company HEADY accounts 2.6
cooking the books When to book revenue and expenses often isn’t an exact science and the ambiguity can be used to manipulate results according to the needs of the company. As one example of many, technology firm Hewlett-Packard has recently concluded that Autonomy, the British software company it bought for more than £7.1bn, made 80% less profits than originally stated in its accounts, due to accounting irregularities by the former management team. You may spot signs of dodgy accounting like this – if the operating profit and operating cash flow are significantly different over a period of years for example – but, even if you’re an expert, this can be very hard to spot just from the published accounts. The auditors are meant to check for this so always read their report at the front of the accounts to see if they raise any doubt (although there are many cases - that of Enron most famously - of auditors not doing their job as stringently as they might).
Cash flow statement The cash flow statement tells you how much cash the company has spent or received over the accounting period and relates to the cash asset on the balance sheet. Unlike the profit and loss statement, this includes cash spent or received through capital expenditure (the buying or selling of fixed assets) and financing. Remember that cash in accounts means any money the company can access quickly to pay people, and that running out of cash is the most common reason that companies go out of business (see pages 23 and 32). Common categories that a company’s cash transactions are grouped into on the cash flow statement include: o Operating activities: net cash received from a company’s day-to-day operations. Because of the accruals basis of accounting, cash from operating activities is unlikely to be the same as the operating profit in the income statement. Over the whole life of the company however, they should always match up. o Capital expenditure: cash from the buying and selling of fixed assets. o Returns on investments or servicing of financing: cash paid out as interest on the company’s debt, or cash it has received in dividends or interest from shares it owns or loans it has made. o Taxation: cash paid out as tax. Note that the cash flow statement shows cash paid for the previous period’s tax bill. This won’t be the same as the tax figure on the income statement, which shows a company’s tax charge from its activities for the accounting period just finished. These figures can be quite different so be careful that you don’t mix them up. If this is a positive amount, it is because the company has received money back from the government as a tax credit. 51