Introduction to Accounting & Finance: Analysis of Financial Ratios and Budgeting

This report provides an introduction to accounting and finance, including analysis of financial ratios and budgeting. It covers profitability, efficiency, liquidity, investment, and financial structure ratios. The report also explains the objectives of budgeting and the differences between financial and management accounting. A case study is included, which involves the calculation of project A & B using NPV and payback period method of capital budgeting.

INTRODUCTION TO
ACCOUNTING &
FINANCE
1

2

Abstract
Accounting and finance is crucial for making the strategic decision. Financial
ratio is considered to be the metrics that allow the investors and other stakeholders to
analyse the financial performance of the organisation. Budgeting is a very important
factor for any organization to be able to plan the financial activities. The different
between the management accounting and financial accounting is that management
accounting is helpful for the organisation and its competitors for the analysation of
trends and performance whereas, financial accounting is requirement of the
organisation for meeting the corporate governance. The current study has involved
calculation of project A & B by involving NPV and payback period method of capital
budgeting which is depicting that project A is beneficial.
3

TABLE OF CONTENTS
INTRODUCTION..........................................................................................................................4
MAIN BODY..................................................................................................................................4
SECTION A...................................................................................................................................4
Profitability Ratios................................................................................................................4
Efficiency ratios.....................................................................................................................6
Liquidity Ratios......................................................................................................................8
Investment ratios...............................................................................................................10
Financial Structure ratios................................................................................................11
SECTION B.................................................................................................................................13
Analysing objectives of budgeting for Manor Ltd...................................................13
Differences between financial and management accounting...........................13
3................................................................................................................................................14
a) Payback Period for the projects A & B..................................................................14
b) calculating the Net Present Value for the projects A & B..............................15
c) Explaining reason for selecting the project.........................................................16
CONCLUSION............................................................................................................................17
REFERENCES............................................................................................................................18
4

INTRODUCTION
Account and finance are the crucial for gaining the relevant
information regarding the prevailing performance in the monetary terms
that provides assistance in making strategic decision. In the current era, it
is important for the organization to pay attention on having the h relevant
practice of accounting & finance in turn accomplishing the organizational
objective of higher strategic decision by considering all crucial aspects to
get competitiveness. The current report will focus on presenting the
calculation of different ratios so that significant insights about Trust plc
performance can be derived. Present report will emphasize on analysing the
objectives of budgeting to Manor LTD, differentiation between financial &
management accounting can be evaluated. This will focus on calculating
payback period and NPV for choosing which project is best.
MAIN BODY
SECTION A
Profitability Ratios
ROCE :
RETURN ON CAPITAL EMPLOYED
Particulars Formula 2020 2021
Net profit 440 500
Total Assets 1160 1400
Current liabilities 250 380
Return on Net profit /capital 48.35% 49.02%
5

capital
employed employed * 100
Return on capital employed is the financial ratio which is utilized for
the assessment of the company's profitability and the capital efficiency
(Rashid, 2018). It can also be said that this ratio is helpful for understanding
how well the company is able to generate profit from the use of its capital.
The calculation shows that the ROCE ratio for this organization has improved
slightly in comparison to that of 2020 in 2021. This indicates the increase in
the capabilities of the organization for utilization of its assets effectively.
This is the financial metric that indicates the growth of the organization and
helps it to attract more investors in order to gain competitive advantage. In
order improve this ratio this organization would need to increase its profit by
enhanced sales.
Operating profit :
OPERATING PROFIT RATIO
Particulars Formula 2020 2021
Operating profit 550 600
Sales revenue 3000 4000
Operating
profit ratio
Operating profit /
sales * 100 18% 15%
Operating profit ratio is considered to be the ratio which is helpful for
the calculation of the dividing the operating profit with its total revenue (Heo
and et.al., 2020). It is also the indicator of the percentage of the profit of the
company from its operations before being subtracted by the tax and
interests. Hence, this is the profit made before the tax and interest. This
ratio also shows the profitability of the organization which it has made
before paying of any tax and interests. Therefore, the results of this ratio of
6

Trust's organization is bad as it fell from 2020 to 2021. The new operating
ratio in 2021 has fallen to 2015. In order to increase the profitability of this
organization it needs to be focusing on making more sales.
Gross Profit Margin :
GROSS PROFIT MARGIN
Particulars Formula 2020 2021
Gross Profit 900 1150
Sales revenue 3000 4000
GP ratio
Gross profit / sales *
100 30% 29%
The gross profit margin also known as the GP ratio is the calculation of
subtracting the direct expenses or costs of goods sold from the net sales of
the organization (Le and Viviani, 2018). This is the indication of the profit
margin that the company has made just from buying and selling of goods.
This profit is further subtracted with other non operating expenses for the
calculation of the net profit. For this company trust the gross profit margin
just like operating profit has also decreased. It shows that the organization
needs to focus on enhancing the sales of the organization which would
automatically improve its gross profit. For this company utilization of
marketing techniques are going to add the benefit that is required for
gaining more sales.
Efficiency ratios
Inventory turnover days :
INVENTORY TURNOVER DAYS
Particulars Formula 2020 2021
COGS 2100 2850
Inventory 350 400
7

Inventory
Turnover Days COGS/Inventory 61 51
The inventory turnover days is a financial ratio that shows how many
times a company has sold and replaced inventory during a given period. It is
also considered to be the division of the days in the period of which the
inventory turnover formula is calculated for the days of selling the inventory
in hand. It has been said that the good turnover days are calculated at 5 to
10 days however for this company this ratio has been calculated at 61 in
2020. The company is making positive efforts for reducing the inventory
turnover to 51 days. Having fewer days in the Inventory turnover days is
helpful for the organization for indicating the weaker sales and declining the
demand of company's products.
Account Receivable days :
ACCOUNT RECEIVABLE DAYS
Particulars Formula 2020 2021
Account
receivable 250 300
Sales revenue 3000 4000
Account
receivable
turnover
Account receivable /
sales *365 30 27
Account receivable days are considered to be the ratio which is helpful
for the calculation of the number of days it takes in average for the company
to recover its debts (Rahman and Fatmawati, 2020). This ratio is helpful for
the company to be able to determine the effectiveness of the collecting
methods of the company for having a tool of adding it into the financial
analysis for the preparation of budget. This ratio has been considered to be
8

the most idea when it is the lowest as possible. For this organization in 2020
account receivable days were 30 which has now accountant to 27 in the
year of 2021 which indicates the efficiency of the organization.
Account payable days :
ACCOUNT PAYABLE DAYS
Particulars Formula 2020 2021
Payables 200 300
Cost of sales 2100 2850
Account Payable
Days
Account payable / cost
of sales *365 35 38
Account payable period is the financial ratio that explains the
efficiency of the organization in analysing the number of the days that a
company can take for paying of the suppliers. Ideally speaking this ratio
needs to be higher for the organization as it will help the company to keep
the liquidity for using it into other expenses for the calculation of financial
metrics. This is also considered to be the indicator for damaging the financial
conditions. For this organization this ratio has increased showing that this
company is increasing its efficiency overall for gaining the competitive
advantages in the Trust.
Liquidity Ratios
Current Ratio
It is one of the significant ratio that is related with assessing the ability
of the organization to pay off its short term liability with help of current
assets
(McMahon, 2018).
Particulars Formul
a
2020 2021
Current assets 560 720
9

Current liabilities 250 380
Current ratio Current
assets /
current
liabiliti
es
2.24 1.89
From the above presented table it can be evaluated that in the two
consecutive year such as 2020 and 2021 the derived results are 2.24 & 1.89
times respectively. This is indicating the declination in the current ratio
which is helping to coordinate with ideal ratio that is 1.2-1.5 times. The
current performance of the firm is higher than ideal ratio that is showing that
firm is having greater current assets than liabilities which indicate good
credibility.
Quick ratio
the particular ratio is related with having reliable capability to
overcome m current liabilities with usage of cash & equivalent assets.
Particulars Formul
a
2020 2021
Current assets 560 720
Inventory 350 400
Current liabilities 250 380
Quick ratio Current
assets -
(stock )
/Curren
t
liabiliti
es
0.840 0.842
On the basis of above reflected results regarding quick ratio of Trust
plc it can be mentioned that there is inclining trend is seen as the
10

performance in the year 2021 has reached 0.842 from 0.840 times. In the
current year firm ha improved its performance as compared to year 2020
but lower than ideal ratio that is 1 times. This reflects poor performance of
the company that is required be improved. The firm should pay attention on
taking actions like better strategic planning, inclined sales & inventory
turnover so that improve outcomes can be derived. There are different
types of the stakeholders such as lenders, e creditors, etc that pay attention
on this ratio for making decision so making modification can help in
achieving significant outcome.
Investment ratios
Earnings per share
This is related with indicating the profitability of the
organization on each share. This is largely taken into the process by
different stakeholders such as investors, lenders, etc to make
sound decision.
Particulars Formul
a
2020 2021
Net income 440 500
Dividend 40 40
Common shares 400 220
Earnings per share (Net
income-
Dividend
)/commo
n shares
1 2
From the assessment of the above provided information it can be
mentioned that in the year 2020 and 2021 the EPS obtained is 1 & 2
respectively. In the present year results are improved as compared to
previous but require more changes in order to attract & retain investors for
11

the longer duration. On the basis of the provided information it can be
mentioned that higher earning per share is helpful in gaining the reliable
outcomes so that achieving stable position in sector for maintaining
competitiveness can be derived.
Price Earnings ratio
It provides information regarding valuing its current share price
relative to earnings per share. This gives ability to obtain the crucial
information so that appropriate insights to get the corrective decision can
become possible.
Particulars Formul
a
2020 2021
Share price 3 2
Earnings per share 1 2
Price Earnings ratio Share
price/
earning
per
share
3 1
From the above provided information it can be mentioned that price
earnings ratio has declined as compared to the earlier period. Higher price
earnings ratio is found to be attracting by the investors o that accomplishing
objective of higher profitability can become possible. From the comparison it
can be identified that firm is having lower effectiveness as Trust Plc
particular ratio has declined which needs to be improved by paying attention
on having reliable understanding of operational actions and market factors
to get positively impacted.
Financial Structure ratios
Interest coverage ratios
This is ascertained for assessing how effectively firm can pay
off its interest on its debts. This is basically taken into the
12

consideration for having higher profitability and sustainability
assessment of firm (Mudzakar, 2021).
Particulars Formul
a
2020 2021
EBIT 550 600
Interest 50 60
Interest coverage
ratios
EBIT/
interest
11 10
From the evaluation of the above provided information it can be
mentioned that interest coverage ratio for the two consecutive period such
as 2020 and 2021 includes 11 & 10 times. This is presenting declination in
the current outcome as compared to the previous which is presenting lower
operating profit that is required to be improved by taking crucial actions.
This is helpful in gaining the information that its ability has declined as
compared to previous which needs to be improved for gaining the
competitive position.
Gearing ratio
Particulars Formul
a
2020 2021
Total debt 550 780
Shareholder's equity 400 400
Debt-equity ratio Long-
term
debt /
shareh
olders
equity
1.375 1.950
This particular ratio is determined to compare how some form of
equity to debt so that financial leverage can be ascertained. The gearing
13

ratio above 50 is found to be risky and tend to affect the overall processing
of the firm in the negative manner, from the assessment of the provided
information it can be mentioned that in the year 2021 the gearing ratio has
inclined which is still indicating that firm is having good performance.
On the basis of the overall performance it can be mentioned that in
the year 2021 the company is performing good but require certain changes
in turn accomplishing the objective of higher profitability & sustainability via
maintaining competitive edge can become possible.
SECTION B
Analysing objectives of budgeting for Manor Ltd
Budgeting for this organization is considered to be a factor which is
responsible for the management of the financial process of the organization
that is helpful for an organization towards the preparation of the budget. The
importance of preparing a budget is very high Manor Ltd. Main objectives of
budgeting has been considered to provide the structure for the organization
which is helpful for the company to guide the direction to the organization
towards the financial goals that it wants to achieve (Bonomi Savignon,
Costumato and Marchese, 2019). It has been considered that the budgeting
process is also very effective for the predicting the cash flows that are
considered to be very useful for the company to growth rapidly. This is also
very effective for the company to predict the view of cash flows and
reasonable budgeting objectives that is helpful for the company to achieve
after the preparation of the budget. Budgeting is the process of allocating
resources that helps the budgeting process to a tool for making the
decisions that are helpful for the allocation of funds in the different business
activities. The process of the budgeting is considered to be the key model
towards the facing the number of possible paths for the creation of a set of
budgeting on the different given scenarios. It has been said to be the factor
that allows the business in the measurement of the performance that helps
in the creating the budget which can be used for the judgement of the
employee performance.
14

Differences between financial and management accounting
There are differences between the financial and management
accounting which is in the relation with the accounting and disclosure for the
end results of the business. The main objective of the managerial accounting
for helping the management for providing the information that is used for
planning the set of goals and evaluate these results for the organization. The
audience which is considered for the producing of information that is helpful
for the management of information that is produced in the organization.
Financial accounting is the factor which is helpful for the organization to
understand the use of external parties which helps the shareholders and
lenders for the management of their accounts. The managerial accounting
helps in the preparation of the reports that is not legally required. In the
financial accounting the certain figures are broken out form materially
significant business units whereas the pertains to individual departments are
in the addition of an entire organization. Focus of this organization is
understood and address the specific format that is able to provide the
comparison of the factors that can be made easy to be compared. This is
also known as the main factor that the accounting reports need
consideration for to develop the legal requirement which provided from the
financial accounting methods. The information provided by financial
accounting is more monetary and verifiable whereas the management
accounting information is based on the company goal and driven
information.
3.
a) Payback Period for the projects A & B
Year Cash
flows of
Project A
Cumulative
cash inflows
Cash
flows of
Project B
Cumulat
ive cash
inflows
15

1 26000 26000 0 0
2 17625 43625 0 0
3 15000 58625 0 0
4 10000 68625 0 0
5 32000 100625 99500 99500
Initial investment 50000 50000
Payback period 2 5
0.4
Payback period 2 year and
4months
5 year
Payback period is one of the significant technique of the capital
appraisal which aids in ascertaining how much time will be taken by
particular project for recovering initial investment. From the above
information it can be interpreted that there are two projects available such
as A and B. the project will take 2.4 years and B will emphasize on having 5
years for the recovering the initial investment. Lower the project payback
period higher it is considered to be beneficial.
b) calculating the Net Present Value for the projects A & B
Year Cash flows
of Project A
PV factor @
10%
Discou
nted
cash
inflows
Ca
sh
flo
ws
of
Pro
jec
t B
PV
fac
tor
@
10
%
Dis
cou
nte
d
cas
h
infl
ow
s
1 26000 0.909 23636. 0 0.9 0
16

363636
3636
09
2 17625 0.826 14566 0 0.8
26
0
3 15000 0.751 11270 0 0.7
51
0
4 10000 0.683 6830 0 0.6
83
0
5 32000 0.621 19869 995
00
0.6
21
617
82
Total
discounted cash
inflow
76172 617
82
Initial
investment
50000 500
00
NPV (Total
discounted cash
inflows - initial
investment)
26172 117
82
Net present value method of the capital budgeting refers to
ascertaining the difference between the present value of the cash inflows
and outflows over the period (Net Present Value, 2021). This provides
assistance in ascertaining the profitability of the project so that strategic
decision formulation can become possible. From the evaluation of the above
illustrated table it can be mentioned that project A and B has net present
value such as 26172 and 11782 respectively. From the comparison it can be
mentioned that the project A is having good net present value as compared
to B which aids In identifying the relevant beneficial.
17

c) Explaining reason for selecting the project
From the calculation it can be mentioned that project A should be
taken into the consideration as as its payback period is lower. Lower
payback period is helpful in recovering the initial investment in less time as
compared to previous. In addition to this, having good net present value of
project A is depicting that there are higher potential of profitability as
compared to other year. On the basis of this, it can be identified that firm
will be beneficial by using the project A as it is having higher effectiveness
by profitability so that accomplishing greater productiveness can become
possible (Setiany, 2021). This is indicating that firm should focus on project
A as compared to B to meet organizational objectives.
CONCLUSION
With the help of this report it can be concluded that the as per the
profitability Trust has been less effective however, this company has been
able to increase its overall efficiency in the production for better and
enhanced performance. In this report the financial performance of the
organization has been analysed for each of the two years presented from
the financial statements that are provided. This report has also analysed the
budgeting for Manor Ltd and differentiated between the financial and
management accounting, For analysing the viability of the two project A and
B different capital budgeting tools have been used.
18

REFERENCES
Books and Journals
Bonomi Savignon, A., Costumato, L. and Marchese, B., 2019. Performance
budgeting in context: an analysis of Italian central administrations.
Administrative Sciences. 9(4). p.79.
Heo, W., and et.al., 2020. Using Artificial Neural Network techniques to
improve the description and prediction of household financial ratios.
Journal of Behavioral and Experimental Finance. 25. p.100273.
Le, H.H. and Viviani, J.L., 2018. Predicting bank failure: An improvement by
implementing a machine-learning approach to classical financial
ratios. Research in International Business and Finance. 44. pp.16-25.
McMahon, S.J., 2018. The linear quadratic model: usage, interpretation and
challenges. Physics in Medicine & Biology. 64(1). p.01TR01.
Mudzakar, M.K., 2021. The Effect Of Return On Asset, Return On Equity,
Earning Per Share, And Price Earning Ratio Toward Stock Return
(Empirical Study Of Transportation). Turkish Journal of Computer and
Mathematics Education (TURCOMAT). 12(8). pp.387-392.
Rahman, T. and Fatmawati, K., 2020. The influence of financial ratios on non
performing financing of the sharia rural banks of Special Region of
Yogyakarta (BPRS DIY) period 2015–2018. Asian Journal of Islamic
Management. 2(1). pp.25-35.
Rashid, C.A., 2018. Efficiency of financial ratios analysis for evaluating
companies’ liquidity. International Journal of Social Sciences &
Educational Studies. 4(4). p.110.
Setiany, E., 2021. The Effect of Investment, Free Cash Flow, Earnings
Management, and Interest Coverage Ratio on Financial
Distress. Journal of Social Science. 2(1). pp.64-69.
Online
Financial Accounting vs. Management Accounting, 2021[Online]. Available
through:
<https://www.diffen.com/difference/Financial_Accounting_vs_Manage
ment_Accounting>
Net Present Value. 2021. [Online]. Available through:
<https://corporatefinanceinstitute.com/resources/knowledge/valuation/net-
present-value-npv/>
19