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Introduction

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In this report, the T-shirts Ltd performance analysis will be discussed by proper analysis of their profit and loss account and their financial position of the company to get their financial position. In this report, a brief discussion about accrual and cash accounting will be defined and how profit and cash flow are different from each other will be discussed. Why a company makes a budget in starting and their purpose of preparing a budget to work properly will be defined. The benefits of forming limited companies and listing benefits in the stock exchange for the companies will be discussed.

Part 1:

1.1 Analysis of profit and loss statement:

Profit and loss statement is useful to determine the actual financial position of the company. In this analysis two year data are provided for the T-shirt ltd. According to the information it is determined that in year 2018 to 2019 the situation of the company become change. In year 2018 company was in profit and in year 2019 company gets the loss. The major factor of this loss is revenue. It is indicating that the sales of the company go down. In 2018 sale was 2101000 but in year 2019 it becomes change and remain 1366000. The Gross profit become reduces due to sales. If talking about the cost of sales so that it is determined that as compared to the revenue changes, cost of sales doesnt change. Sales reduce by the 35% but cost of sales reduces only 11%. Other expense is increased by 23% as compared to the 2018. Along with the other expenses the finance cost also increase by 54% that is biggest problem for the company. Regarding to the all analysis it is identified that from 2018 to 2019 the profit and loss difference becomes 234% which is a big difference ( appendix1).

1.2 Analysis of balance sheet:

Analysis of the Assets side:

Balance sheet is most important statement in the organization and it is defined the overall performance of the company. Balance sheet is divided into 2 parts that is assets and another is liabilities. This company has property and equipment which is reduced by 1% from 2018 to 2019. Current assets are known as the Stock, trade receivables and cash equivalents. Stock and receivables increased in 2019 but it is also finding out that cash of the company decrease and become nil (appendix 2).

Analysis of the liabilities side:

Retained earnings of the T shirt ltd become decrease by 100% and become nil so that total equity of the owners remain only 310000. Company is in loss so for the working capital company take some borrowings and in year 2019 the borrowings increased by 34%. In year 2019 one liability also increased on the company that is Bank overdraft. Trade payable liability also increased in year 2019 by 11% which is also loss for the company.

Talking about the overall performance of the company, it is identify that in year 2019 the company performance increased by 4% but it is also true that this performance comes due to previous retained earnings and profit (appendix 2).

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Part 2

2.1 Accrual accounting versus Cash accounting with their benefits and limitations

 Accrual Accounting- This the method of accounting in which the transactions related to the expenses and revenue are recorded at the time of the occurrence only rather than recording them at the time of payment received or we can say made. This type of accounting method is used by those companies or businesses who want to record all their expenses and revenue related transactions at the occurrence time itself. The principle which is used in this accounting method is the matching principle which says that all the transactions of the expenses and revenue will be recognized in the same period of time.

Cash Accounting- This is also another way of accounting method to record the transactions in the business which is used by the finance accountant. In Cash accounting, the recordation of the transactions are made in the period when the business receives the payment and the expenses will be recorded at the time of their actual payment. This means that all the revenues and expenses transactions will only be recorded at the time of their actual cash paid and receive in the business (Goel, 2016).

Benefits and Limitations of Accrual accounting

Benefits:

  • This makes the planning of the company related to accounts easy as in this all the expenses and revenue transactions will be available at the right time. This helps in creating an effective expenses budget for the company and will also help in the prediction of the sales of the company.
  • With the help of this accounting method, the analysis of the accounts of the business becomes more easy and useful as in this all the transactions will be recorded at the time of the occurrence of the revenue and expenses.
  • This gives a clear picture to the business about their overall flow of the cash which helps them to plan for the next month and for the future about the expenses and control of the cash easily.

Limitations:

  • This accounting method may not be good for the small business as in this the need of the staff is more to control and record all the transactions at the time of the occurrence.
  • This requires the recordation of the transactions on the monthly bases which will not be possible for all the type of the businesses (Labrador et al, 2019).

Benefits and Limitations of Cash Accounting

Benefits:

  • Cash accounting is easy for the business in using, as this is very easy to learn how to use this method and record all the transactions of the revenue and expenses.
  • Provide the current or present position of the business in terms of the cash that how much in hand cash is available with the business.

Limitations:

  • Its uses are limited as every type of business cannot use this method for the record of their transactions.
  • As in this method, you will not be able to see your liabilities due to which extra use of the cash can occur.

2.2 Profit and Cash Flow and their differences

Profit- The Profit is the total amount which the company left after deducting all their expenses and which they have earned from the sale of their product and services after reducing all types of expenses. No business can sustain and survive without the profit they make in their business.

Cash Flow- The Cash flow shows the business their daily outflow and inflow of the cash transactions which gives a clear picture about the total cash the business has and how much they have to spend and this will help them in controlling their cash flow in the business. The less cash flow means that the company is not in a position to pay their employees and suppliers (Diana et al, 2018).

Differences between Cash Flow and Profit

  • The cash flow shows the accurate amount of money outflow and inflow in the company.

And in the Profit, it just shows the total amount of profit the company left after they totally deduct all their occurred expenses in the firm.

  • The business can have cash with them but it is not necessary that they are in the profit all the time.

And In the Profit case, the company may be in profit for a long time but it is not sure that they have enough cash in the liquidity form (Thaddeus et al, 2020).

  • The Cashflow shows how much the business is financially strong for a long period of time.

But in Profit, it just only shows the company their short term success due to the good sales of their products and gaining the profit from it.

  • The Cashflow can get issues even at the time of the high growth of the business as due to the sudden high growth the companies may need more cash to grow and this may cause the issues in the cash flow.

But In Profit this not happen as the companies sometimes make the profit or sometimes make the loss at some fixed period of time so the growth of the company may not affect it too much directly as the company will think of increasing their growth when they were making enough profit from their sales and want to expand (Al Hayek, 2018).

Part 3

3.1 Budget and Its purpose of Preparing

Budget-The Budget is the financial document or plan which is prepared by the companies through which they estimate their future expenses and income which can be made. The budget set the limit on the expenses of the different departments of the company that how much they need to spend in which activity to complete and run their operation.

Anyone can make the Budget if either they can be government, companies, individuals who want to put a control on their expenses and income of there. This determines their expected future income and expenses. With the help of this, the business will be able to control over their unnecessary expenses on the things and tries to save the money of the business and raise the profit. It helps in keeping track of the companys income and expenses made by the various departments of the company (Suurd, 2020).

Purpose of Preparing the Budget

  • Save the money and helps in increase of the savings of the company, as when they make the proper budget for the expenses then all the unnecessary expenses will be stopped and this will turn into a saving of the money of the company.
  • A budget helps the company is having a good and strong financial position in every financial year as they have good control over their income and expenses so they can manage the cash inflow and outflow of the company and have a clear picture about their position in the market financially.
  • This also helps the businesses in improving their net worth as when they properly plan and manage and monitor and improve their budget then they will be able to make a good profit and reduce their expenses and this will lead to the increase of their net worth (Talib et al, 2017).
  • This reduces the burden and stress in relation to their financial position of the companies as to when they will have strong financial background then the company owner and manager will have less stress about their money inflow and outflow and this will help them to grow their business.
  • Will help in getting out from the debt they take from the outside faster as by proper planning and the making of the budget the company will be able to reduce all their excess expenses and properly distribute their money properly between the departments and this will help in making good revenue and this will help in the end to reduce their debt.
  • Help in finding out which department is wasting more money on unnecessary items and things and by these they will focus on this and will reduce the expenses or waste they are making in terms of money.
  • It helps in controlling the companies their daily activities of the money and motivates the managers to focus on their goals which they set to achieve on time and in a perfect manner (Stenman, 2020).

3.2 Benefits of forming a limited company and listing in the stock exchange

Benefits of Forming a limited company:

  • It helps the companies to reduce their personal liabilities as the limited company is the separate legal entity which is treated and by this the company will be treated as a separate one from the person who owns the company and by this, they reduce their personal liabilities in it.
  • This helps in saving the personal tax of the owner as the limited company is treated as separated from the owner so it can save their overall tax. As the owner can reduce their amount of salary and can raise more money from their business from the dividends.
  • The identity of the limited company is distinct as the company will be treated as a separate one from the owner. As everything which will be happening in the company will be undertaken under the name of the company like bank accounts, assets ownership, etc and this will not be come under the name of the owner (Andonovski et al, 2018).
  • Rising the funding for the limited company will be an easy and secure one as compared to the sole traders who want to raise the funds.
  • The limited company can also issue various types of shares.

Benefits of listing in the Stock Exchange

  • Listing in the stock exchange will help in increasing the value of the company as the name and brand of the company will become very known by everyone and by this their market value will be increase due to their stock price.
  • Improve Company Profile, as that company who got listed in the stock exchange, will be largely identifiable and noticeable as compared to the other companies who are not listed in the stock exchange.
  • This helps the companies to raise the funds easily for their business as they are listed on the stock exchange then they can raise money through the sale of their shares as compared to other private companies who are not listed (Dabengwa, 2017).

Conclusion

From the above report, it can conclude that T-Shirt Ltd having a loss in the year 2019 as compared to the year 2018 in which they gain the profit this shows that in the year 2019 their budget planning and other expenses are high and not good. The financial statement of the company shows that total liabilities and total assets are equal in both the years which defines that the company has to work hard to improve its balance sheet. Accrual and cash accounting both are good for different types of business. The profit and cash flow have different importance. The budget is very important for the companies and listing of their companies on the stock exchange will give importance.

Appendix:

Appendix 1:

Profit and loss year ended 31 December

Particular

2019 (in 000)

2018 (in 000)

% changes

Revenue

1366

2101

-35%

cost of sales

-751

-840

-11%

Gross profit

615

1261

-51%

other expenses

-1009

-820

23%

Profit before interest and tax

-394

441

-189%

finance cost

-106

-69

54%

profit / loss for the year

-500

372

-234%

Appendix 2:

Finanacial statemnet for 31 December

Particular

2019 (in 000)

2018 (in 000)

% changes

Assets

Non current assets

Property, plant and equipment

1274

1282

-1%

Current assets:

Inventories

121

89

36%

Trade and other receivables

305

218

40%

cash and cash equivalents

0

45

-100%

426

352

21%

Total Assets

1700

1634

4%

Equity and liabilities

Equity

Share capital

310

310

0%

Retained earnings

0

500

-100%

Total Equity

310

810

-62%

Non-current Liabilities

Long-term borrowings

921

688

34%

921

688

34%

Current liabilities

Trade payables

151

136

11%

Bank overdraft

318

0

469

136

245%

Total liabilities

1390

824

69%

Total Equity and Liabilities

1700

1634

4%

References

Al Hayek, M,A, 2018, The Relationship Between Sales Revenue and Net Profit with Net Cash Flows from Operating Activities in Jordanian Industrial Joint Stock Companies, International Journal of Academic Research in Accounting, Finance and Management Sciences8(3), pp.149-162.

Andonovski, M, Zdravkoski, I, and Midovska, M, 2018, Type And Scope Of Responsibility Of The Cooperators In The Public Trade Company-Advantages And Disadvantages, Cataloging-In-Publication Data, p.105.

Dabengwa, V,N, 2017, The financial effect of cross listing on Sub-Saharan African exchanges for Johannesburg Stock Exchange,(JSE), listed companies (Doctoral dissertation).

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).

Goel, D, 2016, The earnings management motivation: Accrual accounting vs. cash accounting, Australasian Accounting, Business and Finance Journal10(3), pp.48-66.

Labrador, M, and Olmo, J, 2019, Management accounting innovations for rationalizing the cost of services: The reassessment of cash and accrual accounting, Public Money & Management39(6), pp.401-408.

Stenman, E, 2020, Creating projected financial budget For Dwellet Oy to project company profitability and financing requirements.

Suurd, A, 2020, Why you need to budget: business-budgeting, Farmers Weekly2020(20029), pp.32-34.

Talib, N,F,M, and Ismail, R,A,M, 2017, Effect of Financial Management on Budget and Budgeting Process, International Journal of Business and Management1(1), pp.18-21.

Thaddeus, U,N, and Obiorah, I,M, 2020, EVALUATION OF CASH FLOW TO SALES AND NET PROFIT MARGIN TO SALES RATIOS AS A FIRM PERFORMANCE MEASURE. A STUDY OF VITAFOAM COMPANY, NIGERIA (1993-2015). Journal of Accounting Information and Innovation6(3).

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