Module Name Financial Accounting and Financial Management

Module Code BA7001

Assignment Title Financial accounting

Type of Submission Individual written

Word Count 1,083 words

Submission Date

Name
 Table of Contents

Part 1: T Shirt Plc. Business Analysis.............................................................................................3

Part 2: Cash Management & Financial Information........................................................................4

Accrual & Cash Accounting........................................................................................................4

Cashflow & Profit........................................................................................................................5

References........................................................................................................................................6

Appendix A......................................................................................................................................7

Appendix B......................................................................................................................................8

Appendix B....................................................................................................................................10
Part 1: T Shirt Plc. Business Analysis

Roska et al. (2019) indicated that the P/L statement is the summary of the firm’s profitability
over time period. T-Shirt Plc. decided to improve its revenues by increasing the expenditure on
the advertisements. However, this raised the expenses by 23% with virtually no positive impact
on the revenues as it seemed to decreased by 35%. Following this trend, the GPM also fell by
51.2%. Other than this, the firm increased its reliance on the overdraft as can be seen in the
balance sheet i.e. OD rose by 100% from 0 to 318. This indicates the strategy of firm to increase
its debts financing instead of equity financing. The equity decreased by 61.7% indicates that the
firm has decreased the equity but increased its non-current liabilities and the current liabilities. It
can be risky for T-Shirt Plc. because debts are cheap but are way riskier than the equity
financing. This is coupled with the rising gearing ratio from 46% to 75% in 2019. Also, since the
OD has a higher financing cost, it can be seen that the finance costs rose by 53.6% from £69 to
£106. The overall impact of the rising expenses (advertisement expenses) can be seen on the
overall PBIT and profit for the year that fell by 189.3% and 234% respectively.

Since T-Shirt Plc’s is working towards increasing its customer base, it has relaxed its credit
terms from 30 days to 60 days. This decision has put an upward pressure on the receivables
(current assets) in the balance sheet but the increased inventories and receivables were eaten up
by the decreased cash & cash equivalents. Coupled with the falling revenues and profit, the NCA
fell and the liabilities rose. Upon inspection it can be seen that the current liabilities rose
244.85% i.e. way more than the current assets and total assets. This has also put a pressure on the
working capital i.e. Current Assets – Current Liabilities were -43 in 2019 meaning that T Shirt
Plc has not enough current assets to cover it liabilities. It was 216 in 2018. (see Appendix B for
calculations)

As discussed above, the decisions of T-Shirt Plc. to fight the economic turmoil through increased
credit terms and high level of advertisement didn’t work out well for its revenues and current
assets. This can also be backed by the ratio analysis where the GPM fell from 60% in 2018 to
45% in 2019. It means the firm is able to convert 45% of its revenues into gross profit after
covering its cost of sales. The rising expenses of the advertisement backfired and the OPM fell
from 21% to -29% showing T Shirt Plc.’s inability to meet its increasing other expenses due to
which it has failed to even cover its complete other expenses as it exceeds revenues by £394. The
finance cost also rose from £69 to £106 in 2019 from 2018 due to the decision of overrelying on
the bank overdrafts as a funding option. The ROCE also fell from 29% to -32% in 2019 due to
falling PBIT and decreased capital employed. The decrease was due to the loss experienced in
2019 and the rising current liabilities. Overall, the firm has experienced deteriorating position in
terms of profitability in 2019 (see Appendix C for calculations).

Since less equity is being utilized as a funding option, the gearing ratio also depicted that T Shirt
Plc. has become more leveraged. Its leverage ratio rose from 45.9% in 2018 to 74.8% in 2019. It
shows that the firm has become risky. The efficiency ratio also worsened as the inventory days
rose from 38 days in 2018 to 58 days in 2019. The trade receivable days rose from 37 days to 82
days showing that the receivable management department of T Shirt Plc is inefficient in
recovering the debts this was majorly due to the new credit policy for its customers i.e. 30 to 60
days for attracting more customers. The trade payable days also rose from 59 days to 73 days in
2019 from 2018. The operating cash cycle increased from 17 days to 67 days showing issues
with T Shirt’s efficiency. Just like the profitability and gearing, the liquidity ratios also fell
considerably. The current ratio fell from 2.59:1 to 0.90:1 in 2019 from 2018. This shows that
now T Shirt has only £0.90 of current assets to cover its £1 of current liabilities. It has liquidity
issues now. The quick ratio also fell from 1.91:1 in 2018 to 0.65:1 in 2019 showing that now the
firm has only £0.65 highly liquid assets to cover for its current obligations.

Overall, T Shirt Plc. has been experiencing issues in efficiency, liquidity, profitability and
gearing in 2019 as compared to that of 2018. This means, the credit relaxing strategy didn’t work
for T Shirt Plc as it only increased the current receivables but not the revenues. It also increased
the OCC of T Shirt Plc.

Part 2: Cash Management & Financial Information

Accrual & Cash Accounting

Accounting Type Benefits Drawbacks

Accruals accounting: It provides greater insight into It is very complex
The method in which the overall financial health Matching takes time and the
transactions are recognized
using the matching principle
i.e. transactions are matched
with the underlying economic
event occurring regardless of
the timing when the cash is
received or paid (Khan &
Mayes, 2009).
Cash accounting:
Under this method, the
revenues and expenses are
recorded as per the timing
when the cash is received
from customers and when the
payments are paid in cash
(Khan & Mayes, 2009).
It is compliant with the
standards of GAAP
It reflects true and fair view of
financial statement
It is good for large business
Easier and simpler to use
Gives the accurate current
cash measurement
Good for small businesses
It can be used to affect the tax
bill
bank account might not match
with the books
Businesses must pay taxes on
the incomes that are not yet
received even
It doesn’t give an accurate
measurement of the cash in
hand
It can distort the measure of
the profitability
It is only appropriate for the
cash-based businesses
Doesn’t reflect true and fair
view

Cashflow & Profit

Cash Flows Profit

The cash flow is the total amount of cash &
cash equivalents that moves in and out of the
business (MihaelaMaria & Diana, 2019). For T
Shirt Plc. we can see that there is the cash &
cash equivalents and it is the example of cash
flows. It doesn’t include the non-cash
adjustments like depreciation, bad debts, asset
impairment, amortization and depletion.
Profit is the amount that is achieved after
paying for all the operating and non-operating
expenses. For T Shirt Plc. the losses are
apparent in 2018. It can include the non-cash
accounts like depreciation expense, bad debt
expense, impairment gains and the impairment
losses (MihaelaMaria & Diana, 2019).
References

Khan, A. & Mayes, S., 2009. Transition to accrual accounting. Technical Notes and Manuals , p.
002.

MihaelaMaria, M. & Diana, H. I., 2019. Can We Trust Accounting Result And Cash-Flow In
Apreciating Financial Performance?. The Annals Of The University Of Oradea , p. 175.

Roška, V., Kuvačić, D. & Merkaš, Z., 2019. Analysis of Profit And Loss Statement Of The
Listed Companies In Croatia. EMAN 2019–Economics & Management, p. 63.

Shala, B., Prebreza, A. & Ramosaj, B., 2021. Horizontal and Vertical Analysis of SAMSUNG
Enterprise for the Years 2015-2016 and 2017-2018. Journal of Economics and Management
Sciences, 4(1).
Appendix A

Income Statement Vertical Analysis

2019 2018 2019 2018 Formula Formula

£000  £000 2018 2019
 Revenue 1,366 2,101 100% 100% 1,366/1,366 2,101/2,101
 Cost of sales 751 840 55% 40% 751/1,366 840/2,101
 Gross profit 615 1,261 45% 60% 615/1,366 1,261/2,101
 Other expenses 1009 820 74% 39% 1,009/1,366 820/2,101
Profit before interest and tax -394 441 -29% 21% 394/1,366 441/2,101
 Finance costs 106 69 8% 3% 106/1,366 69/2,101
 Profit / (loss) for the year -500 372 -37% 18% 500/1,366 372/2,101

Income Statement Horizontal Analysis

2019 2018 %Change Formula

£000  £000
 Revenue 1,366 2,101 -35.0% (1,366-2,101)/2,101
 Cost of sales 751 840 -10.6% (751-840)/840
 Gross profit 615 1,261 -51.2% (615-1,261)/1,261
 Other expenses 1009 820 23.0% (1,009-820)/820
Profit before interest and tax -394 441 -189.3% (-394-441)/441
 Finance costs 106 69 53.6% (106-69)/69
 Profit / (loss) for the year -500 372 -234.4% (-500-372)/372
Appendix B

Balance Sheet Vertical Analysis

YEARS 2019 2018 % change Formula

ASSETS
Non-current Assets
Property, Plant and Equipment 1,274 1,282 -0.62% (1,274-1,282)/1,282

Current Assets
Inventories 121 89 35.96% (121-89)/89
Trade and other receivables 305 218 39.91% (305-128)/128
Cash and cash equivalents 0 45 -100.00% (0-45)/45
Total Current Assets 426 352 21.02% (426-352)/352
Total Assets 1,700 1,634 4.04% (1,700-1,634)/1,634

EQUITY AND LIABILITIES

Equity
Share Capital 310 310 0.00% (310-310)/310
Retained Earnings 0 500 -100.00% (0-500)/500
Total Equity 310 810 -61.73% (310-810)/810

Non-current Liabilities
Long-term borrowings 921 688 33.87% (921-688)/688
Total Non-Current Liabilities 921 688 33.87% (921-688)/688
Current Liabilities
Trade payables 151 136 11.03% (151-136)/136
Bank overdraft 318 0 - (318-0)/0
Total Current Liabilities 469 136 244.85% (469-136)/136
Total Liabilities 1,390 824 68.69% (1,390-824)/824
Total Equity and Liabilities 1,700 1,634 4.04% (1,700-1,634)/1,634
Balance Sheet Horizontal Analysis

YEARS 2019 2018 2019 2018 Formula Formula

2018 2019
ASSETS
Non-current Assets
Property, Plant and Equipment 1,274 1,282 74.94% 78.46% 1,274/1,700 1,282/1,634

Current Assets
Inventories 121 89 7.12% 5.45% 121/1,700 89/1,634
Trade and other receivables 305 218 17.94% 13.34% 305/1,700 218/1,634
Cash and cash equivalents 0 45 0.00% 2.75% 0/1,700 45/1,634
Total Current Assets 426 352 25.06% 21.54% 426/1,700 352/1,634
Total Assets 1,700 1,634 100.00% 100.00% 1,700/1,700 1,634/1,634

EQUITY AND LIABILITIES

Equity
Share Capital 310 310 18.24% 18.97% 310/1,700 310/1,634
Retained Earnings 0 500 0.00% 30.60% 0/1,700 500/1,634
Total Equity 310 810 18.24% 49.57% 310/1,700 810/1,634

Non-current Liabilities
Long-term borrowings 921 688 54.18% 42.11% 921/1,700 688/1,634
Total Non-Current Liabilities 921 688 54.18% 42.11% 921/1,700 688/1,634
Current Liabilities
Trade payables 151 136 8.88% 8.32% 151/1,700 136/1,634
Bank overdraft 318 0 18.71% 0.00% 318/1,700 0/1,634
Total Current Liabilities 469 136 27.59% 8.32% 469/1,700 136/1,634
Total Liabilities 1,390 824 81.76% 50.43% 1,390/1,700 824/1,634
Total Equity and Liabilities 1,700 1,634 100.00% 100.00% 1,700/1,700 1,634/1,634
Appendix C

Ratio Analysis

2019 2018 2019 2018

Profitability Ratios 2019 2018 Formulas
GPM 45% 60% 615/1,366 1,261/2.101
OPM -29% 21% 394/1,366 441/2,101
ROCE -32% 29% 394/(1,700-469) 441/(1,634-136)

Liquidity Ratios
Current Ratio 0.908316 2.588235 426/469 352/136
Quick Ratio 0.65032 1.933824 426 - 121/ 469 352 - 89/ 136

Efficiency Ratios
Inventory Turnover Days 58.80826 38.67262 121/751 x 365 89/840 x 365
Trade Receivable Days 81.49707 37.87244 305/1,366 x 365 218/2,101 x 365
Trade Payable Days 73.38881 59.09524 151/751 x 365 136/840 x 365
OCC 66.91651 17.44982

Gearing 74.8% 45.9% 921/(1,700 - 469) 688/(1,634 - 136)