The financial statementsperiods in some reasonable manner. In practice in the UK this is typically accom-
plished by sharing the total equally across the number of accounting periods of the life
of the non-current asset concerned.
The ‘equity’ section of the balance sheet shows how the shareholders have con-
tributed to the business’s current wealth. This was by a combination of shareholders
specifically putting assets, normally cash, into the business to acquire shares, and by
allowing wealth generated within the business to remain there, rather than being paid
to them as dividends. These ploughed-back profits, shown under the heading ‘retained
profit’, are known as ‘reserves’. Reserves represent part of the wealth of the share-
holders just as much as dividends do. You should be clear that the £209 million of
retained profit at the end of the year is that part of the business’s end-of-year wealth
that has arisen from profits generated over the years up to 31 December 2008, to the
extent that it had not been
l extinguished by trading losses;
l paid to the Revenue and Customs as tax; or
l paid to the shareholders as dividends.
The £209 million is unlikely to be in the form of cash. As has already been pointed
out, wealth does not just mean cash. In practice the retained profit is probably in vari-
ous forms – plant, inventories etc.
£20 million was paid to the shareholders as a dividend during 2008. This is reflected
in the cash flow statement.The cash flow statement
The cash flow statementis simply an analysis of the cash (including short-term,
highly liquid investments) received and paid out by the business during a period. It is
arranged in such a way that it will enable readers to derive helpful insights about the
sources and uses of cash over the period. It may seem strange that one particular asset- cash – is highlighted in this way when others, for example inventories, are not. What
is so special about cash? The answer to this question is that cash tends to be at the heart
of most aspects of business. A business’s ability to prosper and survive is likely to
depend on its ability to generate cash. This is not usually true for other types of asset.
The cash flow statement of Jackson plc is as follows:
Jackson plc
Cash flow statement for the year ended 31 December 2008
£ million £ million
Cash flows from operating activities
Cash generated from operations 212
Interest paid (30)
Taxation paid (18)
Dividend paid (20) 144
Cash flows from investing activities
Payments to acquire non-current assets (33)
Cash flows from financing activities –
Net increase in cash and cash equivalents 111
Cash and cash equivalents at 1 January 2008 (overdraft) (86 )
Cash and cash equivalents at 31 December 2008 25‘