Financial Decisions Making: Accounting and Finance Departments, Sources of Finance, and Ratio Analysis of Panini Ltd

This report discusses the accounting and finance departments of Panini Ltd, along with the sources of finance available to the company. It also includes a ratio analysis of the company's financial performance, with recommendations for potential investors. The report covers topics such as financial accounting, management accounting, tax function, auditing function, investment function, financing function, dividend function, and working capital function. The computed ratios include gross profit margin, operating profit margin, and return on capital employed.

BM 414 Financial Decisions
Making

Table of Contents
INTRODUCTION...........................................................................................................................3
MAIN BODY..................................................................................................................................3
TASK 1............................................................................................................................................3
Part a: Accounting and Finance departments..............................................................................3
Part b: Sources of Finance...........................................................................................................6
TASK 2............................................................................................................................................8
Part a: Calculation of the ratios...................................................................................................8
Part b: Analysis of Ratios Calculated........................................................................................10
Recommendations......................................................................................................................14
CONCLUSION..............................................................................................................................14
REFERENCES................................................................................................................................1

INTRODUCTION
Financial decisions are an essential part of every business. There are varied decisions that
together are terms are the financial decisions. The financial decisions are the concern area of the
finance department of an organization. Panini Ltd is a medium sized manufacturing company
that manufactures the breads and supplies it to the supermarkets of the region. In this report the
concept of financial and accounting department will be discussed along with the variety of
functions that are performed by these two departments. The report will highlight the sources of
finance for the company. Further in the task two of the report ratios will be calculated and
commented upon. The report will recommend the potential investors of Panini Ltd regarding
their investment decision in the company.
MAIN BODY
TASK 1
Part a: Accounting and Finance departments
1. Accounting department: In an organization accounting department is a division of
business overhead set. There are varied responsibilities over the accounting department in
an organization. The department is responsible for making the payments of the invoices,
preparation of financial statements, payment of compensation to the employees for their
services (Fogarty, 2021). Further cost accounting, timely payments to the materials and
other services providers and related activities are the concern areas of the accounting
department working within a company.
a) Financial accounting function → The accounting department of an organization performs
varies types of functions. The foremost function of the accounting department is the
financial accounting function. Financial accounting means identifying the financial
transactions from all the business transactions, recording the identified financial
transactions, summarizing them in specific formats for the further preparation of the
financial statements (Anggriani, Noviantoro and Efryanty, 2020). The prepared financial
statements are of great use for the various individuals or bodies that have any kind of
stake in the company. The analysis of the information provided by the accounting
department of the company is important for the potential investors to decide whether to
make their investment decision in the company or not.

b) Management accounting function → The next function of the accounting department in
every organization is management accounting. Management accounting function is
dedicated function performed by the accounting department specially for the management
of the organization. The managers in a company as a part of their roles and duties
towards the organization performs a variety of functions. The function of the top
managerial authorities of every organization is basically to make important decisions.
There are various decisions taken by the managers in an organization. These functions are
on both financial and non-financial aspects of the company. Decisions whether financial
or non-financial are taken to maximize the shareholders’ wealth. The decisions taken by
the managers of the company actually benefits the company because of the management
accounting function of the accounting department of the company. Through management
accounting function the accounting department of the company represent actual position
of the company in front of the management. Based on which the management of the
company is able to take effective decisions. The accuracy in the management accounting
function forms the basis for the decisions of the mangers to be fruitful for the business
entity.
c) Tax function → The third function of the accounting department in an organization is
namely as tax function. In large organizations there exists separate department for the
performance of all the activities related to taxations. Both the dedicated taxation
department or the accounting department under its tax function performs same functions.
Tax is accounted by the accounting department of the company. Tax impacts the
organization’s planning of cash and preparation of budgets. There should be availability
of funds in the organization for the payment of tax liabilities to the tax authorities that the
right time (Tashnazarova, 2021). Tax transactions constructs both tax liabilities and tax
assets. Tax liabilities is the sum that has to be paid by company while tax assets are the
amount that the company will receive. Recording and accounting of tax transactions is
done by the accounting department.
d) Auditing function → The auditing function of the company’s accounting department is
concerned with the assurance of accuracy in the accounting of the company. The
financial accounting is verified through the auditing function of the accounting
department. The accounting department of the organization under its auditing function is

concerned with the evaluation of the processes in the business operations, proper
managing of the risks associated with the business entity, activities for controlling the
functions of the company and effective governance of the company.
2. Finance department: The finance department is one of the most important section of the
business organization. The department is responsible for the effective obtaining of funds
for the optimum undertaking of the most profitable investment alternative that is being
undertaken by the company as per the decision made by the department by proper
evaluation of the opportunities available with the company (Balakrishnan, Prakash and
Ramesh, 2020). The department is responsible for the maintenance of the optimum
working capital.
a) Investment Function → The finance department of the company is responsible for the
selection of the investment alternative for the company under its investment function.
The company in order to assure its competitive edge in the market, keeps on analysing
the opportunities that exists in its external environment. To capture the opportunities
there are various investment alternatives for every opportunity (Fachrozie and Syarvina,
2022). The finance department of the company analyses every alternative project for each
of the opportunity on the basis of the initial investment required, the time investment will
take for the repayment of the initial invested amount, the existing value of the money that
will generate in the future. The function of the finance department is to perform this
detailed evaluation and propose the most optimum alternate to the management.
b) Financing Function → In order to accept the investment option nominated, the company
requires to make the initial investment amount arranged within it. This function is taken
care by the finance department of the company. There are various options by which the
company can raise the required amount for the acceptance of the investment. The finance
department with the financing function evaluates each and every source to raise the
funds. Every fund raising alternative have its own costs attached along with risk factor.
The associated cost to the alternate source of finance can be implicit or explicit. Both are
considered while selection of the optimum alternative. The function of the finance
department is to bring the surety that the funds available with the organization are
sufficient for both the working capital requirements and long term requirements.

c) Dividend Function → The profits earned by the company are distributed among the
shareholders both first preference shareholders then the equity shareholders after the
preference shareholders after the payments have been made to the debenture holders and
the tax authorities. There exist two options with the company one is to distribute the
dividend and the second option is not to distribute the dividend. The dividend function of
the finance department is concerned with the making of such decision under its dividend
function (Kaverzina and Cherutova, 2019). The dividend is distributed when the expected
amount to be generated from the retaining of the earnings is lower than the actual market
return. The finance department decides to keep the earnings within the company in the
form of retained earnings and not distribute it to the shareholders when the company
expects to earn more by reinvesting the earnings.
d) Working capital function → The working capital is basically the short term capital
available within the company using which it pays for its short term obligations and also
make essential payments for the daily business operations. There are number of factors
that affects the decision of the finance department regarding the optimum amount that
will be sufficient for the company for its swiftness in the functioning.
Part b: Sources of Finance
1. Retained Earnings: The first source of finance that is most easily available with the
company for meeting its fund requirements is namely retained earnings (Gupta and
Singh, 2018). The retained earnings are basically the portion of profits that the company
keeps with itself instead of distributing it among the shareholders, for further
reinvestment purposes. There are certain advantages that this type of source of finance
has for the company. The stock value of the company increases with the high amount of
retained earnings as balance sheet of such business becomes lucrative for the investors
inviting further investment. This amount can be used effectively for the purpose of
growing the business.
2. Debt Capital: The next source to raise finance required for the fulfilment of expansion
purpose of the company is Debt capital. Debt issue form of raising capital is a long term
source of finance. The individuals or institutes purchasing the debentures are known as
debenture holders. They receive interest periodically against the amount invested by
them. By raising funds through this source of finance help businesses of arrange funds

that are required along with maintaining its control over the activities. There is no
dilution of ownership of the existing owners (Advantages vs. Disadvantages of Debt
Financing, 2022). It gives tax advantage to the company as the interest payments are tax
deductible.
3. Equity Capital: The firm in order to gather funds for its expansion purpose can issue
equity shares in the market (Klimczak, 2020). The money received by issue of equity
shares is called equity capital. The company choosing the alternate of equity capital for
its finance requirement sells the part of its ownership to the public in exchange of money.

TASK 2
Part a: Calculation of the ratios

Part b: Analysis of Ratios Calculated
(i) Gross profit margin
a) Definition: Gross profit is the amount that the company is left with after making
payments for its direct labour and materials, and variable costs from its revenue sales.
Gross profit margin is the percentage of gross profit out of the sales (Mohamad, Azad and
Sifat, 2021).
b) Indication: The gross profit ratio of Panini Ltd indicates the high profitability of the
company. It indicates how much money that is the part of the profits earned by the
company is available for the purpose of covering its both operational and non –
operational expenses. The financial performance of the company can be determined with
computation of gross profit margin. Using this computed figure or value, the efficiency of
the company can be judged on the basis of how well it makes use of its labour, materials
and other inputs to the production process.
c) Comparison of two years computed results: The gross profit ratio for the year 2018 is 35
% that decline to 28.39 % in the current year. Thus it can be said that the profitability of
the company has fallen. It is less capable of cover for its operating and non – operating
expenses. Panni Ltd. has used its resources less efficiently as compared to the last year.
d) Possible reason behind changes: The reason is the fall in the gross profit of the company
in spite of the increase in the sales. There can be various reasons for the fall in gross

profits indicating that company is less efficient in making effective utilisation of its
assets. Also it is not managing the costs effectively, this can be in the increasing level of
costs.
e) Improvement suggestions: For improving the situation Panini Ltd. have to control its
expenses. There are various ways by which expenses can be reduced. Optimising the
efficiency of the workforce, evaluation of the production process are some suggestions.
By evaluating its production process the company can know the areas that are wasteful or
not up to the mark as per the effective process steps.
(ii) Operating profit margin
a) Definition: Operating profit is the deduction of operating expenses from the operating
income (Al-Kassar and et.al., 2019). Operating profit margin is the percentage of
operating profit out of the revenue sales.
b) Indication: The operation profit margin of a company shows the amount of profit the
company generates after the payment for the operating costs. Operating profits earned by
the company are used in determine the potentiality of the firm in making profits exclusive
of the total of inessential factors.
c) Comparison of two years computed results: The operating profit margin of the Panini ltd
reduced by 7.61 % in the current year in comparison to the previous year. The
comparison says that the potentiality of company to earn profits reduced in the current
year.
d) Possible reason behind changes: The reason behind the figure of low operating profit
margin in the current year as compared with the previous year increase in the sales
revenue amount and decrease in the operating profit value. There is an increase in the
operating expenses of the firm by 23% in current year from the past year.
e) Improvement suggestions: For improving the operating profit ratio Panini Ltd must focus
on its operating costs. The operating costs of the company are very high. Company can
increase its operating profit by controlling its administrative expenses, selling and
distribution expenses. The channels that the company uses for selling its products can be
revised for identifying the areas where the costs can be saved.
(iii) Return on capital employed

a) Definition: The return that the company is able to generate from the amount it has
invested (Wadhwa, 2019).
b) Indication: It indicates the efficiency of the company to generate profits out of the
amount it has invested in its assets less short term obligations. It is necessary from the
perspective of the parties who invest their valuable resources in the business. In business
money is invested by the shareholders or different institutions like banks, etc. it is way by
which businesses can justify the trust shown by such individual in their investment.
c) Comparison of two years computed results: The return on capital employed by the Panini
Ltd reduced in the year 2019 in comparison to the year 2018.
d) Possible reason behind changes: The reason behind the declining change is that the
despite of the increase in the capital employed the operating profit of the company is low
this year.
e) Improvement suggestions: The assets of the company should be utilized optimally for
improving its return on capital employed.
(iv)Current Ratio
a) Definition: Current ratio is ratio of the company’s current assets and its current
liabilities.
b) Indication: It indicates the capability of the firm to pay for its short term obligations.
c) Comparison of two years computed results: The current ratio of the firm increased in
comparison to the previous year.
d) Possible reason behind changes: The reason is that the current assets of the company
nearly doubled in the current year. And the current liabilities are nearly halved in the
current year.
e) Improvement suggestions: Increasing the sales volume and scale of production using
materials being supplied on credit will improve the current ratio of the company.
(v) Quick Ratio
a) Definition: A type of liquidity ratio. Quick assets divided by the current liabilities.
b) Indication: The capability of the firm to pay for its obligations using cash reserves.
c) Comparison of two years computed results: Ratio increased in comparison to the previous
year.

d) Possible reason behind changes: The reason for change is decrease in the amount of
current liabilities.
e) Improvement suggestions: Purchasing the raw materials on the credit from suppliers’ will
improve the quick ratio of the Panini Ltd.
(vi)Inventory turnover days
a) Definition: Gives the number of days in which the company’s inventory gets changed
entirely.
b) Indication: The efficiency of sales is shown.
c) Comparison of two years computed results: The inventory turnover days increased to 30
days from 20 days in the previous year.
d) Possible reason behind changes: The cost of sales of the company increased majorly but
the inventory increased in less proportion.
e) Improvement suggestions: For improving the inventory turnover days the company
should control its cost of sales.
(vii) Debtor’s collection period
a) Definition: Period on an average the debtors of the company takes to pay amount due by
them back to the company (Banerjee, 2019).
b) Indication: The efficiency of the company to get the money against the goods sold on
credit to the customers.
c) Comparison of two years computed results: The collection period of Panini Ltd increased
by fifteen days in the current year in comparison to the previous.
d) Possible reason behind changes: Selling of goods to the customer without making the
terms of credit clear.
e) Improvement suggestions: offering of discounts of early payments will improve the
situation.
(viii) Creditor’s collection period
a) Definition: The average time taken by the company to pay its suppliers the amount
against the goods purchased by the company on credit.
b) Indication: Efficiency of the making to meet its obligations and the relations it has with
its suppliers.

c) Comparison of two years computed results: The creditors collection period of the
company reduced in the current year.
d) Possible reason behind changes: Increase in the cost of sales and decrease in accounts
payables amount.
e) Improvement suggestions: For improvement company can maintain its relations with the
suppliers and bargain with them to get credit for longer duration.
Recommendations
It is recommended for the investors not to invest in the Panini Ltd based on the liquidity,
profitability and solvency of the company. The recent financials of the company shows its
declining profitability. The company is becoming less capable for providing for its obligations.
Further on the basis of above done ratio analysis it can be said that the short term assets of the
company are not effectively utilitzed.
CONCLUSION
On the basis of the report the meaning and varied functions of the accounting and finance
department has been discussed. The report highlighted some sources of finance. Lastly the report
analysed the ratios calculated for the Panini Ltd. and recommend the investors.

REFERENCES
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