Financial Decision Making

Financial Decision Making

Contents
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
Critically evaluating the role of accounting and finance.............................................................1
TASK 2............................................................................................................................................3
Calculating the five ratios and commenting on the performance of Tesco.................................3
CONCLUSION................................................................................................................................8
REFERENCES..............................................................................................................................10

INTRODUCTION
Financial decision making is a procedure of analysing the financial performance of an
organisation by evaluating its financial information so that reliable decisions can be taken. This
process is related with financial analysis and performance evaluation of an organisation
(Agarwal and Mazumder, 2013). The main aim of this report is to build an understanding about
the financial aspects of an organisation which can help an investor to invest in a company. For
this purpose, a large scale retail organisation is selected which is Tesco. This is one of the best
supermarket retail organisations in United Kingdom established in the year 1919 and has
headquarters in Welwyn Garden City, England.
In this report, the functions of finance and accounting are analysed along with their critical
evaluation in order to explore their role in Tesco. In second task of this report, annual report of
Tesco is considered and then five different ratios are calculated. After the calculation, all these
ratios are used to provide a commentary on the financial performance of selected company from
the perspective of an investor.
TASK 1
Critically evaluating the role of accounting and finance
The term “finance” refers to the concept of analysing every financial transaction which is
conducted and processes by an organisation. Finance is a wider concept which includes
accounting. “Accounting” is a procedure of recording and analysing the transactions which an
organisation conducts in an accounting year.
The concepts of finance and accounting play various roles in an organisation. In context of
the selected organisation that is Tesco, role of these concepts are analysed below:
Budget & Budgetary Control: Budgetary control refers to the process of determination of
actual performance as compared to the standard or the budgeted performance. Budgetary control
is one of the key roles of accounting and finance function (Du and Zhou, 2012). It helps the
organisation to determine whether the business operations are directed towards the achievement
of organisational goals or targets. For example, in context of Tesco Ltd., accounting and finance
department has the responsibility to prepare budgets related to various departments and measure
the actual performance with the budgeted performance.
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Capital budgeting and investment appraisal: Ascertaining the profitability of any
investment opportunity and helping the management to choose the best alternative for capital
investment is another important role of finance department. It is the duty of finance managers of
the company to make sure that the funds of the organisation are being used optimally and all the
investments are made only after a thorough risk analysis.
Preparation of financial statements: One of the most important functions of accounting
and finance department is preparation of financial statements which helps the management to
determine the financial position of the company and examine any shortcomings in the financial
results obtained during any period. Preparation of financial statements helps in using various
tools such as ratio analysis which provide a better picture of the organisational performance. In
Tesco Ltd, various financial statements are analysed to understand the current financial position
of the company and the debt structure as well.
Handling tax issues- Accounting and finance department plays a crucial role in meeting
the tax requirements of the company. Evasion of tax is illegal and any fault in adhering to the tax
rules of the government can result into a huge amount of penalties charged to the organisation by
the tax department. Thus, it is very essential for the finance and accounting department to make
sure that all the tax rules are duly complied with.
Cost control- It is the duty of the finance and accounting managers of any organisation to
make policies and strategies which help in reduction of costs related to production, inventory
management, supply chains, distribution process etcetera (Koropp and et.al., 2014). Finance
department actively engages itself in classification of costs according to the return obtained by
incurring that cost or expenditure. It helps the business to achieve optimum utilisation of
resources. Any expenditure which is not fruitful and doesn’t yield any result for the organisation
is classified as waste expenditure by the finance department to help reducing costs and increasing
profit margin.
Managing cash flow- Working capital is very important for any business organisation to
ensure smooth functioning of its day to day business activities. Accounting and finance
departments make sure that there is enough cash flow within the organisation to meet the
working capital requirements and payment of any current liabilities. It helps the organisation to
execute the activities related to production and manufacturing of goods and services without any
hindrance (Kramer and Weber, 2012). The finance manager of Tesco ltd. makes sure that enough
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