Business Finance: Analysis of Profit and Loss, Financial Position, Accrual Accounting vs Cash Accounting, Budgeting

This document provides an analysis of the statement of profit or loss and statement of financial position in business finance. It also explains the concept of accrual accounting versus cash accounting and the difference between profit and cash flow. Additionally, it discusses the purposes of preparing a budget in company finance.

Business Finance

Contents
Part 1 Business Performance Analysis............................................................................................3
1.1 Analysis of statement of Profit or Loss............................................................................3
1.2 Analysis of statement of Financial Position.....................................................................4
Part 2 Understanding Financial Information and cash management...............................................5
2.1 Concept of Accrual accounting versus cash accounting..................................................5
2.2 Difference between profit and cash flow..........................................................................6
Part 3 Budget and Company Finance...............................................................................................7
3.1 Budget and purposes of preparing a budget.....................................................................7
3.2 Benefits of forming a limited company and listing it on stock exchange........................8
REFERENCES..............................................................................................................................10
Appendices.....................................................................................................................................11
Supporting Calculations.......................................................................................................11

Part 1 Business Performance Analysis
1.1 Analysis of statement of Profit or Loss
The financial results or sales statement, because it is generally known, is among the
company's preliminary statements that communicate about its financial activities in a specific
timeframe (Chandra, 2017). This is a financial document summarising all of the profits and
expenditures of a corporation. This covers revenues from advertising and other revenues as well
as administrative costs, expense of that same products sold, various expenses resulting in the
organization's net revenue. Net profits can be correct or incorrect, i.e. the company can benefit
across both benefit and loss.
The business's descriptive financial statements has also been analysed to determine the
financial results of T shirts Ltd. but the first aspect which is examined at would be its revenue,
expenses as well as profitability. It is shown in the initial glance that perhaps the group posted a
decline from its sales between £ 2,101,000 during 2018 towards £ 1,366,000 during 2019, which
may be attributed to less interest leading to financial uncertainty. These have reduced the
purchase price from the previous year that has allowed it to record a smaller decline in total
revenue. Going ahead, it has reported a rise in operating costs, and while the spike would not
seem unusual, increasing revenue may be attributed to normal rises in administrative costs such
as publicity and advertising. In 2019, the organization reported a loss between tax and interest,
however in the preceding year was already in a successful condition. The group has reported a
rise in financial expenses by more than 1.5 percent, which indicates that this year the company,
is taking on additional debt with increased costs. The consequence is a massive negative during
2019 that was in 2018 at such a positive stage. With remaining earnings, this deficit may have
been changed. No detail mostly on dividend strategy of T Shirts Ltd was given. Diverse
accounting ratios were listed in the below order to provide a clearer quantitative overview of
financial results over 2 years:
Interest coverage ratio-It is a sovereign debt cum accounting package used only to
determine the willingness of the firm to meet its financial expenses from its profits (Greenbaum,
Thakor and Boot, 2019). The greater the number, the easier it is for industry. T shirt Ltd.
registered 3.71 times the potential to cover attention in 2019, although it became 6.39 times in
2018. The decline may be related to the enhanced cost of fund transfer lending that was missing

in 2018 as well as the volume of loans that will have interest rates has also risen. And, this can
also never be forgotten because, as in 2018, the corporation would not have revenues to offset its
financial expenses in 2019.
Operating gross profit measure that is assesses the productivity of a business by paying
variable manufacturing expenses to produce profit on revenue. T shirt Ltd posted an operating
income margin of 21 percent in 2018, although due to reasons mentioned above, it has an
operational loss ratio of 29 percent in 2019.
1.2 Analysis of statement of Financial Position
Another final declaration by a company that represents a capital structure at a particular time
seems to be the financial report or cash flow statement, because it is generally known (Fazzini,
2018). This covers the accounting results of company properties, liabilities of the company of
investors in such a way as to compare assets with the other two. The net sales defined in the
declaration of profits forms component of the investment of the owners.
In order to examine the financial condition of T Shirts Ltd., its financial situation statement
was analysed. It could be seen in the first calculation that there is indeed a decline in the market
amount of money invested, which is supposedly due to depreciation. Owing to lower demand
and decreased revenue, the closing stock price has risen, which indicates that the business has an
idle stock level in its warehouses. It must improve its marketing steps, and it will quickly have
expired stock. It is confirmed that the company has eased its lending policies to draw more
buyers, reflected in the rise in prior year current liabilities. The unusual truth is that even the firm
registered no short - term liabilities reserves in 2019, which is not a positive indicator of the
company's current assets. The firm has announced the same equity capital for both years,
meaning that T shirts Ltd. have not released any additional equity in 2019. In 2018, the firm
announced an ending balance of £ 500 of remaining profits that had to be used to balance off the
whole year's losses. Hence the retained amount of profits this year has been zero. Long-term
loans however have risen since 2018, suggesting that in 2019 debt payments are being obtained.
Payment period too have grown, but it seems to be in the normal market path from looking only
at ratio of growth. Also it recorded using cash outflow in 2019 that is at a far higher pace than
mortgages, according to data given.
In order to get a clearer comparative overview of T Shirts Ltd's two-year financial situation,
the following financial ratios were determined:

Present ratio: That is a financial leverage that used determine the efficacy of the cash flow
(Samonas, 2015). The greater the ratio, that stronger this is for the firm's cash. T shirts Ltd. had a
recorded current ratio of 2.58:1 in 2018, although it slipped to just 0.91:1 in 2019, showing a
decline in the capacity of the current profits of the firm to meet its financial obligations. It may
be attributed to the reason that the enterprise has used a large amount through debt financing to
finance its activities.
Debt-to-equity ratio-It is a financial measure that assesses that much of the debt could be
financed if required by equity. The greater is the percentage, the greater the standard chance. In
2019, T shirts Ltd posted a ratio of 4.48, while in 2018 it was just 1.01, due respectively to a rise
in retained earnings as well as a reduction in that will to capital gains.
Earnings per share is indeed a low profitability calculation that indicates the firm’s
profitability throughout regards to the corporation's share capital (Cortesi and et.al., 2015). The
greater the proportion, the stronger the situation will be T shirts Ltd. produced strong EPS of 1.2
in 2018 while pessimistic 1.6 in 2019 due to losses affecting the business in both years as
shareholder equity is unaltered.
Part 2 Understanding Financial Information and cash management
2.1 Concept of Accrual accounting versus cash accounting
Accrual accounting-This approach involves collection and measurement company cash products
irrespective not on whether money transactions have been implicated. It is premised on the
equity method that certain profits and losses should be identified in the very same time frame
where either the who are due or reimbursement has been swapped, with whatever occurs first. T
shirts Ltd, for instance, have a monthly overall sale of £ 100,000. From which, 60% is in money
whilst also 40 percent is on loans, of which fee will be did receive later. To have a realistic
image of cash the business follows repayment financial reporting and graphic novel purchases in
both configurations.
Benefits-The most notable advantage of accrual accounting would be that it offers an objective
view of the financial status of a business by comparing actual cash flow with projected potential
cash flows (Gigli and Mariani, 2018). This simpler view of retained earnings makes it really easy
for a T-shirts Ltd boss to handle their existing tasks and finances and also aids in better
preparation for the prospect.

Limitations-This technique is relatively difficult and more costly to follow. It takes some time
and professional professionals to assess earned compensation and make the appropriate change
to the accounting records. In addition, the maintenance of accounting payables and receivables
includes additional requirements. However most of the small firms favour the modified cash
process.
Cash accounting-This approach includes the recognition, calculation and documentation of
payments only where transfers and markets are concerned. Consequently, small firms favour
such accounting approach but it is not ideal for major businesses because it would reveal their
identity financial status (Aleinikov, Kuter and Musaelyan, 2017). A self-employed person has £
2000 in monthly revenue. 80 percent of which is currency, while 20 percent is on loan. The
trader uses the form of cash accounting which reports only cash transactions, leaving trade
debtors records as and then when money is received, since the merchant is only important in
explaining money in hand.
Benefits- The approach is easy and straightforward to enforce. With no need to train trained
workers to pursue this strategy, then there is no need to monitor accounts receivables and
payables, making reporting transparent and simple to follow. Thus the, small businessmen use it
because they are only worried about the money they already have in their possession.
Limitations-The main drawback of this strategy is that it ignores representing the true image of
company losses that have already been incurred but are not yet paid are now not compensated
for, granting the organisation a greater role than it truly is. As this approach does not represent a
true and full image, large corporations such as T shirts Ltd in difficult payments under the
Commonly Agreed Accounting Rules are not permitted to use it (GAAP).
2.2 Difference between profit and cash flow
Profit-Profit and net profits, despite subtracting all company operating costs from the sales,
the positive amount stays (Hogianto and Sebastian, 2019). It can either be shared among holders
or recouped back into the business. When costs outweigh earnings, it is considered a failure for
the corporation. It is measured by the financial statement that is divided into 3 parameters of the
proposed: total revenue, net margin and operating earnings.
Cash flow-Cash balance is refers to as the net amount between the in and out exchange of
money by an organisation at a given period of time. It's both correct and incorrect, thus. The
financial statement is recorded in 3 groups: operating, spending as well as cash flow funding.

Basis of difference Profit Cash flow
Revenue generated Accrued income or the income
that is owed for the year, not just
whether necessarily earned, is
expressed in the financial gains
statement.
In cash balance, only
those sales that have been
realized in money are
obtained.
Expenses incurred Both costs due for the fixed
time, regardless about whether or
not these have been paid during the
fixed time, are factored in the
estimation of benefit or loss.
When reviewing the cash
balance statement, just those
costs that are incurred in cash
during the stated balance sheet
are taken into consideration.
Adequacy Adequate earnings do not always
imply that the corporation has
sufficient money, since it often
requires non-cash costs and sales
(Ozerov and et.al., 2017).
Adequate investment returns
do not always indicate the
company earns adequate
income and that positive cash
flows may be the outcome of a
profitable product the raises
other costs and also profits.
Part 3 Budget and Company Finance
3.1 Budget and purposes of preparing a budget
An expenditure plan is a structured calculation of business activities, i.e. income and
expenditure, in quantitative terms over a determined period of time. These are focused on
financial accounts; cash balance statements, corporate priorities and market conditions. Since the
economic world is complicated, a business must plan flexible budgets that can be tailored as per
program planning (Ehrhardt and Brigham, 2016). A business plans different kinds of budgets
that are listed below:
Master budget-This document is a summary of all frontline services that represents the total
forecasts and projections for the business as a whole in the same financial year. This covers
multiple budgets, like:

Operating schedule-This budget involves the analysis of any of the profits and expenditures
anticipated from its normal business activities. This covers the cost of manufacturing goods,
depreciation and operating expenditures, etc. (Brealey and et.al., 2018).
Cash forecast-This budget provides an approximation of all cash inflows and outflows produced
during that time. This allows the brand optimise its transactions as per the flow of resources
throughout the sector.
Reasons in budget preparation: The following are separate objectives over which the
organisation plans expenditures:
Facilitates in planning and management-The main objective of budget research is to analyse an
organisation prepare and coordinate its operations for the defined time. Other than preparation, it
also serves as the goal or objective for the managerial position of operation and assessment.
Preparing budgets that are consistent over a long stretch of time enables them to keep in
accordance with the lengthy budgetary targets.
Helps to fix accountability-Budgets are the standard for influence, as mentioned previously. This
allows managers to determine differences from the objectives and to determine the accountability
of those responsible for the overlooked performance. Total management helps repairing funding
gaps and boost in investments. This mostly makes the business manage its staff members, and
moreover allows workers improve their skills qualifications.
Reports are created in percentages and enable a corporation maintain leverage of its finances
(Argenti, 2018). If a corporation is able to exert more leverage of its resources, they were
capable of achieving their targets more effectively and increase their net worth. Enhanced
technical and financial efficiency deteriorates stress mostly on organization's assets and
minimises undue financial assertions.
3.2 Benefits of forming a limited company and listing it on stock exchange
A limited partnership is a type of company business arrangement in which the legitimate
possession of a corporation is divided by giving it the status of a distinct legal person itself from
shareholders. They are regulated by the rules set down in the Corporations Act and should be
registered at Company Accounts in the United Kingdom. In the United Kingdom, there are 3
types of limited business: private firm limited by stock, private limited liability company as well
as limited company.

Benefits of forming a limited company: The advantages of creating a business entity are
described below:
A limited partnership is independent from its holders, i.e. this can try and negotiate by its own
behalf and can prosecute or be sued over it. Separate legal body it grants it the moral right to
receive and retain the gains generated from its activities (Miley, 2018).
Limited liability-A legal separation makes companies liable for trying to square its own current
assets and liabilities, and if the business refuses to pay its obligations, managers and owners
really aren't held liable to pay these other obligations individually.
Stock exchange listing benefits: The advantages of listing a corporation on a stock market are
listed below:
Generating revenue thru the public share issue-After listing a corporation on any stock market, it
can purchase it's own shareholders and everyone can buy shares in stock holdings that help it
start raising much greater capital.
Expanding the market share: Firm’s in market capitalization is liable to have a broad market
share, going to promote the threat of property to large numbers of investors without increasing
effort into work by a single campaign group to influence decision-making (Ehrhardt and
Brigham, 2016).

REFERENCES
Books and Journals
Aleinikov, D., Kuter, M. and Musaelyan, A., 2017, December. The early cash account books.
In International Conference on Information Technology Science (pp. 195-207).
Springer, Cham.
Argenti, J., 2018. Practical corporate planning. Routledge.
Brealey, R.A. and et.al., 2018. Principles of Corporate Finance, 12/e (Vol. 12). McGraw-Hill
Education.
Chandra, P., 2017. Investment analysis and portfolio management. McGraw-hill education.
Cortesi, A. and et.al., 2015. Advanced Financial Accounting: Financial Statement Analysis–
Accounting Issues–Group Accounts. EGEA spa.
Ehrhardt, M.C. and Brigham, E.F., 2016. Corporate finance: A focused approach. Cengage
learning.
Ehrhardt, M.C. and Brigham, E.F., 2016. Corporate finance: A focused approach. Cengage
learning.
Fazzini, M., 2018. Financial Statement Analysis. In Business Valuation (pp. 39-76). Palgrave
Macmillan, Cham.
Gigli, S. and Mariani, L., 2018. Lost in the transition from cash to accrual
accounting. International Journal of Public Sector Management.
Greenbaum, S.I., Thakor, A.V. and Boot, A.W., 2019. Contemporary financial intermediation.
Academic Press.
Hogianto, W. and Sebastian, H., 2019. Use of Profit and Cash Flow to Predict the Condition of
Financial Distress. Available at SSRN 3319862.
Miley, V., 2018. Budget cuts hit corporate oversight. Green Left Weekly. (1181). p.9.
Ozerov, E.S. and et.al., 2017, September. Selecting the best use option for assets in a corporate
management system. In 2017 6th International Conference on Reliability, Infocom
Technologies and Optimization (Trends and Future Directions)(ICRITO) (pp. 162-170).
IEEE.
Samonas, M., 2015. Financial forecasting, analysis, and modelling: a framework for long-term
forecasting. John Wiley & Sons.

Appendices
Supporting Calculations
Particular 2019
(Amount in £’000)
2018
(Amount in £’000)
Current Assets 426 352
Current Liabilities 469 136
Current Ratio = Current Assets / Current
Liabilities
0.91:1 2.58:1
Particular 2019
(Amount in £’000)
2018
(Amount in £’000)
Profit before interest and tax -394 441
Finance cost 106 69
Interest coverage ratio = Earnings before Interest
and taxes / Interest expense
-3.71 6.39
Particular 2019
(Amount in £’000)
2018
(Amount in £’000)
Total liabilities 1390 824
Total shareholders’ equity 310 810
Debt-to-equity ratio = Total liabilities / Total
shareholders’ equity
4.48 1.01
Particular 2019
(Amount in £’000)
2018
(Amount in £’000)
Net Income -500 372
Closing number of outstanding shares
(*since no information about price per share, it has
been taken as £1 for each share for the sake of
ease of calculation, making total value as total
310 310

number of shares)
Earnings per share = Net Income / Closing
number of outstanding shares
-1.61 1.2
Particular 2019
(Amount in £’000)
2018
(Amount in £’000)
Profit before interest and tax / Operating Profit -394 441
Total revenue 1366 2101
Operating Profit Margin = Earnings before
Interest and taxes / Total revenue
-29% 21%