Financial Decision Making

This report provides insights into financial decision making and its impact on company performance. It discusses the roles and importance of management accounting and financial accounting. The report also explores the significance of financial statements and various accounting techniques. Additionally, it analyzes the financial performance of Skanska plc, a construction and development company.

Financial Decision
Making

Table of Contents
Introduction-................................................................................................................................................3
Task 1-.........................................................................................................................................................3
TASK 2..........................................................................................................................................................9
Conclusion.................................................................................................................................................12
References.................................................................................................................................................14

Introduction-
This report is based on financial decision making. Decision making is an integral part of an
organization. Financial decision making is totally based on financial performance of the
company. Financial performance of the company can be measured on the basis of the financial
ratios. These are the key indicators which company uses in assessing its financial performance.
In this report, Skanska plc’s financial performance is analyzed with the help of financial ratio.
Management and financial accounting is also analyzed. It is construction and Development
Company which is headquartered in Sweden. It was established by Rudolf Fredrik Berg in 1887.
Company has 35000 employees approximately. Company’s market share is very large in global
industry. Anders Danielson is the CEO of the company. Company has revenue of 172.8 billion
and profit earned by company is 6.054 billion. Company offers product related to residential
development, commercial development and infrastructure development. Company is popular for
green construction.
Task 1-
In this task, management accounting and financial accounting is discussed. Importance, roles and
duties of department is discussed in an elaborated way. It is also discussed how these department
affect the financials of the company. Detailed analysis of the company is as follows-
Accounting department-
Accounting department plays an integral role in organization. It is responsible for preparing
financial records which included day to day transactions. Financial records helps in making
financial statements. These statements are useful in decision making. Bill payments and
maintenance of ledger is also done by this department in the company. In other words it can be
concluded that this department is responsible for handling all the economic fronts of the
company (Prihartono and Asandimitra, 2018). Accounting department is responsible for
accounting functions, finance functions, tax functions and audit functions. Importance of
accounting functions is as follows-

 Recording all the day to day transactions to make financial records which further helps in
making financial statements.
 It helps in tracking all the payments which needs to be done by organization and also
checks receivables.
 It makes sure that all the employees in the organization are getting paid timely. If they are
not getting paid on time then it affects their performance. So, it can be said that it is
useful for performance measurement.
 Government taxes should be filed on time to avoid penalties.
 Financial controls are in hand of management accounting. Fraud and theft can be tracked
on time.
Finance Department-
Finance department is very crucial for the company. This department is responsible for managing
funds, acquiring funds and planning for expenditure of fund. Financial management of company
is efficient and effective; it is making sure by this department. Finance functions are very
important for the company. It is defined as planning, controlling and directing the activities
related to financials in the organization. Finance performs variety of functions like investment
functions, dividend functions, financing functions and working capital functions.
Role of accounting-
It helps in decision making related to finance. Financial statements generated by accounting are-
Balance sheet – It helps in tracking company’s assets and liabilities. It gives real picture of the
company. It is also the financial statement which reports business assets, liabilities or
shareholders' equity. It is one of three (income statement or statement of the cash flows being
other two) core financial based statements adopt to the assess a business.
Income statement – Company can track income and expenses with the help of it. It is also useful
for generating more profit margins.
Cash flow statement - Cash flow statement works as bridge between income statement and
balance sheet. Out flow and inflow of cash can be measured by it. Cash generated by company
can also be tracked (Atmadja and Saputra, 2018).

Role of finance-
It is used for money management in the company. Financial manager can track needed money,
investment decisions and finance requirement with the help of it. Investment decisions are very
important for the company such as investing in plant or land. Proper management of money is
required in taking such actions. Finance is the one of most significant aspects of a company.
With maximum funds, regular cash flow as well as continuous transaction, handling and tracking
all of above turn required. To be the particular, financial management assist the company
determine what to spend, when to spend or where to spend.
Duties of accounting-
 Accounting helps in cost reduction, profit maximization and enhancement of revenue.
 Accounts preparation and tax returns should also be done by this department.
 Payroll management and control over expenditure should also be done by this department
in order to generate profit.
 Financial reports are produced by financial accounting. These reports help in decision
making for investors and management.
 Risk management is also be done by this department.
 Budget making and monitoring is also done by this department.
 Budget helps in financial forecasting.
 Financial reports and budget reports are compiled by accountant.
Duties of finance-
This department is very essential for company as it manages funds, acquirement of fund and
investment planning. This department is responsible for producing reports related to account
receivables, expenses and budgets. It focuses on financial controls over resources for supporting
business related activities. Following are the duties of finance department-
 Bookkeeping records financial activities of the business. Information related to expense
and profit can be tracked by it.
 Cash flow management can be done by this department. It track outflow and inflow of the
funds in order to measure the cash generation capacity of the organization.

 Budgeting and forecasting are most difficult task in finance. Future is always uncertain.
Therefore, it is hard to predict future. Future expenses and profit can be obtained with the
help of budgeting and forecasting. These predictions can be compared with actual
performance of the company to know the deviations.
 New investment is feasible for the company or not can also be tracked with the help of
finance department (Brigham and Houston, 2021).
Financial statement structure-
Financial statements are the financial record of financial activities in an organization. Financial
information involved in financial statements tell about the financial position of the company.
There are four types of financial statements-
 Income statement
 Balance sheet
 Cash flow statement
 Statement of shareholder’s equity
Income statement- it is one of the four financial statements. It is used to know the financial
performance of the company in an accounting period. It is also known as profit and loss
statement. This statement tracks net income of the company. Net income can be calculated by
subtracting total revenue from total expenses. Here total revenue indicates operating and non
operating revenue. On the other hand, Total expense is that expenses which is occurred by
primary and secondary activities.
Balance sheet- It reports assets, liabilities and shareholder’s equity at specific point of time.
Assets are those which are owned by company like plant and machinery, land and building and
other intangible assets. Liabilities are long and short term debts owned by company and equity
can be calculated by subtracting assets from liabilities. Financial analyst uses balance sheet
before investing in company.
Cash flow statement- As the name suggests, cash flow statements measure cash generation
capacity of the company. It is used to track all the out flow and inflow of cash from various
activities. Cash flow statement track flow of cash by three activities which are-

 Cash flow from operations
 Cash flow from financing
 Cash flow from investing
Company’s financial condition can be measured. Financial condition of company gives
information about capability of company in meeting its short term obligations. It can also be
measured that company can fund its operations or not (Loke, 2017).
Statement of shareholder’s equity-
Company issues this document as part of balance sheet. Changes in shareholder’s equity and
ownership interest in company are highlighted in this document. The statement of the
shareholder equity tells to company about their value of a industry after investors
or stockholders are a paid out. This is a section of balance sheet that is reflects changes in value
of company to the shareholders from beginning to end of the accounting period. It is
essential because it is allows to analysts as well as reviewers of the financial statements to see
about what factors are caused change in the owner's equity throughout accounting period.
company can find movements of the shareholder reserves on balance sheet (Masharsky et al
2018).
Accounting techniques-
Different types of accounting techniques are used by company in order to meet its objectives or
goals-
 Main goal of every organization is increase its profits. In order to increase Profits
Company needs to do proper financial planning. Financial planning can be done by
budgeting and forecasting.
 The management accountant adopt the technique of the marginal costing, differential
costing as well as break even analysis for the cost control, decision-making or profit
maximization.
 Marginal costing is a technique whereby the variable costs are a charged to the cost units
or fixed costs attributable to applicable period is a written off in the full against input for
that period. Marginal costing is helpful in income planning; it is obliging to the decide

profitability at various level of the production or sale. It is helpful in the decision making
process about a fixation of the selling cost, export the best decision or make as well buy
decision. Break even based analysis as well as the P/V ratio are valuable techniques
of the marginal costing.
 Cost control is technique of the identifying or reducing company expenses to enhance the
profits, as well as it begin with budgeting procedure. The main advantage of the
putting cost controls in the place is a lowering firm’s entire expenses. Company can limit
amount of the money various staff levels can a spend, keeping the more money from a
going out door. This technique is an essential factor for the maintaining as well as
growing the profitability.
 Analysis of financial statements is necessary to know the financial performance of the
company.
 Cost accounting gives information about the various costs which company has to pay in
production of goods or services. It includes two types of cost which are variable and fixed
cost. Variable costs change with the time. There are two methods to calculate costing
which is marginal and absorption.
 When fund moves from one period to another then it is used. Movement of fund is
analyzed and compared with the past year. Change in fund from operations and working
capital change is analyzed with the help of fund flow analysis.
 This analysis is used for analysis of cash from one period to another. Cash flow statement
is used to know the movement of funds and it is divided into three parts cash flow
through investing, through financing and through operations (Shapiro and Hanouna,
2019).
Role of accountant-
 The role of accountant is to handle and inspect the financial accounts of company.
An accountant can be the accountable for lots of diverse, exciting as well as significant
tasks of business. Accountant job duties comprise giving about tax advice; supporting
firms report their financial circumstances, bookkeeping as well as data analysis.

 The primary task of the accountants, that is extends to all others, is to make and analyze
the financial based records. They ensure that the records of finance in business are
accurate as well as that taxes are paid correctly or on particular time.
 Accountants or auditors perform the overviews of financial operations of company in
order to assist it operate efficiently.
 Financial planning is very necessary for organization. Accountant is responsible for long
and short term planning.
 Preparation of management information system.
 Controlling finance is very important responsibility. Accountant is responsible for
management of finance.
 They analyse the business plans and budgets of projects.
 They administering the payrolls as well as controlling income or expenditure of business.
TASK 2
a.
2018 2019
£000' £000'
Return on capital
employed
EBIT 600 675
Capital employed 3,825 5,850
ROCE 15.69% 11.54%
Net Profit margin
Net profit 600 675
Net sales 4,800 6,000
Net profit margin 12.50% 11.25%
Current Ratio
Current Assets 1,515 2,070
Current Liabilities 645 2,220

Current Ratio 2.35 0.93
Average Receivables days
Net Receivables 900 1,200
Credit Sales 4,800 6,000
68 73
Average Payables days
Net Payables 570 2,100
COGS 3,900 5,250
53 146
b.
i) Return on capital employed
Skansa plc’s ROCE has been decreased from 15.69% to 11.54%. The ROCE assignment is
particularly useful when looking at inter-organizational gain in an industry as comparable
measures of working capital. This measure is also useful for organizations that need a lot of
money to work with creation, also known as capitalization initiatives.
ROCE represents additional liabilities and liabilities, unlike other benefit indemnities such as
profit-on-value allowance (ROE). Auditors and lenders use the ROCE component in relation to
the ROE allowance to determine to what extent an organization can benefit from available
capital (Sazonov et al 2017).
The recipe used to determine ROCE divides group income before interest and expenses (EBIT)
by the capital employed. As the group's ROCE share is not moderately high, this is usually
interpreted as an indication that the group is using its capital.
Return on invested capital is determined by earnings before interest and tax / invested capital.
The key components of making this contribution are profit, interest and the use of capital.

Calculation is not the same as return on equity. This proportion changes from time to time due to
the change of these two important things. On the off chance that EBIT is expanded, ROCE is
expanded and if Capital Hires expands, ROCE is reduced.
The ROCE estimates capital integrity revisions (total assets excluding current liabilities) while
the ROE measures only equity profits. This is the rationale behind why we get several benefits
from the study. The next basic guideline is to measure the return on capital employed. In
practice, the group can find a more difficult calculation than this. I do not like the remaining
payment or other definitive cash estimate. The different elements can address different costs of
duties and interest (Finkler, Smith and Calabrese, 2018).
This proportion is also reasonable for looking into the content project or business that has a
special value and a high level of vision because it uses the benefit only before interest and
obligation. As this is a productivity estimate, an organization can develop its ROCE through the
same cycles in which it seeks to maximize its overall benefit. The clearest place to start is to
reduce costs or expand offers. Monitoring areas that are potentially costly or costly is an
important element of operational productivity (White and Van Dyk, 2019).
ii) Net Profit Margin
The net profit margin of the company has also declined from 12.50% to 11.25% as a
consequence of increase in the growth rate of expenses more than the growth of revenue. This
gap has minimized the overall impact of net profit. Organizations usually don't underestimate the
net benefits. However, a group's net income can generally decrease if the group loses revenue or
incurs additional expenses. An organization can lose revenue if its articles or administrations
become obsolete. It is likely to lose revenue if a competitor enters the market. An organization
can incur a greater amount of costs if rents or utilities are increased, with the possibility that it
will not reimburse employees or if it increases the essentials of the organization.
To maximize net income, an organization can seek to reduce costs or increase revenue.
Organizations can reduce costs by making fewer purchases, reducing labor costs or improving
creative efficiency. Organizations can increase their revenues by attracting more customers
through promotion, contracting in new business segments, or by increasing the cost of the
merchandise they produce, the sales, or the administrations they offer.

iii) Current Ratio
The current ratio of the company has also been declined from 2.35 to 0.93. This decline has
increase the risk of short-term insolvency risk from the investor’s point of view. But from
company’s perspectives, company has utilized its unnecessary holdings through minimizing its
current assets. One of the required cash allowances is the current allowance. It is part of the
liquidity of the organization and is therefore essential for both internal business accounting and
external customers. Organizations are always looking to improve this proportion. For the most
part, organizations intend to increase the current share to improve the liquidity position.
However, there may be situations where reducing this allowance is going to be a major need. The
organization maintains more than the "Margin of Safety" requirement and, therefore, hinders its
development. This suggests that resources in the organization’s working capital may be limited
and not used profitably. For this position, the group must stop playing safely and reduce it, so
that a liquid position is perfectly suited.
In addition, the higher percentage indicates excessive liquidity consumption. This abundance of
funds could reduce the organization’s benefits with the proposed cost of revenue. In this way, the
reduction in the current allowance will mean further improvement for the organization. In these
cases, we will talk about some useful ways to reduce something very similar (Dwiastanti, 2017).
iv) Average receivables days
The average receivables days has increased from 68 to 73 days. This indicates that company has
adopted defensive strategy to collect its debt from debtors. It depends on market trend which
force company to adopt such policy.
v) Average payables days
The average payable days has also increased from 53 to 146 days. This indicates that firm has
adopted policy to hold cash within business for longer terms. This strategy will support company
in avoiding access cash requirement in the business. This strategy has also affect current ratio of
the company. As a result, current ratio has also declined. Alone average payables cannot give
any result. After comparing it average receivable days show that company receives payment

before paying to creditors. The gap rises negative cash cycle which is better for the company
(White and Van Dyk, 2019).
Conclusion
Role of accounting is very vast in the organization. It helps organization in tracking its profits,
losses, income and expenditure. It makes financial records of daily transactions. These records
produce financial statements such as balance sheet, income statement and cash flow statement.
Financial statements can be used by investor, management and stakeholders.

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