Financial Decision Making: Role of Accounting and Finance in Alpha Ltd.

This report explains the role of accounting and finance in Alpha Ltd. and how financial decision making helps in evaluating the merits and demerits of a decision as it relates to the usage of funds. It also includes the computation and interpretation of financial ratios such as Return on Capital Employed, Net Profit Margin, Current Ratio, Trade Receivables Period, and Trade Payables Days/Collection Period for Creditors.

Financial Decision
Making

Contents
Contents...........................................................................................................................................2
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
Explaining the role of accounting and finance in the company...................................................1
TASK 2............................................................................................................................................5
Ratio computations......................................................................................................................5
Interpretation of the results..........................................................................................................7
CONCLUSION................................................................................................................................8
REFERENCES..............................................................................................................................10

INTRODUCTION
Financial decision making is a process of evaluating the merits and demerits of a decision as
it relates to the usage of funds (Ahmed, Manwani and Ahmed, 2018). The financial decision
making is important because it helps the enterprise to know whether the decision related to
finance produces effective returns or not. This report contains the information about Alpha
limited which is a manufacturing concern. It is divided into two parts, in part one it encompasses
the role of accounting and finance within the firm. It also consists calculation of financial ratios
and possible effect and changes for Alpha Ltd. The financial ratios helps in computing the
numerical magnitude of two different firms. It helps to forecast the future outcomes and helps in
improving the profitability of the enterprise.
TASK 1
Explaining the role of accounting and finance in the company
Accounting is a process which helps in organising, measuring and interpreting the
information related to transactions of the business. It helps in estimating the income and
expenditure of the business. It helps various stakeholders to compare the performance between
present and previous years.
 Role of accounting: The accounting plays an important role in taking various decisions
related to business. There are various quantitative information which helps in managing
the enterprise. The role of accounting can be explained as given below:
Prevention error and frauds: There are various deviations which are occurred during the
inspection of accounts of the company. The process of accounting helps in finding the effective
solution to the problems of the enterprise. The top level managers are required to take actions
which result in improving the accuracy and validity (Ghesquiere, McAfee and Burnett, 2019).
Planning future based projects: There are various alternatives for the organisation. It helps
in evaluating each project. The Alpha Ltd. Require to achieve the organisational goals and
objectives. When enterprise is able to forecast the projects, the enterprise is capable of achieving
the competitive edge over other competitors.
Having control over activities and monitoring performance: The process of accounting
helps in monitoring of various tasks of the company. The process of accounting finds remedial
actions to improve the revenue of the enterprise.
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Evaluating Employee's performance: It is crucial for every organisation to inspect the
standard performance set and match with the actual performance of the enterprise. The
accounting enables the enterprise to know the reasons for declining the performance of
organisation in the market. There are various financial statements such as cash flow, profit and
loss and balance sheet which reflect the true position of the enterprise. It helps in effectively
allocating the budget.
Ensures statutory compliance: The accounting conventions and procedures helps in
maintaining the uniformity among different organisations. The accounting principles such as
separate legal entity and consistency helps in adhering to the proper accounting system and
process.
Assists in filing financial statements: Every organisation is required to file their financial
statements with the registrar of companies. It is mandatory for the listed companies to file with
the stock exchange. For the purpose of direct and indirect filing, it is necessary to consider all the
scenarios (Khemakhem and Boujelbene, 2018).
 Roles- Accountancy's main task is to keep a record of the group's earnings and
expenditures in order to cut any unnecessary costs and improve competitiveness and
productivity, all of these are critical for the corporation's future possibilities. Alpha
Limited performs the similar functions and is therefore among the more important
contributors to the business's expanding revenue and profits that assist to its overall
expansion and improvement. It is critical to aid both individuals and organisations in
responding to various commercial situations.
 Functions- The accountancy department performs a number of tasks, the most important
of which are gathering, assessing, recognizing, and recording activities in order to assure
that all activities are oriented towards a common goal. Monetary information collection,
analysis, and processing are the key responsibilities of smaller businesses. In the event of
any deception or error, Alpha Limited completes its job exactly such that the necessary
repairs can be performed as soon as possible (Nurcholisah, 2016).
 Duties- Several obligations must be fulfilled throughout the accountancy procedure, with
the primary objective being to reduce the firm's expenditure in order to increase income
and enhance it consecutively. The production of the income report, other accounting, and
taxation records is also covered. For Alpha Limited accountants to contribute to the firm's
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longer run growth and success, they must understand their roles and do them quickly and
productively.
Aside from this, certain more roles and responsibilities are listed below, such as:
 Aid supervisors in creating tactical decisions: The bookkeeping unit offers
organisational governance with the data they need to make decisive decisions, like which
markets or group projects to pursue, the payout intervals for significant equity buying, the
income from company income to be chosen, the ideal funding combine to produce the
company's aggregate income, and the decision-making procedure.
 Administration of the business's initiatives: In regard for evaluating and selecting
strategic spending, the financial division is now in charge of the corporation's existing
resources. The accountancy division should also manage with existing holdings in regard
to static resources. Because it has a higher effect on business agility than its investing
asset, the functioning significant investor must be carefully managed to optimise returns
over the amount of tied-up funds (Oboh, Ajibolade and Otusanya, 2020).
 Following the rules: They follow the legislation in the workplace. Lacking appropriate
accountancy, anybody could violate a series of rules, such as failing to repay the
necessary proportion of taxation. Insufficient bookkeeping could also cause individuals to
overlook a variety of tiny details that maintain a company running well, like modernising
infrastructure to comply with safety regulations.
 Paying viewpoint: The payroll job of the accountancy division ensures that the firm
appropriately compensates its employees with bonuses, licensing, and benefits. The
division is in charge of employee vacations, breaks, and sick hours. It covers taxation
payments, NI levies, and other expenses.
Division of Finance- Finance is the part of a business which could receive the firm's revenue,
administer its cash, and put aside finances for various goods. It is the part of a corporation that is
responsible for efficient fiscal management and asset administering in order to support all of the
firm's business activities. The Financial Division is in charge of collecting, budgeting, and
managing revenue on various resources in order to gain profits for the organisation. It is a
segment of an organisation which offers the fiscal and completely predictable monetary
resources required to support all of the firm's management. Along with its value, that is the most
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crucial feature for any enterprise active in the sector, irrespective of economy. Alpha Limited's
analysis of these factors is detailed, as is its explanation of its obligations, activities, and tasks-
 Roles- The primary responsibility is to manage the firm's finances, to maximise the usage
of all available funds while reducing losses, and to enables the firm to increase its
competitiveness. Alpha Limited completes all task effectively, thus every employee's role
in the firm's growth is necessary (Paluri and Mehra, 2016).
 Functions- Finance plays a variety of functions that help the firm reach the expansion
and progress goals it has set for itself in the next years, the most important of which is
forecasting profitability and capacity investments whilst an approximation may be made.
Budgetary control, marketing, allotment, and utilisation are all included. To keep Alpha
Limited from jeopardising its operations, all of its actions are performed out in such an
efficient manner, and as a result, the firm's total selling has grown in the marketplace in
which it works. It is critical because it allows this organisation to grow and flourish.
 Duties- Its primary responsibility is to assist in the preparation of forecasts, the
management and recording of daily activities, and the preparation of financial statements
and other important documentation for any business. It is incredibly essential because it
allowed Alpha Limited to achieve its objectives by appropriately distributing and
utilising the company's holdings, allowing Alpha Limited to sustain industry dominance
for a considerably longer period of duration than its competitors under similar
competitive conditions.
Aside from all these, many more roles and obligations are listed below, like:
 Budgeting and estimation- The finance division works with administration to prepare
the firm's forecasts and predictions, as well as soliciting feedback on the firm's fiscal
situation. This data could be used by every department to satisfy existing income needs,
prepare at the corporation layer, acquire planned goods, and develop at the cheapest
expense possible when it is needed. Leveraging past data from many sections, the finance
section may produce improved estimates and forecasts for both prolonged and brief
durations (Prast and van Soest, 2016).
 Bookkeeping- This is the most significant function of the division. It entails recording,
analysing, and evaluating a company's everyday financial transactions. The
accompanying should include the tracking of all expenses (purchases, transfers, and so
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on) as well as the sale of finished products. In some companies, this position is often
performed by an accountant, who may be succeeded by more specialised lenders and
debtor staff as the company grows and expands.
 Monitoring of a business's financials- The financing section is in charge of overseeing
all working capital into and out of the business, as well as assuring that enough funds is
supplied to meet the group's everyday requirements. This component also involves an
invoicing and recovery plan for the company's customers to ensure that vendors and
borrowers are compensated and that too appropriately.
 Consulting and sourcing longer-term funding- The finance team should assist
businesses on the optimal fiscal arrangement that will maximise earnings while also
lowering the expense of long-term borrowing, allowing for flexible earnings (Raucci and
Tarquinio, 2020).
TASK 2
The evaluation of 2 elements in the accounting is required for the analysis of the monetary
ratios. Firms utilise statistical approach to acquire a comprehensive understanding of their
efficacy and financial sufficiency. Profitability ratios investigation is crucial because it serves as
the framework for basic capital assessment. Comparative monetary analysis is critical because it
allows shareholders and researchers to evaluate a firm's fiscal viability ahead of time. Reliable
information can also be utilised to forecast a group's potential scenario. Depending on Alpha
Limited's accounting records, a variety of indicators are helpful and displayed effectively.
Ratio computations
Return on Capital employed- It is a fiscal measure used to evaluate a firm's earnings and
operating efficiency. Calculating the proportion is critical since it gives investors a complete
image of how a company makes revenue from its investment. Professionals classify ROCE as a
revenue indicator for analysing a company for investing purposes (Snuggs and McGregor, 2021).
Utilizing information from Alpha Limited's accounting results, the company's ROCE is
calculated as follows:
Particulars 2017 2018
EBIT 675 750
Total Assets 2235 4035
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Total Current Liabilities 322.5 1110
Total Capital Employed (Total Assets – Total Current Liabilities 1912.5 2925
Return on capital employed = EBIT/Total Capital Employed 0.35 0.26
Net profit margin- Calculating the net profit margins is critical in a business since it
allows huge organisations to see how each dollar collected is represented in revenue. The
company's net profits are calculated by subtracting expenditures from gross earnings in the
income report.
Particulars 2017 2018
Net Profit 300 262.5
Sales Revenue 2400 3000
Net Profit Margin = Net Profit/Sales Revenue*100 12.5 8.75
Current ratio- It is among the liquidity measure which is employed to compare a
company's current holdings to its current obligations. This proportion suggests that the current
ratio is critical because it enables the company to demonstrate its ability to meet its brief
run obligations alongside other customers. This ratio informs experts and investors on how a
business can best use its current holdings to meet its shorter run fiscal obligations.
Particulars 2017 2018
Current Assets 757.5 1035
Current Liabilities 322.5 1110
Current Ratio = Current Assets/Current Liabilities 2.35 0.93
Trade Receivables period- The usual receivables days are a ratio of the sum of days a
company requires to recover money from its consumers. The mean due date computation's
principal goal is to ensure that a company has enough cash on hand to meet its commitments. In
the setting of enterprises which depend heavily on borrowing, the ratio is critical (Tambingon,
Yadiati and Kewo, 2018).
Particulars 2017 2018
Sales Revenue 2400 3000
Average Accounts Receivable 450 600
Accounts Receivable Turnover Ratio = Sales
Revenue/Average Accounts Receivable
5.33 5.00
Average Receivable Days = 365/Accounts 68 73
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Receivable Turnover Ratio
Trade Payables Days/Collection Period for Creditors- The mean payables days ratio
depicts how long it requires a corporation to repay back its obligations. The ratio is usually
measured weekly or annually and illustrates how successfully a company's investment returns are
handled.) This ratio indicates that businesses with a higher mean payable days' proportion
postpone repayments and employ the wealth to pursue short-term acquisitions, so boosting their
capacity funding and earnings growth.
Particulars 2017 2018
Net Credit Purchases 1350 2400
Average Accounts Payable 285 1050
Payable Turnover Ratio = Net Credit
Purchases/Average Accounts Payable
4.74 2.29
Average Payable Days = 365/Payable
Turnover Ratio
77.06 159.69
Interpretation of the results
In this section, the results of the above ratios would be reviewed, and the financial
effectiveness would be evaluated.
The ROCE is initially and primarily a financial metric that companies are using to evaluate
their monitoring and risk efficacy. A significant ROCE indicates higher revenue for a company,
and vice versa. According to the statistics, Alpha's ROCE threshold was 0.35 in 2017, but 0.26 in
2018. According to the information, the company's ROCE was high in 2017 but dropped
substantially in 2018. According to the facts, Alpha Limited doesn't really make a return from its
investment in a cost-effective manner (Tumataroa and O'Hare, 2019). It has a lower ROCE,
which remained weak in 2018. The company, on the other hand, made greater investment gain in
2017 and lower revenue in 2018. The low ROCE could be attributed to greater expenses, as seen
by the heavy cash reporting and debt payback in 2018. As previously said, the margin net income
percentage aids administration in determining whether a company earns appropriate selling
profitability or whether operating and over-the-counter expenses are kept to a minimum. Profit
margins percentage is among the most important indicators of a company's fiscal sustainability.
According to the statistics, Alpha's NPM initially restricted at 12.5 percent in 2017, and then fell
to 8.75 percent in the subsequent years. Despite significant selling and net revenues, the
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company's NPM fell from 12.5 percent in 2017 to 8.75 percent in 2018, according to the report.
The decrease in earnings could be due to the rise in operating costs, as the fiscal statements
show. The current ratio, as indicated above, assesses a company's ability to repay borrowing
within a year. In addition, a good current ratio is approximately 1.2 and 2. It has two-to-one
asset-to-current-obligations ratio, which indicates it has double as large holdings as current
liabilities. In 2017, the Alpha Limited proportion was 2.35, and in 2018, it reached 0.93. The
company had a high current ratio in 2017, indicating that it can meet its current obligations in the
near run. Nonetheless, the company had an adverse current ratio of 0.93 in 2018, and the CR was
under one, indicating that it lacked the ability to repay its current obligations via liquid assets.
The decline in the company's current ratio could be attributed to the year's higher current
obligations. Although current holdings increased during the year, the increase in the lower CR
proportion was insignificant when contrasted to current debts. In other words, the duration it
requires a company to collect cash from debtors is equivalent to the trade receivables, as shown
previously. Several financial professionals believe that a lower average day allowance is
preferable to a higher one. With a lower receivable day’s proportion, a company could generate
the required funds by engaging in anything else (Zachariadis, Hileman and Scott, 2019). For both
periods, the company's trade receivable day's ratio was 68 and 73 days. The collecting period is
getting extended, and the corporate isn't satisfied about it. In order to decrease costs, the
company needs to take a much more appropriate solution in this case. In 2017, the company had
77 days to settle its obligation in the context of its trade payables, and in 2018, it had 160 days.
The statistics show that now the corporation's fiscal operations increased rapidly in 2018
comparing to 2017. It could be attributed to the increase in consumer spending. Furthermore, the
deadline to settle accounts proportion for both years is high, indicating that the company is
unable to meet its commitments on schedule. This is a sign that the business isn't operating
correctly, and it's time to take measures.
CONCLUSION
According to the aforementioned research, fiscal decision-making is a technique utilised by
major corporations to make fiscal viability and well-being decisions. According to the study, the
finance and accountancy department performs a critical role in ensuring that a business functions
smoothly. The group is responsible for a variety of tasks and operations which are critical to the
business' culture. Furthermore, the analysis of accounting metrics is acceptable to conclude that
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understanding a firm's performance is critical. Executives, investors, and experts can utilise such
data to take informed decisions. Business activities should keep accurate accounting records in
order to track progress.
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REFERENCES
Books and journals
Ahmed, F., Manwani, A. and Ahmed, S., 2018. Merger & acquisition strategy for growth,
improved performance and survival in the financial sector. Jurnal Perspektif
Pembiayaan Dan Pembangunan Daerah, 5(4), pp.196-214.
Ghesquiere, A.R., McAfee, C. and Burnett, J., 2019. Measures of financial capacity: A review.
The Gerontologist, 59(2), pp.e109-e129.
Khemakhem, S. and Boujelbene, Y., 2018. Predicting credit risk on the basis of financial and
non-financial variables and data mining. Review of Accounting and Finance.
Nurcholisah, K., 2016. The effects of financial reporting quality on information asymmetry and
its impacts on investment efficiency.
Oboh, C. S., Ajibolade, S. O. and Otusanya, O. J., 2020. Ethical decision-making among
professional accountants in Nigeria: the influence of ethical ideology, work sector, and
types of professional membership. Journal of Financial Reporting and Accounting.
Paluri, R.A. and Mehra, S., 2016. Financial attitude based segmentation of women in India: an
exploratory study. International Journal of Bank Marketing.
Prast, H. M. and van Soest, A., 2016. Financial literacy and preparation for retirement.
Intereconomics. 51(3). pp.113-118.
Raucci, D. and Tarquinio, L., 2020. Sustainability performance indicators and non-financial
information reporting. evidence from the Italian case. Administrative Sciences. 10(1),
p.13.
Snuggs, S. and McGregor, S., 2021. Food & meal decision making in lockdown: How and who
has Covid-19 affected?. Food quality and preference. 89. p.104145.
Tambingon, H. N., Yadiati, W. and Kewo, C. L., 2018. Determinant factors influencing the
quality of financial reporting local government in Indonesia. International Journal of
Economics and Financial Issues. 8(2). p.262.
Tumataroa, S. and O'Hare, D., 2019. Improving self-control through financial counseling: A
randomized controlled trial. Journal of Financial Counseling and Planning, 30(2),
pp.304-312.
Zachariadis, M., Hileman, G. and Scott, S. V., 2019. Governance and control in distributed
ledgers: Understanding the challenges facing blockchain technology in financial
services. Information and Organization. 29(2). pp.105-117.
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