Review | Company Reporting, Profit And Loss And Cash Flows

Company Reporting, Profit And Loss And Cash Flows

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Company reporting

Companies which are quoted on the Stock Exchange need, we have seen, to provide their shareholders with more frequent information than that supplied by the legally required annual accounts. Some weeks after the end of the first half of the companys year it will normally produce an interim profit statement (or interim) giving unaudited first-half profit figures. The statement also normally gives the size of the interim dividend (see below) and includes some comment on trading and prospects from the company.

Sometime after the end of the full year a preliminary announcement (prelim) will usually be published, giving the profits for the year and often a lot of background information. This appears some weeks before the full report and accounts are posted to shareholders. Most daily press comment on the companys figures is based on the interim and preliminary statements which have greater news value though less depth of information than the full accounts.

Profit and loss account

A profit and loss account shows the results of a companys trading over the last financial period. Usually this means a year, though the year can run to whatever date the company chooses. December 31 and March 31 year-ends are popular, though it could be April 1 or November 5. The profit and loss account thus shows the effect on the companys revenue account of all the transactions over the past year. If a company made profits of 20m in the first ten months of its year and losses of 22m in the last two months, the profit and loss account would show a loss of 2m: the final outcome. It would not by itself reveal that the company had been trading profitably for much of the period.

Cash flow statement

Profits are not necessarily the same as cash flows, and the differences can sometimes be revealing. Take just one example. A company lends to another company for two years at 10 per cent a year interest but agrees that the interest will only be paid when the loan itself is repaid after two years. In its profit and loss account at the end of the first year the lending company will include in its profits the interest of loan which has accrued (built up) by that point. It has earned this interest. On the other hand, it has not yet received any interest in cash, so the loan will not feature in its cash flow statement for that year.

Companies go bust primarily because they run out of cash. The cash flow statements that they have been obliged to publish since the early 1990s make it far easier to see the early warning signs.

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