This term paper has been prepared for the partial

fulfilment of the Principles of Accounting course of BBA in

Marketing Program

Date of Submission: 6th November, 2020

ISSUED BY
Mohammed Moin Uddin Reza
Assistant Professor
Department of Business Administration in Accounting &
Information System
Faculty of Business Studies
Bangladesh University of Professionals
Course Name: Principles of Accounting
Course Code: ALD 1202

SUBMITTED BY
Sadia Noor
Roll- 2025171006
Section- B
Department of Business Administration in Marketing
Faculty of Business Studies
Bangladesh University of Professionals
 HORIZONTAL ANALYSIS
(BALANCE SHEET)
Regent Textile Mills Limited

In case of analysing the statement of financial position or balance sheet, we

have to take the details of balance sheet of two consecutive year i.e. 2017 and
2016. We have to put the details accordingly to determine the increase and
decrease that has taken place and the change is to be noted which will be
expressed as an amount and percentage. Here, 2016 is the base year and we will
measure all percentage increases or decreases from the base period amount as
follows.

Change since Base Period = (Current Year Amount – Base Year Amount) /
Base Year Amount

The comparative balance sheet shows that a number of significant changes have
occurred in Regent Textile Mills Limited’s financial structure from 2016 to
2018.
Here, in the statement of financial position of Regent Textile Mills LTD, we find an
increase of 16.72% in total assets. But an increase in the current asset is noticeable
which is 16.03%. The management should focus increasing the long-term investments
instead of the current assets. Long-term investments have also increased by 3.55%,
which should be risen up more as the organization can earn interest from it.

Secondly, their long-term liabilities increased by 393.62% which is a sign of danger

for the organization as they need to pay huge interest against it. So, the managers have
to take necessary initiatives to lessen the amount of liabilities or invest their current
assets in it to pay all these liabilities.
 HORIZONTAL ANALYSIS
(INCOME STATEMENT)
Regent Textile Mills Limited
While preparing the horizontal analysis of the statement of Profit or Loss, we require
the details of income statement of two consecutive year i.e. 2017 and 2016. To assess
the increase and decrease that has taken place, we have to put the specifics
accordingly and the improvement is to be noted, which will be expressed as a number
and percentage. Here, 2016 is the base year and all percentage changes or decreases
from the sum of the base year will be calculated as follows.

The comparative income statement shows that a number of significant changes have
occurred in Regent Textile Mills Limited’s financial structure from 2016 to 2017.

As there is no sales return, sales discount given in the income statement of Regent
Textile Mills LTD, we have counted the revenue as the Net Sells. The revenue
decreased 47.21% in between the years 2017 and 2016 which is not positive for the
organization. The more an organization increases the sales revenue, the better they
perform their business. We can see a decrease of 34.09% in the net income as well.
The management must focus increasing total comprehensive income. Again, the
corporation should lessen the expenses to gain profit and run a competitive business.

VERTICAL ANALYSIS
(BALANCE SHEET)
Regent Textile Mills Limited

In case of analysing the statement of financial position or balance sheet, we will

consider the value of the entire asset as 100%. We start off by calculating the
percentage of the individual current and non-current assets against this value. That is,
let an asset entry be x, so the percentage of that specific asset will be (x/Total asset)
*100%.

Following the same procedure, we also calculate the percentage of the individual
entries of current and non-current liabilities and the owner's equity as well.

Finally, we see that the total value of the assets sums up to be 100%, as well as total
owner’s equity and liabilities end up with the same value. Hence, the equation [Asset
= Liability + Owner's equity] has been accurately followed and the vertical analysis of
the balance sheet is being prepared by making necessary remarks on the obtained
values or percentages.
Here we can see, in 2017, the total Current Asset was 59.10% of the total current asset
of the said year. Where, the total Current asset of 2016 was 59.45% of the total asset
of that particular year. There is a slight decrease between these years in the total
Current asset. We know, that decreasing current asset is good for the financial position
of the company. Again, if we compare the current asset of 2017 — 59.10% with the
current Liabilities of 2017 — 20.24% even then also, the current asset should be
lessened by Regent Textile Mills LTD. The total long-term investments in 2017 and
2016 is 40.90% & 40.55% respectively which is disappointing. We know that increase
in the long-term investments is good for the organization as we gain interest from
these. Finally, in terms of assets, the organization should focus increasing the long-
term investments of the company and decrease the current assets.

In case of Liabilities, total Liabilities of 2017 and 2016 is 35.99% and 25.87%
respectively. A huge increase of liabilities is noticeable here. The management should
focus on decreasing the liabilities of the organization as well.

VERTICAL ANALYSIS
(INCOME STATEMENT)
Regent Textile Mills Limited

While preparing the vertical analysis of the statement of Profit or Loss, we require the
value of net sales if there is any purchase discount or purchase return. We consider the
value of the sales revenue as 100% and proceed with our analysis. With respect to this
value, we find the percentage of the other entries of revenue and expense as
mentioned in the income statement i.e. COGS, Gross profit, Operating profit, Finance
income, Income tax expense etc. This way, we obtain those values and compare them
for the years 2016 and 2017 and make necessary remarks as a part of analysing the
income statement of Regent Textile Mills Limited.
In the income statement of Regent Textile Mills LTD, there is no sales discount or
sales return included. For this, we have counted the sales revenue as net sales. So, the
sales revenue of both the year is 100% The initial concern of Regent Textile Mills
LTD in the income statement is the net profit or total comprehensive income of the
year which is 13.02% and 10.43% in 2017 and 2016 respectively. The net profit
increased by 2.35% which is a good sign for the organization. The Net Profit of an
organization is the most significant element. Without profit, the organization may
disappear. So, Regent Textile Mills LTD should focus on cost management and
decrease the Cost of Goods Sold, Total Expense and other expenses to escalate the net
profit more in future.
 RATIO ANALYSIS
Regent Textile Mills Limited

Current Ratio
This ratio reflects the number of times short-term assets cover short-term liabilities
and is a fairly accurate indication of a company's ability to service its current
obligations. The composition of current assets is a key factor in the evaluation of this
ratio.

Current ratio= Current asset/Current liabilities

The current ratio of 2017 is 2.92, which compared to the previous year of 2.68
indicates the company's ability to service short-term obligations is satisfactory. And
the percentage of increase is 8.96%. However, the value of the quick ratio will
provide a clearer indication of the company's success in this area.
 Quick Ratio
(Cash + Marketable Securities + Trade Accounts Receivable) / Current
Liabilities

This ratio, also known as the acid test ratio, measures immediate liquidity - the
number of times cash, accounts receivable, and marketable securities cover short-term
obligations. A higher number is preferred because it suggests a company has a strong
ability to service short-term obligations. This ratio is a more reliable variation of the
Current ratio because inventory, prepaid expenses, and other less liquid current assets
are removed from the calculation.

The quick ratio of 2017 is 1.62, which compared to the previous year of 2.31 indicates
the company's ability to service short-term obligations is not favourable at all as the
percentage of decrease is 29.87%.

Inventory Turnover
Cost of Goods Sold/ Average Inventory

Inventory turnover is the rate at which a company replaces inventory in a given period
due to sales. Calculating inventory turnover helps businesses make better pricing,
manufacturing, marketing, and purchasing decisions. Well-managed inventory levels
show that a company's sales are at the desired level, and costs are controlled. The
inventory turnover ratio is a measure of how well a company generates sales from its
inventory.

The inventory turnover in 2017 is 2.65 and in 2016 it is 3.95. Any of these is not ideal.
Ideal inventory turnover is around 5.

Asset Turnover
Net sales/ Average assets

The asset turnover ratio measures the value of a company's sales or revenues relative
to the value of its assets. The asset turnover ratio can be used as an indicator of the
efficiency with which a company is using its assets to generate revenue. The higher
the asset turnover ratio, the more efficient a company is at generating revenue from its
assets. Conversely, if a company has a low asset turnover ratio, it indicates it is not
efficiently using its assets to generate sales.

The asset turnover ratio of Regent Textile Mills LTD in 2017 is 0.19 which is not
decent as company tries more likely to aim for an asset turnover ratio that's between
0.25 and 0.5.

Return on Assets
Net Income / Average Assets

This ratio measures how effectively a company's assets are being used to generate
profits. It is one of the most important ratios when evaluating the success of a
business. A higher number reflects a well-managed company with a healthy return on
assets. Heavily depreciated assets, a large number of intangible assets, or any unusual
income or expenses can easily distort this calculation.

The return on assets ratio of 2017 is 3.16, which indicates the ratio is quite decent for
the company as the ideal rate is 0.05/5%. But it has decreased in comparison with the
ratio of 2016. The organization should try to be more consistent.

Return on Common Stockholder’s Equity

(Net income – Preferred Dividend) / Average Common Stockholders’ Equity

Return on common stockholders’ equity ratio measures the success of a company in

generating income for the benefit of common stockholders. It is computed by dividing
the net income available for common stockholders by common stockholders’ equity.
The ratio is usually expressed in percentage.

The return of common stockholders’ equity ratio of 2017 is 3.96% and it was 6.16%
in 2016. Both of the values are normal as the ideal value stands at 10% or less.
 Debt to Total Assets Ratio

Total Debt / Total Asset

Debt to assets is a leverage ratio that defines the total amount of debt relative to assets
owned by a company. Using this metric, analysts can compare one company's
leverage with that of other companies in the same industry. This information can
reflect how financially stable a company is. The higher the ratio, the higher the degree
of leverage (DoL) and, consequently, the higher the risk of investing in that company.

The debt to asset ratio in 2017 was 0.56 and in 2016 was 0.35 and the increase is
60%. A lower debt-to-asset ratio suggests a stronger financial structure, just as a
higher debt-to-asset ratio suggests higher risk. Generally, a ratio of 0.4 – 40 percent –
or lower is considered a good debt ratio. The ratio is very higher than the ideal value
which concludes being said that the organization is at higher risk.

Profit Margin

Net income/ Net sales

This ratio measures how much profit a company makes on each sales dollar received
and how well a company could potentially deal with higher costs or lower sales in the
future.

The profit margin on sales in 2017 is 0.13%, which compared to the previous year of
0.10% indicates sales are contributing enough to the company's bottom line since it
increased by 60%.
 Receivable Turnover

Net Sales / Average Net Receivable

This ratio measures the number of times receivables turn over in a year and reveals
how successful a company is in collecting its outstanding receivables. A higher
number is preferred because it indicates a shorter time between sales and cash
collection.

The accounts receivable turnover is 1.84. So, the company’s accounts receivable
turned over 1.84 times during the past year, which means that the average account
receivable was collected in 365 days which has to be improved.

Payout Ratio
Total Dividends / Net Income

The payout ratio is a financial metric showing the proportion of earnings a company
pays shareholders in the form of dividends, expressed as a percentage of the
company's total earnings. On some occasions, the payout ratio refers to the dividends
paid out as a percentage of a company's cash flow. The payout ratio is also known as
the dividend payout ratio.

The payout ratio of Regent Textile Mills LTD in 2017 is 2.39 or 293% which is much
enough though it decreased 28.23% than previous year. As, payout ratio that is around
80 percent is considered high. A company with a high payout ratio is generally on the
cusp of declaring most or all the money it makes as dividends.