Financial Analysis of T-shirt Plc

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This document provides a detailed financial analysis of T-shirt Plc, including the statement of profit and loss, statement of financial position, accrual accounting vs cash accounting, difference between profit and cash flow, and the purposes of preparing a budget. It also discusses the benefits of forming a limited company and getting it registered on the stock exchange.

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BUSINESS FINANCE

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TABLE OF CONTENTS
PART 1............................................................................................................................................3
Statement of profit and loss........................................................................................................3
Statement of financial position ..................................................................................................4
PART 2............................................................................................................................................5
Accrual Accounting & Cash Accounting....................................................................................5
Difference Between Profit & Cash Flow....................................................................................7
PART 3............................................................................................................................................8
Define Budget and explain purposes of preparing a budget......................................................8
Benefit of forming limited company and getting it registered on stock exchange.....................9
REFERENCES..............................................................................................................................11
APPENDIX....................................................................................................................................12
Ratio analysis calculation..........................................................................................................12
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PART 1
Statement of profit and loss
The statement of profit and loss is an account which is prepared by company in order to
calculate profit earned or loss incurred by the company (Klopotan, Zoroja and Meško, 2018). It
is very essential for company to analyse the profit and loss of company in order to assess the
market position of company. Hence, for this Vest Plc will use the analysis of profit and loss
statement of T- shirt plc is analysed by using ratio analysis. With help of profit and loss account
company can assess its liquidity and profitability.
Ratio 2019 2018
Current ratio 0.91 2.59
Quick ratio 0.65 1.93
Gross profit ratio 45% 60%
Net profit ratio -37% 18%
Return on asset ratio -29.41 22.77
Liquidity ratio
From the current asset it is clear that liquidity of company has decreased to a great extent.
This is pertaining to the fact that as compared to last year, current ratio decreased from 2.59 to
0.91. this reflects that current liabilities of company have increased to a great extent as compared
to last year that is 2018. For this it is advisable to company that they must try to reduce their
liabilities so that liquidity of company can be increased.
On the flip side with help of quick ratio it was seen that in 2018 it was 1.93 but in 2019 it
reduced drastically to 0.65 which is not good for T-shirt plc. The major reason for high decrease
in quick ratio is that company has increased the amount of inventory which has blocked cash in
hand. Hence, for this company need to sell off inventory so that it can be converted in cash.
Another measure for T- shirt plc is that they must try to limit their liabilities. Also, the bank
overdraft taken carries a huge amount of interest which is again a liability for company
(Connolly and Bank, 2020).
Profitability ratio
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With help of gross profit ratio of T- shirt plc it is clearly evident that gross profit of
company has reduced to a great extent. The reduction was 15% that is from 60% to 45% from
2018 to 2019 respectively. This reduction was majorly due to the fact that sales of company has
reduced drastically from 2101 to 1366. This was the major reason for decrease in the gross profit.
Hence, for mitigating this issue that is to increase sales company is now providing more credit
period to their consumer and increased it to 60 from 30 days.
Along with this the net profit ratio depicted a downward trend in profit and loss account
of T- shirt plc. This was a very high change as company has incurred a loss of 500. This, because
of this NP ratio was -37% in 2019 which was earlier 18% in 2018. The major reason for this
reduction was that sales revenue decreased and along with this other expenses increased
(Ylhäinen, 2017). Thus, because of this increase in other expense and increase in finance cost the
expenses of company increased and as it was more than income so company suffered a loss.
In addition to return on asset ratio also company can assess it profitability. The return on
asset is a ratio which depicts ability of company in using its asset in order to generate revenue. In
2019 the return on asset was -29.41%, whereas in 2018 it was 22.77%. This reflects that
currently T- shirt is not in a position to optimally use its asset in order to generate finance from
the present asset.
Statement of financial position
The financial position of company is being reflected by balance sheet of company and for
analysing financial position of T- shirt plc it is very crucial to effectively assess the balance sheet
as well. For this company takes help of solvency and efficiency ratios to analyse balance sheet.
Ratio 2019 2018
Asset turnover ratio 0.82 1.29
Inventory turnover ratio 1.93 9.44
Debt to equity ratio 4.48 1.02
Proprietary ratio 18% 50%
Efficiency ratio
With help of asset turnover ratio, it was clearly visible that there was decrease in ratio
from 1.29 to 0.82 from the year 2018 to 2019 respectively. This reflects that company is not
making proper and efficient use of its asset in order to increase sales. For effective running of

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company, it is necessary to have high asset turnover ratio which is not in case of T- shirt plc
(Lewis and Liu, 2020). Hence, now company need to optimally use the asset in order to increase
the sales of company so that profitability and working efficiency of company increases.
Another efficiency ratio that is inventory turnover ratio depicts that in 2018 it was 9.44
times but in 2019 it reduced to 1.93 times. This reduction reflects that company is holding
inventory for a longer period of time before selling it. This means that high amount of cash is
being blocked in form of inventory as the inventory turnover ratio is low. For this it is advisable
to the company to manages its inventory system and try to manage inventory in effective
manner.
Solvency ratio
With help of debt to equity solvency ratio it is clearly visible that there is an increase in
this ratio in comparison with previous year. In 2018 it was 1.02 but in 2019 it increased to 4.48
which is not good for company. The major reason underlying this fact is that this increase
reflects that company has increased its debt which is very risky for company. This is pertaining
to the fact that now company has to pay more interest and this added to liability of company.
With help of proprietary ratio, it was clearly evident that in 2018 the ratio was 50 % but
in 2019 it decreased to 18 %. This reflects that in 2018 50% of fund was being contributed by
shareholder and remaining by creditors. For 2019 this reduced to 18 % and this suggest that
company has utilised debt in financing rather than equity. Company need to work in managing
proprietary ratio because for effective working there need to balance in both debt and equity
financing.
Hence, in the end it can be concluded that financial position and performance of company
T- shirt plc is not in good condition. The major reason underlying this fact is that with help of
financial ratio it was analysed that financial performance of company is very poor. Hence, for
this company need to take corrective action in order to improve the financial working of
company. For this company need to take effective decisions in order to improve the sales of
company and try to limit expenses of company (Laktionova, Tereshchenko and Desyatskii,
2017). This is necessary as this will assist company in managing the expenses of company and
this will result in increase in profits for company.
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PART 2
Accrual Accounting & Cash Accounting
Accrual accounting refers to the entry which had been made in the book of account
related to the revenue or expenses paid without exchange of cash (Goel, 2016). Under Accrual
method of accounting different expenses are generally balanced with the revenues of Income
Statement. Cash Accounting at the same time refers to the situation where different transaction
are recorded in the books of accounting at the time cash is exchanged in between the two parties.
Difference Between Accrual Accounting and Cash Accounting is as follows:
Basis Cash Accounting Accrual Accounting
Meaning It is the type of the accounting
in which transaction is only
recorded once cash are paid for
the expenses or cash received.
It is the type of accounting
system in which we will record
transaction at the time of its
occurring. Irrespective of cash
paid or not.
Financial Statement This financial statement does
not show the actual position of
the business (Diana and
Vasile, 2018). As this
Accounting system does not
show the actual expenses
which has been incurred.
This statement is more accurate
as compare to cash accounting,
as this system shows actual
income and expenses incurred.
Recognized This system is not recognized
by any law.
This system is recognized by
the law.
Limitation of Cash Accounting and Accrual Accounting
Cash Accounting
ï‚· Cash Accounting generally used to limit the organization Looks at the income and
expenses of the business. This system of accounting do not present different accounting
liability of the company in front of the management at all the time. As under this system
only cash transaction are recorded.
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ï‚· Cash Accounting system does not provide the management with the actual position of the
business. This will create the situation where management think they have more money
than they actually have in hand. This will ultimately create the deficiency in presence of
cash and cash equivalent for the organization.
Accrual Accounting
ï‚· The Biggest limitation of Accrual Accounting is that it is one of the complicated form of
accounting, this type of Accounting generally requires better amount of resources and
time to to be invested by the organization. Hence, it gets very difficult for small
organization to adopt the same (Ali, Ormal and Ahmad, 2018).
ï‚· Another limitation of Accrual Accounting is that it sometime used to create the issue for
the organization in maintaining and managing the Cash flow statement of the
organization. As date of receiving the cash in the organization is ignored by the
organization. Hence, any issue occurred in cash flow statement can not be rectified with
the help of Accrual Accounting system.
Profit & Cash Flow
Profit in accounting is an income distributed to the owners in a profitable market
production process. In simple words profit is an amount left with the owner after deducting
production and operation cost from the amount earned.
Cash Flow at the same time is defined as a net amount of cash and cash equivalent
transferred into or out of the business (Rafi and et.al., 2020). If company is able to generate cash
flow way above their expenses then it is called as a positive cash flow. If company is not able to
generate cash flow to satisfy its expenses itself then is it is called as a negative cash flow.
Difference Between Profit & Cash Flow
Basis Profit Cash Flow
Meaning Profit is defined as a positive
difference between Sales
revenues and total cost of the
company.
Cash Flow at the same time is
defined as total money that
flow in and out of a business
over a given year.
Purpose Profit statement generally
shows the immediate success
Cash Flow at the same time is
assured as a means of

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of the company (Diana and
Vasile, 2018). As Profit
statement can be analysed to
find out the difference between
the amount of the profit which
had be enhanced in the recent
past.
determining companies long
term financial outlook in front
of the others.
Process Profitability of the company is
the end of the objective
outcome of the project. As
different activity which are
planned by the organization is
to maximize profit at the end
of the year.
At the same time Cash Flow
management is a continues
process. As organization used
to plan the variety of the
different activity in a way that
cash flow of the organization
can be maintained throughout
the year.
PART 3
Define Budget and explain purposes of preparing a budget.
Budget is define as a financial plan for a defined period, budget is an expected or
estimated revenue or expenses over a specified future period and is re-evaluated on a periodic
basis. Budget can be made for a person, group of people and government. In general a budget is
a microeconomic concept which used to show the trade off which has been made when one good
is exchanged for another good. There are variety of the different type of the budgets which are
generally made in the organization. For example; Sales budget, sales budget generally used to
describe the amount of the money which company will be investing to generate the assumed
amount of the sales. Production Budget, budget which used to define the minimum amount of
production which company will be doing in coming financial year. There are variety of different
way through which budget can be prepared such as ABC budgeting, Incremental Budgeting (Ali,
Ormal and Ahmad, 2018).
Purposes of preparing a budget
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Optimum Utilization of Resources: It is one of the biggest purpose for which budget is
prepared in the organization. All the organization with the help of budget looks to allocate the
different resources in a way that organization is able to optimum utilize different resources.
Communication: Another purpose of drafting budget is to communicate clear message
to all the individual in regard to different resources which they are having to complete the task in
their hand. This ultimately help the company in maintaining good sort of the clarity in the long
run.
Achieve Financial Goal: First step in budget preparation is to set financial goal. After
budget is generally prepare in a way that it generally used to help the organization in achieving
the Financial goal of the business very efficiently.
Benefit of forming limited company and getting it registered on stock exchange
A limited company is a type of company which is formed or incorporated wherein the
liability of shareholders of company is limited (Canales, 2016). This includes a legal structure
which makes a provision that liability of members or shareholder is limited up to only their stake
in investment. Within the limited company all the asset and liabilities of company are separate
from that of shareholders. This can be limited by two methods that is limited by shares and
limited by guarantee. Listing is referred to as a process through which securities of company are
listed over the trading platform of different stock exchanges. It is very beneficial for a limited
company to get itself registered over stock exchange. The major benefits of forming a limited
company and getting it registered on stock exchange are as follows-
Minimising of personal liability- this is the major benefit of forming a limited company
as in this the personal liability of shareholder is not present. Thus, the shareholder will be liable
only to the extent to their money invested in company.
Limited risk- this is another major benefit of forming a limited company as under the
limited company the risk of the member or shareholder is very limited. The major reason
underlying this fact is that as company is separate from its owners hence, the risk is very
minimum and this is advantage for shareholders.
Enhanced visibility- another major benefit of getting the limited company listed over
stock exchange is that this increases the visibility of company. The major reason behind this is
that when company is listed over stock exchange then people can trade in shares of company and
this increases knowledge of people relating to the company.
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Transparency- this is another major benefit of listing the company over stock exchange.
This is a benefit because when company list itself over stock exchange then they have to disclose
many of the fact sand information relating to company to its shareholders (Advantages and
disadvantages of private limited company, 2020). Thus, this calls for displaying all relevant
information to its shareholders which increases transparency among shareholders and company
which is a benefit.

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REFERENCES
Books and Journals
Canales, R., 2016. From ideals to institutions: Institutional entrepreneurship and the growth of
Mexican small business finance. Organization Science. 27(6). pp.1548-1573.
Connolly, E. and Bank, J., 2020. Access to small business finance. RBA Bulletin, September,
viewed. 10.
Klopotan, I., Zoroja, J. and Meško, M., 2018. Early warning system in business, finance, and
economics: Bibliometric and topic analysis. International Journal of Engineering Business
Management. 10. p.1847979018797013.
Laktionova, O.E., Tereshchenko, E.Y. and Desyatskii, S.P., 2017. Transformation of the
organization and management of small and medium-sized business' finance. Finansovaya
analitika: problemy i resheniya= Financial Analytics: Science and Experience. 10(7).
pp.767-789.
Lewis, M. and Liu, Q., 2020. The COVID-19 Outbreak and Access to Small Business
Finance. 1. 1 Managing the Risks of Holding Self-securitisations as Collateral 2. 11
Government Bond Market Functioning and COVID-19 3. The Economic Effects of Low
Interest Rates and Unconventional 21 Monetary Policy 4. Retail Central Bank Digital
Currency: Design Considerations, Rationales, p.58.
Ylhäinen, I., 2017. Life-cycle effects in small business finance. Journal of Banking &
Finance. 77. pp.176-196.
Goel, D., 2016. The earnings management motivation: Accrual accounting vs. cash
accounting. Australasian Accounting, Business and Finance Journal. 10(3). pp.48-66.
Gigli, S. and Mariani, L., 2018. Lost in the transition from cash to accrual
accounting. International Journal of Public Sector Management.
Diana, H. I. and Vasile, B., 2018. INTERFERENCE BETWEEN PROFIT AND CASH-FLOW
IN EVALUATING ECONOMIC PERFORMANCE. Annals of'Constantin
Brancusi'University of Targu-Jiu. Economy Series, (3).
Ali, U., Ormal, L. and Ahmad, F., 2018. Impact of free cash flow on profitability of the firms in
automobile sector of Germany. Journal of Economics and Management Sciences. 1(1).
pp.57-67.
Rafi, M and et.al., 2020. Budget harmonization and challenges: understanding the competence
of professionals in the budget process for structural and policy reforms in public
libraries. Performance Measurement and Metrics.
Online
Advantages and disadvantages of private limited company. 2020. [Online]. Available through: <
https://taxguru.in/company-law/advantages-disadvantages-private-limited-
company.html#:~:text=It%20can%20be%20registered%20with,family%20owned%20or
%20professionally%20managed. >
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APPENDIX
Ratio analysis calculation
Liquidity ratios
Current Ratio Formula 2019 2018
CA/ CL 0.91 2.59
Current Asset 426 352
Current Liabilities 469 136
Quick Ratio Formula 2019 2018
(CA- Inventories)/ CL 0.65 1.93
Current Asset 426 352
Inventory 121 89
Current Liabilities 469 136
Profitability ratios
Gross Profit Ratio Formula 2019 2018
GP/ Net Sales * 100 45% 60%
Gross Profit 615 1261
Net Sales 1366 2101
Net Profit Ratio Formula 2019 2018
NP/ Net Sales * 100 -37% 18%
Net Profit -500 372
Net Sales 1366 2101
Return On Asset Ratio Formula 2019 2018
Net Income/ Average Total Asset -29.41 22.77
Net Income -500 372
Average Total Assets 1700 1634
Efficiency ratios
Asset Turnover Ratio Formula 2019 2018
Net Sales/ Average Total Assets 0.82 1.29
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Net Sales 1366 2101
Average Total Assets 1667 1634
Inventory Turnover Ratio Formula 2019 2018
COGS/ Average Inventory 1.93 9.44
COGS 751 840
Average Inventory 389 89
Solvency ratios
Debt To Equity Ratio Formula 2019 2018
Total Liabilities/ Total
Shareholder Fund 4.48 1.02
TL 1390 824
Total Shareholder Fund 310 810
Proprietary Ratio Formula 2019 2018
Total Equity/ Total Asset 18% 50%
Total Equity 310 810
Total Asset 1700 1634
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