Business Finance: Analysis of Profit and Loss and Financial Position

This document provides an analysis of profit and loss statement and statement of financial position for T-shirt Ltd. It also discusses the concepts of accruals vs cash accounting and profit vs cash flows. Additionally, it explains the meaning and purposes of budgeting and the benefits of forming a limited company and getting it registered on a stock exchange.

Business Finance

Table of Contents
Table of Contents.............................................................................................................................2
INTRODUCTION...........................................................................................................................1
1.1 Statement of profit and loss:..................................................................................................1
1.2Statement of financial position:..............................................................................................2
PART 2............................................................................................................................................2
2.1 Accruals vs cash accounting:.................................................................................................2
2.2 Profit vs cash flows:...............................................................................................................3
PART 3............................................................................................................................................4
3.1 Meaning and purposes of budget:..........................................................................................4
3.2 Benefits of forming a limited company and getting it registered on a stock exchange:........5
CONCLUSION................................................................................................................................5
REFERENCES................................................................................................................................7

INTRODUCTION
Business finance refers to raising and managing funds by business or organisation. It is
about assistance a business that it utilise its resources to meets monetary needs. Financing is the
process of providing funds for business activities, production function and investment. Every
firm needs for funds to operate its functions and business finance provides a source for
organisation to manage its monetary needs (Fairchild and Hahn, 2020). The company which is
selected for this report is T- shirt Ltd. It is trading in garments and struggling in the current
economic climate. This report covers topics such as business performance analysis through P &
L and balance sheet, concept of accrual accounting versus cash accounting and profit and cash
flow. Apart from this, it also covers budget techniques, purpose of preparing budget and benefits
of forming a limited company and listing it on a stock exchange. This report also contains the
ratio analysis of T-shirt limited that shows its comparison with past years (Cox and Nguyen,
2018).
PART 1
1.1 Statement of profit and loss:
Ratio analysis for T-shirt limited:
Ratio analysis is provides comparison to firm of line items in the financial statement of a
business. It is used to evaluate the organisations issues such as liquidity, turnover, operations
efficiency and profitability. The ratios which is calculated for this report are profitability ratios
such as gross profit margin, net profit margin and interest coverage ratio. Ratio can be calculated
by used of profit and loss account and balance sheet (Heil, 2017).
Gross profit margin
2018 2019
gross profit 1261 615
Sales 2101 1366
gross profit ratio 0.60019 0.45022
Net profit margin
2018 2019
Net profit 372 -500
Sales 2101 1366
Ratio 0.177059 (0.36603)
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Interest cover ratio
2018 2019
EBIT 441 -394
interest 69 106
6.391304 -3.71698
From the above calculation it shows that in 2018 T-shirt limited has 60% of its gross
profit and in 2019 it was decreased by 45% approx that shows firm’s less sales in 2019. Apart
from this it further decreases its net profit in 2019 by 36% appox in negative but it was 17% in
positive in year 2018 that shows firm’s profitability in the year. Firm has decreased its interest
courage ratio in year 2019 by negative 3.71% and that was positive in 2018 by 6.39% it leads to
higher finance cost in 2019 (Kostin and Kotelkin, 2018).
Profit & loss statement: It is a financial statement that contains the revenues, expenses,
cost incurred over a period of time, usually in quarterly and yearly basis. After considering all
these transactions it shows net profit of the firm. Net profit is summarized by difference of
expenses over its revenues. The statement shows firm's ability to generate its sales, expenses and
profits.
T-shirt Ltd. Formulates its p & l account every year. The report contains its profit and
loss account for the year 2018 and 2019 that shows its expenses and revenues for both years. In
2018 firms revenue shows 2101 that were decreased in 2019 by 1366. decrease in revenue maybe
the reason for less sale in 2019. in matter to cost of goods sold in 2018 it was 840 in negative
value but by 2019 it was increased by 751 in negative. Decrease in sales and increase in revenues
leads to firm's less gross profit in 2019. it was almost half profit for the firm than 2018. firms
expenses and tax liabilities also increased in 2019 with less production or sale. Because of its
less sale and more expenses it affects the firms revenue in 2019 that were shows loss in (500) for
the year. Firm should take some steps to improvement in its profits steps such as improvement in
quality, skilled labour, increase in promotional activities, technology advancement etc. so that it
can improve its productivity, decrease its cost as well as generate more profits (Liu, 2018).
1.2Statement of financial position:
Balance sheet: It is a financial statement that records a firm's liability, assets and its
shareholders equity. It presents a firm's financial position at the end of the year on specific date.
It has two sides with it that is liabilities and assets of the firm. And these both side covers in two
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part that is current assets or liabilities and fixed assets or liabilities and also includes
shareholders equity.
T-shirt Ltd. Prepares its balance sheet at the end of every year. In this report it shows its
financial position for the year 2018 and 2019 that contains its non current or current assets and
short term and long term liabilities. Firm shows its non current asset in 2018 it was 1282$ and in
2019 it decreased by 1274$. that shows firm sales some part of its plant & machinery or
depreciated in 2019. In 2018 firm's current asset shows 1634 that is increased by 1700 in 2019
that shows firm has less current assets or lack of liquidity with it. Firm's earning on its equity
shows 0 in 2019 that shows less capital in firm. Firms short term and long term liabilities
increased over a period of time that is not positive sign for it because firm has less asset or
liquidity to pay its liabilities. It has to improve its productivity and sales for generating profit and
improve its liquidity so that it can paid its liability by generating profits.
PART 2
2.1 Accruals vs cash accounting:
Accrual accounting: It refers to record transactions on the time of occurrence rather than it
converts in cash. In this concept tax appears on income even the cash is not received. Generally
it recognizes revenues when the goods or services deliver to the customers and expenses when
the transaction happens. It gives a realistic picture of any business financial position because it
accepts all types of revenues and expenses. In context to T-shirt Ltd. The firm records all
transactions on the basis of accrual accounting concept so that firm can use actual information at
the time of evaluating P & L and balance sheet. It helps firm in identifying income trends and
customer spending habits and creating cash flow forecasts to manages its working capital in
better way. Since the income and debt are precisely outlined, this allows the business to manage
the patterns of their financial activities (Mathkur, 2019).
Cash accounting: It refers to recording transactions when payment or receivables are
converts in cash. Cash accounting recognizes revenues when the firm received cash for sales and
expenses when it pay for purchase. Many business are prefers to cash accounting because it gives
actual bank balance. This concept is not includes all the transactions during records such as
prepaid and outstanding. Sometimes T-shirt Ltd. Uses this concept for accounting when it has
lack of cash flows. Cash accounting provides an accurate picture of funds that business has with
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its or in bank balance. Prepaid and outstanding expenses are not considers while making P & L
accounting and balance sheet. It does not present company's overall financial changes over a
specific period. It gives firm simplicity, accurate picture of cash flows and tax benefits. T-shirt
ltd can easily record and maintain their transactions in small notebook without preparing separate
set of systematic books.
2.2 Profit vs cash flows:
Profit: It refers to balance between firm's operating expenses and its revenues. It is a
subtraction of operating expenses from firm's revenues. Profit either provides to the owners and
shareholders of an organisation. In context to T-shirt Ltd., firm finds its profit in specific period
of time by revenues and expenses. Profits can be classified into three parts that are:
Gross profit: It refers to revenue minus the cost of goods sold. It concerns with variable
costs that occurs on level of output such as material cost and labour cost. It does not includes
fixed cost that company pays such as rent and salary not includes in production cost.
Operating profit: It includes all expenses occurs in firm's operations. Basically those
expenses that are generates from all business activities but excludes tax payments and interest
payments. Similarly it excludes positives cash flows that are arises from outside of the core
entity. It is also known as profit before interest and tax (Parle and Laing, 2017).
Net profit: Net profits concerns the income that is arise from after deducting all expenses
from all the revenues. It is the net income of firm that is distributed in owners and shareholders
of the firm. It is also called as net profit after interest and tax for the firm.
Cash flows: A cash flow shows real movement of money. For example, when a retailer
buys a product then money is flows out from the business to its suppliers. While, the retailer is
selling its products cash flows into the firm from its customers. Cash flow shows the net balance
between cash moving out and into in the business at a specific point of time. Cash flows of the
firm can be classified into three parts which are operating cash flow, investing cash flow and
financing cash flow.
 Operating cash flow: It refers the net cash generated from firm's daily operations.
Positive cash flow shows that firm is ton required to maintain its growth. In T-shirt
Limited firm records its daily operations to know firm’s growth and income generated
from its day to day activities.
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 Investing cash flow: it refers to firm's investment related to sale its asset or purchase
asset like equipments or property. Active investment in assets leads ton firm's growth. In
T-shirt Limited it helps firm to managing its sales and purchase activities of its assets.
 Financing cash flow: It refers to net flows of cash from the company in its activities and
cash flow from investors into the company and shows how firm is able to managed its
capital structure. In context to T-shirt Limited firm use this technique in order to know its
cash flow for the business operations and inflow by investors so that the managers of the
firm can manage its activities effectively and efficiently.
PART 3
3.1 Meaning and purposes of budget:
Budget: A budget is a plan usually used in quantitative monetary terms over a
period of time. A business refers to pre-estimation of expenses and revenues within a specific
period. Every firm plans for their annual budget for a profit plan that shows planned activities
that the firm responsible in order to achieve its goals and objectives. T-shirt Ltd. Also considers
budget in its activities to manage, evaluate and controls its performance. Budget gives the idea
about firm's performance in which manner it has to done its activities. budget helps in planning,
organising, monitoring and controlling of its performance according to planned manner (Shah
and Rankin, 2017). It provides a standard for comparison with the actual result achieved. It has
some elements such as plan, operations and resources, financial terms, specific future period,
comprehensiveness and coordination.
Purposes of budget in T- shirt Ltd.:
 It helps in making and managing short term plans.
 It is tool for communication to mangers in response to their responsibilities about plan.
 It is a tool of motivating managers to achieved their targets.
 It is a basis for evaluating and controlling activities according to planned manner.
 In other words, standard costing and budgeting go hand in hand, because a budget sets a
standard for firm's task.
 It gives a right path for organisation to complete its activities in efficient and effective
manner so that firm can achieve maximum profits.
 It helps in plan, organize, monitor and improve financial position (Siciliano, 2017).
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3.2 Benefits of forming a limited company and getting it registered on a stock exchange:
Limited company, it refers to a business entity that usually exist in their own liability that
means a limited company has separate rights then its owners. It can be separate by its shares
or by guarantee. This may be further divided into public and private limited. T-shirt Limited
as name shows it registered as a limited company that restricted by laws and the firm’s rules.
Firm has separate entity from its owners that leads to investment or any guarantee of
company. Minimizing personal liability, as company is separated its income and assets from
owners that allows firm to minimize its personal liabilities. This is because limited company
follows separate entity concept as business is separate from its owners. It allows firm to
create more professional image that helps firm to achieve more customer base in order to
increase its profitability and accomplish its goals.
Stock Exchange, it refers to managing and controlling securities for the purpose of buying and
selling. It allows firm to offers its security into the public for generating fund for business
purpose. In context to T-shirt Limited, the firm is listed in security exchange market that helps
firm to aware investors about the firm and generate a brand image. In this company offers
securities to stakeholders in order to raising fund. Raising more fund helps company to invest
more and that leads to expanding business activities. The most significant benefit of listing firm
in security exchange that these companies are more recognizable and visible in compare to
privately held firm’s (Ye, Bian and Xu, 2018).
CONCLUSION
From the above report it has been concluded that business finance refers to planning,
organising, analysing, managing and controlling of fund within the organisation. Financing
is the process of providing funds for business activities, production function and investment.
For the analysing any business performance in compare to past years it uses ratio analyses as
a planning tool. Firm uses profit and loss account and balance sheet that helps firm to know
about its expenses and income and liabilities and assets. For the transactions firm sometimes
use accrual accounting method and sometime it uses cash accounting, both are opposite of
each other. Firm’s profit are divided into three parts that are operating profit, gross profit
and net profit and its cash flows also covers three parts such as operating activities,
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investment activity and finance activity. Limited company has less liability and registered it
into stock exchange will give it chance of expanding business.
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REFERENCES
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the major field test in business and the Comprehensive Business Exam: An analysis of
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Mathkur, N. M .M., 2019. Business Ethics in Islamic Finance. Archives of Business
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Shah, A. K. and Rankin, A., 2017. Jainism and ethical finance: a timeless business model.
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Ye, X., Bian, X. and Xu, Q., 2018, July. Empirical analysis and optimization for supply chain
finance business process based on Petri nets. In 2018 15th International Conference on
Service Systems and Service Management (ICSSSM) (pp. 1-6). IEEE.
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