Financial risks
Directors emoluments (including pension costs and other benefits).
Particulars of staff, the average number of persons employed during
the year and the aggregate amount of their wages and salaries; social
security costs and pension costs.
Auditors remuneration (including expenses).
Hire of plant and machinery, if material.
Depreciation and diminution in value of fixed assets.
To summarize, the P/L account performs three functions:
It shows how much profit has been earned by the company, and
whether this is sufficient to cover the dividends and to provide for
expansion of the business.
Explains how the reported balance of profit was computed.
Shows how the reported profit has been distributed and what has
been retained.
Cash flow statements
Cash is the lifeblood of a business, and the company will only be able
to survive if it is able to generate sufficient cash inflows to cover its cash
Companies can be profitable with negative cash flows and loss making
with positive cash flows. A company can report a large profit for a year in
which the cash balance may have fallen, perhaps as a result of heavy
expenditure on fixed assets. Likewise, a company can be losing money and
generating cash via asset disposals. It is important to understand that cash
and profit are different.
The purposes of the cash flow statement are, therefore, to report the net
change in the cash balance and to help explain how the surplus or deficit
in cash arose.
This is done by listing the cash inflows and cash outflows during the
accounting period.
In summary the cash flow statement:
Reports the financial effect of all transactions during the accounting
Credit Risk Management
Mixes capital and revenue transactions and is entirely backward
Annual report cash flow statement
Best public limited company Cash flow statement for the year ended
31 December 200x
Note 200x 200x
GBP 000 GBP 000
Net cash flows from operating activities 12 878 885
Returns on investment and
servicing of finance
Interest received 20 15
Interest paid 135 90
Dividend paid 200 200
Net cash flow from returns on 563 610
investment and
servicing of finance
Tax paid 246 207
Investing activities
Payments to acquire tangible fixed assets 335 308
Receipts from sale of tangible fixed assets 20 30
Net cash outflow before financing 2 125
Repayment of debentures 100 100
Increase in cash and cash equivalent 98 25
It is important to realize that a company can be profitable and have a short-
fall of cash, likewise a company can be losing money but have a surplus of
cash. This can be summarized as follows:
Increases in assets and decreases in liabilities represent an outflow of
Decreases in assets and increases in liabilities represent an inflow of
Refer to diagram Sources & Uses of Cash on page 145.
This paradox is illustrated by the French national railways in the late
1990s selling land on discontinued rail lines which had been carried at
Financial risks
AMADEUS: Vodafone Annual Profit and Loss Graphic
book value: the company had been generating record losses at the operat-
ing profit level due to the substantial investments carried out in the new
high speed rail lines but generated record net profits via the extraordin-
ary sales of the land on the discontinued lines. During salary negotiations
with the trade unions, the unions argued for salary increases with the
argument that the company could afford it due to the record profits
achieved via the sale of lands which formed the overall heritage of com-
pany operations over time, while the management countered with the
argument that it could not afford the salary increases since it was the
underlying operations and operating results (losses) which counted, not
the net profit impacted by the asset disposals (extraordinary items). Who
do you think has the valid argument?
These relations between various elements impacting cash flow are sum-
marized in the following two screencaps:
In the first, Vodafone exhibits pre-tax losses for three years while in the
second, cash flows are positive for two out of the three years.

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