Financial Decision Making

Task1 Tesco Organisation

FINANCIAL
DECISION
MAKING

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................3
Task 1...............................................................................................................................................3
Function of Finance and Accounts..............................................................................................3
Classification of accounting functions.........................................................................................4
Parts of finance function..............................................................................................................5
Common benefits of Accounting and Finance function..............................................................6
Task 2...............................................................................................................................................7
CONCLUSION..............................................................................................................................11
REFERENCES..............................................................................................................................12

INTRODUCTION
The report is on Financial Decision Making. Financial decision making involves taking decisions
in accordance with financial analysis and accounts. In Task 1, organization taken is Tesco. Tesco
is a retail organization based in UK offering a diversified range of products. Importance of
finance and accounting function has been talked about here. In Task 2, organization is Alpha
Limited which is a manufacturing firm started in 1954 based in UK. Ratio analysis has been
done of the company and interpretation of financial performance done.
Task 1
Function of Finance and Accounts
Accounts maintains track of how much money comes in and out of the company, as the name
implies. It generates financial statements, such as general ledgers, statement of income and
financial position etc. to track transactions of finance over a time period, like quarterly or
annually. These financials are used for internal evaluation by organisation executives and
investors who seek to participate in organisation (Rikhardsson and Yigitbasioglu, 2018).
The department of finance is in charge of managing cash by the use of capital, purchasing assets,
managing fund within the company's other departments, and preparing for future asset
acquisitions. It is in charge of managing the company's equity and debt balances in order to
ensure the company's solvency. In order to make better project investments, it uses a range of
approaches to analyse cash flows and determine rates of return.
In commerce, there are various different sorts of industries, and accounting for them can differ in
some circumstances. As a Retail company, Tesco has developed its own approach of examining
accounting systems that is adapted to the needs of the industry.
Classification of accounting functions
The Audit function's role
A corporation must obey specific rules and regulations when conducting business. To avoid
fines, Tesco's audit department ensures that legislative standards are fulfilled. Businesses use
internal auditors to examine operational records and spot error that has slipped in. The executive
are given instructions to remedy the problems before to the audit externally. They check also

financial statements for accuracy and examine the firm's objectives to see if any policy
adjustments are required to help the company reach its objectives.
Taxation function
Retail companies, like Tesco, use a variety of reporting of tax systems. Profit and expenses for
completed contract are not given for report till the job is finished, tax deferral allowing until the
project is concluded. As it records expenses and income according to year generated, percentage
of completion is a useful technique to deal with tax volatility. Businesses may also delay taxes
with the agreement of the Internal Revenue Service (Rikhardsson and Yigitbasioglu, 2018).
Job costing
As a Retail company, Tesco holds contracts for a wide range of projects and jobs. Because they
all have separate expenses and expenditures, accounting for them all at once might be tough.
Employment costing eliminates any ambiguity by allowing accountability for both indirect and
direct expenditures and revenue for every position separately. The corporation has been able to
cover all operating expenditures and calculate project profitability thanks to this. Thanks to this
well-organized system, internal accountants can swiftly evaluate financial accounts and prepare
tax returns.
Cash basis
Cash basis accounting has benefited Tesco since it permits them to disclose revenues and
expenses occurring in contract, making simple the record-keeping procedure. However, if the
contract is for more than one year, the costs must be spread out evenly throughout the years
(Appelbaum and et.al., 2017).
Percentage of tasks completed
Due to the varying lengths of contracts, matching ultimate income and expenditures might be
difficult. This is where the Percentage of Completion approach comes in, which assists the
company in overcoming this stumbling block. An estimate of project expenses is made, and then
the expense which in actual incurred in completing the job are taken and split by former to
calculate the benefit or loss.

This might help to figure out if a project is on schedule. If there is a benefit, the total gross profit
is calculated by multiplying it by the percent of project that is yet to complete. The results have
been consistent, with little variance (Grashuis and Su, 2019).
Financing function
As a business creates money at regular base, it's critical to appropriately allocate cash to area like
payments outstanding, invoices, raw material and equipment finance, financing of machinery,
payment to labour, and supplier, as well as delegation of funds to other elements of the company.
By the support of good software of finance operations, Tesco can allocate funds to the right areas
and keep accurate records. Financials of previous year are referered to match monies authorised
in growth or decrease mode.
Parts of finance function
Dividends' Importance
On an annual basis, Tesco is mandated for paying a percentage of the earnings to the investors.
The amount to be given is calculated by the managers based on their estimate of the investor's
holding. Dividend income refers to income that is subtracted from gross profit. Because there are
so many investors, calculations of finance are done using technology to ensure that the funds are
distributed effectively (Appelbaum and et.al., 2017).
The function of investment
Tesco's managers decide how to increase funds for the organisation's operations. The corporation
issuance of shares, IPOs and market debentures to raise funds for its operations. Tesco's
executives ensure that a balance exists between debt and equity, as depending too heavily on
debt could lead to financial concerns. Company's bank loan, credit card issuance by a group, are
examples of debt.
Working Capital as a key component of business.

Tesco's working capital is managed in such a way that there are no surplus funds or cash
shortages. Resources are being not utilised with as efficiency as they could be for everyday
operation because of excess funds. If resources are utilised to their greatest capacity, profits can
be made. Lower funds imply that the organisation is not able to manage capital for everyday
operations and has limited liquidity.
a) Profit and loss statement: The statement summarises the earnings from cost of products
sold, as well as fixed and variable and overhead. The net loss or profit, whether quarterly
or annually, demonstrates the company's long-term viability (Arnaboldi, Busco and
Cuganesan, 2017).
b) Balance Sheet: It depicts the company's liabilities and assets. It also examines current
liabilities and assets, that allows investor to analyse the company's current liquidity and
market solvency. It can also be used to calculate net working capital, which is required to
run a business.
c) Ledgers: Also called as general ledgers, ledgers record the company's debit and credit
transactions. Debit records all inbound transactions, while credit records all outward
transactions for the company.
Common benefits of Accounting and Finance function
Obeying the law: Tesco’s accounting employees adhere to the accounting regulations that they
are expected to follow in order to achieve large profits in business. They can’t compute methods
of payment, tax and things that are vital for the business to run and have an accurate evaluation
of the work without having good accounting in the firm. As a result, the corporation is required
to have good finance and accounting function in the organisation, for which there is need to
follow the legislation and ensure that the things that are vital for them in having proper
estimating are in place. With the proper law in place, businesses may simply pay the taxes that
their firms are needed to pay, and this can also play an important part and fulfil the
responsibilities that the organisation is expected to fulfil in order to work properly (Woo, Kwon
and Yuen, 2021).
Developing a company strategy: Having a solid accounting and finance function allows an
organisation to be aware of the high influence on their business while also allowing for easy
expansion. They also play a vital role in creating a proper company strategy, through which

Tesco can easily ensure that their work processes are in good shape for the future. The
organization's aims are to have high profits from which they can maintain their high
expectations, and this may be helpful in keeping track of everything that appears to be vital in the
firm. Customers who purchase products and services from Tesco are obligated to retain records,
which can be used by other customers to determine the pricing of their products and many other
services (Grashuis and Su, 2019).
Organizational decision-making:- Finance and accounting also play an important part in the
Tesco organisation in order to make better decisions, which makes it appear to be easier to make
better future decisions. While which organisation may not be effective over a circumstance and
so may not be able to make the best business decisions. This could also allow them to have
stronger future aspects in the organisation and to ensure that they have the financial backing they
need to support the business strategy. Financial problems may arise in the decision-making
process for Tesco, as the company is forced to deal with a difficult position. It will not be easy
for the company to make a powerful decision in this difficult moment (Arnaboldi, Busco and
Cuganesan, 2017).
Financial performance: The accounting and finance functions at the Tesco play essential roles
and responsibilities that can assist the business in improving its performance. Furthermore, this
may assist them in achieving better future outcomes, and it may be necessary for achieving their
goals and objectives. The corporation must maintain a good financial performance while also
assisting the business in learning about various topics that may appear to be vital rather than
incurring losses as a result of their products and services.
Task 2
a) Analysis of ratios
Ratios 2017 2018
ROCE=Operating Profit/Total
Assets-Current Liabilities*100
675/(2235-322.50)*100=
35.29
750/(4035-1110)*100=25.64

Net Profit Margin=Net
Profit/Sales*100
300/2400*100=12.5 262.50/3000*100= 8.75
Current Ratio=Current
Assets/Current Liabilities
757.50/322.50=2.34 1035/1110=0.93
Average receivable
days=Receivables/Sales*365
450/2400*365=68.43 600/3000*365=73
Average payable
days=Payables/Purchases*365
285/1350*365=77.05 1050/2400*365=159.68
b) Return on Capital Employed (ROCE)
The ratio demonstrates how effectively a company's finance has been put to work in order to
generate profits. Operating costs are subtracted from gross profit to get the numerator. This
figure, also known as EBIT on the Stock, illustrates money the organisation earns through its
operations. The cost of sales is reduced from the revenue, and operating expenses are added in.
Capital utilised is computed as current liabilities subtraction from total assets, because current
liabilities must be paid off and hence can’t be considered capital (Woo, Kwon and Yuen, 2021).
Some researchers consider total employed capital, being the average of the closing and opening
capital employed over time. ROCE allows for a more accurate financial examination of
enterprises with considerable debt because it counts both shareholder equity and long-term debt
as capital invested. It is the amount of profit generated per dollar invested in capital. Companies
with a stable or increasing ROCE are preferred by investors over those with a declining ROCE.
In comparison to 2017, Alpha Limited's ROCE has dropped in 2018, meaning reduced investor
profitability. Despite the fact that operating profit has risen in tandem with revenue growth, total
assets and current liabilities have grown dramatically. As a result of greater a/c payables, there is
increase in current liabilities. While a rise in assets is a nice indicator, it can also suggest that the
company is in debt. Second, the best feasible asset utilisation is required to achieve a significant

increase in operating profits or EBIT (Kornberger, Pflueger and Mouritsen, 2017). As a result,
the organisation will be able to provide a higher ROCE.
Investors would be more concerned about an increase in operational income than an increase in
assets since the higher the operating profit, the better the ROCE.
Net profit margin
In this ratio, the net profit gained from sales is shown as a percent and frequently as a decimal.
Operating costs are subtracted from gross profit, and then interest and taxes are subtracted once
more. Net income, or earnings which has been turned to gain, is a term used frequently. The
numerator, income or sales, is the revenue amount of dollar transformed in profit for the
organisation. The margin shows how effectively the organisation manages its expenses of
operations while still producing income. A company's net profit reflects whether or not its
operations are on track. It indicates whether a company's running costs should be reduced.
Investors examine financial statements to check if profits have been increasing and if the
company has been able to increase sales while covering operational and overhead expenditures.
The use of percentages to describe net profit allows for comparisons between businesses of
varying sizes (Kornberger, Pflueger and Mouritsen, 2017).
In the instance of Alpha Limited, net profit decreased in 2018 comparing to 2017, which is poor
show as it means the falling of company’s profits. The balance sheet depicts that costs of
overheads, like purchases, have skyrocketed, but expenses of operations have only increased
very less.
While seeking to decrease operating costs, the corporation will need to boost income.
The net earnings have decreased in 2018, gross profits have increased, which indicates that the
organisation can meet its overhead expenditures in the following year if the correct steps are
taken.
Current ratio
It's a liquidity ratio that displays an organisation's current liabilities and assets. This shows if an
organisation can meet its short-term obligation in a year while also maximising current assets for
offsetting debts and current liabilities, resulting in working capital. Current assets are ones which

must be sold or utilised in a year in order for operations to continue to run properly. Among them
are cash, cash equivalents, accounts receivable, stock inventory, marketable securities, and other
financial instruments. Current liabilities that must be paid off within one year include short-term
loans, accounts payables, and notes payable.
The current ratio should, in an ideal situation, show that the current liabilities of organisation can
be fully covered through assets which are current. A current ratio of more than one indicates a
firm's liquidity currently; nevertheless, a significantly ratio which is higher implies that the
corporation is not able to effectively control on asset use (Beynon-Davies, 2021).
Since 2017, Alpha Limited's current ratio has been below one, which is a terrible sign for the
liquidity of organisation. This means that a business's current assets are less than its current
obligations. This ratio was formerly lesser than 3, that was beneficial to the company's liquid
assets and asset usage.
Although current assets have increased, cash in hand has reduced and account payables have
skyrocketed, which result in a significant increase in current liabilities. The corporation would
have to discover new means to collect income to assist pay down the payables.
Most investors want a current ratio larger than one. Alpha Limited would need to focus on
boosting current assets for increasing current ratio and so bring investment.
Average receivable days
The time it takes for collection of receivable from debtors is referred to as the debtor payment
period. The faster a loan is recovered, the cash can be used for operations and maybe debt
repayment. Because receivables recovery rate depends on sales generated, the sales denominator
is utilised to calculate the ratio. Since sales are calculated annually, the product of sales and
numerator is multiplied by 365. It is symbolised by days (Musengamana, 2019).
An organisation knows of the time range for recovery of debt while making an order in advance
for supplies or issuance of debt. If the receivables are received on schedule, the organization's
productivity will be demonstrated. In the instance of Alpha Limited, there has been a little
increase in the time it takes to collect debts since 2017. Because of the lengthier collection time,
the corporation currently has less liquidity as per standard. Although there is lack of a significant
increase, investors shall not be turned off. Investors like organisations with a low quantity of
payments outstanding as this can cause payments of dividend to be delayed.

Average payable days
It's the ratio which illustrates how long a company can take for settling trade credits. It's also
known as trade payables. The denominator of the ratio is the number of transaction conducted by
the company annually, hence the measurement is done once a year. The corporation should
utilise credit for its operations and pay its dues timely and ethically for earning or maintaining its
credibility with the creditors. When a company pays its payments on time, it shows that it is in
good financial shape.
Due to an increase in both account payables and transactions, Alpha Limited's payment cycle has
more than doubled in 2018. It also suggests that the company is delaying payment of its
expenses. Changes have to be made to ensure that payment should not take long to be completed
and that payments are made on a consistent basis (Musengamana, 2019).
It may appear to investors as a means for a firm to use loans for a long time, but it raises
questions if the organisation is experiencing a liquidity problem. As the current ratio declines,
such doubts will deepen. A company's relationship with its debtors must be robust in order to
meet possible cash needs.
CONCLUSION
It can be concluded that finance and accounts play an important role in functioning of an
organization. The same was depicted in the study. Ratio analysis of the organization was done
and its relevance talked about for the company and its investors.

REFERENCES
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enterprise systems on managerial accounting. International Journal of Accounting
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Arnaboldi, M., Busco, C. and Cuganesan, S., 2017. Accounting, accountability, social media and
big data: revolution or hype?. Accounting, auditing & accountability journal.
Kornberger, M., Pflueger, D. and Mouritsen, J., 2017. Evaluative infrastructures: Accounting for
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Beynon-Davies, P., 2021. Business Analysis and Design: Understanding Innovation in
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Musengamana, A., 2019. non-performing loans and financial performance of microfinance
institutions in rwanda (Doctoral dissertation, University of Rwanda).
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