10-Q: Reviewed, Not Audited
A 10-Q is the quarterly report US listed companies file for their first three quarters, containing unaudited financial statements. It is subject to a limited review rather than a full audit, and it arrives within forty days of quarter end.
How it works
Three per year, not four. The fourth quarter is covered by the annual filing, which is why a company’s Q4 figures usually have to be derived by subtracting the first three quarters from the full year.
It arrives within about forty days of quarter end, against sixty or more for the annual filing. Speed is the trade-off it makes, and everything else about it follows from that.
Reviewed is not audited
A review is substantially less work than an audit. It consists mainly of enquiry and analytical procedures — asking management questions and checking that the numbers move in ways consistent with what is known — rather than testing transactions and verifying balances.
The auditor’s conclusion is worded negatively as a result: nothing came to their attention suggesting the statements are materially misstated. That is a weaker statement than an audit opinion, and it is worded that way deliberately.
Which means quarterly figures carry less assurance than annual ones, and restatements of quarterly numbers when the annual audit is performed are not rare.
Reading a quarter without being misled by it
Almost every business is seasonal to some degree. A retailer’s fourth quarter dwarfs its first; a company selling to schools has a summer. Multiplying a quarter by four is meaningless for most of them.
Year-on-year is the comparison that controls for it. This Q1 against last Q1 removes the seasonal pattern; this Q1 against last Q4 mostly measures the calendar.
Sequential comparison is only informative where the business genuinely has no seasonality, which is rarer than it appears.
In practice: what to actually read
The balance sheet is the most underused part of a quarterly filing. Receivables, inventory, cash and short-term debt all move faster than profit, and a quarterly series of those four numbers catches a deteriorating working capital position long before an annual report would.
Days sales outstanding computed quarterly is the specific version of that. Four consecutive quarters of lengthening collection is a trend; one quarter is noise, and only the quarterly filings make the distinction possible.
Subsequent events appear here first. Anything material that happened between quarter end and the filing date is disclosed, which occasionally makes the quarterly filing the earliest public description of something significant.
And the risk factors item can be updated. A quarterly filing only has to report changes, so a new paragraph in it is a company saying something changed within the last three months — an even stronger signal than a change in the annual version.
And any position taken as a result pays a spread and any commission on every round trip.
Two structural quirks are worth knowing before comparing quarters. The fourth quarter has no filing of its own, so its figures have to be derived by subtracting the first three quarters from the annual result — and because the annual figures are audited while the quarterly ones were only reviewed, any audit adjustments land entirely in that derived fourth quarter.
Which makes Q4 look unusual in a way that is partly an artifact of the process. A company whose fourth quarter regularly contains large charges may have a seasonal business, or may be where the annual audit’s corrections accumulate. Comparing Q4 to Q4 across several years separates the two, and it is one of the few places where the reporting calendar itself creates a pattern that looks like information.
What a 10-Q is not
It is not audited. A review is a different and lesser procedure.
It is not a quarter of a year. Seasonality makes annualizing misleading.
It is not the same as an earnings report. The press release comes first and contains what the company chooses; this contains what the rules require.
And it is not final. Quarterly figures can be restated when the annual audit is performed.
How this connects
The working capital items above have a ratio attached. Current assets divided by current liabilities is the current ratio, and tracking it each quarter shows the strain the balance sheet warns about.
The cash flow statement in it is cumulative for the year. Quarterly operating cash flow has to be derived by subtracting the previous filing’s figure, the same arithmetic the missing fourth quarter needs.
Gross margin compared with the same quarter last year shows pricing pressure or rising cost of goods sold before it reaches profit, and it moves more slowly than revenue.
Most material events between filings arrive first as an 8-K, which is why the quarterly filing is only occasionally the earliest description of anything large.
And management’s commentary comes on the earnings call, where guidance for the next period is usually given; the next filing is where that guidance meets the numbers.
When it fails
The structural problem is that quarterly reporting invites quarterly reaction. Forty quarters in a decade, and very few of them contain information that should change a long-horizon view. The cadence of disclosure is not the cadence of decisions.
The second failure is the sequential comparison, which for a seasonal business describes the calendar rather than the company.
A third is over-reading the assurance. A reviewed statement carries less weight than an audited one, and the wording says so explicitly.
A fourth is ignoring the balance sheet, which is where the fastest-moving information is.
And a fifth is treating a restatement as unusual. Quarterly figures are unaudited, and correction at the annual audit is a normal part of the process rather than an admission.
The original data
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The specific habit worth building from quarterly filings is a four-number series, not a profit number. Cash, receivables, inventory and short-term debt, one line per quarter, kept in a spreadsheet. Four quarters of that tells you whether a company’s working capital is improving or deteriorating, which is information the profit figure lags by two or three quarters — and it takes about five minutes per filing to maintain.
Related
10-K is the annual, audited filing with the full structure. Earnings report is the announcement that usually precedes this filing. And balance sheet is the part of it most worth reading.
The habit that made quarterly filings useful was ignoring the income statement in them and going straight to the balance sheet. Receivables and inventory move faster than profit does, and a quarterly balance sheet catches a deteriorating working capital position two or three quarters before the annual report would.
— Michael Whitman
This page is educational, not financial advice. Test every idea on your own charts before risking money.