Role of Accounting and Finance in ALPHA Limited Company and Financial Ratio Analysis

The report discusses the role of accounting and finance in ALPHA Limited Company and analyzes its financial ratios. It covers the purpose and basic roles of accounting and finance departments, along with the calculation and analysis of financial ratios. The report also compares the ratios of two years and shows the position of the business along with the cause and effect variations in ratios.

Financial Decision
Making

Table of Contents
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
Describe in detail about the role of accounting and finance function in the ALPHA Limited
company......................................................................................................................................1
TASK 2............................................................................................................................................4
a. Calculate the financial ratio of the company ALPHA Ltd......................................................4
b. Analyse the performance of ALPHA LTD on the basis of the above calculation of ratios
along with the results and comparison between the two years, mentioning possible causes and
effects for the changes.................................................................................................................6
CONCLUSION..............................................................................................................................10
REFERENCES .............................................................................................................................12

INTRODUCTION
The report discuss about the firm ALPHA Ltd which mainly works upon the estimated
business practices for the period of 10 years. It also depends upon the financial statements of two
years. This ALPHA Limited company is production based firm which was established in UK in
1954. The organization make strategy to develop its business and want to stable in market for the
long time duration along with the expansion of UK on different areas in the next financial
years(Aviantara, 2021). This case study recommend the solution for developing the business to
the company for long term with the help of accounting and finance role. These role of ALPHA
Ltd company play a most important function for creating high sales revenue and profits along
with the growth and development of the firm also. In another task it compute some financial
ratios of the company which indicates the financial position of the business. Afterwards, in
another part it compare the ratios of two years and show the position of the business along with
the cause and effect variations in ratios.
TASK 1
Describe in detail about the role of accounting and finance function in the ALPHA Limited
company.
The function of accounting and finance play a vital role in the business, firm assists in
analysing the complete performance of the company for a particular duration of time. It assist in
handling the daily financial transaction of the firm APLHA Limited. On the other hand, function
of finance assist a firm for procuring a resources and creating strategic decision to develop them.
Organization is mainly executed on the finance, so on that basis it is crucial to control the
expenditures and money overflow(Baidoo, Boateng and Amponsah, 2018).
Purpose of accounting department : Th main role of accounting is executing a firm. It also
includes the chasing of incomes and expenses and checking legal components. It gives data
related to the financial qualitative and quantitative measures to the investors who invest in their
business also the administration and government assist the firm to take business related
decisions. This procedure of accounting assist in preparing the financial documents which makes
through the assistance of financial transaction of the business.
There are some basic role of accounting which are as follows:
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◦ Financial accounting: This role of accounting manage the past records of all
proceedings mainly it can create and measure for the audit purpose. It also utilize for
the preparation of budgets and reports, which helps in reducing the expenses and
maximize the income, availability for growth opportunity and making financial
forecasts. It also handle the financial reports of the firm and maintain the daily
proceedings of accounting in the organization. It involves purchases, sales, bills
payable and bills receivable of the entity(Bisht and Kumar, 2019). Apart from this it
mainly helps in achieving the company objectives and provide an assistance to the
accountant for keeping the data and performing the financial duty and planning of the
company's goals.
◦ Management accounting: The main goal of the administration helps the managers
within the firm to make good decision. Basically, in the organization it helps in
determining , justifying , interpreting and communicating the data to the manager.
Usually, it also provide an assistance for achieving the firm objectives and targets. It
mainly plan and predicting the strategy which assist the firm to create plan for
projected tasks into the organization(Bowers and et.al., 2019). In general, strategy
considered in advance what to do, how to do and who is to do. Apart from all this it
also create the activity in the company for their projected activities along with this it
gets easy for the management to divide an every individual role in the enterprise
before operating the activity.
◦ Tax function: It is very important to handle the data for directing and controlling the
tax risk along with some other various reasons which includes; task planning,
predicting the issue and share the strategy with the other members of the company.
They also provide a suggestion to them on their companies proceedings it is very
important to suggest the company on their proceedings because every firm necessary
to know that if company do not want to pay more taxes they it necessary to do highly
focused on their proceedings limit. Apart from this they also provide the annual report
to their stakeholders of the company because they invest their money in the business
so, they have right to know the area in which company use their funds(Chai and Ngai,
2020).
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◦ Auditing function: The function of auditing is a major part of accounting department
in this it identify the essence, time period and development of audit process. It
becomes easier for the auditor to analyse and justify the accounting of organization. It
analyse the accounting structure for the main purpose of auditing in which the
auditor who comes to analyse the financial statement should need to ensure the assets
of the company. It own with the identification of value and the ownership of company
assets. It also necessary to check the presence of assets.
Purpose of finance department: This department is mainly answerable for making the issues
which are truly depends upon the financial statement of the organization(Susan, 2020). It also
control the income and expenses of the department(Chen and Chen, 2019). So, that organization
not needed to face any problem in the projected activity of the company.
There are some various roles of finance department which are as follows:
 Investment function : The basic purpose of investment is to indicate the relation among
the interest amount and the companies investment. Generally, the purpose of investment
discuss about the formula to calculate the investment that is the amount of investment –
Interest rate and the slope of investment goes downward. If company invest their money
in such type of technology which are new and innovative and more useful in nature then
its lead to create high demand for that particular technology(Gomez, Herrera and
Granadillo, 2018). So, in that case it beneficial for the investor to invest money in such
advance technology. In this function the investment of the company is depends upon the
level of income if the income of investor is more than it's invest huge amount in the
company and hold that money for the long term purpose. But in case if the income of
investor is less than its invest low amount in the company but after ensuring company
profitable situation.
 Financing function: In this particular function of finance it includes that the retaining and
using of resources for the growth and development of the organizational activities also
helps to control the plan of financial funds. It also create the relevant plan for the
investment to achieving the desired objectives and targets. It mainly prepare appropriate
strategy for accomplishing the projected task it should be required productively into the
company(Tjandra and et.al., 2020). It also record the loans and advances of the
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organization,it assists the firm to keep all the records which are mainly depends upon the
loans and advances of the company. It is the part of financing in which they record the
lending money which they lend in form of loan against security.
 Dividend function: If company earn profit in any year then it's distribute among the
members and board members of the firm after that it share in form of dividend to the
equity and preference shareholder of the organization(Jang and et.al., 2019). Company
need to distribute dividend among the shareholders if they actually earn profit in any year
because they also provide funding to the company when they needed so, it's a duty of the
firm to provide dividend to te shareholders of the organization. Apart from this company
can only pay dividend from the profits of the organization if they earn surplus profit in
any year then they can pay dividend to the equity and preference shareholders of the
enterprise.
 Working capital function: It mainly helps to recover the firm short term expenses which
are remain unpaid within a year. It also indicates the comparison in amount of current
assets and liabilities. In general, They can also help to purchase inventory, paying short-
term debts and all the day to day projected expenses of a company. It mainly helps to
develop and increase the criteria of investment they use cheap finance source for the
growth and development of the organization. Apart from this it maximise the profit
situation of the business trough performing well in organizational activities(Liu and et.al.,
2019). So. It helps the firm to generate more profit into the firm and they invest low
amount in expenditures.
TASK 2
a. Calculate the financial ratio of the company ALPHA Ltd.
 Return on capital Employed
Operating profit / Total Assets – Current Liabilities * 100
In 2017,
Return on capital Employed = (675 / 1912.50) * 100
= 35.29%
In 2018,
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Return on capital Employed = (750 / 2925) * 100
= 25.64%
 Net profit margin
Net Profit / Sales * 100
In 2017,
Net profit margin = (300 / 2400) * 100
= 12.5%
In 2018,
Net profit margin = (262.5 / 3000) * 100
= 8.75%
 Current Ratio
Current Assets / Current Liabilities
In 2017,
Current Ratio = 757.5 / 322.5
= 2.35 Times
In 2018,
Current Ratio = 1035 / 1110
= 0.93 Times
 Debtors Collection Period
Account Receivable / Sales * 365
In 2017,
Debtors Collection Period = (450 / 2400) * 365
= 68.44 Days
In 2018,
Debtors Collection Period = (600 / 3000) * 365
= 73 Days
 Creditors Payment Period
Account Payables / Purchases * 365
In 2017,
Creditors Payment Period = (285 / 1350) * 365
= 77.05Days
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In 2018,
Creditors Payment Period = (1050 / 2400) * 365
= 159.68 Days
b. Analyse the performance of ALPHA LTD on the basis of the above calculation of ratios
along with the results and comparison between the two years, mentioning possible causes
and effects for the changes.
On the basis of the above calculation of financial ratios company get to know the
Financial condition of the ALPHA Limited company and the stability of the business in long run
basically this organization analyse the five ratios of the company which helps to understand the
firm's profitability and capital productivity, level of liquidity, profitable situation ,time period for
the recovery of loan amount and collection of liability in an less time. Basically this ratio helps to
find out this components with the help of above calculated ratios. Afterwards, it analyse those
factors also which influence the company position and show the variations of the business
financial ratios. This financial ratio is very helpful to estimate the future performance of the
company if any company having a good portfolio then its a good sign for the organization and its
stable in them market for the long time and increase its reputation in them market as well.
ROCE ( return on capital employed)
 Definition
The financial ratio indicates that if a firm is performing a better job for creating the profits from
its capital(Mio and et.al., 2020). Organization have some financial funds it use to construct and
develop their business.
 Analyse the company performance with the help of financial ratios.
The above calculation of ratio indicates about the firm performance which means company earn
less return on capital employed in 2018 it basically show that the company is less efficient to
generate profit from its capital.
 Compare the ratio of 2017and 2018 on the basis of above calculated ratio.
In the year 2018 company is less efficient as compare to 2017 because company earn high ROCE
in 2017 and show less skill to accomplish their targets.
 Reason for changes in the ratio between 2017and 2018
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The main reason to show variation in 2018 its less concentration on their objectives in
comparison to the 2017.
 ways to improve the value of ratios in future.
The way to improve the value of ratios is, company need to perform their task with full
productivity and good skills it increase the value of ratio and helps in accomplishing their goals.
 Cause and effect for the variations in financial ratios.
Not efficient use of capital resources: company not use their capital efficiently they invest in
such type of activities in which they need huge amount of capital so, that its create wastage of
capital funds.
More invest in expenses: In this point company not efficiently use their money. They invest more
in expenses and its generate low sales that the reason company didn't achieve their targets.
Net profit margin
 Definition
This financial ratio shows the net profit of the organization after reducing all
expenditures(Muñoz-Murillo, Álvarez-Franco and Restrepo-Tobón, 2020). It very crucial
for the organization to keep or maximise their profits for development purpose.
 Analyse the company performance with the help of financial ratios.
On the basis of above calculation of ratio company earn less profit in 2018 because they usually
more spend on the firm expenses which decreases the profits of the company.
 Compare the ratio of 2017and 2018 on the basis of above calculated ratio.
In the year 2017 company earn high net profit as compare to 2018, because in 2017 company
less invest in expenses and more concentrate on the sales revenue but in 2018 it incurred high
cost and low sales revenue.
 Reason for changes in the ratio between 2017and 2018
The main reason to show variation in the ratio of 2018 is, its less efficient to achieve high profits
not focusing on the profits of the company.
 ways to improve the value of ratios in future.
The only way to improve the ratios in future is, company need to be highly focused on their
goals and need to work with full productivity.
 Cause and effect for the variations in financial ratios.
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Planning and policy of pricing: The above ratios show variation due to the improper planning of
pricing and not correctly implement the policies in the organization.
Inappropriate management: one of the main reason to change in the ALPHA Limited company
ratios because of inappropriate management resources during the particular period of time. Its
very important for the firm to handle the presence of accurate value of resources.
Current ratio
 Definition
It identify the firm capability to pay its short term liability duty. It is a basic tool which
assists in analysing the liquidity condition of the firm(Naciri, 2018). The only way to
compute the ratio is current assets divide by current debts.
 Analyse the company performance with the help of financial ratios.
The performance of the business is not good in 2018 ALPHA Ltd is not capable to pay its short
term debt obligations.
 Compare the ratio of 2017and 2018 on the basis of above calculated ratio.
On the basis of the above computed ratio it analyse that in 2017 company liquidity position is
good but in 2018 business liquidity position is not good enough and not able to pay its short
term liability.
 Reason for changes in the ratio between 2017and 2018
The main reason to change in the ratio of 2018 is its less efficient to accomplish their goals and
more depends upon the liability.
 ways to improve the value of ratios in future.
The only way to improve the ratio is, firm need to work with full productivity and necessary to
reduce its dependency of liability.
 Cause and effect for the variations in financial ratios.
Increasing short-term liability: The variations shows in the ratio of ALPHA Limited due to its
high current liability as compare to the current assets that means it unable to pay its short term
debts.
Declining current assets: The another reason to express the variation in the ratio of business is
less current assets. ALPHA Limited having less current assets in 2018 that means the company
liquidity position is also less.
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Debtor collection period
 Definition
This ratio helps to measure the debt collection, if company takes low time then its more
productive but if it takes high time time then its less productive(Nematollahi and
Hosseini-Motlagh, 2022).
 Analyse the company performance with the help of financial ratios.
It measure the performance of organization from the above calculation of ratio that company
takes high time time to collect liability in the year 2018 that means its less productive.
 Compare the ratio of 2017and 2018 on the basis of above calculated ratio.
From the calculation of above ratios show the comparison between the year 2017 and 2018 it
show that ALPHA Limited is company is highly efficient to achieve their targets in 2017 but its
less productive in 2018.
 Reason for changes in the ratio between 2017and 2018
The basic reason to change in the ratio of 2018 is, firm not work effectively to achieve their
goals and not focusing on their targets properly.
 ways to improve the value of ratios in future.
Effective way to improve in the ratios is, its need to be more consistent or focused on their goals
and targets.
 Cause and effect for the variations in financial ratios.
Customer is not financially stable: The client of the organization is not financially viable to repay
its debt obligations to the company.
Improper period of collection: organization not use proper collection period to collect the debts .
They need to control and apply relevant strategy for the collection of debt.
Creditor collection period
 Definition
It analyse the time period to retrieve the amount of loan(Palm and et.al., 2019). If
company takes high time to repay its liability then its more advantageous for the firm.
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 Analyse the company performance with the help of financial ratios.
The performance of the firm is good in 2018 because it takes high time to repay its debts
obligations.
 Compare the ratio of 2017and 2018 on the basis of above calculated ratio.
From the comparison of the ratios of two year it found that company is highly productive and
concentrated to achieve their targets as compare to 2017.
 Reason for changes in the ratio between 2017and 2018
The reason to change in the ratio of 2018 is company is highly efficient to achieve their targets
and more consistent in the year 2018.
 ways to improve the value of ratios in future.
There is no need of improvement in the ratio of 2018 because its already takes high time to repay
its debt obligations.
 Cause and effect for the variations in financial ratios.
Communication gap: Firm is not productive to repay its lenders on time. The main responsibility
of the company to pay the creditors on a given time period.
Hardness: The basic reason to change in the ratio is strictness procedure of collecting debts
which assist to gather its liability and pay debts on particular time.
CONCLUSION
The above report concluded that function of accounting and finance department which
helps in smooth running of business in a productive way. The case study is very helpful in
analysing the purpose for maximising the manufacturing expense, debts and expenses along with
this its identify the useful method to control it. Accounting and financing discuss about the
amount of making the budget, strategic and future projected activities to increase the profits of
APLHA Limited company. In another task it analyse the ratios of the company which show the
financial condition of the business in long run. After that it analyse the performance and
comparison of two years ratio also the cause and effect changes in financial ratios of the
organization.
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