Managing Financial Resources

This report provides an in-depth understanding of managing financial resources, including management and financial accounting, investment appraisal techniques, and ratio analysis. It covers topics such as profitability, liquidity, and solvency ratios. The report also includes a case study and recommendations for decision making.

Managing Financial Resources

TABLE OF CONTENTS
INTRODUCTION......................................................................................................................3
QUESTION 1.............................................................................................................................3
Explaining management and financial accounting................................................................3
Presenting difference between management and financial accounting..................................4
QUESTION 2.............................................................................................................................5
Assessing viability of options available referring investment appraisal techniques..............5
QUESTION 3.............................................................................................................................8
Analyzing financial statements of firm using ratio analysis technique..................................8
CONCLUSION........................................................................................................................10
RECOMMENDATIONS.........................................................................................................11
REFERENCES.........................................................................................................................12

INTRODUCTION
In the recent times, business units lay more emphasis on undertaking competent
strategic and policy framework with the motive to make optimum use of funds. Moreover,
without having wide framework business unit faces difficulty in getting desired level of
outcome or success. Now, several tools & techniques are available which firm can use before
taking decision pertaining to investment and financing decision. The present report is based
on different case situation which will develop understanding about the concept of
management and financial accounting. Further, it will shed light on the aspects on the basis of
which management accounting differs from financial. Along with this, report will exhibit
how concept pertaining to ratio analysis and capital budgeting aid in decision making.
QUESTION 1
Explaining management and financial accounting
Management accounting: It refers to the presentation of accounting information
which in turn used by management team for the formulation of policy framework regarding
day to day activities. MA assists management team in performing functions related to
planning, organizing, staffing, directing and controlling. In other words, the main function of
MA is to make appropriate forecast about production and selling aspects, cash inflow &
outflow (Eldenburg and et.al., 2019). In addition to this, aspects of MA also focus on
identifying specific cost centre and delegation of roles and responsibilities which in turn
helps in achieving success.
Financial accounting: It implies for the collection, summarization and presentation
of monetary information that resulted from business transactions. FA reports furnish
information about operating profit and business value to the concerned stakeholders
(Steccolini, 2019). Hence, financial accounting technique is undertaken by businesses with
the motive to serve information to all the stakeholders in an acceptable and standardized
format. In this way, it can be stated that financial accounting process is employed by the firm
for showing financial position and performance to both internal and external stakeholders
(Weetman, 2019). There are several functions which in turn associated with financial
accounting aspects. This in turn includes recording of systematic records, communicating
results to the stakeholders, budget preparation and cost control. It is highly significant which

helps in analyzing areas where improvements are needed. In addition to this, by analyzing
performance company can set appropriate budget for the upcoming time frame.
Presenting difference between management and financial accounting
Differentiation between management and financial accounting is enumerated below:
Basis of difference Management accounting Financial accounting
Meaning It helps management team in
making effectual decisions
about business.
FA refers to the
classification, analysis,
recording and summarization
of financial affairs associated
with the company
(Stockenstrand and Nilsson,
2017).
Objective MA is undertaken by the firm
for offering management
team with wide framework
for ensuring informed
decision making (Chibili,
2019).
The main motive behind
undertaking financial
accounting practices is to
provide outside parties such
as investors, creditors etc
with suitable information for
decision making.
Regulatory compliance In MA, there is no specific
framework with which
business unit needs to
comply. However,
institutions like CIMA,
ICWAI etc offer some
frameworks & format for
reporting purpose
(Richardson, 2017).
According to financial
accounting, business units
need to comply with specific
rules. In other words,
companies are obliged to
prepare financial accounting
reports by taking into
account IFRS, IASB etc.
Time horizon Managerial reports are
prepared as per the
Financial reports are
prepared and published by

convenience usually weekly,
monthly, quarterly etc.
the firms at the end of an
accounting year (Difference
between Financial
Accounting and Management
Accounting, 2019).
Scope Unlike FA, scope is much
broader.
Scope of financial accounting
is pervasive and
comparatively narrow in
against to MA.
Measuring aspects Focuses on the evaluation of
both qualitative and
quantitative aspects while
presenting information for
decision making (Lowe,
2019).
FA reports contain only
quantitative information and
avoid qualitative aspects.
Users or used for Only management team is
the main stakeholder of MA
reports.
Potential investors and all
other stakeholders
(employee, government,
financial institutions etc.) are
identified as the main users
of financial reports.
Verification Information presented in MA
reports is predictable which
cannot be verified easily.
Information included in FA
reports is verifiable.
QUESTION 2
Assessing viability of options available referring investment appraisal techniques
Investment appraisal techniques include payback, net present value, average and
internal rate of return which helps in evaluating suitability of options available. By
undertaking capital budgeting tools firm can analyze option which in turn aid in the

profitability of firm (Maas, Schaltegger and Crutzen, 2016). On the basis of cited case
situation, business unit is willing to invest £600000 for getting high profitability. In this
regard, for assessing viability investment appraisal tools are applied on project A, B and C.
Payback period
Year
Project
A
Cumulativ
e cash
inflow
Project
B
Cumulativ
e cash
inflow
Project
C
Cumulativ
e cash
inflow
1 25000 25000 150000 150000 200000 200000
2 100000 125000 150000 300000 250000 450000
3 250000 375000 150000 450000 25000 475000
4 300000 675000 200000 650000 25000 500000
5 50000 725000 200000 850000 100000 600000
6 50000 775000 200000 1050000 275000 875000
Payback
period
2 + (225000
/ 300000) =
2.7 years
3 + (150000
/ 200000) =
3.7 years 5 years
Computation of Net present value (NPV)
Year
PV
factor
@
10%
Proje
ct A
Discount
ed cash
inflow
(A)
Proje
ct B
Discount
ed cash
inflow
(B)
Proje
ct C
Discount
ed cash
inflow
(C)
1 0.909 25000 22727
15000
0 136364
20000
0 181818
2 0.826
10000
0 82645
15000
0 123967
25000
0 206612
3 0.751
25000
0 187829
15000
0 112697 25000 18783
4 0.683
30000
0 204904
20000
0 136603 25000 17075
5 0.621 50000 31046
20000
0 124184
10000
0 62092
6 0.564 50000 28224
20000
0 112895
27500
0 155230
Total discounted
cash inflows 557374 746710 641610
Less: initial
investment 600000 600000 600000
NPV -42626 146710 41610
Accounting rate of return

Year
Project
A
Project
B
Project
C
1 25000 150000 200000
2 100000 150000 250000
3 250000 150000 25000
4 300000 200000 25000
5 50000 200000 100000
6 50000 200000 275000
Average cash
inflow 129167 175000 145833
Average
investment 600000 600000 600000
ARR 22% 29% 24%
Internal rate of return
Year
Project
A
Project
B
Project
C
0 (600000) (600000) (600000)
1 25000 150000 200000
2 100000 150000 250000
3 250000 150000 25000
4 300000 200000 25000
5 50000 200000 100000
6 50000 200000 275000
IRR 8% 17% 12%
By applying investment appraisal tools on given cash flows it has identified that
payback period pertaining to project B & C implies for 3.7 and 5 years. Referring this, it can
be entailed that by investing money in project b business entity will recoup initial investment
within the period of 3 years and 8 months. Along with this, ARR and IRR of project B
accounts for 29% & 17% respectively. This in turn shows that project B will offers higher
returns after the period of 6 years over other options available. In addition to this, NPV of
project B is also higher over other alternatives. As per the selection criteria, company should
give priority to the projects having lower payback period and higher NPV, ARR & IRR.
Accordingly, project B falls in the category of viable option as compared to A & C. The
rationale behind this, NPV of project A is negative and C having lower return. Further, ARR
and IRR of other options are less in comparison to project B. Considering all these aspects, it

can be said that project B will help in increasing company’s profitability and assists in getting
desired level of outcome or success.
QUESTION 3
Analyzing financial statements of firm using ratio analysis technique
Ratio analysis may be served as the most effectual techniques which help in analyzing
and evaluating financial statements from several perspectives such as profitability, liquidity
& solvency (Cooper, Ezzamel and Qu, 2017).
Profitability ratio
Particulars Formula 2017 2018
Gross
Profit 250000 280000
Net profit 30000 45000
Sales 650000 700000
GP ratio
Gross
profit /
sales *
100 38% 40%
NP ratio
Net
profit /
sales *
100 5% 6%
Return on assets (ROA)
Particulars Formula 2017 2018
Net income 30000 45000
Average
total assets 566500 620000
ROA
Net
income /
average
total
assets 5.3% 7.3%
Return on capital employed (ROCE)
Particulars Formula 2017 2018
Operating 30000 45000

profit
Total assets 600000 640000
Current
liabilities 80000 75000
ROCE
Operating
profit /
total
assets –
current
liabilities 5.8% 8%
Return on equity (ROE)
Particulars Formula 2017 2018
Net income 30000 45000
Shareholders’
equity 435000 485000
ROE
Net
income /
shareholders
equity 6.9% 9.3%
Liquidity ratio analysis
Particulars Formula 2017 2018
Current
assets 160000 165000
Stock 0 0
Prepaid
expenses 0 0
Quick
assets 160000 165000
Current
liabilities 80000 75000
Current
ratio
Current
assets /
current
liabilities 2 2.2

Quick ratio
Current
assets -
(stock +
prepaid
expenses)
/ current
liabilities 2 2.2
Solvency ratio analysis
Particulars Formula 2017 2018
Long term
debt 85000 80000
Shareholders’
equity 435000 485000
Debt ratio
Long term
debt /
shareholders
equity 0.20 0.16
By doing ratio analysis, it has identified that gross and net profit margin of the firm
increased over the time frame. The above depicted table shows that NP ratio of the firm
increased from 5% to 6% at the end of an accounting year 2018. Further, profitability
analysis shows that in the period of 2017 & 2018 ROA implies for 5.3% and 7.3%
significantly. In addition to this, ROCE and ROE of firm was 8% and 9.3% in the period of
2018. By taking into account all such aspects it can be mentioned that profitability aspect of
company is good and improved over the time frame.
Results of liquidity ratio analysis exhibits that, in the period of 2017 & 2018, current
ratio was 2 and 2.2 significantly. As per the ideal framework firm should focus on
maintaining ratio of 2:1. On the basis of this, company must have 2 current assets in against
to 1 liability. Thus, it can be presented that company is highly capable in relation to meeting
financial obligations.
The above depicted table presents that debt-equity ratio of firm decreased from .20
to .16 respectively. For ensuring optimal capital structure company should focus on
maintaining ideal framework of .5:1. On the other side, company’s solvency ratio is far from

the ideal framework. Thus, at the time of raising funds firm should keep in mind ideal ratio.
Accordingly, business organization should issue 2 equities in against to 1 debt instrument.
CONCLUSION
By summing up this report, it can be concluded that significant difference take place
between management and financial accounting. Moreover, such accounting systems differ on
the basis of several aspects namely stakeholders, period, reporting format etc. Besides this, it
can be inferred that investment appraisal techniques are highly significant which facilitates
selection of appropriate project out of several options available. It can be summarized from
the evaluation that project B will prove to be more beneficial for the firm. Further, it has been
articulated that financial position and performance of firm has improved over the time period.
This in turn recognized as good indicator for the firm which shows that strategic framework
undertaken is competent.
RECOMMENDATIONS
 In the context of outcome derived through capital budgeting, company should focus
on investing £600000 in project B over A & C. Moreover, NPV, IRR and ARR of
project B are positive and higher in comparison to other alternatives.
 As per the results of ratio analysis business organization is advised in relation to
employing budgetary control and promotional tools. Moreover, through employing
such tools business unit can exert control on undesirable expenses. Further,
promotional tools also help in raising sales and thereby profitability as well.
 Further, at the time of developing framework regarding working capital and financial
structure firm should keep in mind ideal ratio.

REFERENCES
Books and Journals
Chibili, M., 2019. Basic management accounting for the hospitality industry. Routledge.
Cooper, D. J., Ezzamel, M. and Qu, S. Q., 2017. Popularizing a management accounting idea:
The case of the balanced scorecard. Contemporary Accounting Research. 34(2). pp.991-
1025.
Eldenburg, L. G. and et.al., 2019. Management accounting. John Wiley & Sons.
Lowe, E. A., 2019. On the idea of a management control system: integrating accounting and
management control. Management Control Theory. p.63.
Maas, K., Schaltegger, S. and Crutzen, N., 2016. Integrating corporate sustainability
assessment, management accounting, control, and reporting. Journal of Cleaner
Production. 136. pp.237-248.
Richardson, A. J., 2017. The relationship between management and financial accounting as
professions and technologies of practice. In The Role of the Management Accountant (pp.
246-261). Routledge.
Steccolini, I., 2019. Accounting and the post-new public management: Re-considering
publicness in accounting research. Accounting, Auditing & Accountability Journal. 32(1).
pp.255-279.
Stockenstrand, A. K. and Nilsson, F. eds., 2017. Bank Regulation: Effects on Strategy,
Financial Accounting and Management Control. Taylor & Francis.
Weetman, P., 2019. Financial and management accounting. Pearson UK.
Online
Difference between Financial Accounting and Management Accounting. 2019. Online.
Available through: < https://keydifferences.com/difference-between-financial-accounting-
and-management-accounting.html >.