Statement of Profit and Loss and Balance Sheet Analysis

This document provides an analysis of the statement of profit and loss and balance sheet. It discusses the ratios and their implications for the company's profitability and financial position. It also explains the concept of accrual accounting vs cash accounting and the difference between profit and cash flow. Additionally, it explores the meaning and purpose of budgeting and the benefits of forming a limited company and registering it over the stock exchange.

BUSINESS FINANCE

Table of Contents
Table of Contents.............................................................................................................................2
PART 1............................................................................................................................................3
Statement of profit and loss........................................................................................................3
Statement of Balance sheet.........................................................................................................4
PART 2............................................................................................................................................5
Concept of accrual accounting v/s cash accounting....................................................................5
Meaning and difference between profit and cash flow...............................................................6
PART 3............................................................................................................................................7
Meaning and purpose of budget..................................................................................................7
Benefits of forming limited company and registration of it over stock exchange......................8
REFERENCES..............................................................................................................................10
APPENDIX....................................................................................................................................11

PART 1
Statement of profit and loss
The statement of profit and loss account is the statement of the company which outlines the
profit or the loss suffered by the company. For analysing the profitability of the company there
are some ratios which the company need to analyse some of the following ratios-
Ratios 2019 2018
Quick ratio 0.65 1.93
Current ratio 0.91 2.59
Gross profit Margin 45.02% 60.02%
Net profit margin -36.60% 17.71%
 Quick ratio- this is a ratio which outlines the liquidity of the company that is the speed of
company in which they can convert the current asset into cash (Aisy, Mulyono and
Susilowati, 2017). The quick ratio of the company has decreased and this suggests that
company has started to invest more in inventories and because of this the cash of
company has been blocked. This states that company need to improve the quick ratio and
for this they have to invest more in current asset and try to limit their liabilities. Along
with this they also have to convert the inventory into cash.
 Current ratio- this ratio implies that how much current asset is present with the company
in order to pay off all its liabilities. This is very essential for the company to have good
current ratio. In 2019, the current ratio of company has decreased to 0.91 as compared to
2018, which was 2.59 times. This reflects that the company is not in much good and
liquid position and states that for paying of one liability the company is having only 0.91
assets. Hence for this it is essential for T- shirt plc to invest more current asset or they
must focus on limiting their current liabilities.
 Gross profit margin- the gross profit is the profit which is earned after deducting direct
expenses from the income. The gross profit of 2019 was 45.02% which was higher in
2018 that id 60.02%. Thus, this implies that the profitability of the company has
decreased and this resulted in decrease in the gross profit of company. This might be
possible that the direct expense of company may have increased or the production has

decreased. For managing this company need to limit their direct expenses. For this
company has already initiated giving more credit period which will result in increase in
profit.
 Net profit margin- this is defined as the profit which the company has earned after
deducting the indirect expense from the gross profit and the taxes and interest as well.
The net profit has changes drastically from 17.71% to -36.60% which is very high
change. This is very critical situation for the profitability of the company as profits of
company has been converted into losses. For this company need to work hard on limiting
their expenses and try to produce and sell more of the product and services. Further the
company also need to work more on marketing of the goods and services so that more
consumers are attracted towards it.
Statement of Balance sheet
The balance sheet is a statement which reflects the position of company at a point of
time. This simply means that this statement highlights all the liabilities and asset which are there
with company. Hence, for the analysis of the financial position of company some of the ratios are
being evaluated which are as follows-
Ratios 2019 2018
Debt to equity ratio 4.48 1.02
Proprietary ratio 18.24% 49.57%
Asset Turnover ratio 0.82 1.29
Inventory Turnover ratio 1.93 9.44
 Debt to equity ratio- this is the ratio which suggest the ratio of borrowed fund as
compared to the owners fund. In the current year the DE ratio is 4.48 and has been
increased from 1.02 and this suggests that the debt fund has increased. This clearly
reflects that the company has shifted more towards the debt financing as compared to the
equity financing. This means that company has to pay more of the interest and this is not
good for company.
 Proprietary ratio- this is a ratio which suggest the estimation about the money which is
capitalized for meeting the requirement of the business. As compared to the last year the
the proprietary ratio has decreased from 49.57 % to 18.24 % which is not good for

company. This is particularly because of the reason that this suggests that 18.24 % of
financing involves the capital arranged from investors and other by the loan providers.
 Asset turnover ratio- this ratio illustrates the relation between the facts that how
effectively the assets are being used in order to increase the sales of the company. In the
current year the asset turnover ratio is 0.82 and in 2018 it was 1.29. This reflects that the
ability of company in using the asset to increase the sales has reduced to a great extent.
Thus, this means that the company has to work more effectively in order to increase the
usage of asset to improve the sales of the company (Bjorklund, 2019).
 Inventory turnover ratio- this is a ratio which depicts the fact that inventory turnover
ratio is the one which suggest the time period in which the inventory is converted in cash.
In 2018 the inventory turnover ratio was 9.44 which have reduced to 1.93 in the year
2019. This is good for the company as the reduction in this ratio suggest that the
company can speedily convert the inventory in cash and again invest in inventory to
again convert it in cash.
PART 2
Concept of accrual accounting v/s cash accounting
Accrual accounting- the accrual accounting concept is the one which states the revenue or
the expense is recorded at the time when the transaction actually occurs and not the time when
payment is paid or received. This method of accounting follows the principle of matching
principle which states that the revenue and expenses must be recognized at the same time at
which they have been incurred.
Benefits
 The major benefit of using this method of accounting is that this allows for much easy
planning of the activities of business. The major reason for this is that company records
the transaction at time when it occurs then they know how they have to make future
strategies. This is assistive in making budget in proper and effective manner (6
advantages and disadvantages of accrual basis accounting, 2016).
 Another major benefit is that this concept of accounting is complied with GAAP which is
generally accepted accounting principles. Thus, this will assist the company in making

the financial statements more accurate and proper representation of the financial health of
the company.
Limitation
 The major limitation of the accrual accounting concept is that this leads to deception of
the financial statements. The major reason for this is that there might be confusion at time
of using this principle as sometimes it considers the transaction at that time only and
sometimes not. Thus, this may provide some negative or confusing image of company
financial position.
 Another limitation of this concept is that the switching cost of the company for this
concept is high. The major reason for this is that when the company is using the cash
accounting and then switches over the accrual then this increases the cost.
Example- with respect to the present case study it can be seen that the credit period was
increased from 30 to 60 days. Hence, in this present situation even if cash is not received it will
be shown in books of account as a debtor.
Cash accounting- this is a method of accounting in which payment is recorded at the time
in which it is received and expenses are recorded at the time when they are paid. In other words
it can be said that the transaction is recorded at the time when the payment is made or received
and not when they occur.
Benefit
 The major benefit of using the cash accounting is that it is very easy to use and
implement in order to conduct proper accounting. The major reason for this is that this
does not involve much steps and formalities and hence is easy to use.
 Another major benefit is that this provides a tax advantage because of the reason that the
transaction is only recorded when it occurs and rest it is not recorded in books of
accounts.
Limitation
 The major drawback of cash accounting is that this does not list out the complete picture.
The major reason for this is that the transaction is recorded only when cash is involves
that is either in case of payment or receipt of cash.
 Another limitation is that the use of this is very restricted as the transaction is only
recorded at time when the cash payment of receipt is involved. If the credit is provided to

the consumer then this will not be recorded at time of credit but will be recorded when
payment will be made.
Example- with respect to the above example of the goods is sold to consumer on credit that if 60
days then the transaction will be recorded at the time when cash will be received from the
consumers.
Meaning and difference between profit and cash flow
Meaning of profit and cash flow
Profit- the profit is referred to as remain of money which is left after deducting all the
cost and expenses from the income. The profit is calculated and showed in the income statement
after deducting all the direct and indirect expenses from the income. This profit is required for
the survival of the business.
Cash flow- this is the amount of cash which the company receives or pay during a certain
period of time. The cash can have two different flows that is cash inflow and cash outflow. The
cash outflow means cash going out of business and cash inflow means cash coming within the
business. For business to be successful the most essential thing is having a positive cash inflow
so that business is having good amount of cash.
Difference between cash flow and profits
Cash flow Profit
Cash flow is the amount and movement of cash
from within and outside of the business (What
is the difference between the cash basis and the
accrual basis of accounting? 2020).
On the flip side profit is defined as the money
which is left after deducting all the expenses
from the income.
The cash flow highlights the movement of cash
which is incurred from business activities.
On the other side profit indicates the amount of
cash which is generated from the selling of
product in which company deals.
The cash flow highlights the liquidity of the
company.
The profit depicts the profitability of the
company that is what the company earns after
applying for all expenses.
The cash flow includes the total of cash inflow
and outflow from the operating, investing and
financing activities.
The profit is referred to as the variation
between the revenue and the expenses which
the company incurs during the certain period of

time.
PART 3
Meaning and purpose of budget
Budget is defined as the estimation of the expected income and expenses which the
company may incur within the time frame of one year. This budget can be prepared for any
purpose that is for estimating the income and expense, sales, production, activity based zero
based and many other types of budget (Yaxin, 2018). These entire budgets provide a basis for
decision making for the manager. The major reason for this is that this budget provides
estimation that this much income or expense will be incurred. Thus, this provides an idea to the
manager and other people that they will have to spend this much amount in order to be in
profitable situation. The budget is also a basis for planning for effective future strategies and this
assist the manager in developing good and realistic strategies for optimum utilisation of the
budget. Another major reason for the effective use of budgeting is that this assists the company
in spending the amount in very optimal and effective manner. Thus, for this the manager can
make better strategies for the optimum and effective management of the limited finance in such a
manner that all expenses and requirements are being met.
Benefits of forming limited company and registration of it over stock exchange
The forming of a limited company is defined as forming a company wherein the
shareholders of the company have limited liability in the company unlike the partnership or a
company. Under this the shareholders have the liability limited up to the capital which they have
invested or as decided by all the shareholders. Further the registering of the company over stock
exchange is defined as listing the company over the stock exchange of the country or any
international stock exchanges. For a company there are many different types of benefits which
the company enjoys when they get themselves registered over the stock exchange (Firdaus and
Endri, 2020). These benefits are listed as below-
 The most important benefit which the company enjoys after listing is the increase in
goodwill and market reputation of the company. This is the major benefit as when the
company list itself over stock exchange then the buyers in stock market comes to know

about the company and this increase goodwill of company. Thus, this results in boost in
the market profile of the company to a great extent.
 Further another major benefit of listing is that when the company trades over the stock
market then it can easily get access to better financial options for raising capital. The
major reason for this is that when the company operates over stock market then people
trust the company and this increases the credibility of the company. Thus, as a result of
this company can arrange for easy access to the capital and at lower rates as well.
 Another major benefit is that there is more liquidity as the company register itself over
the stock market. The major reason for this is that when the company list itself over stock
market then this increases the investor investing in the company and as and when the
company requires money they can float their shares within the market. Thus, this result in
increase in the liquidity of company and they can arrange finance very quickly.
 Further another major benefit of registering over stock market is that this increases
transparency and efficiency of the company (Easton and et.al, 2018). The major
underlying this fact is that when the company is in stock market then they have to reveal
their financial position at least every year and because of this there is transparency among
company and its shareholders.
 In addition to this another major benefit of listing the company over stock exchange is
that this leads in more ethical and effective working. The major reason underlying this
fact is that when the company works over stock exchange then they come in contact with
much higher authorities. Thus, this result in more ethical and effective working.

REFERENCES
Books and Journals
Aisy, H.R., Mulyono, I. and Susilowati, K.D.S., 2017. Compilation of Financial Statements and
Financial Analysis for Non Profit
Organizations. JurnalMahasiswaAkuntansiManajemen. 3(1).
Bjorklund, P.R., 2019. The Financial Statements of a Property & Casualty Company. J. Legal
Econ. 25. p.101.
Easton, P.D. and et.al., 2018. Financial statement analysis & valuation. Boston, MA: Cambridge
Business Publishers.
Firdaus, F. and Endri, E., 2020. Financial Statement Analysis: Evidence from Indonesian Bank
BUKU IV. International Journal of Innovative Science and Research Technology. 5(4).
pp.455-461.
Yaxin, H., 2018. Analysis of financial statements of listed companies: a case study of Gree's
2016 annual report. Jiangsu Science & Technology Information. (15). p.4.
Online
6 advantages and disadvantages of accrual basis accounting. 2016. [Online]. Available through:
< https://connectusfund.org/6-advantages-and-disadvantages-of-accrual-basis-
accounting >
What is the difference between the cash basis and the accrual basis of accounting? 2020.
[Online]. Available Through:<https://www.accountingcoach.com/blog/cash-basis-
accrual-basis-of-accounting>.

APPENDIX
Liquidity Ratios
Formula 2019 2018
Current assets 426 352
Inventory 121 89
Current liability 469 136
Quick ratio (current assets-inventory)/current liabilities 0.65 1.93
Current ratio Current asset/ current liabilities 0.91 2.59
Profitability ratio
Net sales 1366 2101
Gross Profit 615 1261
Net income -500 372
Total assets 1700 1634
Gross profit Margin Gross profit/ sales 45.02% 60.02%
Net profit margin Net income/sales -36.60% 17.71%
Solvency ratios
Total assets 1700 1634
Total debts 1390 824
Total equity 310 810
Debt to equity ratio Total debt/total equity 4.48 1.02
Proprietary ratio Total equity / total Assets 18.24% 49.57%

Efficiency ratio
COGS 751 840
Average inventory 389 89
Net sales 1366 2101
Average asset 1667 1634
Asset Turnover ratio Net sales/Average Total Asset 0.82 1.29
Inventory Turnover
ratio COGS/Average Inventory 1.93 9.44