Comprehensive Business Report: Analysis of T-Shirt Ltd's Performance

This report offers a comprehensive analysis of T-Shirt Ltd's financial performance. It begins with an examination of the statement of profit or loss and the statement of financial position, including a detailed ratio analysis of key metrics such as current ratio, quick ratio, gross profit margin, and return on assets, highlighting the company's declining financial health. The report then delves into understanding financial information, contrasting accrual and cash accounting, and differentiating between profit and cash flow. Furthermore, it explores budget techniques, the purpose of budgeting, and the advantages of forming a limited company and listing it on a stock exchange. The analysis reveals significant financial challenges for T-Shirt Ltd, including declining revenues, increasing costs, and a shift from profitability to losses, emphasizing the need for immediate strategic interventions to improve financial performance and avoid potential bankruptcy.

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TABLE OF CONTENTS
PART 1: BUSINESS PERFORMANCE ANALYSIS..............................................................3
1.1 Statement of Profit or Loss..............................................................................................3
1.2 Statement of Financial Position.......................................................................................5
PART 2: UNDERSTANDING FINANCIAL INFORMATION & MANAGEMENT OF
CASH.........................................................................................................................................6
2.1 Understanding the concept of accrual accounting vs cash accounting............................6
2.2 Meaning and differences between the profit and cash flow.............................................7
PART3: BUDGET TECHNIQUES AND COMPANY FINANCE..........................................8
3.1 Budget and purpose of preparing it..................................................................................8
3.2 Benefits of forming a limited company and listing it on a stock exchange.....................8
REFERENCES.........................................................................................................................10
APPENDIX..............................................................................................................................11

PART 1: BUSINESS PERFORMANCE ANALYSIS
1.1 Statement of Profit or Loss
Statement of profit or loss statement is one among the three financial statements prepared
by the organisations. It is also known as income statement that provided about the incomes
and expenses to be carried out by the business during the year. It enables the management
and investors to identify the profits earned during the year by company. The statement
reflects incomes and expenditures of the business.
In the present case, T-shits ltd’s income statement provides that the company is having
revenues of 1366000 which had declined significantly as compared with the previous years. It
is essential for the business to ensure that revenues are growing every year. The cost of sales
as against the revenues have not decreased and this has lead to further decrease in the gross
profits of company. It requires the business to adapt cost efficient strategies that enables the
company to control the costs and expenditures (Abernathy and et.al., 2017). The increase is
seen due to rise in prices of raw materials and labour rates. However the revenues have not
increased. Company is required to adopt significant steps and restructuring for increasing the
revenues. The gross profit reflects the amount left with company after meeting the direct
trading and manufacturing expenses of company, It has decreased from 1261 in 2018 to 615
in 2019 which is very low.
The other expenses of company have increased from 820 to 1009 in current year. The
other expenses reflect the cost of running the operations of business. It includes
administration, selling, distribution and other cost of business. There has been rise in the
other expenses where the revenues have been decreased. It could be assessed that the
business is not able to manage the operations of business.
The finance cost of company has also increased due to new loans acquired by the
company. The increase in finance cost will also lead to decrease in profits as it is fixed
obligations. The company has turned to loss making from the profitable state last year. It had
incurred losses of 500000 in current year. The loss is mainly seen due to decrease in the
revenues and increase in costs. The mismanagement of the financial incomes and expense has
caused company to suffer losses.
Ratio analysis
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%
Return on assets -29.41% 22.77%
Current ratio:
The current ratio of T-shirts Ltd has shown a decline from 2.59 times to 0.91 times
in 2019. This means that there is an increase in the current obligations of the company as
against the current assets. Therefore, the liquidity position of the company is not good and
requires to take actions for minimizing its current obligations in order to avoid the situation
of cash crunch.
Quick ratio:
This ratio has also reduced which means that most of current assets of the company
involves inventory which has resulted into major reduction (Campisi and et.al., 2019). Along
with that, T-shirts Ltd requires to minimize its cash blocked in inventory and reduce its
current liabilities as well.
GP margin:
This is the profitability ratio which highlights that the GP margin of T-shirts Ltd has
declined and the main reason behind this is that of fall in the net sales of the company. This
has consequently led to reduction in the gross profit of the company. In the year 2018, it was
60.02% which has declined to 45.02% in the year 2019. Therefore, the company is required
to take immediate action for rising its revenue for which it has implemented the strategy of
providing credit to its debtors to 60 days from 30 days in order to grab more customers.
NP margin:
This proportion of T-shirts Ltd has demonstrated a descending pattern as the ratio
has diminished from 17.71% to the negative 36.60%. The primary purpose for this reduction
in ratio is the decrease in income and the increment in different costs of the organization
(Rodrigues and Rodrigues, 2018). Likewise, there was a rise in the interest burden too
influencing the profits of the organization. Consequently, organization needs to decrease its
operating costs and financial interest burden.
Return on assets:
It tends to be seen that the organization can't successfully utilize its resources in
producing higher benefits since the proportion has become negative which demonstrates that
the T-shirts Ltd isn't powerful enough in making appropriate and ideal use of its resources.

There has been an expansion in the resources however a decrease in the sales of the
organization.
1.2 Statement of Financial Position
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:
D/E ratio is the solvency ratio to measure the capital structure of the organization. T-
Shirts Ltd in the year 2019 has indicated an ascent in the proportion when contrasted with the
earlier year which is for the most part a direct result of the expansion in the obligation in the
capital structure. This demonstrates the unsafe circumstance for the organization as it is
having more prominent extent of obligation against the equity financing. This may imply that
the investors are least keen on providing funds to the business activity as the organization
isn't performing acceptable which is the reason T-shirts Ltd is looking for extra debt
financing.
Proprietary ratio:
The proprietary ratio of the organization features that in the year 2018 the
organization has almost 49.57% of the assets being contributed by the investors and the rest
of the sum has been financed through lenders (Zainudin and Hashim, 2016). Then again, in
2019 it diminished to 18.24% which shows that the organization has utilized the obligation in
its financing instead of the costly equity. The organization needs to keep up a harmony
between the high and low proportions.
Asset turnover ratio:
This proportion of the organization is extremely low which shows that the
organization isn't having capacity to successfully utilize its resources so as to create income
for the organization. This features that the organization isn't working gainfully in using its
resources to its full limit. The proportion was 1.29 in 2018 which further diminished to 0.82
in 2019. It is great to have higher proportion and as the organization is having lower
proportion which shows that the organization isn't using its resources effectively which may
be a result of the issue relating to the administration or the production.

Inventory turnover ratio:
In the year 2018, the organization was having the ITR of 9.44 occasions which
portrays the proficiency of the organization in selling out its stock which isn't so high
however sensible. Rather than it, in 2019, the ratio reduced to 1.93 which expresses that the
organization is experiencing time as the organization is overspending the sum in purchasing
huge quantity of stock and wasting the assets by making the capacity for the non-saleable
stock. In this way, the organization needs to audit its stock administration framework and
actualize approaches for successfully dealing with its stock driving to improve its liquidity
position also.
Based on above, it can be stated that the financial position of the company is not
good and the company requires to undertake immediate actions in order to effectively
manage the company otherwise, there is chance that the T-Shirt Ltd may become bankrupt.
PART 2: UNDERSTANDING FINANCIAL INFORMATION &
MANAGEMENT OF CASH
2.1 Understanding the concept of accrual accounting vs cash accounting
Accrual Accounting: in this form of accounting, the performance of the company is
measured through the way of recognizing the economic events even if the cash has actually
been received or not (Accrual Basis and Cash Basis. 2020). This approach follows the
matching principle and according to which the revenue and the expenses should be
recognized at the same time.
Benefits:
 This form of accounting is considered as the most useful method from the point of
business analysis.
 It additionally helps businesses in making financial plan for the costs and further
estimation of sales also and its complies with the GAAP.
 This strategy considers financial report which does not get affected on account of the
timing for cash received inside business.
Limitations:
 The main drawback of accrual accounting is that it is very complex to recognise the
revenue and expenses and requires help of accountant.
 It might create confusion in the mind of the people leading to deception in the
financial statements.

Example: The company T-shirt Ltd has increased the terms of credit to 60 days so even if the
cash is not received it will be recorded in the books of accounts under debtors.
Cash Accounting: This is another method of accounting, under which the payment and
receipts are recorded in the books only when the cash has been paid for expenses and cash
received for receipts (Cash basis vs. accrual basis accounting. 2019). It does not account for
when the transaction took place.
Benefits:
 This method is very easy to use, learn and implemented and is cost efficient as well.
 Another advantage is that it helps in accurately determining the account of cash
available in hand.
 For some businesses it provides tax benefits as only incomes and expenditures are
recorded for which cash has actually been received or paid.
Limitations:
 It does not provide a clear picture about the performance of the business as only cash
transactions are recorded.
 This method cannot be used by the businesses who sells goods on credit and is having
the gross receipts more than the IFRS requirements.
Example: As per the case given, even if the credit limit is extended but the transaction will
only be recorded when ach is received from the customers.
2.2 Meaning and differences between the profit and cash flow
Profit: It is net earnings which is left after meeting with all the expenditure
pertaining to that period. It is the amount which the business requires to incur otherwise, it
might not be able to survive for long. It is shown in the profit and loss account.
Cash flow: It refers to amount that the organization receives or pays in a specific
period of time (Stobierski, 2020). It is desirable to have positive cash flow in order to grow
and survive in the market without taking any additional funds. This also useful for creating
value for money.
Differentiating between cash flow and profit
Cash flow Profit
It mainly refers to the movement of cash in and
out of the business.
It is the residual amount left after subtracting
all the business expenses.

Cash flow depicts the different sources through
which the cash is received and paid.
It represents the amount which has been
generated by achieving the desired sales.
Cash flow is determined from the cash flow
statement which is based on the cash
accounting approach.
Profit is computed following the accrual basis
of accounting.
It provides information on the liquidity
position of the company which is important for
survival.
It highlights the performance of the
organization.
PART3: BUDGET TECHNIQUES AND COMPANY FINANCE
3.1 Budget and purpose of preparing it
Budget plan is fundamentally considered as an arrangement which is communicated in
a quantitative term for a particular timeframe which is primarily one year. It depicts all the
exercises which the organization is needed to embrace in that period so as to accomplish its
ideal objectives and goals. Some of the important purpose of budget is stated underneath.
Forecasting the revenue and expenses: The core objective for preparing the budget is
to get an estimated amount of expenditure the business is required to incur for that period in
order to attain the desired goals like sales or profit. Before initiating a new project r the
business, it is important to carry out the budgeting for knowing the funds that will be required
for implementing it.
Monitoring and controlling the performance: It provides a framework through which
the business organization can measure and monitor the performance of the organization in
comparison to the amount forecasted (OYEBODE, 2018). Through this, the organization can
exercise control action if the performance is not up to the mark.
Helps in undertaking decision: Budgeting gives money related structure inside which
the business association is needed to settle on choices like the proposed activity is arranged or
not. For the business to be completed in an effective manner, the occurrence of expenditure is
required to have been under control. For instance, financial plan for promotion and
advertisement is totally depleted and now the choice for causing extra expense on a similar
will to be in all likelihood "no".
Helps in providing benchmark: Budget gives a benchmark dependent on which the
current exercises of the association can be effortlessly handled and controlled with the
assistance of the set benchmark (Henttu-Aho, 2016). In this way, it helps and supports the

organization in taking right and improved decision which consequently results into
accomplishing the desired goals.
3.2 Benefits of forming a limited company and listing it on a stock exchange
A limited organization builds the methods of procuring funds and contributing
towards the development and improvement of the association. Listing an organization on a
stock trade empowers it to raise capital from the public which will help in additional
reinforcing of the authoritative structure and brand image. Listing encourages in offering
liquidity to the various providers of funds and in guaranteeing viable consistence with the
issuer and working in light of a legitimate concern for the investors. There are different
advantages related with the listing an organization on a stock trade which are expressed
underneath.
Procuring capital for additional growth: Companies arrives at a level where the extra
capital is needed to be infused which helps in organization's development and business
extension plans (Public Limited Companies. 2020). Hence, opening up to the world (going
public) is a path through which these limitations can be handily relieved. In this, the
organization builds the investors base and upgrades its credibility.
Increasing the organization’s visibility: This will help in improving the organization's
perceivability and validity all over different foundations and the public who are eager to
contribute which is a result of consenting to the various regulatory requirements and
guaranteeing straightforwardness while undertaking the business activities.
Liquidity: Going public animates liquidity giving the investors the opportunity to
understanding the worth they have put resources into the organization. It gives chance to the
investors or financial specialists to transact in the shares of the association and sharing
dangers and alongside the equivalent profiting the speculators with the expansion in the
company’s worth.
Enhancement in the employee morale and confidence: Listing of the organization
builds the perceivability and improves the impression of the general population towards the
business association, consequently, coming about into increment in the worker worth and
boosting of their spirit. There are odds of enlisting new staff and giving them the stock-based
payments like ESOPs and so on.

REFERENCES
Books and Journals
Abernathy, J.L., and et.al., 2017. Income statement reporting discretion allowed by FIN 48:
Interest and penalty expense classification. The Journal of the American Taxation
Association. 39(1). pp.45-66.
Campisi, D. and et.al., 2019. Efficiency assessment of knowledge intensive business services
industry in Italy: data envelopment analysis (DEA) and financial ratio
analysis. Measuring Business Excellence.
Henttu-Aho, T., 2016. Enabling characteristics of new budgeting practice and the role of
controller. Qualitative Research in Accounting & Management.
OYEBODE, O. J., 2018. Budget and Budgetary Control: A pragmatic approach to the
Nigerian infrastructure dilemma. World Journal of Research and Review. 7(3).
Rodrigues, L. and Rodrigues, L., 2018. Economic-financial performance of the Brazilian
sugarcane energy industry: An empirical evaluation using financial ratio, cluster and
discriminant analysis. Biomass and bioenergy. 108. pp.289-296.
Zainudin, E. F. and Hashim, H. A., 2016. Detecting fraudulent financial reporting using
financial ratio. Journal of Financial Reporting and Accounting.
Online
Accrual Basis and Cash Basis. 2020. [Online]. Available Through:<
https://www.toppr.com/guides/fundamentals-of-accounting/accounting-process/
accrual-basis-and-cash-basis/>.
Cash basis vs. accrual basis accounting. 2019. [Online]. Available Through:<
https://www.accountingtools.com/articles/cash-basis-vs-accrual-basis-
accounting.html>.
Public Limited Companies. 2020. [Online]. Available Through:<
https://www.tutor2u.net/business/reference/public-limited-companies >.
Stobierski, T., 2020. CASH FLOW VS. PROFIT: WHAT'S THE DIFFERENCE? [Online].
Available Through :< https://online.hbs.edu/blog/post/cash-flow-vs-profit>.

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%
Return on assets Net income/assets -29.41% 22.77%
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