Financial Decision Making for Panini Limited: Accounting and Finance Functions, Sources of Finance, and Ratio Analysis

This report evaluates the accounting and finance functions of Panini Limited, discusses sources of finance available for expansion, and performs ratio analysis of the company's financial performance in 2018 and 2019. It provides recommendations for potential investors based on the analysis. The report includes information on the functions of accounting and finance departments, sources of finance such as share capital, retained earnings, and bank loans, and ratio analysis of gross profit margin, operating profit margin, return on capital employed, current ratio, and inventory turnover. The report concludes with recommendations for potential investors based on the analysis.

FINANCIAL DECISION
MAKING

Table of Contents
INTRODUCTION...........................................................................................................................3
Task 1...............................................................................................................................................3
Part A...........................................................................................................................................3
Accounting department and its role in Panini limited.................................................................3
Part B – Sources of finance.........................................................................................................6
Calculation of ratios for the two years that is 2018 and 2019.....................................................6
Interpretation of ratios.................................................................................................................8
Recommendations......................................................................................................................10
CONCLUSION..............................................................................................................................10
REFERENCES................................................................................................................................1

INTRODUCTION
Panini limited is a medium sized organization and is known as a bread making company due
to its specialization in making breads for supermarkets across UK. The company was established
in the year 2016 and now it is planning its operational expansion as a result of success it has
enjoyed in past few years. The present report is based on critical evaluation functions that is
being performed by accounting and finance department within Panini limited along with the
discussion highlighting the various sources of finance that is available for the purpose of
expansion to a small and medium sized company. Furthermore, on the basis of financial
statements of Panini limited various profitability, liquidity and efficiency ratios will be
calculated and accordingly the recommendations will be made to a potential investor with
regards to potentiality of investment in Panini limited based on their financial performance in
2018 and 2019.
Task 1
Part A
Accounting department and its role in Panini limited
Accounting department is primarily concerned with performing the task of bookkeeping in
order to maintain the day to day financial records of the business, so that financial statements
could be prepared at the end of the period to indicate the financial performance and position of a
concern (Awaluddin and et.al., 2020). The following are the four major functions of accounting
department:
Financial accounting function: It involves utilizing accounting transactions for the
purpose of preparing financial statements at the end of the period. Under this function,
systematic record of financial transactions taking place in day to day business operations are
maintained along with tracking, storing, summarizing and analysing this information in order to
report entity’s financial performance and position at the end of the accounting period. Therefore,
financial accounting allows Panini limited to prepared their financial statements such as income
statements, balance sheet and cash flow statements for several users of its accounting
information such as investors, creditors, government and taxation bodies.
Management accounting function: Under this function of accounting department,
managers undertakes to observe business’s financial performance in order to determine the ways
through which financial health of the business can be improved (Zietlow and et.al., 2018).

Management accounting uses information of financial accounting for the purpose of planning,
determining the problematic areas, formulate policies and establishing effective control for the
better prospects of the business in future. The several functions performed by management
accountant involves assistance in forecasting future prospects of the business, taking make or
buy decisions, forecasting future cash flows, assists in understanding the variances associated
with business’s performance and evaluating the rate of return. Therefore, Panini limited by
ensuring that the accounting department is effectively carrying out its management accounting
function could ensure improved financial health of the business in future.
Tax function: This function of accounting department is concerned with adoption of those
methods which assists in preparing the financial statements for the purpose of complying with
the taxation requirements and accordingly prepare tax returns. The purpose for which this
function is performed is to determine the profit that is taxable according to the applicable tax
laws by making necessary adjustments in accounting profit that has been arrived through the
application of accounting principles. Whatever workings and adjustments are performed in
included within the tax return and accordingly, the resulting statements are presented for the
purpose of tax audit (Eppich and et.al., 2019). Tax function is generally performed for the
purpose of effective tax planning which requires adoption of such strategies and methods that
could minimize the outgo of tax in a lawful manner. This is possible through capitalizing
available benefits in terms of deductions and exemptions. Accordingly, with the help of tax
function performed by accounting department, Panini limited gets benefitted in terms of
complying with the tax along with reducing the outgoing tax amount by adopting effective
strategies and accounting methods.
Auditing function: This function is independently undertaken by external bodies in
coordination with internal executives of accounting department. It involves examination of
company’s books of accounts in an attempt to determine the accuracy its financial statements. It
is performed both internally by management externally by authority independent of the affairs of
the business. The auditing function ensures that the company’s financial statement indicates true
and fair view of its financial health with respect to the period under consideration. Accounting
department of Panini limited performs internal audit for the purpose of assessing the fairness of
accounting methods adopted and its potentially in indicating the true financial prospects of the
business through financial statements (Mehra and et.al., 2018). Therefore, when the accounting

department of Panini limited performs the function of auditing it leads to several benefits for the
company such as effectiveness in operations, establishing controls for mitigating risk and
ensuring compliance with the relevant regulations and laws to protect business from government
and regulatory interference.
Finance department is primarily concerned with the tasks associated with financial
management of a concern which involves taking decisions pertaining to investments, financing
activities, dividend distribution and working capital requirements of the business. The following
are the four major functions performed by finance department within Panini limited:
Investment function: With the performance of this function, finance department allocate
available funds towards the investment in long term and short term assets. Long term
investments involve commitment of capital towards the fixed assets of the business which is
considered to be having great impact the company’s financial performance and pursuits in the
long run. Accordingly, Panini limited could ensure that the funds available with it for the
investment purpose have been utilized efficiently through its allocation to assets that are meant
for generating higher profits for it. For the effective performance of this function, several capital
budgeting techniques are applied to determine most potential and profitable investment avenue.
Financing function: This function of finance department facilitates acquisition of funds
from internal and external sources of finance by giving reasonable consideration to the costs and
risks associated with it (Siswanti and et.al., 2020). This function is of great importance because it
helps in determining the sources and application of funds, so that enough finance could be
procured to ensure its commitment whenever the need arises. Through this function only,
optimum capital structure for a concern is determine to ensure higher value of the firm by
keeping its cost and risk at the lowest. In this way, Panini limited could ensure that it has
sufficient funding available to meet the requirements of its operations along with incurring
lowest possible cost associated with its acquisition.
Dividend function: Finance department of Panini limited performs the function of taking
decision with respect to how much profit made by it during the period should be distributed
among the shareholders and how much profit should be retained with the business to meet the
financing requirement of the business in future. The financial managers within Panini limited are
responsible for determining the optimum dividend policy with the help of estimating the right

dividend pay - out ratio, so that overall value of the business can be enhanced in the market. This
function facilitates the achievement of the objective to maximize the wealth of shareholders.
Working capital function: This is another most important function of finance department
which estimates the amount of capital needed to be invested in current assets to fulfil the day to
day requirements that arises during the normal course of the business. Current assets indicate the
liquidity position of a concern which can be converted into cash within a duration of one year to
meet the current obligations of the business (Plaskova and et.al., 2020). Working capital function
facilitates the determination and arrangement of working capital for the business which is done
through investment in current assets. Therefore, it is necessary for the finance department of
Panini limited to accurately determine the requirement of working capital in order to ensure
smooth functioning of the business.
Part B – Sources of finance
There are several sources of finance available to a medium sized business for the purpose of
expansion which involves both internal and external sources, such as the following:
Share capital: Equity and preference shares issued to shareholders of the company provides for
the best source of finance for the medium sized business. It fulfils the long term funding
requirements of the business but the ownership gets distributed among large number of
shareholders. In return, shareholders get dividend out of the profit made by the business by
utilizing their invested amounts. It is considered to be less risky source of finance as the dividend
payment and capital repayment is not compulsory for the business.
Retained earnings: It involves injecting the profits of the business for financing the expansion
of the business. It is the amount retained by the business out of the profit made and is not
distributed as dividend among shareholders. This source of finance is the cheapest of all as no
additional costs and risks are required to be bear by the business (Nusron, and et.al., 2018).
Loan from bank: It is the credit obtained from bank or financial institution. Loans indicate the
debt capital of the business which must be repaid on maturity along with meeting the interest
obligations from time to time. Therefore, it is quite risky and costly than the above two source of
finance.
Calculation of ratios for the two years that is 2018 and 2019
Particulars Formula 31st December 2018 31st December 2019

Revenue from sales 10000 11500
Gross profit 3500 3265
Gross profit margin Gross profit / Revenue
from sales * 100
3500 / 10000 * 100
= 35%
3265 / 11500 * 100
= 28.39%
Operating profit 2765 2305
Revenue from Sales 10000 11500
Operating profit
margin
Operating profit /
Revenue from sales *
100
2765 / 10000 * 100
= 27.65%
2305 / 11500 * 100
= 20.04%
Operating Profit 2765 2305
Total Assets 9725 10723
Current liabilities 970 512
Capital employed Total assets – Current
Liabilities
8755 10211
Return on Capital
employed
Operating profit /
Capital employed *
100
2765 / 8755 * 100
= 31.58%
2305 / 10211 * 100
= 22.57%
Current Assets 1175 2110
Current liabilities 970 512
Current ratio Current Assets /
Current Liabilities
1175 / 970 = 1.21
times
2110 / 512 = 4.12
times
Current Assets 1175 2110

Inventories 350 674
Quick Assets Current assets –
Inventories
825 1436
Current liabilities 970 512
Quick ratio Quick Assets / Current
Liabilities
825 / 970 = 0.85 times 1436 / 512 = 2.8 times
Inventory 350 674
Cost of Sales 6500 8235
Inventory Turnover
days
Inventory / Cost of
Goods sold * 365
[(350 + 350 / 2) /
6500] * 365
= 19.65 or 20 days
[(350 + 674 / 2) /
8235] * 365
= 22.69 or 30 days
Accounts receivables 760 1340
Net Sales revenue 10000 11500
Receivables Collection
Period
Accounts
Receivables / Net
Sales revenue * 365
760 / 10000 * 365
= 27.74 or 28 days
1340 / 11500 * 365
= 42.53 or 43 days
Accounts Payables 920 495
Cost of Sales 6500 8235
Payables Payment
Period
Accounts Payables /
Cost of Sales * 365
920 / 6500 * 365
= 51.66 or 52 days
495 / 8235 * 365
= 21.94 or 22 days
Interpretation of ratios
Gross profit margin: This ratio indicates the efficiency of management in generating sales for
the business. It indicates the profitability of the company. With respect to Panini Limited, the

ratio has reduced from 35% to 28.39% instead of rise in sales in the following year. The reason
for the fall in gross profit margin is the higher costs of goods sold and accordingly, indicates
poor efficiency of management. Therefore, to raise this ratio, there is a need to find better terms
with the suppliers which leads to reduction in COGS (Palepu, and et.al., 2020).
Operating profit margin: The ratio indicates the operational profitability of a concern. The
operating profit margin of Panini has reduced in the current period due to greater operating
expenses in 2019. The reason for the increase in ratio is higher operating expenses of the
business as against the increase in sales revenue. Therefore, through effective budgetary control,
these operating expenses can be lowered which leads to rise in operating profit margin for the
company (Arnold and et.al., 2019).
Return on capital employed: This ratio indicates efficiency with which the employed capital
has been utilized. With respect to Panini limited, this ratio has reduced in 2019 as compared to
2018 because of poor efficiency of management in utilizing the capital employed. Therefore, by
increasing the efficiency in using available assets for generating sales for the business, ROCE
can be improved (Husna and et.al., 2019). The returns could be enhanced by establishing
effective cost controlling system to reduce inefficient costs which would lead to improvement in
operational efficiency and therefore, the operating margins.
Current ratio: This ratio indicates the ability of a concern in meeting its current obligations and
accordingly, ideal ratio of 2:1 is required. In case of Panini limited, the current ratio was lower
and higher in the year 2018 and 2019 respectively. Both conditions are not good, so to reduce the
higher ratio than requirement, the excess balance in current assets must be invested in short term
investment avenue to enhance business profitability (Haydarov, 2020). The reasons for higher
current ratio in the year 2019 was due to increase in trade receivables while reduction in trade
payables. This shows that the business has become inefficient in collecting its dues from its
account receivables.
Quick ratio: This ratio indicates the quickness with which the current assets can be converted to
cash in order to meet current obligations. The ideal ratio is 1:1. In case of Panini, the ratio was
lower in 2018 while higher than the requirement in 2019 which indicates idle liquidity within the
business. So, this must be investment in profitable investment avenue for increasing business
profitability. The reason for the increase in ratio from 2018 to 2019 was due to increase in trade
receivables and corresponding reduction in trade payables.

Inventory turnover days: The ratio indicates the time taken by business in converting the
inventory into sales. In case of Panini, the ratio has increased from 20 to 30 days which indicates
poor efficiency of the company in utilizing and managing the inventory held. The reasons for the
increase in inventory turnover days occurs due to two reasons that is, poor sales performance or
purchasing too much inventory. In the given case of Panini limited, the sales performance
however has improved in current year than previous year and the reason for increase in inventory
turnover days was identified as purchase of too much inventory as indicated by COGS (Nufus
and et.al., 2020).
Receivables collection period: This ratio indicates the efficiency with which the company is
collecting its dues from debtors. The reasons for increase in receivables days is poor credit
policies which leads to delayed payment from customers. In case of Panini, the ratio has
increased from 28 days to 43 days and accordingly, indicates poor efficiency of the company.
Payables payment period: This ratio indicates the efficiency of the company in meeting its
obligations towards trade payables. The ratio of Panini has reduced from 52 to 22 days in 2019
which indicates that the company is meeting its obligation timely (Easton and et.al., 2018). The
reasons for improvement in this ratio could be obtaining better terms with suppliers with respect
to outstanding amount. Also, as the liquidity position of the business has improved, it leads to
lower payables payment period.
Recommendations
 The company’s profitability has reduced while the company is meeting its obligation on
time which indicates that the investment would be safe in Panini limited as its solvency is
favourable.
 To reduced receivables collection period, there is a need to offer discounts and revise
credit policy of the company (Barr and et.al., 2018).
 There is a need to adopt better inventory management techniques to overcome the issue
of higher inventory turnover days.
 Furthermore, the company’s sales have increased in current year, so this shows that the
company is growing and thus the investor would get benefitted on investing in it.
 Good current and quick ratio indicates that the company would be able to meet dividend
obligations on time, thus another favourable point for investors.

CONCLUSION
From the above report, it has been concluded that accounting and finance department plays a
significant role in the success of the business like Panini limited. Also, it has been identified that
the efficiency of Panini limited has reduced in 2019 as compared to 2018 which leads to
reduction in its profitability as well. At last, it has been identified that the liquidity position of the
company is good which indicates that the company’s working capital management is good.

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