Importance of Accounting and Finance in Financial Decision Making

This report discusses the importance of accounting and finance in financial decision making, including the functions, roles, and duties of accounting and finance. It also covers different sources accessible for small and medium organizations for expansion purposes. Additionally, it includes the computation of ratios and the reasons behind changes observed in financial ratios. The subject is finance and accounting, and the course code and college/university are not mentioned.

FINANCIAL
DECISION MAKING

Table of Contents
INTRODUCTION ..........................................................................................................................3
MAIN BODY...................................................................................................................................3
1.1. Measure the importance of Accounting and finance related functions, duties and roles
within a company........................................................................................................................3
1.2. Describe different sources accessible with small and medium organisations for expansion
purposes.......................................................................................................................................6
TASK 2............................................................................................................................................6
(A) Compute ratios for last 2 years.............................................................................................6
(B) Define reasons behind changes observed in financial ratios................................................7
(i) Reasons behind diminishing Return on capital employed:....................................................7
(ii) Explanation behind increasing Receivable collection period:..............................................8
(iii) Reasons leading to decline in Payment period of company:................................................8
(iv) Causes for rise in quick ratios recorded in a organisation:...................................................8
(v) Reasons behind rise in current ratio recorded over 2 years:.................................................8
(vi) Causes for decline in Gross profit ratio observed:...............................................................8
(vii) Causes behind decreasing operating profit:.......................................................................9
(viii) Issues responsible for rising rate of inventory turnover days:...........................................9
CONCLUSION ...............................................................................................................................9
REFERENCES..............................................................................................................................11

INTRODUCTION
The report prepared below reflects the idea and necessity of accounting role, duties and
functions that would contribute in running and smooth functioning of Panini Ltd in business
environment (Agrawal and Lakshmi, 2020). It helps organisation to plan budgets and chose
innovative ideas for implementation that would help it in growth and expansion. It also includes
Finance as an important factor that contributes in choosing among best alternatives available for
different type of companies. The report also reflects computation of ratios and finding the related
reasons behind changes observed between current and past recorded results. It also takes in
account sources that would help in fund generation for small and medium scale enterprises.
MAIN BODY
1.1. Measure the importance of Accounting and finance related functions, duties and roles within
a company.
Accounting: It can be explained as a procedure that helps in keeping a systematised
record of finance related proceedings in relation with Panini ltd company. Operations related to
accounting takes in account to summarise, analyse and report related transactions well in time
and record necessary changes.
Functions of accounting: There are many functions that are performed by companies keeping
accounting in mind. Such functions can be explained such as:
 Preparation of budgets: Accounting is helpful in development of budgets that would help
to manage projects in a efficient and effective way as well. It is necessary for every
business to prepare budgets that would help firms to plan in advance what amount has to
be invested and the amount that has to be kept to spending & covering debts.
 Legal compliance and monitoring finance related areas: It is useful in maintaining legal
compliance that would contribute in proving company true and fair in eye of law.
Accounting helps to have a close control on finance related aspects of Panini ltd
(Broeders and Prenio, 2018).
 Analyse the track performance: It is very important in case of accounting to have a proper
track analysis and record related transactions that would contribute in examining current
results with previous year performance. It helps business to understand the profitability of
organisations.

Role of accounting: It plays necessary role in carrying out related functions in a firm that would
help to manage reports and records by finance managers in Panini Ltd.
 It helps to attract investors and customers from market: A basic and most prioritised role
that is performed in accounting is to link more and more potential customers towards
business from competitive environment that would help to increase income & profit
generation in relation with companies (Chia, 2019).
 Facilitates better decision making: Accounting can be counted as a measure that helps in
better decision making. It serves as a standard to decide what should be done, how should
be done and the time duration that is required for completing assigned tasks.
 Maintain finance related records systematically: Preparation of accounts related to
finance would be beneficial for carrying out activities and operations. Accounting helps
in maintaining books of accounts that would help to plan and forecast in advance what
can be related conditions that would affect the running of business in environment.
Duties of accounting: There are many responsibilities that are linked with accounting as defined
below:
 Provides advices on minimisation of cost and maximize income: Certain duties that are
expected to be performed in Panini Ltd are to reduce expenses and increase earning on a
large scale in long run. This helps companies to use the saved money at other places that
would facilitate to discover more revenues.
 Identify problems and find effective solutions: Problems at times turn into obstacles if not
solved within expected time duration. It is then mandatory for companies to have a look
at the areas that are liable fir such issues and find effective solutions that would help to
eliminate risks hindering the growth of business (Giannouli, Stamovlasis and Tsolaki,
2018).
Finance: It can be explained as a technique that is useful in raising and managing funds
in any complex situations. Without adequate funds it is practically impossible for anyone to carry
out related operations well in time.
Functions of finance: Various functions that help enterprise to work in a competitive
environment are:
 Effective and efficient use of funds: Finance plays a vital role in using funds and
resources in best possible manner. It further helps to increase worth and value of

enterprise also it assist to minimise the cost related to capital. It is useful in maintaining
profitability and sustainability in market (Gupta and Saxena, 2019).
 Allocate scarce resources in best possible areas: There are resources such as limited cash
flow, land and machineries that produce limited quantities thus locating such assets in
areas that would give maximum returns.
 Predict cash inflow and outflow: Finance sector helps Panini Ltd to forecast what can be
the positioning of company in near future. It also assess reasons behind rise and fall in
cash inflow and outflow.
Role of finance: There are many roles that finance sector plays in every company but some major
roles and responsibilities are stated as under:
 Employment growth and development: There are many roles that are performed within a
company and which help in rise & expansion as well. Finance is helpful in improving
efficiency and effectiveness of staff persons in Panini Ltd.
 Increase domestic trade: It is internal trade that exists between various regions of similar
territory. Finance helps to tap areas that go unseen and uncovered by Panini ltd company.
Thus would prove to be an opportunity for a running business.
 Management of money: Finance plays an integral role in managing liquid funds and
investing them at places that would generate maximum returns. It is useful for business to
have a proper cycle that helps to invest and earn funds.
Duties of finance: There are various duties that are performed by finance sectors that help firm
to run smoothly in a competitive environment.
 Keeping deep knowledge and information about company's product and services
rendered: It is the responsibility of finance manager to have a deep knowledge regarding
business related work and carry out functions accordingly (Hu and Wang, 2020).
 Preparation of financial records such as Balance sheet, income statement etc.: In finance
sector it is mandatory for companies to develop financial statements that helps to predict
future and keep a systematic record of everything that takes place while running a
organisation. In case of Panini Ltd company development of statements such as income,
fund flow, balance sheet would help them to measure its current performance in relation
to its competitor's.

1.2. Describe different sources accessible with small and medium organisations for expansion
purposes.
There are many methods that would help in raising adequate funds which can be used by related
firms for generating more revenues and invest it for expansion & growth of certain business
functions. Panini ltd. can expand its market and related activities by making investment in areas
that would provide maximum returns. Some of the methods are described below:
 Equity: It is one of the sources in finance related areas that helps business to raise funds.
In such cases banks can increase the amount of funds generated in a company without
using loan and borrowings from market or any other company. Equity is assumed to be
an effective tool that helps to generate more revenues from market by investing such
funds to areas that would facilitate increasing sales (Khan, 2020).
 Debts: It is considered as affordable source for generating funds that can be used by
enterprises for raising required amount from credit facilitators. In the given case Panini
can use such sources of funds because it is advised more profitable as compared to other
available options.
 Retained earnings: It can be explained as income earned by a enterprise after deducting
all the payment that has to be made to creditors and even after eliminating the dividend
paid to its shareholders. It is helpful for increasing level of production in companies and
ensure that company is not affected by external factors and protects its image and
ownership (Malik and et.al., 2021).
TASK 2
(A) Compute ratios for last 2 years.
(I) Gross profit margin: Gross profit/ Net sales * 100
2018 : 3500/10000 * 100 = 35%
2019 : 3265/ 11500 * 100 = 28.39%
(II) Operating profit margin: Operating profit/ Net sales * 100
2018 : 2765 / 10000* 100 = 27.65%
2019 : 2305 / 11500* 100 = 20.04%
(III) Return on capital employed: Earnings before interest and tax/ Share equity +
Long term Liabilities * 100

2018: 2765 / 6755 * 100 = 40.93%
2019: 2305 / 8111* 100 = 28.41%
(IV) Current ratio: Current assets/ Current liabilities
2018: 1175 / 970 = 1.211 : 1
2019: 2110 / 512 = 4.12 : 1
(V) Quick ratio: Current assets – Inventory / Current liabilities
2018: 1175 – 350/ 970 = 0.85 : 1
2019: 2110 – 675/ 512 = 2.80 : 1
(VI) Inventory turnover days: Inventory / Cost of goods sold * 365
2018: 350 / 6500 * 365 = 19.65 days
2019: 674 / 8235 * 365 = 29.87 days
(VII) Receivable collection period: Average account receivable / Net credit sales *
365 days
2018: 760 / 10000* 365 = 27.74 days
2019: 1340 / 11500* 365 = 42.53 days
(VIII) Payable payment period: Average account payable/ Cost of goods sold * 365 days
2018: 920 / 6500* 365 = 51.661 days
2019: 495 / 8235*365 = 6.010 days
(B) Define reasons behind changes observed in financial ratios.
(i) Reasons behind diminishing Return on capital employed:
 Increasing rate of liabilities and debts: It is clear that if Panini ltd faces any rise in scale
of debts and liabilities prevailing around the company it may lead to a situation that
would seem impossible to be tackled in the long run by the managers of the company
(Marchant and Harrison, 2020).
 Poor utilization of resources: It can be said that the reason behind declining return on
capital employed in Panini ltd company is inefficient utilisation of available resources. It
can be managed by finding ways that would improve allocation of funds and other
necessary sources (Ostrovsky-Berman and Litwin, 2019).

(ii) Explanation behind increasing Receivable collection period:
 Mismanagement of credit policies: It is mandatory for every business organisation to
manage and maintain its credit related policies effectively and efficiently that would help
in better running and functioning of Panini Ltd. It also contributes in enhancing
expansion and growth (Reza-Gharehbagh, and et.al., 2019).
 Less efforts contributed in collection of money: There are less efforts recorded in the
process adapted for collecting money by Panini Ltd company from environment. Hence,
due to such actions it led to circumstances such as shifting of receivable collection period
curve in upward direction that indicates rising scale of receivable collection time period.
(iii) Reasons leading to decline in Payment period of company:
 Bad financial situations: Another reason that can be held responsible for decreasing scale
of payment period in the company and which would delay in accessing payment towards
suppliers of stock is bad management of funds in company that serves as a hurdle in
growth of enterprise in competitive environment.
 Payment is slow towards supplier: One reason that is accountable for falling payable
period in Panini Ltd company and delays in processing payments towards supply of raw
material and products (Samson and Bhanugopan, 2022).
(iv) Causes for rise in quick ratios recorded in a organisation:
 Proper management of inventory related turnover: Increase in ratio of inventory turnover
can be stated a reason behind growth in quick ratios.
 Increase in sales: There are unpredictable situations such as fall in prices of products and
services that lead to rise in demand and further increases scale of sales.
(v) Reasons behind rise in current ratio recorded over 2 years:
 Management of payable and receivable: Panini Ltd organisation is advised to manage its
related payable and receivable in given time frame that would assess to find reasons
leading to rise in current ratio in next year.
 Setting up of liabilities: It is possible that business is expected to cover its liabilities and
settle its debts faster than the year before and this can be held a reason for increasing
current ratio in coming year.

(vi) Causes for decline in Gross profit ratio observed:
 Increase in expenses with relation to raw material would decrease quantity of gross profit
too.
 Diminishing rate observed in price of products will result in decline of Gross profit the
reason being, cost incurred during sales remains constant even after observing any
alteration in number of units sold (Seifzadeh and et.al.,2020).
(vii) Causes behind decreasing operating profit:
 Higher operating expenses involved: Operating income has declined in comparison with
previous accounting year the reason being rise in cost and expenses for a certain duration.
 Decline in sale recorded in a organisation has resulted operating profit to fall. Enterprises
are not able to generate enough revenues when compared to past performance.
(viii) Issues responsible for rising rate of inventory turnover days:
 Reducing level of expenses: Inventory turnover can be observed rising in Panini Ltd
company and this can be controlled & monitoring by adapting new and advanced
technologies.
 Managing level of production: It is said to be a mandatory step for Panini Ltd company to
maintain the level of production in business environment. It helps to protect company
from adverse effects around the enterprise that might ruin the working of organisation.
CONCLUSION
The report prepared helps to interpret the necessity of accounting and finance in
competitive business environment. It serves as an idea for understanding how it contributes in
growth and expansion of organisations. It also takes in account the computation of ratios for
finding related profitability, cutting down costs and expenses, eliminating wastage of materials,
find reasons behind increase/ decrease in sales and profit as well. The report also helps to
manage utilisation of resources and maintain production level in a company. It serves ideas
towards small and medium firms that help to generate funds from related sources such as debt,
equity, borrowings, retained earnings etc.

REFERENCES
Books and Journals
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