Financial Decision Making: Accounting and Finance Department, Sources of Finance, and Ratio Analysis

This report discusses financial decision making, accounting and finance department, sources of finance, and ratio analysis. It explains the importance of financial decisions and how to maximize wealth of shareholders. The report includes calculations and analysis of various ratios such as gross profit margin, operating profit margin, return on capital employed, current ratio, quick ratio, inventory turnover days, debtor's collection period, and creditor's collection period. The subject is finance and the course code is not mentioned. The college/university is not mentioned.

Financial decision making

Table of Contents
INTRODUCTION...........................................................................................................................3
MAIN BODY..................................................................................................................................3
Task 1...............................................................................................................................................3
Part a: Accounting and Finance Department...............................................................................3
Part b: Sources of finance............................................................................................................6
Task 2...............................................................................................................................................7
Part a: Calculating the ratios:.......................................................................................................7
Part b: Analysing the numerical results.......................................................................................9
CONCLUSION..............................................................................................................................10
REFERENCES................................................................................................................................1

INTRODUCTION
Financial decisions are concerned with undertaking of the decisions that are related to the
effective procurement and allocation of funds by the business organization to earn return and
maximize the wealth of the shareholders. The report will highlight the importance and functions
of the accounting and finance department Panini ltd is a manufacturing company that
manufactures bread and supplies it in the supermarkets of United Kingdom. In this report the
various sources using which medium sized firms acquire funds will be outlined. Various
accounting ratios will be calculated and analysed in this report.
MAIN BODY
Task 1
Part a: Accounting and Finance Department
Accounting Department: The accounting department of the company is responsible for
preparing financial statements, general ledger maintenance, bill payments, customer invoice
preparation, cost accounting, payments to the employees etc. All the economic matters are the
areas that concerns the accounting department of the organization. Accounting department is
present in organization of all levels and sizes (Osakwe and Otuo, 2022). The accounting
department is usually managed and controlled by a controller who reports the chief financial
officer of the organization. Below is the list of the functions that the accounting department is
responsible for in an organization:
a) Financial Accounting Function: Accounting department of the organization performs all
the financial accounting functions. Through financial accounting functions measuring,
processing and communicative functions of the financial information are carried out.
Financial accounting function of accounting department is concerned with all the basic
accounting functions that are identifying, recording, summarizing and analysing the daily
business transactions. This function involves preparing financial statements that are
meant to be used by the various stakeholders for different purposes that concerns them.
b) Management Accounting Function: The management accounting function of accounting
department is concerned with providing the information for the financial and non-
financial decisions that are to be taken by the managers in the daily course of their
business activities (Javed and Zhuquan, 2018). Accounting department gives the
accounting information that provides the provision for the managers to undertake better

decisions that ensures better management and control over the functions within the
organization. Through the management accounting function, the accounting department
provides the data it prepares while performing the accounting function and modifies it for
communicating the information to the management. Information to the management is
communicated by proper analysis and interpretation of the data. By this function the
accounting department provides qualitative information in addition to the quantitative
information. Management accounting function of accounting department provides
assistance in planning, organizing and decision making process to the management of the
organization. Goals are set up and plans are made for the optimum economic actions and
employee performances are also measured. These are done in order to increase the overall
efficiency of the employees and motivate them. In this function the department
coordinates and controls the entire activities of the business entity.
c) Tax Function: The tax accounting function of accounting department is concerned with
the look after of all the rules following which the taxes are generated. Tax transactions
may result in creation of tax assets or tax liabilities both are recorded the books of
accounts (Jędrzejka, 2019). Internal revenue code is the origin from which the tax
accounting is derived. Sometimes it may happen that the figures generated by the tax
accounting may be different from the income statement of the organization. The
difference is because of the fact that the tax rules, enacted may get speedily or delayed
the recognizing certain type of expenses and generally should be recognized within a
reporting period. This function of accounting department is essential from the legal
perspective of the business entity.
d) Auditing Function: The auditing function of accounting department requires the
information from the financial statements that are prepared during financial accounting
function of the accounting department. The work performed in the financial accounting
function is basically verified by the auditing function of the accounting department. By
this function it is ensured that the financial statements that were prepared represents the
true position of the financial position of the company. The accounting department of the
specific organization performs the internal audit type of the audits. There is a vast range
of functions that are performed by the accounting department auditing is one function

from that. Through auditing function accounting department verifies the financial
information for the accuracy.
Finance Department: The finance department at an organization is responsible for the
effective management of working capital more specifically, cash resources that are available
with the company. The department performs the supervisory tasks for managing the accounting
and produce the information vital for managerial control. Financial indicators and margin
calculations are performed by the finance department.
a) Investment Function: The investment function of the finance department is concerned
with the investment decision. One of the main function of the finance department is to
decide where to allocate the limited funds of the business organization to have maximum
benefits. The decision that is taken by the finance department in this particular function is
also known as capital budgeting decision (Okodo, Momoh and Yahaya, 2019). Those
assets are chosen to be invested in that will have maximum future benefits. This function
evaluates the projects in terms of the profitability it has. The most important part in this
function is that the uncertainty of the future makes it difficult to calculate the returns that
are expected from the investment projects.
b) Financing Function; The function evolves around the financial decision undertaking. The
financial manager of the financial department of the organization takes financial decision
as a part of financial function of the department. In the financial decision it is decided
that when, from where and how will the funds be acquired for the fulfilment of the
business needs. Every business performs various kinds of activities that require funds for
their completion. There are various ways using which funds can be acquired. Mainly
there are two broad categories equity and debt. The ratio of equity and debt in the capital
structure of the business entity is decided by the financial department of the business
organization. The main focus of the financial department through this function is to
maximize the wealth of the shareholders. Wealth of the shareholders increases when the
market price of the shares rises. So this function tends to benefit from such situation. The
other source to raise funds is debt. The debt source is riskier as raising funds through this
sources increases the amount of fixed obligation for the firm. but it also results in

increasing the market price of the shares. The main task of financial department by this
function is to maximize the wealth of the shareholders at the minimum level of risk.
c) Dividend Function: The financial department with this function deals with the taking up
the decision regarding the distribution of the dividends. Pay-out ratio that is optimum or
best suited for the firm is decided in this function. A frim may decide to keep its pay-out
ratio equals to zero meaning that no dividend will be distributed among the shareholders.
The entire earnings after interest and tax may be retained in the organization if it expects
that the cost of capital will be lower than the returns that will be generated from investing
the amount earned instead of distribution of dividends (Smith, 2018). The pay-out ratio
can be decided to be kept as a hundred percent, meaning all the earnings after interest and
tax payment to be distributed as dividend among the shareholders if the cost of capital is
assumed to be high than the returns that will come through investing the amount. The
financial department can alternatively decide that the mix of both is more suitable.
Optimum dividend policy is decided by the finance department in this function.
d) Working Capital Function: Working capital function is concerned with deciding the
liquidity of the firm. Liquidity position is needed to be maintained in order to avoid the
insolvency of the organization. Insolvency is a situation where the firm finds itself unable
to pay for its short term obligations. Working capital function is used to decide the
amount of cash that the company decides to maintain in cash form and invest in the
current assets for the firm. There are three types of situations that can followed while
making this decision. The stringent policy is followed when the entity believes in
investing in the current assets are rather than keeping funds in the liquid / cash form.
Following the lenient policy firm may decide that it will keep the funds in liquid form
more and invest comparatively less in the current assets of the business. By this function
of working capital the financial department of the business entity decides to keep the
liquidity of the firm balance such that it is sufficient enough to pay for the short term
obligations and also maintains an adequate level of inventory.
Part b: Sources of finance
Retained Profit: In this source of finance the business enterprise earns the profit but does
not distribute it among its shareholders. The earnings that are kept within the business and is not
distributed among the shareholders is termed as retained earnings. A firm may do so as a part of

its dividend policy. The decision to retain the profits instead to distributing it among the
shareholders is taken for the purpose of reinvesting the amount in some business investment
project (Amornkitvikai and Harvie, 2018). The source is considered best for expansion purpose
as no interest charges incur on this type of business source to acquire funds.
Share Issue: In order to raise fund, the firm may use external source and raise funds by
issuing share in the market. In this source the company sells its ownership in exchange of money.
Task 2
Part a: Calculating the ratios:
(i) Gross Profit Margin
Panini limited
Particulars Formula 2019 2018
Gross Profit Ratio
Gross Profit/Net Sales X
100 28.39%
35.00
%
Gross Profit 3265 3500
Sales 11500 10000
(ii) Operating profit margin
Panini limited
Particulars Formula 2019 2018
Operating Profit Ratio
Operating Profit/Net Sales
X 100 20.04%
27.65
%
Operating Profit 2305 2765
Sales 11500 10000
(iii) Return on Capital employed
Panini limited
Particulars Formula 2019 2018
Return on Capital
Employed Ratio
Net Profit after Taxes/
Gross Capital Employed X
100 12.30%
23.13
%
Net Profit after Taxes 1256 2025
Gross Capital Employed
Total Assets – Current
Liabilities 10211 8755
Total Assets
Noncurrent assets + current
assets 10723 9725
Non-current assets 8613 8550
Current Assets 2110 1175

Current Liabilities 512 970
(iv)Current Ratio
Panini limited
Particulars Formula 2019 2018
Current Ratio
Current Assets/Current
Liabilities 4.12 1.21
Current Assets 2110 1175
Current Liabilities 512 970
(v) Quick ratio
Panini limited
Particulars Formula 2019 2018
Quick Ratio
Liquid Assets/Current
Liabilities 2.80 0.85
Liquid Assets
Current Assets - inventories
- prepaid expenses 1436 825
Inventories 674 350
Prepaid Expenses 0 0
Current Liabilities 512 970
(vi)Inventory turnover days
Panini limited
Particulars Formula 2019 2018
Inventory Turnover days
365 / (Cost of Sales /
Closing Inventory) 29.87
19.6
5
Cost Of Sales 8235 6500
Closing Inventory 674 350
(vii) Debtor’s collection period
Panini limited
Particulars Formula 2019 2018
Receivable Collection
Period
Receivables / Net Credit
Sales for the year x Months
or days in a year 42.5304348 27.74
Receivables 1340 760
Net Credit Sales for the
year 11500
1000
0
(viii) Creditor’s collection period
Panini limited

Particulars Formula 2019 2018
Payable Payment Period
(Trade Payables / Cost of
Sales) * 365 15.7108696 33.58
Trade Payables 495 920
Cost of Sales 11500
1000
0
Part b: Analysing the numerical results
(i) Gross Profit Margin: It is a measure of company’s profitability. Cross profit is the
amount that is left with the organization after the payment is made for the labours and materials
used. Labour and material used in the goods are also known with the term cost of goods sold
abbreviated as COGS (Haralayya, 2021). The gross profit margin of the is lower than the ideal
ratio. The firm’s gross margin reduced in the current year in comparison with the previous year.
The possible reason is the inefficient control of the firm on the expenses incurred. Buying
materials from the alternate sources at lower prices will help in improving the ratio.
(ii) Operating profit margin: The operating profit margin is calculated to measure the amount
of profit a company generates by selling a unit worth of currency after making the payments for
its variable costs incurred in the production. Company’s operating income is divided by its net
sales for this purpose. The operating profit margin of the firm is good and higher than the ideal
one. In the current year the company experienced low operating margins as compared to
previous year. There is fall of 7.61% in the current year. Increasing the volume of sales along
with the control over the operating expenses can improve the ratio.
(iii) Return On Capital Employed: Commonly abbreviated as ROCE is a kind of financial
ratio that is used to assess the profitability of the company and tells about the efficiency of a
company in utilising its capital. The ratio provides information regarding the company that
whether it is generating profits from the capital; that has been invested or not. The ROCE of the
company is very poor as compared to the previous year. This indicates the inefficiency of the
company in optimum utilization of its resources employed (Liu and et.al 2019). Increasing the
production capacity along with the sales volume is the solution for the issue.
(iv) Current ratio: It is a kind of liquidity ratio that is calculated in order to know about the
ability of the company to provide for its short term obligations. The current ratio of the company
is below than the ideal ratio that is 2:1. Indicating the inefficiency to pay for its short term

obligations. Current year’s current ratio is indicating the inefficient utilization of the company’s
resources.
(v) Quick ratio: It is also a kind of liquidity ratio. This ratio tells about the capability of a
company to pay for its short term obligations with its liquid assets. The liquid ratio of 1:1 is
considered as ideal. Firm is having excess of liquid assets that can be utilized efficiently to
increase the profitability of the firm. In the previous year the firm had low liquid ratio.
(vi) Inventory turnover days: The ratio shows how many times in a year does the inventory of
the organization gets replaced. Firm replaces its inventory in 30 days approximately. That is
higher by around 10 days as compared to previous year. It indicates the weak sales by the
company. More advertisement expenditure will increase the sales volume of the company.
(vii) Debtor’s collection period: The debtors’ collection period shows in number of months or
number of days the company get back the credit sales amount on an average from the date it
sales the goods on credit. The average time taken by the company to collect the amount from its
debtors increased by 15 days in the current year. It is not good for the company as it increases the
risk of debtors being bad and blocks the working capital of the firm. to improve the situation
early payment discount can be provided to the customers.
(viii) Creditor’s collection period: The creditors’ collection period gives result in the months or
number of days taken on an average by the firm to pay for its obligations against the suppliers of
the firm supplying materials on credit. Creditors collection period is considered good the more it
is. But the firm’s creditor collection period reduced to 15 days from 33 days in the current year
(Choi and et.al., 2018). Building up good relations with the suppliers will help the firm to take
the advantage of getting materials on credit for longer duration.
CONCLUSION
Based on the report the meaning and importance of financial decision making has been
understood. The various functions and the importance of accounting and finance department has
been highlighted in the report. Different sources for raising funds for the medium sized firm has
been seen. Through the report the calculation of eight different accounting ratios has been done.
The report has analysed the ratios for the Panini ltd.

REFERENCES
Books and Journals
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Finance. 6(2). pp.47-53.
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numerology transmissions. IEEE Transactions on Vehicular Technology. 69(2). pp.1802-
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