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■ 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

outflows.

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

period.

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■ Mixes capital and revenue transactions and is entirely backward

looking.

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

Taxation

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

Financing

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

funds.

■ Decreases in assets and increases in liabilities represent an inflow of

funds.

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

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139

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.