Finance: Ratio Analysis, Economic Order Quantity, Accounting Rate of Return

This document provides a comprehensive analysis of financial ratios, economic order quantity, and accounting rate of return in the field of finance. It includes a ratio analysis of Quinn Ltd., a discussion on economic order quantity and its critical evaluation, and an analysis of accounting rate of return and net present value techniques. The document also provides advice to the company based on the findings.

WELCOME TO FINANCE

Table of Contents
INTRODUCTION.................................................................................................................................3
Question 1.............................................................................................................................................3
Question 2.............................................................................................................................................6
Economic order quantity....................................................................................................................6
Annual cost of graphite......................................................................................................................6
Critical evaluation of EOQ decision..................................................................................................7
D) Advise to company.......................................................................................................................8
Question 3.............................................................................................................................................8
Accounting rate of return...................................................................................................................8
Net present value...............................................................................................................................9
C) Critical evaluation of net present value technique......................................................................10
D) Advise to organisation................................................................................................................11
Question 4...........................................................................................................................................11
a) Principles of effective corporate governance...........................................................................11
b) Traditional aim of financial management encourage short termism............................................12
C) Three effective corporate governance.........................................................................................12
CONCLUSION...................................................................................................................................13
REFERENCES....................................................................................................................................14

INTRODUCTION
Investment decision making is about to make the best investment option out of the
selected choices. This project will discuss the economic order quantity technique of inventory
management. Different investment decision making methods will discuss such as internal rate
of return, net present value and other such techniques related to the investment decision
making. Further the project will discuss effective corporate governance and other such
aspects.
Question 1
Ratio Analysis of Quinn Ltd.
Particulars Formula 2020
(£'000)
2019
(£'000)
Profitability Ratio
Gross profit 57294 67592
Net profit 9000 23654
Net sales 116422 116268
Gross Profit Ratio Gross profit/ Net sales*
100
49.21% 58.13%
Net Profit Ratio Net profit/ Net sales* 100 7.73% 20.34%
Efficiency Ratio
COGS 59128 48676
Opening stock 22438 0
Closing stock 24568 22438
Net sales 116422 116268

Fixed assets 100310 102652
Average stock Opening stock + closing
stock/ 2
34722 11219
Inventory turnover ratio COGS/ Average stock 1.70 4.34
Fixed assets turnover ratio Net sales/ Fixed assets 1.16 1.13
Liquidity Ratio
Current assets 77828 66790
Current liabilities 34248 26964
Stock 24568 22438
Quick assets Current assets- stock-
prepaid
53260 44352
Current ratio Current assets/ current
liabilities
2.27 2.48
Quick ratio Quick Assets/ current
liabilities
1.56 1.64
Financial Gearing Ratio
Long term debt 54132 59666
Short term debts 34248 26964
Total equity 89758 82812
Total assets 178138 169442
Total debts/ Total liabilities Long term debts + short
term debts
88380 86630

Debt equity ratio Total debt (Total
Liabilities)/ total equity
.98 1.05
Total asset to equity ratio Total assets/ total equity 1.98 2.05
Market Value Ratio
Net income 9000 23654
Outstanding shares* 475.84 475.84
Earnings per share Net income/ outstanding
shares
18.91 49.71
*Note: Because of the lack of information regarding the outstanding shares, it is assumed that
the company’s fair value of the shares is 100 so the total outstanding shares for both the year
is 475.84 i.e., (47584/100).
Analysis and Interpretation of financial performance of the company
Profitability ratio is used to analyse the profit ability of the company over sales revenue after
meeting all operational and financial cost. Here, the gross profit and net profit percentage of
the company in the year 2019 was higher than the year 2020. It clearly indicates that the
company’s profit is declined in the past one year. It might be because of the decrease in the
sales revenue or may be because of increase in the operational and financial expenses of the
company. Efficiency ratio such as inventory turnover ratio of the company indicate that the
excessive inventory level of the stock as compared to sales in high in the year 2019 than
2020. While on the other hand, the total assets turnover ratio of the company is high in the
current year as compared to the previous year (Choi and et.al., 2018). This clearly indicate
that the efficiency of the company is poor and need to take appropriate steps such as training
to the employees in order to improve the efficiency of the company. The liquidity ratio of the
company shows that the working capital ratio of the company was poor in the current year as
well as the ability to pay its shot-term obligation as quickly as possible is also poor in the
year 2020. This whole scenario interpret that the company have to improve its liquidity
position by arranging funds in order to manage the working capital of the company. It is

because this capital is used in the daily operations of the business which need to perfect so
that company produce the high-quality products in the less time as well as minimum wastage.
The Financial gearing and leverage ratio of the company indicate that the because of
the not able to maintain the ideal debt equity ratio of 2:1 in both the year the company have to
acquire more funds from the debenture or non-current liabilities rather than the issuance of
the equities. The company total asset to equity ratio in the current year was less than the
previous year which indicate that the company’s leverage performance of the company is
getting poor day by day and require some appropriate step (Walmsley and et.al., 2018). The
earnings per share of the company is poor in the year 2020 which indicate that the earning for
the shareholder’s is less as compared to previous year. For this the company have to improve
their overall performance and efficiency of the company by taking strategic options.
Question 2
Economic order quantity
Economic order quantity (EOQ): √ 2 * A* O / C
A = Annual consumption
O = Ordering cost per order
C= Carrying cost per quantity
= √ 2 * 36000 * 27 / .75
= √2592000
= 1610 Units
Annual cost of graphite
Purchase prices 57600 (36000 * 1.6)
Holding cost 27000 (36000 * .75)
Ordering cost 604 (36000 / 1610 * 27)
Total 85204
Critical evaluation of EOQ decision
Annual cost at EOQ Units = 85204

Annual cost at offer
Purchase prices 54720 (36000 * 1.6 – 5%)
Holding cost 27000 (36000 * .75)
Ordering cost 97 (36000 / 10000 * 27)
Total 81817
Analysis the decision:
Economic order quantity technique is one of the prominent inventory management
system has been used by business entities at a global level. The basic ideology is that under
this technique it is anticipated that the total cost of ordering and carrying would be minimum
that further benefit to the business entity in controlling the total cost of making the product
ready to sale. Cost of goods sold could have been achieving minimum with support of this
technique. The above mentioned calculation clearly reflects that the total cost of graphite is
85204 that is minimum in number on the basis of the economic order quantity technique of
inventory management. This is the level of cost of goods sold that allow the organisation to
make effective level of profitability against the business operations.
The above calculated total cost based on the proposal regarding buying 10000
inventory at one single time allow the organisation to attract the overall cost of goods sold
amounted to 81817. This clearly reflect the less value of cost of goods sold as it could
directly restrict the ordering cost as now company only require to make few orders as
compare to the earlier business situation (Mosteanu and et.al., 2019). This decision allows the
business entity to ain potential benefits against channelizing the business operations in form
of overall cost of producing the units. There is also a one risk involve in this decision as when
company order bunch of material at one single time than the risk of fire in stock, damage due
to any unexpected situation and many such circumstances also arise in the business. If the
company is ready to take such risk than this proposal could have been accepted by the
organisation as it favour in form of low cost of producing, holding and carrying cost as
compare to the economic order quantity technique of inventory management.
D) Advise to company
The above projected evaluation is already analysed both the aspect of management
decision making. The entire evaluation stated that the overall cost of buying, ordering and

carrying is minimum when the management order 10000 units at a one single time. In case of
the economic order quantity technique the total cost incurred is 85204 and in the current
situation the total cost incurred as 81817. This clearly reflect the difference in the total cost of
storing the material (Ibtasam and et.al., 2018). The difference is arise out of the controlled
ordering cost as now the number of order require to place in the whole year get very
minimum that could allow the organisation to save the respective capital or resources.
Question 3
Accounting rate of return
Accounting rate of return (ARR): Average accounting profit / Average investment
Project A
Annual depreciation: (Initial investment – Scrape Value) / Useful life
= (200250 – 310) / 10
= 19994
Average accounting income: (Total income of all year / number of year) – Depreciation
charged every year
= (40000 + 50000 + 45000 + 50000 + 55000 + 50000 + 45000 + 40000 + 40000 + 35000 /
10) – 19994
= 25006
Accounting rate of return: 25006 / 200250 * 100
= 12.49%
Project B
Annual depreciation: (Initial investment – Scrape Value) / Useful life
= (210260 - 425) / 10
= 20984

Average accounting income: (Total income of all year / number of year) – Depreciation
charged every year
= (60000 + 45000 + 50000 + 50000 + 50000 + 40000 + 40000 + 35000 + 30000 + 30000 /
10) – 20984
= 22016
Accounting rate of return: 22016 / 21026010 * 100
= 10.47%
Net present value
Project A
Year Cash inflow Discounted rate of
return
Present value of
cash inflow
1 40000 .8621 34480
2 50000 .743 37150
3 45000 .641 28845
4 50000 .552 27600
5 55000 .476 26180
6 50000 .410 20500
7 45000 .354 15930
8 40000 .305 12200
9 40000 .263 10520
10 35000 .227 7945
Total cash inflow at present value 221350
Net present value = Present value of accumulated cash inflow – Initial investment
= 221350 – 200180 (200250 – 70 (310 * .227))
= 21170
Project B
Year Cash inflow Discounted rate of Present value of

return cash inflow
1 60000 .8621 51720
2 45000 .743 33435
3 50000 .641 32050
4 50000 .552 27600
5 50000 .476 23800
6 40000 .410 16400
7 40000 .354 14160
8 35000 .305 10675
9 30000 .263 7890
10 30000 .227 6810
Total cash inflow at present value 224540
Net present value = Present value of accumulated cash inflow – Initial investment
= 224540 – 210164 (210260 – 96 (425 * .227))
= 14376
C) Critical evaluation of net present value technique
Net present value technique is a method of analysing the investment decision making.
This technique state that the investment can be evaluated on the basis of analysing the annual
based cash inflow of the project by bringing the cash inflow at the present rate of value and
compare it with the total cost of installing the whole set up. This is denoted as the
profitability against selecting a certain proposal at the present level. This technique is limited
as there is not any proper method of identifying how much the cash inflow company will be
able to generate in future context (Shahab and et.al., 2019). This technique further allow a
limitation as business environment is full of unexpected situation and abnormal like of
situation which clearly affect the business operations entertained by the organization. Net
present value method allows the business entity to assume that all factors influence business
environment will remain the same in the whole set up. This is completely a void assumptions
to be made when it comes to deal with the complex situation arises under the business
environment.

D) Advise to organisation
In context to the accounting rate of return technique the investment is able to arise
return at the rate of 12.49% whereas in case of option B the same rate is 10.47%. This clearly
reflects that company should consider option A as a part of its investment proposal. This
clearly shows that the business entity will be capable enough to generate more revenue in
case the organisation select option A to be a investment proposal.
Net present value method show that company should investment in Option A as it
allow the organisation to get the net benefit of 21170 against making investment decision
while the benefit in case of Option B is only 14376. This clearly specifies that origination
has more advantage in selecting the Proposal A.
On the basis of analysing both the investment options it can clearly understand that
the organisation should go for the Option A as it allow better internal rate of return along
with the more profitable net present value (Lusardi and et.al., 2017).
Question 4
a) Principles of effective corporate governance
Corporate governance is about to project the financial position of the organisation in
the most simple way possible. This involves different principles such as accountability,
fairness, transparency and responsibility.
Accountability
Accountability is among the core principle associated with the corporate governance
concept. This principle state that business organisation should be accountable for all the
projection they have made in the accounting books of records. This principle of corporate
governance is very crucial as it empower the organisation to feel accountable for whatever
the projection has been cone in the financial records (Van Steenburg and Naderi, 2020). As
the accounting books of records is the display of all transactions and entries company has
made in the business operations. This principle allows the management to feel accountable
regarding the projection of the financial statement.
Fairness

Fairness is also a key principle associated with the corporate governance. This
principle state that all accounting and financial records must be fair and state only the trust
position or situation of the organisation. This is the core responsibility of the business entity
to state the fair position of the accounting records company maintain against delivering the
business objectives (Roa, Garrón and Barboza, 2019). This principle guide the management
to not to make any fake transaction in the accounting books to improve the profitability of the
organisation.
Transparency
Transparency is another core principle associated with the corporate governance. This
principle reflects that business entity must keep transparent system so that stakeholder can
clearly look at the financial records of the organisation ad the financial position and stability
of the business entity. Transparency creates trust in between business entity and stakeholder
in regards to the financial records state in the financial books of accounts.
Responsibility
This is the responsibility of the organisation to project all the financial records in front
of the stakeholders. This principle is the fourth principle associate with corporate governance
that clearly reflect that the business entity should present all the transactions in its financial
book of accounts along with representing in front of all stakeholders.
b) Traditional aim of financial management encourage short termism
Financial decision making is all based on different principles and practices related to
the finances. All these practices regarding the financial management decision making is
based on the fact that all factors affecting business environment are inflowing all areas of the
business in the same way and manner as they are affecting earlier (Fenyves and et.al., 2018).
The traditional aim was to record all financial transaction in the fair manner so that business
can clearly look at its financial position and situation with support of the financial records.
C) Three effective corporate governance
The three effective corporate governance in short term are information, research and
interpretation. All three aspects allow the business entity to take the best level of financial
decision in the short termism (Nuriyev and Azizov, 2019). In context to the short terism
concept the basis focuses is over analysing the different options based on the multiple choices
available and take the best level of decision with support of research and other techniques.

CONCLUSION
Financial decision making involve technique like economic order quantity, internal
rate return, net present value method and other such technique. All these methods allow the
organisation to assess the situation and take the best level of decision in favour of the
business entity.
REFERENCES
Books and Journals

Mosteanu, N. R. and et.al., 2019. Fractals–A Smart Financial Tool to Assess Business
Management Decisions. Journal of Information Systems & Operations Management.
pp.45-56.
Shahab, Y. and et.al., 2019. Individual’s financial investment decision-making in reward-
based crowdfunding: Evidence from China. Applied Economics Letters. 26(4).
pp.261-266.
Lusardi, A. and et.al., 2017. Visual tools and narratives: New ways to improve financial
literacy. Journal of Pension Economics & Finance. 16(3). pp.297-323.
Van Steenburg, E. and Naderi, I., 2020. Unplanned purchase decision making under
simultaneous financial and time pressure. Journal of Marketing Theory and
Practice. 28(1). pp.98-116.
Roa, M. J., Garrón, I. and Barboza, J., 2019. Financial decisions and financial capabilities in
the andean region. Journal of Consumer Affairs. 53(2). pp.296-323.
Fenyves, V. and et.al., 2018. The role of the notes to the financial statements in corporate
decisionmaking. Corporate Ownership & Control. 15(4). pp.138-148.
Nuriyev, N. and Azizov, A., 2019. Mental Accounting: The Impact Of Human Psychology
On Financial Decisions. Economic and Social Development: Book of Proceedings,
pp.1043-1050.
Choi, K. B. and et.al., 2018. Amplification ratio analysis of a bridge-type mechanical
amplification mechanism based on a fully compliant model. Mechanism and
Machine Theory, 121, pp.355-372.
Walmsley, T. G. and et.al., 2018. Energy Ratio analysis and accounting for renewable and
non-renewable electricity generation: A review. Renewable and Sustainable Energy
Reviews, 98, pp.328-345.
Kopanja, L. and et.al., 2018. Shape and aspect ratio analysis of anisotropic magnetic
nanochains based on TEM micrographs. Ceramics International, 44(11), pp.12340-
12351.
Ibtasam, S. and et.al., 2018, June. Knowledge, access, and decision-making: Women's
financial inclusion in Pakistan. In Proceedings of the 1st ACM SIGCAS Conference
on Computing and Sustainable Societies (pp. 1-12).