Financial Decision Making

This article explains the structure and terminologies of financial statements, their application in Skanska PLC, and the calculation of important accounting ratios such as Return on Capital Employed, Net Profit Margin, and Current Ratio. It also highlights the significance of these ratios for the user of financial statements.

Financial Decision
Making

Table of Contents
INTRODUCTION......................................................................................................................3
TASK 1......................................................................................................................................3
Explain the structure and terminologies of financial Statements...........................................3
TASK 2......................................................................................................................................6
Application of the management accounting techniques for control, decision- making and
planning in the Organisation called Skanska PLC.................................................................6
TASK 3......................................................................................................................................7
Calculate the important accounting ratios for Skanska PLC and how it is useful for the user
of financial statements............................................................................................................7
TASK 4......................................................................................................................................9
Illustrate the role of finance and accounting with reference to reporting and decision –
making in Skanska PLC.........................................................................................................9
CONCLUSION........................................................................................................................11
REFERENCES.........................................................................................................................12
APPENDICES..........................................................................................................................13

INTRODUCTION
Successful enterprise corporations are nicely conscious and aware of the function that
Accounting and Finance play in the long-time period fulfilment of the enterprise, main to the
accomplishment of the company’s set goals, targets and targets (Ali and Lin, 2020). A quick
evaluation of the Skanska PLC, a UK-primarily based totally international contractor that
offers a huge variety of engineering and creation services. In particular, the file identifies and
descriptions a whole lot of functions, roles and obligations of each Accounting and Finance
in the above-noted company. The file addresses viable reasons of the adjustments that befell
with reference to the a few monetary ratios; and any resultant effect and results at the
monetary repute of the company.
TASK 1
Explain the structure and terminologies of financial Statements
Balance Sheet: It demonstrates what the firm owns and the monetary position in the
market. In this, companies report their assets on the balance sheet's left side. They list their
obligations and shareholders' equity on the right side. Assets are sometimes at the top of
balance sheets, followed by liabilities, and shareholders' equity is at the bottom. Assets are
valuable items that a corporation has. This usually means they can be sold or used to create
items or deliver services that can be sold by the company. Plants, trucks, equipment, and
inventories are examples of physical assets. It also covers items that cannot be touched but
yet are valuable such as patent, trademark etc.
Assets: It is the valuable item that a corporation has. This usually means they can be sold or
used to create items or deliver services that can be sold by the company. Plants, trucks,
equipment, and inventories are examples of physical assets (Al-Sagheer, Alshahrie and
Mahmoud, 2021). It also covers items that cannot be touched but yet are valuable such as
patent, trademark etc.
 Liabilities: A company's obligations are the sums of money it owes to others. This
can entail a wide range of responsibilities such as, rent of the building, payroll, taxes,
debtor, borrowings, etc. Debts to supply goods or services to clients in the future are
also included in liabilities.
Assets = Liabilities + Shareholders’ equity

 Shareholders’ Equity: It is sometimes known as capital or net value. It's the cash left
over after a corporation sells all of its assets and pays off all of its debts. The
remaining funds belong to the company's shareholders, or owners.
A balance sheet depicts the assets, liabilities, and shareholders' equity of a corporation at the
end of a reporting period (Bustos and Pomares-Quimbaya, 2020). It does not indicate the
inflows and outflows of funds into and out of the accounts over time.
Income Statement: Investors rely on the profit and loss account, to analyse the future growth
and profitability of the company. It summarizes the sales and expenses and is made on the
quarterly and annually. It is made in a multiple – steps format by calculating gross profit,
operating income before tax and after tax. Investors need to preserve in thoughts that the
profits assertion acknowledges sales while they may be realized—this is, while items are
shipped, offerings rendered, and costs incurred. With accrual accounting, the float of
accounting activities via the profits assertion does now no longer always coincide with the
real receipt and disbursement of coins. The profits assertion measures profitability, now no
longer cash flow.
 Net income: This is the cost of a company's income of products and offerings to its
customers. Although a company's backside line (its internet profits) receives
maximum of the eye from investors, the pinnacle line is in which the sales or profits
technique begins. In the lengthy run, income margins on a company's present
merchandise have a tendency to attain a most this is hard to enhance upon. Thus,
agencies usually can develop no quicker than their sales.
 Cost of Sales: For a manufacturer, the fee of income is the fee incurred for labour,
uncooked materials, and production overhead used in the manufacturing of products.
While it could be said separately, depreciation fee belongs in the fee of income. For
wholesalers and retailers, the fee of income is largely the acquisition fee of products
used for resale (Cassell and et. al., 2020). For service-associated businesses, fee of
income represents the fee of offerings rendered or fee of sales.
 Gross income: A company's gross income isn't simply the distinction among internet
income and the fee of income. Gross income additionally presents the sources to cowl
all the company's different costs. Obviously, the more and extra strong a company's
gross margin, the more ability there may be for nice backside line (internet profits)
results.

 Selling, general, and administrative costs: Often known as SG&A, that is the
company's operational costs. Financial analysts count on that control sporting
activities an amazing deal of manipulate over this fee category (Christensen and et.
al., 2021). The method of SG&A costs as a percent of income is watched intently to
locate symptoms and symptoms of managerial efficiency, or loss of it.
Cash Flow Statement: Cash flow statements record an employer’s inflows and outflows of
coins. This is vital due to the fact an employer wishes to have sufficient cash on hand to pay
its prices and purchase assets. While an earnings statement can let you know whether or not a
employer made a profit, a cash flow declaration can let you know whether or not the
employer generated cash. It makes use of and reorders the facts from an employer’s stability
sheet and earnings statement. The bottom line it indicates the net growth or lower in cash for
the period. Generally, those are divided into 3 foremost parts.
 Operating Activities: The first a part of a cash flow statement analyses an
employer’s cash flow from net earnings or losses. For maximum companies, this
segment of the cash flow statement reconciles the net income to the real cash the
employer received from or utilized in its working sports. To do this, it adjusts net
profits for any non-cash items (consisting of including again depreciation costs) and
adjusts for any cash that became used or supplied by different operating assets and
liabilities.
 Investing Activities: It generally includes the sales and purchase of long- term assets
such as machinery, plant, equipment and investment securities. If an employer buys a
bit of machinery, the cash flow statement might replicate this interest as a cash
outflow from making an investment sports as it used coins (Gangi, Daniele, and
Varrone, 2020). If the employer determined to promote off a few investments from an
investment portfolio, the proceeds from the income might display up as a cash inflow
from making an investment sports as it furnished cash.
 Financing Activities: It indicates the cash flow from all financing activities. Typical
sources of cash flow consist of cash raised through promoting shares and bonds or
borrowing from banks. Likewise, paying again a financial institution mortgage might
display up as a use of cash flow.

TASK 2
Application of the management accounting techniques for control, decision- making and
planning in the Organisation called Skanska PLC.
Management accounting is a crucial component of any business. It provides
generation, identification, demonstration and analysis of the appropriate statistics to help the
administrators run the organisation. The main functions of the management are involved with
the following techniques:
 Planning: It entails determining an organization's goals and developing applicable
tactics for achieving those goals. To develop plans, it's helpful to know what's
happened in the past so that decisions may be made about what's possible in the
future. For example, if a management is planning future sales quantities, it must first
understand prior sales volume. As it contributes insights for decision and while the
entire budgeting process is built around accounting-related reporting, management
accounting is tightly woven into planning (Li, and et. al., 2021). It aids managers in
planning by providing reports that estimate the effects of various activities on Skanska
PLC’s capacity to meet its objectives. The management accountant compiles data to
assist managers in determining which products are the most profitable. Management
accountants generate forecasted financial statements, also known as proforma
statements, as part of the budgeting process.
 Decision – making: It requires evaluating the information presented and making an
informed decision. In the majority of cases, decision-making entails selecting one of
two or more options. In the majority of cases, decision-making entails selecting one of
two or more options. Managers want accurate data in order to analyse the various
courses of action available and comprehend the potential ramifications of each. It is a
technique of selecting amongst competing alternatives. Decision-making is inherent in
each of the management features, namely, making plans, setting up and controlling. A
supervisor of Skanska PLC cannot plan without making choices and has to pick
amongst competing targets and strategies to perform the selected targets. Similarly, in
setting up, managers want to determine on an employer shape and on particular
movements to be taken on every day operations.
 Control: It is the technique of monitoring, measuring, comparing and correcting real
outcomes to make certain that a commercial enterprise enterprise’s dreams and plans
are achieved. Control is accomplished with using feedback. Feedback is statistics that

may be used to assess or accurate the stairs being taken to enforce a plan. Feedback
permits the managers to determine to allow the operations and pastime preserve as
they are, take remedial movements to place a few movements again in concord with
the authentic plan and dreams or do a little rearranging and re-making plans at
midstream of Skanska PLC. Management accounting allows in the manipulate feature
via way of means of generating overall performance reviews and manage reviews
which spotlight variances among anticipated and real performances. Such reviews
function a foundation for taking vital corrective movement to govern operations
(Rieg, Zarzycka and Dobroszek, 2021). The use of overall performance and
manipulate reviews follows the precept of control via way of means of exception. In
case of enormous variations among budgeted and real outcomes, a supervisor will
typically inspect to decide what goes incorrect and possibly, which subordinates may
want help.
TASK 3
Calculate the important accounting ratios for Skanska PLC and how it is useful for the user of
financial statements.
1. Return on Capital Employed: It is used to determine the profitability and capital
efficiency of the companies.
Year 2020 = 12633 / (125631 – 69162) = 12633 / 56469 = 0.22
Year 2019 = 7428 / (126018 – 74678) = 7428 / 51340 = 0.14
Interpretation: By seeing the calculations performed above, it can be analysed that
the profitability ratio of Skanska PLC is better in 2020 compared to 2019. It means
that the firm is using its assets effectively to generate the profits.
Significance: It tells the investors an estimate to invest in the company or not, by
determining the return on its capital on the basis of the net earnings. A higher ROCE
means the company is providing good returns on its assets so it can invest in the
undertaking.
2. Net Profit Margin: It measures how much net profit is being generated from the
revenue. It is expressed in the form of percentage .
ROCE = Earnings Before Interest and Tax / Capital Employed

Year 2020 = (9897 / 160344) * 100 = 6.17%
Year 2019 = (6054 / 172846) * 100 = 3.50%
Interpretation: It can be seen from the above figures that the net profit margin is
almost double in 2020 than in 2019. It means that the company is increasing its
earning from the sales and is doing better.
Significance: It tell how well the Skanska PLC is handing its financial resources to
generate the profit from its revenue. A greater margin depicts the positive impact on
the investors.
3. Current Ratio: It measure the ability of organisation to pay its short – term
obligations and to main a certain liquidity in the company.
Year 2020 = 104978 / 69162 = 1.52:1
Year 2019 = 100906 / 74678 = 1.35:1
Interpretation: From the above calculation it can be assumed that Skanska PLC is
ding better in 2020 than in 2019. But it has to utilise its assets more effectively. The
ideal current ratio is 2:1. A ratio of less than one indicated the liabilities of payment
are more than the assets of the organisation, which will affect the goodwill of the
organisation negatively.
Importance: It tells the investors of Skanska PLC that how the organisation is
maximising it existing assets on the balance sheet to satisfy the current obligations of
paying. It also helps then in understanding more about the capability of the firm to
pay its short – term debt.
4. Debt Equity Ratio: It offers an idea of ways a great deal borrowed capital (debt) may
be fulfilled in the occasion of liquidation the usage of shareholder contributions. It is
used for the evaluation of monetary leverage and soundness of a corporation and is
generally calculated the usage of preceding monetary year's data.
Year 2020 = 86914 / 38717 = 2.24
Year 2019 = 92997 / 33021 = 2.82
Interpretation: It can be analysed from the above figures that in 2020 it is less than
in 2019, which is good for Skanska PLC. Because the low debt- equity ratio is
Net Profit / Sales
Current Assets / Current Liabilities
Total Liabilities / Total Equity

favourable from funding point of view as it's far much less unstable in instances of
growing interest rates. It consequently draws extra capital for in addition finance and
growth of the business.
Significance: Investors will frequently regulate the D/E ratio to awareness on long-
time period debt most effective due to the fact the dangers related to long-time period
liabilities are distinct than short-time period debt and payables of Skanska PLC.
5. Return on Assets: It indicated that how efficiently the company is using its assets in
term of its earnings. Comparing income to sales is a beneficial operational metric,
however evaluating them to the assets an enterprise used to earn them presentations
the feasibility of that enterprise's existence.
Year 2020 = 9897 / 125631 = 0.79
Year 2019 = 6054 / 126018 = 0.48
Interpretation: The return on the asses of Skanska PLC in 2020 is 0.79 and in 2019
is 0.48. It means that the company is performing well and can be proved efficient for
the investors.
Use: ROA for Skanska PLC can vary substantially and will be highly dependent on
the industry. The ROA figure gives investors an idea of how effective the company is
in converting the money it invests into net income. The higher the ROA number, the
better, because the company is earning more money on less investment. Because of
the balance sheet accounting equation, note that total assets are also the sum of its
total liabilities and shareholder's equity. Both of these types of financing are used to
fund the operations of the company. Since a company's assets are either funded by
debt or equity, some analysts and investors disregard the cost of acquiring the asset by
adding back interest expense in the formula for ROA.
TASK 4
Illustrate the role of finance and accounting with reference to reporting and decision –
making in Skanska PLC.
Analysis of Function of Finance and Accounting: Accounting is one of the
capabilities carried out through each enterprise corporation (Shen and et. al., 2021). It is
Net profit / Total Assets

described because the systematic and targeted recording of monetary transactions of Skanska
PLC. Its capabilities consist of:
1. Classifying, recording and summarizing of the monetary transaction.
2. Exhibition of the economic role of Skanska PLC for the specific period of time.
3. Communication of applicable figured received from evaluation an interpretation of
the records.
4. Preparation of the financial reports which includes profit and loss account, cash flow
statement, balance sheet.
5. The day – to day recording and reporting of the monetary matters to the management
for the purpose of decision – making.
Role of Accounting and Finance: Accounting gives control statistics concerning, amongst
different things:
1. The monetary role of the Skanska PLC in net earnings and loss, price and costs,
liabilities and assets.
2. Management information which is beneficial for the stakeholders concerning the
overall performance of the firm.
3. Facts and figures which require the legislative requirements along with the custom
duty, VAT, And corporate tax assessment.
4. Information for different beneficiary parties - potential creditors of cash such as
banks.
5. Data for the potential buyers within the Skanska PLC corporation. The position of
financial inside a company includes:
 The provision of monetary statistics to the alternative departments so as for
them to function successfully and efficiently.
 Finance helps the Skanska PLC with making plans and decision - making.
Analysis of the Duties of Finance and Accounting: The main obligations of Accountants
consist of the guidance of bills, budgets, and dealing with monetary statistics and facts (Smith
and Castonguay, 2020). Some of the important thing obligations of Accountants consist of
the following:
1. They put together the enterprise bills and tax returns of Skanska PLC.
2. They reveal budgets and standard spending.
3. They endorse the Management on numerous components of Financial Management.

4. They examine monetary facts when it comes to the company’s overall performance.
5. They scrutinize monetary facts and make certain that they agree to criminal
requirements.
CONCLUSION
This report has states about the company called Skanska PLC, which is UK based. It
has calculated the financial ratios of the year 2019 and 2020, which shows that the overall
performance of the company is improving and increasing the profitability of the firm. From
the investors point of view, it is good to invest in the company for future benefits. This also
concluded about the importance of the financial accounting in the business and how it had
helped to grow Skanska PLC and managing their resources efficiently. This report has also
discussed about the structure of the financial statement and its major terms which are used it
balance sheet, income statement and cash flow.

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APPENDICES
Income Statement of Skanska Plc

Balance Sheet of Skanska Plc

Cash Flow Statement of Skanska Plc