrated across the top of the page using a
columnar format. (Example. Common stock – shares and dollar amount.)
Common Stock, Retained Earnings, Treasury Stock, Accumulated Other Comprehensive

(Loss) Income, Total Shareholders’ Equity
Chapter 3: SSE—Question 2
Identify the cash dividends per share. $1.40
Determine the dividend payout percentage. A company’s 22.7%
dividend payout percentage is computed by dividing dividend per
common share by net income or earnings per common share.
(Hint: If your company reported a net loss for the year, the answer
lacks meaning.)
Compute dividend yield. A company’s dividend yield is 2.1%
computed by dividing dividend per common share by market
price per common share. (Hint: Use the current per share price for
your selected company.)
Is your company’s dividend yield a reasonable return given current market conditions?
Yes in this current market condition and dividend is a good.
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Notes to the Financial Statements
Chapter 3: Notes to the Financial Statements—Question 1
How does your company define “cash and cash equivalents”?
GD classifies securities in accordance with Statement of Financial Accounting Standards

(SFAS) No. 115, Accounting for Certain Investments in Debt and Equity Securities. GD
considers securities with a maturity of three months or less to be cash equivalents. GD
adjusts all investments in debt and equity securities to fair value.

How does your company value its “inventories”? Explain the meaning of the inventory
valuation method. Are domestic and international inventories valued the same? Service
companies will typically not have inventory.
Inventories are stated at the lower of cost or net realizable value. Cost for work-in-process
inventories, representing principally aircraft in the manufacturing process, is based on the estimated
average unit cost of the units in a production lot, or specific identification. Cost for aircraft parts and
components is based on the first in, first out method, or specific identification. We record pre-owned
aircraft acquired in connection with the sale of new aircraft at the lower of the trade-in value or the
estimated net realizable value.

Does your company report any investments in marketable securities? Identify the
respective amount(s) invested.
Category Current Year Amount
Trading Securities 143
Available-for-Sale Securities 241
Held-to-Maturity Debt Securities 20

Note 1 and a separate note on income taxes should provide the information to answer
this question.
What was your company’s income tax 965
expense for the current year?
How much cash was paid for income taxes 841
in the current year? (Hint: Review the
SCF. The difference generally relates to
the accrual basis of accounting.)
25
Identify the three major elements, such as depreciation or other post employment
benefits, that gave rise to deferred tax assets or deferred tax liabilities:
Deferred Tax Assets Deferred Tax Liabilities
Retirement plan liabilities Intangible Assets
Other Long-term Contracts
Capital Construction Fund
What is this year’s effective tax rate for Effective Tax Rate: __31.2____%
your company? What is the current year Statutory Tax Rate: __35.0____%
statutory rate?

Reviewing note #1, any related supporting notes, and/or the 10-K, identify the fixed
asset group(s), depreciation methods used, and the estimated useful lives of these fixed
assets.
Fixed Asset Group Depreciation Method Estimated Lives (range)
Building and Improvements Straight-line 50
Machinery and equipment Staight-line 28

Review the balance sheet, note #1, and any related notes and identify the amount of
goodwill reported in the current year.
Amount reported in current year. $ __11,413_________
Identify the amount of any significant write-down of
goodwill that occurred during the current year. $ ____(93)_______
How does management describe how it accounts for goodwill as disclosed in the note(s)
to the financial statements?
We review goodwill and indefinite-lived intangible assets for impairment annually by applying a fair-
value-based test. Goodwill represents the purchase price paid in excess of the fair value of
identifiable net tangible and intangible assets acquired in a business combination. We apply a
two-step impairment test to first identify potential goodwill impairment for each reporting unit and then
measure the amount of goodwill impairment loss, if necessary. We completed the required annual
goodwill impairment test during the fourth quarter of 2008 and did not identify any impairment.
26
Given present executive compensation packages, why would the user of financial
information prefer a company follow SFAS #123 instead of APBO #25? Explain.
SFAS #123 requires that companies expense stock option during the vesting period not
just when the option is exercised. This keeps companies from being able to hide large
executive compensation.

Review your company’s lease note (and related balance sheet information), then identify
the following amounts:
Minimum lease payments under operating leases 230
Minimum lease payments under capital leases 1
Ratio of operating lease payments to capital lease 1:230
payments
As a user of reported financial information, would you be concerned about a significant
amount of operating leases that are not reported in the balance sheet? Explain.
Yes because this is unrealized liabilities and the companies debt could be much higher
than the balance sheet indicates.

Review your company’s long-term debt note and identify the following (consider the
three most significant liabilities only):
Instrument Maturity Date Rate Amount Due
Fixed-Rate Note May 2013 4.250% 999
Fixed-Rate Note Feb 2014 5.250% 995
Commercial Paper None 0.850% 905
How much interest expense was 133
recognized in the current year?
How much cash was paid for interest in 66
the current year? (Hint: Look in the
SCF.*)
*The difference between interest expense and cash paid for interest is due to the accrual
basis of accounting (and in some cases, the capitalization of interest).
27
Review your company’s pension and OPEB note (if applicable) and answer the
following questions.
Pensions OPEB
How much is the Projected Benefit (7579) (972)
Obligation (PBO) and Accumulated
Postretirement Benefit Obligation
(APBO) for your company at the
end of the current year?
What was the amount of pension or 395 86
OPEB benefits paid to plan
participants during the current
year?
What amount of cash did the 17 95
company contribute to the
respective funds during the current
year? This is known as “employer
contributions.”
What is the value of the plan assets 4823 332
at the end of the current year?
Based on your review of the plan assets and the projected benefit obligation (or
accumulated postretirement benefit obligation), has your company sufficiently funded
its employee benefit plans (this is known as funded status)?
Due to the recent downturn in the stock market and the project rise in health care costs,
GD is $2,922 underfunded.
An expected average return on invested plan assets is used to reduce the volatility in the
reporting of pension or OPEB expense. Higher expected average returns reduce pension
or OPEB expense, and lower expected returns increase pension expense. What rate of
return on plan assets does your company use to compute pension or OPEB expense?
Does this appear reasonable, given present market conditions?
Rate employed? 8% Response: This is reasonable rate given market conditions.

Based on your review of the contingencies note, briefly identify specific events that have
led to the accrual of contingent liabilities in your selected company’s the balance sheet.
Litigation concerning Termination of A-12 Program, EPA and other environmental considerations,
28
minimum lease payments, Letters of Credit, Government Contracts, Aircraft Trade-ins, Labor
Agreements, and Product Warranties

Based on your review of the segment-reporting note to the financials, identify the
reported operating segments, their related revenues, and operating income. Identify the
largest three if more than three are disclosed.
Reportable Operating Segments Net Sales Revenue Net Operating Income
Info Systems and Tech 10038 1075
Combat Systems 8194 1111
Aerospace 5512 1021

Based on your review of the segment-reporting note to the financials, identify the
geographical segments and their related revenues. Identify the largest three if more than
three are disclosed.
Country Net Sales Revenue
North America 25163
Europe 2958
Asia 545

Based on your review of the notes to the financials or the statement of stockholders’
equity, identify the components (no more than four) that comprise Other Comprehensive
Income for your company.
Component Amount
Pension (3026)
Foreign Currency Translation Adjustment 356
Cash Flow Hedges (55)
Other Post Retirement (53)
29
CHAPTER 4 - FINANCIAL ANALYSIS
Summary Financial Analysis Report
Profit Margin %
Company Company
Answers how well the
Two Years One Year Company Industry S&P 500
business performed. Prior Prior
Gross 10.9 11.4 17.3 20.0 38.5

Gross Profit /
Margin
Total Revenue
Pre-Tax 10.5 11.2 11.1 9.4 9.9
Operating Income
Margin
/ Total Revenue
Net Profit *7.7 *7.6 7.6 6.3 6.9
Net Income /
Margin
Total Revenue
Sales 24063 27240 29300 Not required Not required
Financial
Statement
Operating 2625 3113 3653 Not required Not required
Financial
Income
Statement
Operating 1856 2072 2459 Not required Not required
Cash Financial
Flows Statement
Evaluate Profitability (Think about the corporate strategy in providing a response. Following
are general guidelines, yet each company situation is unique. For a company with a growth
strategic focus you will likely find increasing performance, above or below industry average.
For a company with a stability strategic focus you will likely find stable performance, above or
below industry average. For a company in a retrenchment strategic focus you will likely find
poor performance, below industry average with efforts to improve and approach industry
average. Note: Sales, operating income and operating cash flows should trend in approximately
the same direction. This signals a stable operating business environment. If the three measures
are not trending together, this signals lack of control by management.)
In every case all three numbers trend upward together. GD is implementing a growth strategy
and is performing it very well. The fact that GD’s gross margins are below industry average, but
their pre-tax and net profit margins are above is a testament to GD’s above average management.
Also, the reason they are below average for gross margins is due to the US government sets a 8%
margin cap on military contracts.
30
Financial Condition
Signals ability to take on Company Company
additional debt and Two Years One Year Company Industry S&P 500
liquidity. Prior Prior
Debt/ *0.28 *0.24 0.33 0.72 1.11

(Total Liabilities –
Equity
Current Liabilities)
Ratio
/ Total equity
Current 1.2 1.7 1.5
Current assets /
Ratio
Current liabilities
(Cash and Short 0.5 0.6 0.6 1.1 1.2
Term Investments
+
Short Term
Quick
Investments +
Ratio
Total Receivables,
Net) /
Current Liabilities
Interest * Not provided * Not provided 20.3 19.9 26.7

Data not readily in report in report
Coverage
available
Evaluate Financial Condition (often labeled liquidity and solvency analysis) (Think about the
corporate strategy in providing a response. Following are general guidelines, yet each company
situation is unique. For a company with a growth strategic focus you will likely find stable or
slightly decreasing liquidity, above or below industry average. Debt to equity often is increasing
in a growing company. For a company with a stability strategic focus you will likely find stable
liquidity, above or below industry average. Debt to equity often is stable as well. For a company
with a retrenchment strategic focus you will likely find poor liquidity, below industry average
with efforts to improve and approach industry liquidity. Debt to equity often is decreasing in a
company during retrenchment.)
GD’s number highly correlate with a growth strategy. The have increased their debt to equity
ratio, but have also increased the Current Ratio. The Quick Ratio is staying relatively the same.
GD has low debt compared to the industry and S&P 500, and therefore maintains lower current
and quick ratios compared to the industry. In effect keeps less cash on hand.
31
Investment Return %
Company Company
Signals performance for
Two Years One Year Company Industry S&P 500
managers and owners. Prior Prior
Return On *18.9 *17.6% 20.3 22.3 14.7

Net Income /
Equity
Total Equity
Return On *8.3 *8.1% 8.7% 6.5 5.6
Net Income /
Assets
Total Assets
Return On Not required Not required 19.8 19.6 19.4
Equity
(5-Year
Avg.)
Return On Not required Not required 8.3 6.5 8.0

Assets
(5-Year
Avg.)
Evaluate Investment Return (Think about the corporate strategy in providing a response.
Following are general guidelines, yet each company situation is unique. For a company with a
growth strategic focus you will likely find increasing returns. For a company with a stability
strategic focus you will likely find stable investment returns. For a company in a retrenchment
strategic focus you will likely find poor and stable investment solvency, below industry average.)
GD’s investment returns are about average for the industry and slightly better than S&P 500.
This is really good for a company the size of GD. GD’s returns on equity and assets are both
increasing. GD is achieving its growth strategy. Both ROE and ROA are higher then the 5 year
averages showing strong returns on a comparative basis.
32
Management Efficiency
Signals how well the
Company Company
company was run by Two Years One Year Company Industry S&P 500
management. Prior Prior
Income/ Not required Not required 26,208 18,660 42,458

Employee
Revenue/ Not required Not required 345,991 291,682 774,043

Employee
Total Revenue / 10.3 9.5 9.2 7.6 13.7

Receivable Average
Turnover Accounts
Receivable -
Trade, Net
Average is defined: (beginning of the year + end of the year) / 2
Cost of 3.6 3.8 4.2 12.9 8.9
Inventory
Revenue,
Turnover
Total / Average
Total Inventory
Asset Total Revenue / 1.1 1.1 1.1 1.1 0.8
Turnover Average Total
Assets
Evaluate Management Efficiency (Think about the corporate strategy in providing a response.
Following are general guidelines, yet each company situation is unique. For a company with a
growth strategic focus you will likely find improving efficiency, above or below industry
average. For a company with a stability strategic focus you will likely find stable efficiency,
above or below industry average. For a company in a retrenchment strategic focus you will
likely find poor efficiency, below industry average with efforts to improve and approach industry
average.)
Again all numbers are trending together. Receivable Turnover is improving year over year and
the other indicators are all remaining strong. This shows that GD is very efficiently executing its
growth strategy. These numbers are highly correlated to the fact the GD works on many very
large dollar multi-year long term contracts and that the US government pays on time.
33
CHAPTER 5 - DECISION-MAKING PROCESS
N ow you must make two decisions.
Chapter 5: Decision-making Process—Question 1

Based upon your review, do the numbers support the company’s explicit strategic focus: a
growth, stability or retrenchment focus? Why or why not?
After review, the numbers strongly support that General Dynamics is achieving its stated growth
strategy. By almost every measure GD’s numbers are trending with a growth strategy. They are
increasing revenue year after year. GD relies on the US government for a large portion of
revenue and it does not look like the US is going to dramatically lower orders to GD anytime
soon.
34
Chapter 5: Decision-making Process—Question 2
Return to the first question in this project.
Chapter 1: Identify Why You Selected This Company—Question 1
A) What is/are your motivation(s) or interest(s) in selecting this company?
B) What question(s) are you seeking to answer?
You were asked to explain why you were investigating this company’s annual report. You have
likely uncovered numerous pieces of information, some with conflicting insight. This may
involve both financial and nonfinancial information. In addition, you may have found certain
information to be incomplete for decision-making purposes. This is real world analysis. Most
business decisions are made with as much reliable information as possible, yet common to the
decision-maker is a desire for more information.
Prepare a thorough, yet concise answer to your original questions A and B above. For example,
would you work for this company, why or why not? Support your response with the information
gathered throughout your annual report study.
After careful review, it does appear that a win of the LCS contract will have a significant impact
on General Dynamics. With the current US political climate, of Democrats cutting future
defense spending a very large contract like the LCS will continue the growth of this extremely
well managed company. With that being said the world is increasingly becoming a dangerous
place and this could increase GD’s non-US revenue streams. Also, as the economy recovers
GD’s aerospace business should pick back up. GD is a well positioned company with multiple
revenue streams and seems to do well in any business climate.
35
Chapter 5: Validate Your Conclusion—Question 1
The Altman Z-score is a predictive model created by Edward Altman in the 1960’s. The score
combines and weights five financial ratios to estimate the likelihood of a company going
bankrupt. The lower the Altman Z-score the higher the odds of bankruptcy. Research findings
suggest the Z-score predicts 72 - 80% of corporate bankruptcies two years prior to the actual
filing.
• Z-score > than 3 = considered healthy
• Z-score between 1.8 and 3 = considered a warning sign
• Z-score < than 1.8 = could be headed for bankruptcy
Computing the Z-score for your company is very simple. Go to one of the Web sites listed
below and compute the Z-scores for the respective years identified below. Print out your results
and turn them in with this workbook.
• www.creditguru.com/, select ‘Insolvency', ‘Altman Z-score’
• www.jaxworks.com/calc2a.htm
Two Years Prior One Year Prior Current Year

Z-score 2.64 2.72 2.5
Z-score interpretation compared to the financial analysis. Does the Z-score agree or disagree
with your analysis?
The Z-scores disagree with my analysis. The main drivers of the low z-score are GD’s low
liquidity and really high Total Assets. GD is very large company that does a lot of its business
with the US government. Government contractors usually have lower then average Z-scores
because they tend to have high Total Assets versus income. A lot of this has to do with max
profit margins allowed on government. In order to compensate for this fact government
contractors tend to spend a high percentage of revenue on Assets and Operating Expenses.
36
Concluding Comments
The skills developed in this project should serve you well throughout your business career. The
reporting content and methodologies for publicly traded companies will likely evolve. This is a
natural sequence of events under competitive pressures and complex business conditions.
Change, however, does not disrupt rigorous and systematic company analysis. This workbook
provides the structure to analyze any company. Regardless of the annual report reporting
environment, learning about the industry, the company, and the company’s strategic focus and
financial condition helps you formulate a comprehensive set of indicators to make a valid
business decision.
Congratulations.
Now submit to your instructor your completed workbook.
Complete the following before you submit your assignment. This step is required to
validate your compliance with sections 107 or 108 of the 1976 United States Copyright
Act.
1. Remove the front cover of the workbook and identify:
o Name: Josh Simmons .

o Term: FALL-2 2009 .
o Company: General Dynamics .
o Instructor: Dr. Donny Bagwell .
2. Print out your completed electronic template.

3. Attach the following:
• Front cover (completed)

• Electronic solution template
• Company annual report
37

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INTRODUCTION TO THE CORPORATE ANNUAL REPORT:

1. Remove the front cover of the workbook and identify:

o Name: Josh Simmons .

o Term: Fall 2 2009 .

o Company: General Dynamics Corporation .

o Instructor: Dr. Donny Bagwell .

2. Print out your completed electronic template.

3. Attach the following:

Chapter 1: Select a Company and Gather Documents—Question 1

Chairman’s Message (President’s, I-3 Notes to Financial Statements 40

Management’s Discussion and 19 Report of Independent 64

Statement of Change in 39 Investor and Company 69

Chapter 1: Identify Why You Selected This Company—Question 1

Company and Annual Report Essentials

GENERAL DYNAMICS CORPORATION

Chapter 1: Company and Annual Report Essentials—Question 2

2941 Fairview Park Drive, Suite 100,

Chapter 1: Company and Annual Report Essentials—Question 3

Chapter 1: Company and Annual Report Essentials—Question 4

Telephone number: (703) 876-3000

E-mail address: agilliland@generaldynamics.com

Chapter 1: Company and Annual Report Essentials—Question 6

Chapter 1: Company and Annual Report Essentials—Question 7

Not found in report?

Chapter 1: Company and Annual Report Essentials—Question 8

There are 13 board members.

Chapter 1: Company and Annual Report Essentials—Question 9

Company Strategy and Business Environment

Chapter 1: Company Strategy and Business Environment—Question 2

Growth: Vertical Horizontal Concentric Conglomerate .

Phrases to support your conclusion:

Chapter 1: Company Strategy and Business Environment—Question 3

Chapter 1: Company Strategy and Business Environment—Question 4

Growth: Vertical Horizontal Concentric Conglomerate .

“Survive economic downturn”, “gains coming from process improvements”, “decline in

CHAPTER 2 - ANNUAL REPORT STRUCTURE

Net sales or revenues 29,300 27,240 24,063

General Company and Marketing Information

What is the broader message from this information?

Management’s Discussion and Analysis

Who audited management’s assessment of Management’s assessment is audited by an

Independent Auditors’ Report

Financial Statements and the Related Notes

Financial Position GD has consistently increased assets, paid down debt,

Summary GD’s management has very tight control over the

Chapter 3: Balance Sheet—Question 2

Chapter 3: Balance Sheet—Question 3

Total Property Plant and Equipment = 5340

Chapter 3: Balance Sheet—Question 4

Chapter 3: Balance Sheet—Question 5

Chapter 3: Balance Sheet—Question 6

Chapter 3: Balance Sheet— Question 7

Chapter 3: Balance Sheet—Question 8

Chapter 3: Balance Sheet—Question 9

Was the increase or decrease in retained earnings Yes or No*

Chapter 3: Balance Sheet—Question 10

Chapter 3: Balance Sheet—Question 11

Chapter 3: Balance Sheet—Question 12

Chapter 3: Balance Sheet—Question 13

Current Assets 42.1 47.8 (5.7)

Chapter 3: Balance Sheet—Question 14

Current Assets This was driven by an increase in inventory due to slowing

Debt/ 0.28 0.24 0.33 0.72 1.11

Return On 18.9 17.6% 20.3 22.3 14.7