Principle of Financial Management Analysis of Financial Statements

PRINCIPLE OF FINANCIAL
MANAGEMENT ANALYSIS OF
FINANCIAL STATEMENTS FOR
DECISION MAKER

TABLE OF CONTENTS
ASSIGNMENT: PART 1................................................................................................................3
1.0 Introduction ..........................................................................................................................3
2.1 Evaluating approaches, techniques and factors contributing in decision-making along with
management accounting functions..............................................................................................3
3.0 Evaluation of Principles for effective and efficient financial strategies to maximize
shareholder value and fulfil needs...............................................................................................5
4.0 Analysing role and functions of management account in regard to financial control and
monitoring...................................................................................................................................6
5.0 Analysing techniques for fraud detection and prevention approaches for ethical decision-
making.........................................................................................................................................7
5. Recommending strategies to management accountants for improving decision-making.......9
6.0 Conclusion .........................................................................................................................11
References ................................................................................................................................11
ASSIGNMENT: PART 2..............................................................................................................12
1. Introduction ..........................................................................................................................12
2.0. Determining ratios of Mothercare plc................................................................................12
3.0. Justification for ratios that how they help company to take operational and strategic
decisions....................................................................................................................................21
4.0 Comparing as well as contrasting investment appraisal techniques and their assistance in
maximizing ROI........................................................................................................................23
5.0 Discussing the role of cash flow statement and break even analysis in decision-making. .24
6.0 Evaluating and recommending management accounting techniques for long term financial
stability and decision making....................................................................................................24
7.0 Conclusion..........................................................................................................................25
References ................................................................................................................................26
APPENDIX ...................................................................................................................................27

ASSIGNMENT: PART 1
1.0 Introduction
Financial management refers to planning, organising, directing and controlling monetary
resources of an organisation. Further, it includes applying financial management principles to
manage organisation’s resources for longer stability of business. The retail sector of UK plays
wide role in contributing in growth of the economy. In addition to this, the chosen company in
the report is Mothercare plc which is an established British retailer. Additionally, Mothercare plc
offers wide range of clothing, footwear, home and travel. The current reports describe principles
of management and how they assist business to take strategic decisions.
Further, report highlights financial strategies for maximizing shareholder’s wealth. Along
with this, the current report gives emphasis on role and functions of management for financial
controlling and monitoring. With respect to this, the present reports show fraud detection and
prevention techniques for strategic decision making. In addition to this, the report gives details of
ratio of Mothercare plc and their justification for operational decisions. In aspect to this, report
elaborates three investment appraisal tools for maximizing ROI.
2.1 Evaluating approaches, techniques and factors contributing in decision-making along with
management accounting functions
There are several techniques and tools that management accountant uses for making
decisions in organizations. These approaches include decision matrix, Pare-to analysis, cost
benefit, conjoint, SWOT and PEST evaluation. In addition to this, every organization use these
tools according to suitability to its scale and business structure (Pedroso and Gomes, 2020).
With respect to decision-making process management functions helps the organization to
identify, implement and monitor chosen tools, etc. These management functions include
forecasting, organizing, coordinating, controlling, analysing, communicating, etc.
Decision matrix
It helps business to evaluate all the options of decisions by formulating matrix table
which clarifies all the factors that can affect business. In regard to this, score is given in table in
turn it makes management to forecast and analyse that the decision will be appropriate for
business growth or not. In this tool final score reveal that which option of decision is best. In

addition to this, management accountant uses this tool to organize, evaluate and control its
financial resources of organization to ensure impelling operations of business.
Pareto analysis
This tool is used by manager when organization need to make numerous decision at
single time. It assists business to prioritize decisions which is very essential for managing
organizational activities. It makes easy for firm to evaluate that which decision should be made
first by determining overall impact on business activities. Further, this tool helps business to
identify a proper procedure for managing different functions of business to assure that it’s all
activities are carry out in systematic manner.
Cost-Benefit analysis
This tool is very beneficial to enterprise for making decisions regarding financial
resources of organisation. There are several benefits and drawbacks that business get from usage
of this approach. In addition to this, it plays vital part in managing business functions by
determining respective benefits and cost that firm need to incur for functioning of organisation. It
is majorly used by those businesses whose motive is to reduce cost of products than quality
management.
SWOT analysis
It refers to analysis of internal and external environment of business that helps it to take
strategic decision. In addition to this, the techniques identify company's internal strength and
weakness to measure its performance (Wahyuni and Triatmanto, 2020.). Further, it evaluates
external environment of firm by assessing available opportunities and threats of market. In turn
this analysis helps business to make critical decision by considering all its internal and external
factors which can impact its overall performance (What is SWOT analysis? 2021). This approach
aid firm to improve its strategies of managing functions such as organising coordinating,
controlling, and analysing its resources of enterprise.
PEST analysis
It refers to evaluation of political, economic, social and technological macro factors that
can influence functioning of organization (Lebedev, 2019). This method helps business to know
present trends so that it can modify its strategies of managing management functions to deliver
effective product and service into the market. It is one of the best decision-making tool that
enable company to recognize its macro elements of environment.

These are tools and approaches that can be used by organization to take strategic
decisions. Additionally, SWOT and PEST can be considered better techniques to conduct
decision process as it provides platform to analyse micro and macro factors that helps business to
manage functions of organization.
3.0 Evaluation of Principles for effective and efficient financial strategies to maximize
shareholder value and fulfil needs
There are several principles of financial management that helps organization to meet its
objective of increase wealth of shareholders along with company. These principles include
formation of optimal capital structure, considering time value of money, wealth maximization,
determining cost of capital, diversifying investment and borrowings, etc.
For making effective functioning organization require to make optimal capital structure
so that it can fulfil needs of its shareholders (Prasad, 2020). Whenever investors evaluate options
of investment their primary expectation from the company is to be efficient in optimizing its
capital structure. So that investors can understand financial plan of organization and take
decision regarding investment. Additionally, it is essential for company to follow this principle
to ensure that it is acting accordingly so that it can execute need of shareholders.
On the contrary note, it is also essential for the company to be aware with principle of
time value of money. This principle assist company to know what is expected from it in terms of
return on investors' capital. It decides the company's intentions in turn to safeguard interest of
investors. Through these shareholders evaluate that organization is accomplishing their needs
and maximizing wealth or not.
Another principle on which company needs to focus is cost of capital. Effective financial
management always does a comparison of financial reward and cost associated with it. In
addition, this assists it to decide interest rate because company need to fulfil its own
requirements also along with maximizing wealth of shareholders. If the cost of capital is more
than rate of return, then investors will not take interest in investing their capital in the company.
So it is essential for the organization to considering this principle to make sure that it is matching
with expectations of its shareholders.
In addition to this, forecasting cash flow plays vital function in making financial strategic
decision. There are various ways through which company can evaluate its cash flow to determine
company's liquidity ratio (Rikhardsson and Yigitbasioglu, 2018). The liquidity ratio measures

organisation’s ability to pay its current obligations. In addition to this, it becomes crucial for
company to evaluate its cash flow to make investors assure that their invested capital is safe. It
will result in gaining trust of investors that can motivate company to deliver good outcomes to
shareholders.
On the other side, maximizing wealth is also stated as an essential principle of financial
management. For achieving this, management accountant need to consider all the above
mentioned principles to have maximization of wealth. In addition to this, along with following
strategic financial management principles company need to be effective and efficient in
managing financial resources and fulfilling necessarily of investors.
4.0 Analysing role and functions of management account in regard to financial control and
monitoring
Roles
Management accountant is accountable for commencement, formulating and efficient
functioning of organization. He is responsible for collecting, compiling, preparing report and
interpreting internal financial information of the company.
He is obligated to prepare frame work of the cost and financial report so that all
departments of organization can perform effectively. In addition to this, management accountant
computes the variance of all activities to compare the difference between estimated and actual
performance so that improvement actions can be taken. The important role of management
accountant is to interpret financial reports to check the current performance of company in turn it
can evaluate reasons for errors so that corrections can be made.
The main role of management accountant is to keep control over activities of all
departments to make sure that company is performing better than prior stage. Additionally,
preparation of reports and interpretation helps him to identify lacking areas where firm need to
monitor and control effectively to achieve desire outcome.
Functions
There are several functions of management accountant that clarifies his roles and
responsibility which depends on capacity of organization. In addition to this, these functions
include planning, controlling, reporting, coordinating, interpreting, evaluating, advising
government reporting, economic appraisal and protection of assets, etc.