Financial Decision Making: Accounting and Finance Functions of Alpha Ltd

This report discusses the importance of accounting and finance functions in organizations, with a focus on Alpha Ltd. It covers the functions of the accounting, management accounting, tax, and auditing departments, as well as the investment, financing, dividend, and working capital functions of the finance department. The report also includes a calculation of financial ratios and a commentary on the performance of Alpha Ltd based on those ratios.

Financial Decision Making

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................3
TASK 1............................................................................................................................................3
Accounting and finance functions of Alpha Ltd.........................................................................3
TASK 2............................................................................................................................................7
Calculating ratios........................................................................................................................7
Commenting on performance of Alpha.......................................................................................8
CONCLUSION..............................................................................................................................11
REFERENCES..............................................................................................................................13

INTRODUCTION
Accounting and Finance functions are cardinal to any organisation. Financial decision
making is a sound approach to weighing the pros and cons of a decision which relates to funds.
The decisions taken by the finance manager are very crucial. The following Report is based on
Alpha manufacturing company based in uk which started their operations back in 1954.The
current report will outline the importance of accounting and finance functions along with all the
ratios which analyses the performance of Alpha Ltd. Alongside financial ratios will critically
examine financial statements which will be used to evaluate profitability, analyse trends,
evaluate borrowing capacity of the Alpha ltd.
TASK 1
Accounting and finance functions of Alpha Ltd
ACCOUNTING DEPARTMENT
The accounting department is responsible for billings, Payroll, Cost Accounting, supplier
payment, preparing financial statements and many more. The accounts department is also
responsible for recording all the cash flows, both in and out for the company. Accounting
department is managed by controller who reports to chief financial officer of the Company.
Accounting department maintain adequate internal controls within the organization to safeguard
valuable resources also keep track of costs incurred by the company and anticipate business
needs.
Functions of Accounting Department
FINANCIAL ACCOUNTING FUNCTION
Financial accounting primary functions is to record and measure all the business activities
of the company and convert that information into financial statements through which investors
can make financial decisions for the betterment of the company. The primary beneficiary are
investors, creditors & lenders. The functions include
Systematic Record
The important function is to record financial transactions systematically for the business.
Recording of each and every financial transaction of business must be according to the financial
standards.
Analysing and summarising

Financial accountants show the correct financial position of the company with the
analysing and summarising of the financial transactions recorded (Zéman, 2019). With this profit
and loss of business in a financial year can be obtained.
Communicate results
The financial accountants must provide report of financial position of the business in the
financial year to all the shareholders & owner of the company, Government, investors and all
other related parties.
Meeting legal requirements
Legal requirements like auditing of the books from external auditor & tax liabilities as
per the taxation system of the country should be meet.
MANAGEMENT ACCOUNTING FUNCTION
Management accounting refers to branch of accounting that includes planning and
controlling of business operations. It helps the Alpha Ltd. management in formulating policies
by collecting information and processing it for further use. This helps in making quality
decisions for the business in the competitive business environment.
Functions of Management accounting
Planning
Planning helps management of Alpha Ltd. to formulate the business objectives which
can be achieving of desired profits for a particular year, steps to reach the targeted profit.
Decision making
For decision making the Alpha Ltd. management uses statistical and accounting
information so that the decision taken benefits the interest of the business (Ross, Shi and Xie,
2019). For example, business uses cash flow forecast and projected reports, burn rate, comparing
costs vs budget for the project etc.
Controlling
Controlling include measuring and monitoring actual results to make sure that goals and
plans of Alpha Ltd. are achieved. It checks the expected performance of a business.
TAX FUNCTION
Tax accounting function deals with the preparations of tax returns and tax payments. It
also takes in account to work with taxable income of Alpha Ltd. along with any deductions or
any tax benefits & exemptions (Muda and et. al., 2018). There are two items which must be

recognised in tax accounting i.e. current year liability and future year liability. Corporation tax is
also considered under tax accounting, Alpha Ltd. is liable for corporation tax and must submit
their tax return at the end of each accounting period. Tax function helps mitigate risk, problems
in business growth, efficiency analysis.
AUDITING FUNCTION
The internal audit and assurance is dedicated to provide Management of Alpha Ltd. With
value added services as well as safeguarding of their assets, compliance with applicable laws,
regulations, contracts which helps to determine effectiveness and efficiency of operations along
with reliability and integrity of financial and operational information. The auditors of Alpha Ltd.
are provided access to all property, personnel and records so that the above activities can be
submerged (Kotsupatriy and et. al., 2020). The primary objective of the Audit is to examine
whether or not if there is an error or fraud in the financial information of the Alpha Ltd. Also to
ensure that the financial position reveals a true and fair view of the business.
FINANCE DEPARTMENT
Finance department ensures that there is timely & enough availability of funds for the
continuous business operations. It also manages that the company pays its debtors and suppliers
on time along with that it also focuses on the income & expenditures of the company (London
Business training and Consulting, 2022). Finance department is the part of organisation that is
responsible for acquiring funds for the firm, managing the funds in the organization and planning
those funds for expenditure on different assets. bookkeeping, cash flows, budgeting and
forecasting, financial reporting and analysis etc. are activities of finance department.
Functions of finance department
INVESTMENT FUNCTION
Investment means allocation of funds or some other resources in expectations of benefits
in the future. It’s one of the most important finance function which allocates capital to long term
assets. Investment in Long term assets produces the maximum yield in the future. Alpha Ltd. doe
prospective investment while considering the expected return and the risk involved with the
investment. As the risk factor plays an important role while considering expected return this
must be calculated before investment (Jowett and et. al., 2020). Investment function also helps in
taking decision regarding reallocation of funds which are being earned by decomposing non

profitable and less productive assets. The Expected rate of return must be determined by the
finance manager to match the investment function.
FINANCING FUNCTION
Financing function is another important function of finance department which a financial
manager must opt. the decisions regarding financing must be wise and accurate because a large
chunk of funds is invested in different projects (Gutsalenko and et.al., 2018). Financing can be
done through internal and external sources. The mix of equity capital and debt is known as firm’s
capital structure.
A sound capital structure aims to maximizes shareholders return with minimum risk.
Managers of Alpha Ltd. make estimation regarding the capital requirements. This also depends
on cost of existing and upcoming projects. Cash management decisions are also being taken by
financing manager. Ratio analysis, financial forecasting, cost and profit control etc. are part of
financial control.
DIVIDEND FUNCTION
Earning profit or positive return is the main aim of the business but the key function of
financial manager is to take into account that whether or not to distribute all the profit to
shareholders as dividend or to keep some part of the profits as a part of retained earnings for
future uncertainties or expansion of the business (Eldomiaty, Bahaa El Din and Atia, 2018). It’s a
financial manager duty to select the best optimum dividend policy which maximizes the
shareholder returns and increase the market capitalization of the Alpha Ltd. In case of
profitability it’s a common practice to pay dividends otherwise issue bonus shares to existing
shareholders. Dividend decision is an important aspect of finance department because this effect
on the availability and cost of capital.
WORKING CAPITAL FUNCTION
Working capital is the difference between current assets and current liabilities. Working
capital refers to the money used for company’s short term expenses, which are due within one
year. This capital is being used for purchasing inventory, paying short term debt and for
financing day to day Operating expenses. The four elements of working capital are account
payable, account receivables, cash and inventory. Non availability of cash, uncontrolled creditors
policy may lead to restructuring of capital, sale of assets and can lead to liquidation of the
company. The goal of working capital management is to maximize operational efficiency. An

efficient working capital management uses working capital ratio, inventory turnover ratio to
monitor how efficiently the working capital is managed.
TASK 2
Calculating ratios
ALPHA LIMITED (£000)
RATIO ANALYSIS FOR THE YEAR ENDED 31 DEC, 2017 & 31 DEC, 2018
PARTICULARS FORMULA 31/12/17 31/12/18
Return on Capital
Employed
Earning before interest and
tax/Capital employed 0.2 0.14
Earning before interest
and tax 375 412.5
Capital employed (TA
– CL) 1912.5 2925
Net Profit Margin Net profit/Net sales revenue 12.50% 8.75%
Net Profit 300 262.5
Net sales revenue 2400 3000
Current Ratio Current assets/Current liabilities 2.35 0.93
Current assets 757.5 1035
Current liabilities 322.5 1110
Debtor Collection
Period
(Account receivables/Total net sales
revenue)*365
68.44 or 68
days 73
Account receivables 450 600

Total net sales revenue 2400 3000
Creditors Payment
Period (Account payables/COGS)*365 60.30 or 60
days
170.33 or 170
days
Account payables 285 1050
COGS 1725 2250
Commenting on performance of Alpha
Return on Capital Employed:
As per the given data of Alpha limited, return on capital employed for the year ended 31
December 2017 is 0.20 whereas for the year ended 31 December 2018 is 0.14. Return on capital
employed shows how much capital is utilized by the company to generate the given earnings.
Although both earnings before interest and tax as well as capital employed increased in the
current year as compared to the previous year but rate of increase in capital employed is greater
than the rate of increase in earnings before interest and tax i.e., EBIT increased by 10% whereas
capital employed increased by almost 53% (Alabdullah, 2022). To generate better return,
earnings shall increase considerably but this is not the case, therefore, return on capital decreased
from 0.20 to 0.14 which is not a good indicator.
Considerable measures shall be taken to improve the return on capital employed like
improvement in the overall profitability (Afolabi and et.al., 2019). Such improvement can be
achieved fundamentally by either reduction in the costs like operating expenses, administrative
and overhead costs or increase in sales of the company. Decreasing liabilities i.e., pay off of
debts is also a measure. A major measure that can be taken and requires a strategic decision-
making is restructuring of its debts and refinancing with lower interest rates or more favourable
terms of repayment. Also, gross margin shall be optimum and shall not be decreased to achieve a
higher level of sales volume as the company will not be able to meet its day to day expenses in
the long run and thus will lead to its degradation.
Net Profit Margin:
As per the given data of Alpha limited, net profit margin for the year ended 31 December
2017 is 12.50% whereas for the year ended 31 December 2018 is 8.75%. Net profit margin

shows profits earned out of revenue received and whether the company is able to cover its
operating, overhead and finance costs. Although net sales revenue increased in the current year
as compared to the previous year from £2,400,000 to £3,000,000 but net profit decreased in the
current year as compared to the previous year from £300,000 to £262,500. Reason being,
operating expenses increased in the current year and most importantly, finance costs doubled in
the current year as Alpha limited doubled the outstanding loan payable in the current year as
compared to previous year (Nariswari and Nugraha, 2020). Therefore, net profit margin
decreased from 12.50% to 8.75%.
First and foremost, suggestion of increasing the net profit margin is to increase the sales
revenues which will in turn lead to increase in gross profits and which will in turn will increase
the net profits of the company. Such sales revenue can be increased either by raising product
price or increasing the sales volume. To have a competitive advantage over other rivals, the
company shall be able to achieve a higher net profit margin than the industry average in general.
Another way to achieve an elevated net profit margin is healthy and optimum reduction in the
costs of the company. The Best option is to increase sales revenues and cost reduction
simultaneously.
Current Ratio:
As per the given data of Alpha limited, current ratio for the year ended 31 December
2017 is 2.35 whereas for the year ended 31 December 2018 it is 0.93. Current ratio shows how a
company is able to meet its current liability obligation on the basis of its current assets base.
Being a current ratio, it concentrates on liabilities becoming due within a year and assets
maturing for utilization within a year and it is also called Working Capital Ratio, Although
current assets increased in the current year as compared to the previous year but current
liabilities also increased in the current year as compared to the previous year and that too at a
greater rate than current assets i.e., current assets increased by almost 37% but current liabilities
increased by a whopping 244% (Irman and Purwati, 2020).
The main reason for such a sharp increase is increase in trade payables from £285,000 to
£1,050,000 and such an increase is due to increase in the amount of purchases in the current year.
The current liabilities increased by 244% but current assets do not increase at an equally
considerable rate to compensate such increase in the current liabilities. Therefore, current ratio
fell from 2.35 to 0.93. An ideal current ratio is 2. Ratio as calculated in the current year is very

poor and company needs to adopt drastic measures to improve the ratio. Some measures can be
avoiding large scale capital payments which will require large cash out flow and will decrease
the current assets, personal drawings on the business shall be kept on check to avoid decrease in
the cash i.e., current assets of the company, selling off of the capital assets that are lying ideal
and has no part in generating revenues for the company to increase the cash and bank and
thereafter, paying its current debt obligations.
Debtor Collection Period / Average Receivable Days:
As per the given data of Alpha limited, debtor collection period or average receivable
days for the year ended 31 December 2017 is 68.44 or 68 days whereas for the year ended 31
December 2018 is 73 days. Debtor collection period / average receivable days show how
effective the management of the company is in recovering its receivables from its debtors (What
are Financial Ratios? 2022). Management's debtor collection policy shall be up to date and
effective to achieve a lower collection period of days. Although both account receivables and
total net sales revenue are increasing in the current year but account receivables are increasing at
a greater rate which is leading to decrease in the debtor collection period / average receivable
days (Oksanen and et.al., 2018). Therefore, receivable days increased from 68 days to 73 days.
Increase in receivable days may create a problem for the company as it leads to shortage of funds
to fuel its daily operations and thus, shall be decreased.
Payment terms shall be negotiated with customers in such way to allow timely receipt of
payments, discounts to the extent affordable by the company can be made available to the
customers to receive payments early, immediate communication with the customer in case of late
or delayed payment and reminders from time to time will keep them on edge to meet their
obligations (Rashid, 2018). Automating the process of communication with customers in case of
delayed payments is a very effective measure and is consistent which will remind customers in
ever fixed number of days of their unpaid debts to the company. Allowing customers to directly
deposit the money in the company's account will lead to faster receipt of money and time can be
saved in the processing by the banks in other cases.
Creditors Payment Period / Average Payable Days:
As per the given data of Alpha limited, creditors payment period or average payable days
for the year ended 31 December 2017 is 60.30 or 60 days whereas for the year ended 31
December 2018 is 170.33 or 170 days. Creditors payment period / average payable days shows

the average number of days which the company is taking to pay its current liability obligations to
its trade creditors or trade payables. This ratio shows how efficient the cash management system
of the company is to meet its current liability obligations.
Although both account payables and COGS are increasing but account payables
increased at an alarming rate of 268% since last year which is due to increase in trade payables
from £285,000 in previous year to £1,050,000 in the current year (Hasanaj and Kuqi, 2019). This
can be due to increase in levels of purchases in the current year as compared to previous year.
Therefore, payable days increased from 60 days to 170 days. Increase in payable days is
troublesome as the creditor may discontinue its business with the company and thus, shall be
decreased. Although more time the company have to pay its debts, more beneficial it is but very
delayed payments affects its credit rating and the vendor may no be satisfied, and he even may
decrease the quantum of allowed discounts therefore, reasonable payable days shall be fixed. In
this case payable days of 170 days is very high and definitely against the interest of the company.
Recommendation:
As per the above calculations and interpretations, it can be observed that return on capital
employed is decreasing, net profit margin is decreasing, current ratio is decreasing, debtor
collection period is increasing and creditor payment period is also increasing therefore, it is not
advisable to invest the Alpha Limited as all the ratios shows unfavourable results.
CONCLUSION
The following report is made on topic financial decision making using various finance
and accounting functions also including ratio analysis with two years’ data of Alpha Ltd. The
main objective of accounting and financing functions are to provide information about the
financial position, financial performance and changes in the financial performance of the
company. The current ratio indicates the short term financial positon which is declining. Its
shows that there are problems with inventory management, low standards for collecting
receivables whereas activity ratios show the increase in debtors and creditors collection period
which show the inefficiency of performance of Alpha Ltd. with increase in both the collection
days. The financial performance of the Alpha Ltd. for the 2 years is analysed and it is proved that
the company is not financially sound. As all the ratios comes out with unfavourable result
therefore its recommended that it is not advisable to invest in Alpha Ltd.

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