Financial Decision Making: Role of Accounting and Finance in Managing Company's Financial Activities

This document discusses the role of accounting and finance departments in managing a company's financial activities. It also includes an analysis of the financial performance of Alpha Limited company using various ratios. The document provides insights into the importance of these departments and their impact on decision making. The analysis shows that Alpha Limited performed better in 2018 compared to 2017.

FINANCIAL DECISION
MAKING

EXECUTIVE SUMMARY
The project summarizes about financial decision making based on making proper analysis of
financial statements. The report abstracts about role of accounting and finance in the context of managing
various kinds of aspects. As well as second task of report summarizes about calculation of different types
of ratios and measurement of financial position of related company. On the basis of this, it can be
abstracted that Alpha limited company’s performance is better in year 2018 as compared to year 2017.

Contents
EXECUTIVE SUMMARY.........................................................................................................................3
INTRODUCTION.......................................................................................................................................5
MAIN BODY..............................................................................................................................................5
Task 1......................................................................................................................................................5
TASK 2...................................................................................................................................................8
Calculation of the ratios to analyse company performance:.....................................................................8
Interpretation and analysis of financial ratios:.........................................................................................9
CONCLUSION.........................................................................................................................................12
REFERENCES..........................................................................................................................................13

INTRODUCTION
The term financial decision-making can be described as the decision-making mechanism
within a business regarding all creditors, liabilities and other financial activities. Eventually,
financial decisions must be made correctly by businesses, because any mistaken judgment will
have an impact on development and productivity (Hirshleifer, Jian and Zhang, 2018).
Furthermore, on the basis of proper analysis of financial statements, companies make financial
decisions. The project report is split into two tasks in which the first task outlines the role of
company accounting and financing. The second task is based on measure and interprets the
financial data of Alpha limited company by help of various kinds of ratios. In order to complete
task one, a company is selected that is John Lewis and partners. John Lewis & Partners (formerly
John Lewis) is a chain of high-end UK-wide department stores. The Republic of Ireland and
Australia are both found in concessions. It was founded in 1929 by Spedan Lewis, son of its
creator John Lewis. The corporation is responsible for distributing general merchandise as part of
the mutual employees' union called "John Lewis Collaboration" and is the United Kingdom's
largest cooperative. Since 1925 the company claims to be 'never intentionally undersold' – it still
meets at least a lower cost provided by a highway regional rival.
MAIN BODY
Task 1
Define Accounting and Finance Department:
Accounting department- It is a part of an administration which prepares the financial statements,
retains the general leader, pay bills, billing customers, payroll, cost accounting, financial
reporting, etc. The department head of Accounting is considered as controller (Kubilay and
Bayrakdaroglu, 2016).

Finance department- The part of a cash-making organization. A financial department usually
conducts corporate roles of preparation, coordination, auditing, accounting and management of
the finances of the client. The finance department produces the annual statements of the business
as well (Martin and Gomez-Mejia, 2016).
Importance of Accounting and Finance Department:
In the management of every business, accounting and finance play an important role.
Managers can control the flow of funds and thus steer the direction of the enterprise by taking
properly account of company's profits and expenditures. These both departments have key role
for companies’ better management (Njegovanovic, 2018). In regards to above company, role of
both departments is mentioned below in such manner that is as follows:
Role of Accounts Department:
 Financial accounting- Financial accounting is an accounting field specialized in the
analysis of the financial statements of a business (Consigli, Kuhn and Brandimarte,
2017). The transactions are reported, outlined and published by way of uniform rules, for
example an income tax, a balance sheet or a financial statement. The accounting
department plays a key role for better financial accounting as they record all financial
data for a particular time which becomes a framework for preparation of financial
statements. In the aspect of above John Lewis & Partners, this department is useful for
better financial accounting with help of accounting department.
 Management accounting- Managers use the features of accounting reports to help
understand them when focusing on problems within their organizations that benefit their
administration and the execution of control functions in administration accounts or
management accounting (Lusardi and Mitchell, 2017). Basically, this accounting is useful
for companies for making better internal decisions by help of internal reports. In order to
make these internal reports, accounting department plays a key role such as collection of
financial information and analysis of this information. Such as in the above company,
their accounting department enables preparation of internal reports that helps them in
better decision making.

 Tax function- Taxes are voluntary fees levied on persons or corporations and added to the
funding of public works by a governing body, whether local, regional or global.
Economically, taxes depend on the tax payer if it is the taxable corporation, for example a
product, or the final buyer of the products of the firm. This is also a main function of
accounting department of companies. By help of this department, above companies’
managers become able to compute how much amount of tax they need to pay.
 Auditing function- The audit is an analysis or examination by an inspector of different
accounts accompanied by the actual inventory test to insure that all agencies adopt a
recorded reporting activity program. This is undertaken to verify the exactness of the
organization's financial statements. This process of examining financial statement of
companies become possible by help of accounting department. It is so because
accountants produce and publish financial statements to audit department which becomes
a cause of better auditing (Chambers, Echenique and Saito, 2016).
Role of Finance Department:
 Investment function- An investment is a commodity or element bought to produce
income or interest. The investment is essentially the purchasing of products that are not
used now but intended to generate capital in the future. In finance an investment is an
asset commodity that the commodity can produce profits to be offered for sale at a better
price in the future (Eberhardt, de Bruin and Strough, 2019). This is essential for
companies to take correct investment decisions so that they can gain higher return. In this
aspect finance department plays a key role, as finance manager provide guidance to take
suitable decision regards to make investment in any project. Such as in the above
company, they take better investment decisions by help of finance department.
 Financing function- Financing is the method of supplying, purchasing or spending funds
for company operations. Financial organizations including banks are responsible for
supplying companies, customers and creditors with resources to help them accomplish
their objectives (Nogueira and Jorge, 2016). For every economic structure, the utilization
of capital is important, as it encourages businesses to buy goods out of control. By help of
finance department, it becomes easier for manager to distribute funds into different
resources.

 Dividend function: A dividend is the payment of a part of the business's profits, agreed
upon and controlled by the committee of company directors, as well as charged to a
group of its owners. A dividend is a nominal compensation given to shareholders towards
their interest in the shares of a corporation, which is typically extracted from net income
of the business. Although the majority of the revenues are held within the corporation as
retained earnings that reflect the money to be utilized for the current and potential
operating operations of the firm the rest will be paid as a pay-out to the owners.
Companies will also allow dividend distributions at times even though they don't earn the
necessary money. They will do so to preserve their long record of producing daily
dividend payments.
 Working capital function: The finance department one role is to ensure that the
business is not without funds. This involves estimating the company's potential working
capital (receivables, wages and stock), injecting excess cash into short-term interest
income products and controlling currency risks. The role of Working capital is to choose
from the different uses of capital or construction programs. Over all, most companies, in
the expectation of increasing revenue or rising expenditure, should have the capital to
spend in the business. But the investment incentives typically outweigh the sum that is
available and Working capital creates business cases to determine and select the right
projects. A good role of capital budgeting would not only predict project advantages but
also measure these advantages over time to decide whether capital usage was as
successful as initially expected.
TASK 2
Calculation of the ratios to analyse company performance:
Ratios 2018 2017
ROCE or Return On Capital
Employed :
= (Operating Profit /Capital
= 412 / 2925 * 100
= 14.10%
= 375 / 1912.50 *100
= 19.60%

Employed) *100
here, Capital Employed = Total
Assets – External liabilities.
Net Profit Margin:
= Net Profit / Sale * 100
= 262.50 / 3000 * 100
= 8.75 %
= 300/ 2400 * 100
= 12.5 %
Current Ratio:
= Current Assets / Current
Liability
= 1035 / 1110
= 0.93
= 757.50 / 322.50
= 2.34
Debtor Collection Period:
= Receivable / Sales *365
= 600 / 3000 * 365
= 73 Days
= 450 / 2400 * 365
= 68.43
= 68 Days
Creditor Collection Period:
= Payable / Purchase * 365
= 1050 / 2400 * 365
= 159.68
= 160 Days
= 285 / 1350 * 365
= 77.05
= 77 Days
Interpretation and analysis of financial ratios:
1. Return on Capital Employed- This is a formula that businesses use to measure the
return on the capital spent. This ratio is necessary to measure the efficiency of firms in
exchange (Xiao and Zhang, 2016). Companies can concentrate on certain projects on
which their anticipated profit is greater by measuring this formula. It is also advantageous
for various categories of external stakeholders as they will then spend their resources in
the processes and activities of corporations. In this case, the return on capital employed is
19.60 in the above Alpha Limited Business. In 2017, it was reduced by 28.16 and in the
following year 2018 it was of 14. 08%. Therefore, the efficiency of the business to earn
profit decreased in 2018 compared to 2017. The primary cause of this difference is the
urgent need for operating expenditure in 2018, as these expenditures in 2017 contributed
to £300 and rose to £337.50 for year 2018. This increase in spending has impacted the
overall return in 2018 automatically. In this respect, managers above Alpha Limited need

to concentrate on reducing average operational costs over the next few years. It will
increase their return on investments invested in further years.
2. Net profit margin- The net profit relation describes the correlation between net revenue
and profits after tax. Production, funding, etc. expenses are excluded in this income. This
ratio is important for estimates for businesses such that at the end of the financial year
they will predict net income. The ratio of net profit / net revenue * 100 is determined by
using this calculation. Much like the above figure, the investment capital in market
practices is beneficial for a broad range of external factors, such as creditors, vendors,
etc. This is because if the income level of firms is raised, that always means that the
projected return rate is strong. The company's net income figure in Alpha Limited above
was of 12. 05% in year 2017 which declined in 2018 from 29.41 and became of 8.75%
? A shift in the company's net income ratio describes a larger loss in 2018 in contrast with
2017. The main reason for the disparity between the 2018 net income margin and the rise
in production expenses is the increased fixed and variable expenses in manufacturing
operations. In this context, the focus on producing greater incomes from investing
resources and on holding all costs below the projected goal is important for an above
business.
3. Current ratio- It is a form of ratio that businesses use to assess successful liquidity.
Current asset / current liability formulation measures that. In addition, organizations are
critical that this ratio be maintained in an optimal 2:1-fold manner (Grohmann, 2018). If
the current ratio of companies is the optimal one so short-term debt can be quickly
compensated off. In turn, companies focus on reducing current liabilities and seeking to
increase current assets. The current ratio of the above-mentioned Alpha limited company
was 2. 34: 1 times in 2017, but fell in 2018, by 0:93: 1 times in 2018. The two-year
liquidity scenario determines the liquidity situations for firms in 2017 are better as
compared to year 2018, since they have ample actual assets to take out short-term debt.
Here, the reason is increased in the volume of liabilities in this year for this lower current
ratio in 2018. Total current assets have decreased considerably throughout the duration
2017-2018. In this case, the company above has to focus on that the current assets in

order to fulfill the optimal ratio criterion. It may also help increase the productivity of
businesses in servicing short-term debts.
4. Debtors’ collection period- This can be described as a form of ratio related to
calculating the number of days taken by firms to obtain a return fund from various
debtors. The debtors' ratios are measured on a regular basis (Chang, Tang and Liu, 2016).
This ratio is even best known if it is lower. By utilizing this formula, organizations would
be able to determine and strengthen the partnership with debtors that are liable for paying
repayments. Moreover, the average receivables / net sales * 365 days is the formula to
calculate this ratio. This ratio of 68 days in 2017, which rose in 2018 and reached 73
days, is above the Alpha limited company. It indicates that the ability of the business to
receive debtors' credit declines. Because of the higher extent of this measure, the
company cannot predict which debtors would be insolvent in the future. In this way, the
Alpha limited company must concentrate on the debtors who prolong the refund and seek
not to offer loans in the future. In order to minimize the amount of insolvent debtors, the
Business should also emphasize having cash purchases. If this ratio is raised by year, it
may otherwise be a shortage of fund or loss for the above-mentioned business.
5. Creditor’s payment period- Such as the above ratio, it is measured in days as well. This
can be described as a kind of ratio determined by corporations to determine the amount of
time over which creditors are charged. Last but not least, creditors for companies exist
while crediting with others (Rasheed and Siddiqui, 2019). Companies must preserve this
ratio as small as possible in this regard. That is because if it is better, the performance of
the organization for making payments is increased. In the Alpha limited involvement
aspect, this ratio has been increased by 52 percent in the year 2018 by 83 days and has
exceeded 160 days in the next year. The reputation of corporations for reimbursement to
their investors may be perceived as enormous loss. In this case, it is necessary to seek to
create a deal in cash beyond the product. In addition to making cash transfers, payment
can be concentrated on in less time. If this ratio does not otherwise improve, a
organization will be confronted with problems.
Therefore, based on the following review of the financial reports of Alpha Limited from
2017 to 2018, the results of Alpha Limited Company in 2017 are better than in 2018.

Both of them show a successful performance in 2017 although the outcome is lower in
2018. Furthermore, their spending also increases in 2018, which in 2018 is a big concern
for weak financial results.
CONCLUSION
Based on the preceding project report, financial decision-making is concluded to be too
critical for businesses, because it is essential for the better management of cash. The project
report concludes different forms of accounting methods, such as expense accounting, standard
charges, etc. As well as role of accounting and finance is also mentioned under the report in a
detailed manner by relating to respective company. In fact, financial factors in Alpha limited
partnerships are measured and analyzed to take important financial decisions. In the end of
report, this can be concluded that company’s performance is weaker in year 2018 as compared to
year 2017.

REFERENCES
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