Chapter 3 • Financial statements and their interpretation
This statement shows that the business generated a net cash inflow of £212 million
from its trading activities. That is to say that during the year the receipts of cash from
sales exceeded payments of cash to pay wages and salaries, suppliers of goods and
services, and so on, by £212 million. You should be clear that this is not the same
as profit. Profit is the net increase in wealth generally as a result of trading – not
just cash.
The remainder of the statement shows where any other cash has come from (none
in the case of Jackson plc in 2008) and gone to. In this case, cash has been spent on pay-
ing the interest, taxation and dividend. In addition, some cash was spent acquiring
non-current assets.
Had any cash been raised through an issue of shares or loan notes, or had any cash
been paid to redeem shares or loan notes, the effect of these would have appeared
under the ‘cash flows from financing activities’ heading in the statement.
The net cash generated during the year was £111 million which had the effect of
bringing the cash balance up from a negative (overdraft) of £86 million to a positive
balance of £25 million between 1 January and 31 December 2008.3.3 Definitions and conventions of accounting
Accounting is a language that is used to store and communicate economic information
about organisations. It has a set of rules. It is particularly important that anyone try-
ing to read accounting statements and draw conclusions from them is clear on the
rules of accounting. Severe misunderstandings could arise for someone not familiar
with the rules.Accounting definition of an asset
An asset has a particular meaning in accounting, which is rather more restrictive
than the general one that we use in everyday speech. To be included in a balance sheet
as an asset of a particular business, the item would need to have the following
attributes:l It is likely to produce future economic benefits to that business.
l It has arisen from some past transaction or event involving that business.
l The right of access to it by others can be restricted by that business.
l It must be capable of measurement in monetary terms.The benefit of having a loyal workforce has the characteristics of an asset, to the
extent of it being capable of producing probable future economic benefits, for
example through savings in recruitment costs as a result of low labour turnover.
It would not, however, be included on the business’s balance sheet because it has
almost certainly not arisen as a result of any particular transaction or event. It would
also be extremely difficult to put a monetary value on the benefit of the loyal
workforce. It is also the case that the business would probably find it impossible to
deny rival businesses access to members of the staff to try to employ them. It can be
persuasively argued that failure to take account of such assets gives accounting a
limited view of reality.