Financial Decision Making: Role of Accounting and Finance in Company

This report explains the role of accounting and finance in companies and evaluates the financial performance of Alpha limited company over two years through the calculation of five ratios. It also provides reasons behind the possible cause and effect for the changes observed in calculated ratios.

FINANCIAL
DECISION MAKING

TABLE OF CONTENTS
INTRODUCTION ..............................................................................................................................................................3
TASK................................................................................................................................................................................4
Task 1:.............................................................................................................................................................................4
Explain the role of accounting and finance in company............................................................................................4
Task 2:.............................................................................................................................................................................6
A)Calculation of five ratios for two years are as under:.............................................................................................6
B)Explain the reasons behind possible cause and effect for the changes observed in calculated ratios for 2 years.
....................................................................................................................................................................................7
CONCLUSION ...............................................................................................................................................................10
REFERENCES..................................................................................................................................................................11

INTRODUCTION
The report prepared below the working of Alpha limited company over ten years. It gives
an idea about the functions of accounting and finance in every organisation ( Bhuiyan. et.al.
2020) . It is important for better functioning of company in the long run and would help to
generate sufficient revenues and profits. It helps to plan operations well in advance and work
accordingly. It provides an idea as how a company should plan its projects in coming future. It
helps to understand the usefulness of ratios calculated below such as Ratio on capital employed,
Net profit margin, Current ratio, Debtors collection period and what is expected time period of
Creditors payment period. It thus helps to compare performance and growth of a company over a
period of time. There are several functions of accounting which are necessary for every
organisation which includes the preparation of cost budget, control of finance policy and
formation of effective & efficient planning. It also serves as a tool to evaluate performance of
employees present in the firm over a period of time. The report carried below helps to
understand methods which would help to evaluate the results carried out so far.

TASK
TASK 1:
EXPLAIN THE ROLE OF ACCOUNTING AND FINANCE IN COMPANY.
Accounting and finance plays an important role in companies, organisations and
businesses as it helps to assess what has been the growth and progress of Alpha manufacturing
company over a period of time. It helps to manage retainment of investors, it also helps to use
data and information which would guide in formulating decisions. It serves as an option which
would help in stakeholders in comparing the performance between present and previous years.
Finance helps to manage and control funds in a Alpha limited company also helps to collect
required funds from the market ( Broeders and Prenio, 2018).
Role of Accounting: It plays an important role for managing the the life cycle of business. It
helps Alpha ltd company to plan its operations, implement strategies and policies, monitor the
performances over years also find what are the possible reasons behind it. It helps to predict
associated risks in the firm and forecast results as what effective measures can be taken and
implemented. It further explains how company can be held accountable for any fraud or errors if
noticed in the business and what can be certain steps which would help to overcome such issues.
Some roles are explained as under:
 Prevention errors and frauds: It helps to minimize the amount of errors observed and
recorded in Alpha ltd company over a time period. It helps the managers to find out the
reasons behind such errors and issues and find an effective solution for the same before it
creates a major issue.
 Planning future based projects: Accounting helps to plan actions which can be
implemented in near future and projects which would prove to be profitable in near
future. It helps to plan in advance what should be done and what could be done. Alpha
ltd company can use accounting as a medium for future based goals which would provide
them a competitive advantage in the long run.
 Having a proper control over activities and monitoring performance: It helps to have a
proper monitoring of activities assigned to people working in Alpha ltd company.
Accounting serves as a base in controlling activities which are not useful and profitable
for the functioning of firm.
 Evaluating employee’s performances: It is important for every company to examine the
standard performance set and actual performance recorded of employees contributing in

the success of Alpha ltd company. Accounting also helps to understand reasons
responsible for lagging behind of company in market.
Role of Finance: Finance plays an important role in companies as it helps to calculate financial
position of a company in economy. Finance helps in preparation of finance based records and
statements which serve as a proof in the eyes of law. As the name suggests provide guidance to
arrange funds and money which would provide ways for growth and expansion. It also helps to
manage collected money by a firm over a period of time and how some issues might lead to risk
and uncertainties. Some important roles are explained as under:
 Measuring success: Like accounting, finance also contributes in success of company. It
thus helps Alpha ltd company to measure its success for a certain duration and state the
reasons behind such issues and problems. Success can be measured by many useful ratios
which would help to understand effects a company is facing due to improper utilisation
of resources and finding effective tools which would serve better in the journey. Finance
helps to understand where the company is and where it can reach and what could be the
possible steps that must be taken for the same (Chen and Xu, 2018).
 Assess unwanted incurred cost in business: It helps to evaluate the causes behind
unwanted expenses incurred in a business for a period of time. It thus makes the firm
understand what could be the possible issues that are leading towards such expenses that
must be controlled. Alpha ltd company helps to examine possible causes behind the
occurrence of costs which affect the profitability of business.
 Work according to guidelines and manage payment of taxes on time: Finance plays an
important role which includes carrying out related operations of Alpha ltd according to
expectations of clients and investors. It helps to prepare finance related records and
statements well in time which would help in smooth payment of taxes & work according
to guidelines laid. It is important for business to carry out working according to laws and
regulations prevailing in the economy.
 Predict risk and uncertainties: Finance based reports helps Alpha ltd company to predict
losses and scenario which might take place at any point of time. It thus helps to prepare
companies funds in advance to deal with such situations and conditions. It provides steps
that would help to minimize risks prevailing around the company. It guides to find ways
which would help to ascertain ways for calculating risks and find techniques which
would help to reduce the effects caused because of them.
 Focus on areas which can reflect growth and expansion: It plays its role in areas which
require attention and guidance for better working and functioning. Alpha ltd company
requires such guidance for expanding its operational work and maximizing its growth in
the market. It helps to tap areas which can help in facilitating better functioning and
working of business. There would be many areas that would help to provide desired

resuls if the effort is made at right place at right time. It is neccesary for every firm to
understand best possible ways for increasing the market share and profitability margins
as well.
TASK 2:
A) CALCULATION OF FIVE RATIOS FOR TWO YEARS ARE AS UNDER:
(i) Return on capital employed = Earnings Before Interest and Tax / Capital
Employed *100
In 2017 = (675 / 1912.50) * 100
= 35.29 %
In 2018 = (750 / 2925) * 100
= 25.64 %
(ii) Net profit margin = Net Profit / Total Turnover * 100
In 2017 = (300 / 2400) * 100
= 12.5 %
In 2018 = 262.50 / 3000
= 8.75 %
(iii) Current Ratio = Current Assets / Current Liabilities
In 2017 = 757.50 / 322.50
= 2.35 Times
In 2018 = 1035 / 1110
= 0.93 Times
(iv) Debtors Collection period = Account Receivables / Total Sales * 365
In 2017 = (450 / 2400) * 365
= 68.44 Days.
In 2018 = (600 / 3000) * 365
= 73 Days.

(v) Creditors Payment Period = Account Payables / Total Sales * 365
In 2017 = (285 / 2400) * 365
= 43.34 Days.
In 2018 = (1050 / 3000) * 365
= 127.75 Days.
B) EXPLAIN THE REASONS BEHIND POSSIBLE CAUSE AND EFFECT FOR THE CHANGES
OBSERVED IN CALCULATED RATIOS FOR 2 YEARS.
There are many effective reasons behind possible changes observed in the performance
of company over a period of time. The return on capital employed indicates how much operating
income is earned for every penny invested. A higher percentage reflects more favourable results
and helps to measure the growth of the company which would serve a better idea in comparison
to others present in market (Chen and Xu, 2018). Net profit margin helps to calculate net
amount earned in relation with percentage of revenues. It is more important for the company as
it indicates overall position of business and it also helps investors to evaluate exact amount
earned by an organisation over a period of time. The current ratio is helpful in measuring a
organisation’s capability to cover short term tasks or assignments which are to be completed
during a year. In accounting and finance debtor collection period helps to understand the average
time required to cover trade debts. It helps to improve efficiency of a company. Creditors
payment period can be explained as a term which helps to give an overview that what would be
the time required which would remain outstanding in current liabilities. Below are the reasons
explained for changes in respective ratios:
Return on capital employed: Return on capital employed indicates amount earned over a period
of time for the amount invested in a business. The return on capital employed shows the amount
of return the organisation get from the amount they have invested in their business such as equity
and debt proportion from which they have generated their profit volume across the board. Return
on capital also shows that how well the organisation utilises their funds effective and efficient
manner during the accounting period. Return on capital employed is calculated by dividing the
net operating profits or earnings before interest and tax by the capital employed by the
organisation. The good return of capital employed can be 15% which shows that the business is
earning on the decent way and also fulfilling the needs of their stakeholders accordingly. Further
the return on capital employed is made up of two parts, the first one is return and the second one

is the capital employed. The higher amount of capital employed is always preferable for the
corporate as it simply indicates that more profits are generated per dollar of capital employed
invested by the entity. If the return of capital employed is negative, then investors and creditors
does not will to invest in the company as it simply means the shareholders and other investors
funds are not safe and they are not getting the desired return.
Reasons for decreasing ROCE:
 Rise in liabilities: There are many reasons behind decrease in return on capital employed
by Alpha ltd for 2 years and the causes which led to situation such as decline in ROCE.
There might be reasons such as increase in amount of liabilities from year 2017 to year
2018.
 Inefficient use of capital resources: There are situations when companies use resources
inefficiently that leads to situation such as Decrease in return on capital employed by
Alpha ltd company. If the organisations make use of resources in a ineffective way it
might lead to situations which won’t be fruitful in near future.
 Decline in sales: One reason for falling return on capital employed would be insufficient
sales by Alpha ltd company in two years. The company is suggested to find ways which
would increase the margin of sales in market. It also help to improve the financial
position and liquidity of company. It further is beneficial in maintaining liquidity of firm
in economy .
Increase in costs and expense: It might be possible that increased costs and expenditures
prevailing in the Alpha ltd organisation resulted in problematic situation such as less revenue
generation and more losses & costs. It is necessary for company to look after such conditions for
generating profits and managing future related operations and actions ( Gorshkova, and
Kusmartseva, 2019).
Net profit margin: It can be explained as net income earned after deduction of all expenses and
taxes. Reasons for declining net profit:
 Pricing strategies/ policies: Decreasing margin of Net profit In Alpha ltd company can be
due to improper pricing policies and guidelines followed by them during years. It Is thus
necessary for companies to improve the pricing strategies and understand what would be
beneficial for the business.
 Inefficient management: Another reason that can be held responsible for declining net
profit margin is improper management of funds collected by the company over a period
of time. It is necessary for Alpha ltd company to manage adequate funds available and it
them to best possible uses and areas that could generate required funds.

Current ratio: It helps to calculate amount of current assets over current liabilities. It also helps
to understand its position in market and liquidity status. Causes behind decrease in current ratio:
 Increasing short term debts: It can observed that current ratio of Alpha ltd company is
falling the reason behind such complex situations would be rising debts which must be
covered and paid by the business well in time for managing current assets. It is thus
advised that it must focus on increasing current assets and reducing current liabilities in a
running business.
 Decreasing current assets: Current assets are required to rise in numbers as would give its
contribution in the management of situations such as winding up or at the time when
company would be requiring assets which would help to generate funds. Current ratio is
thus calculated with the help of current assets and current liabilities thus it is important
for Alpha ltd to focus on increasing current assets and decrease current liabilities.
Debtor’s collection period: It helps to evaluate time required fir collecting trade debts. If it rises
it reflects that the company is maintaining efficiency. Reasons for increasing debtors collection
period:
 Customer’s not financially feasible: It indicates that the customer linked with Alpha ltd.
company are not having capability to pay back the debts and credit. It thus leads to a
problematic situation which is not easy to tackle and it is further advised that
organisation must reduce the credit sales which would in return decrease the time
demanded by customers for paying back ( Durband, Law and Mazzolini, 2018).
 Inadequate collection process: One more reason which led to increased debtor collection
can be said as inadequate collection of money landed by Alpha ltd company to its related
customers. It is important for the company to have a proper control and seek actions
which would help to decrease such collection period.
 Worse credit policies: The reason behind increased debtors collection period can be said
as the Alpha company might be following bad credit based policies. It must be improved
which would in return help company to improve its debtors collection period in market.
Creditor’s payment period: It explains time which is required by company for paying back to its
creditors. It is also called as performance ratio which highlights the efficiency of business. The
reasons behind increasing credit payment period are:
 Lack of communication: Creditors collection period can result as a complex condition
which must be handled well in advance by Alpha ltd company. It can be explained as
time demanded by company to pay its debts thus if the company takes more time than
desired or expected it would lose its reputation and market image in the economy in
eyes of consumers. Business is required to have a proper channel medium which would

help to serve their messages and ideas right and implement their actions before
competitor’s.
 Strict bill collection process must be followed: It is advised to Alpha company to apply
strict bill collection process which would help them to collect their debts on time and
pay their liabilities and credit before the time arrives. It would help them to maintain
liquidity and position itself above others already present in market. It is expected by the
company to improve its working in the next year which would attract more potential
customers from the market (Al-Sartawi, 2018) .

CONCLUSION
The report prepared above explains how role of accounting and finance help company in
better working and functioning of business in long run. It explains the importance of preparation
of budgets, planning projects and actions in advance. This report also serves as guide to evaluate
reasons behind increasing liabilities, costs, expenses and how they could be controlled well in
time. It helps to understand the importance of ratios and what they indicate. It also gives an
overview about monitoring the financial performance and what can be the possible reasons
behind inefficient management of company. It also helps to plan actions according to the
financial position of company in market and what could be the possible steps taken that would
contribute in improving the same. It also helps to form a comparison between other companies
over a period of time for a better and clearer picture. Reports are necessary as they provide an
idea towards managers, investors and employees to understand how performance can be
improved and growth can be maximized in coming years.

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