BM414 CW1: Functions and Ratio Analysis Finance Report

This report provides a detailed overview of accounting and finance functions within a business context, specifically examining the operations of Associated British Foods Plc. It explores the roles of financial accounting, management accounting, tax functions, and auditing, along with investment, financing, dividend, and working capital functions within the finance department. The report then transitions to a case study of Alpha Limited, calculating and interpreting key financial ratios such as return on capital employed, net profit margin, current ratio, accounts receivable period, and accounts payable period. The analysis highlights trends in Alpha Limited's financial performance and provides insights into its efficiency, profitability, and liquidity. The report concludes with an assessment of the company's financial health based on the calculated ratios and provides recommendations for improvement.

BM414 CW1

Table of Contents
INTRODUCTION...........................................................................................................................3
MAIN BODY..................................................................................................................................3
TASK – 1:........................................................................................................................................3
Accounting Department:..............................................................................................................3
Finance Department:....................................................................................................................5
TASK – 2:........................................................................................................................................7
Calculation of ratios of Alpha Limited:.......................................................................................7
Interpretation of the ratios:..........................................................................................................8
CONCLUSION..............................................................................................................................10
REFERENCES................................................................................................................................1

INTRODUCTION
Associated British Foods Plc is food processing and retailing company having its
headquarters in London, United Kingdom. Being a multinational brand it needs to have an
extensive accounting and financing departments to carry on its operations efficiently as such
operations will be large scale and very complicated. Therefore, such report contains
information regarding various functions of accounting and financing departments like financial
accounting function, management accounting function, investment function, financing function,
etc. The report also contains accounting ratio analysis and interpretation of Alpha Limited on the
basis of return on capital employed, net profit margin, current ratio, accounts receivable period
and accounts payable period calculated for such a company as per the given data. Accounting
ratios are the comparison between quantitative financial information of an entity to infer some
meaningful relationship between the financial information used and thus, performance of the
business is analysed on the basis of such ratio whether business is showing favourable or
unfavourable indications.
MAIN BODY
TASK – 1:
Accounting and Finance Functions:
Accounting Department:
a. Financial Accounting Function – Functions relating to financial accounting comes
under the purview of the financial accounting function. Such function involves accurate
and in depth disclosure of the financial information of the in the form of financial
statements (Kintonova and et.al., 2019). Such accurate and in depth disclosure will allow
the stakeholders or the users of such financial statements to make decisions on the basis
of such statements regarding investment, divestment, advancing loans, etc. to the entity.
It ensures that financial statements are prepared according to the applicable
financial reporting framework. Associated British Food (ABF - UK) is an international
retail group which needs to follow accounting standards and principles of the countries in
which it operates to render the financial statements useful in the respective country for
the respective stakeholders. Recently, ABF presented its interim results on 26/04/2022
for the 24 weeks ended 5 March 2022.

b. Management Accounting function – Management Accounting Function as the name
suggests is the function responsible for the management accounting of the entity. Such
information under management accounting is utilized by the managers to manage the
operations of the entity effectively and efficiently and thus be able to make wise business
decision without any risk of error or inefficiency (Ascani, Ciccola and Chiucchi, 2021). It
is to be noted that management accounting function will vary from entity to entity as
management composition is different for each and every entity along with cultural
diversity of the people working in the entity.
Management accounting function involved analysis of financial as well as non –
financial data to render better decision making in terms of both quantitative and non –
quantitative aspects of the entity (Rikhardsson and Yigitbasioglu, 2018). Associated
British Food (ABF – UK) also requires such management accounting function to manage
its retail business along with the food and ingredients business.
c. Tax Function – It involves calculation of taxable income of the entity, calculation of
taxes, payment of taxes, setting aside the funds for the payment of taxes, preparation of
tax returns, responding to the notices and demands of the tax department, etc.
(Accounting and Finance: Why Is It Important to Your Business? 2022). Naturally, there
are number of types of taxes applicable on an entity like corporate taxes, dividend
distribution taxes, goods and services taxes, property taxes, income taxes, sales taxes, etc.
and thus, efficient management of the all the taxes as mentioned above is the
responsibility of the tax function of the accounting department.
Also, changes in the tax laws and applicable tax regulations are to be carefully
assessed for their impact on the entity’s calculation of the taxable income of the entity,
taxed to be paid on such taxable income and resultant funds required for such payment.
Associated British Food (ABF – UK) needs to manage its day to day tax functions it
needs to keep in mind its tax compliance and risk associated with such legal compliances.
Material transactions shall be managed for their tax effects.

d. Auditing Function – Auditing function as the name suggests is responsible for analysing
the financial statements of the entity along with the records, documents, books of
accounts to ensure that such financial statements show true and fair view of the financial
information and of the operations of the entity and that such financial statements are free
from material misstatements which may occur due to error or fraud. Such accurate
financial statements will assist the stakeholders like, management, government,
shareholders, creditors, debtors, etc. in wise decision making (Ramesh, 2020). The main
element of such function is Internal Audit Function which will involve an internal auditor
who may or may not be an employee of the entity but will carry out auditing functions to
assist management carrying out the financial functions effectively and efficiently.
Also, external auditors of the entity fall under the auditing function who will be
examining the accounting records and financial statements of the entity to given an
opinion on the relevance and reliability of the financial statements (Abdullah, Ismail and
Smith, 2018). Associated British Food (ABF – UK) being a listed entity will be required
to get its financial statements audited by statutory auditors and such audit report will be a
part of annual report made available to public in general.
Finance Department:
a. Investment Functions – Functions relating to the investment decision making of the
entity are called investment functions. It will involve decisions regarding investments like
whether to invest or not, how much to invest, where to invest, what rate of return is
expected by the entity, what rate of return is actually earned by the entity, how much
investment to be sold, at what rate it is to be sold, on what basis the investments are to be
valued, etc.
The entity can invest in various types of investments on the basis of its
requirements like equity, debt, mutual funds, ETFs, options, annuities, etc. (Marjanović
and Domazet, 2021). Return on Investment (ROI) is the most crucial factor for any entity
as such ROI shall be able to cover the interest obligations to be met by the entity.
Structure of investment portfolio shall be as per the requirements of the entity to be able
to achieve its organisational objectives and goals. Associated British Food (ABF – UK)

showed a total of gross investment of £721 million of the 53 weeks ending September
2021.
b. Financing Functions – Financing function is one of the critical and crucial function of
any business be it small or big. Every entity requires finances to run its operations and
such acquisition of the finances comes at a cost called Finance Cost i.e., interest payable
on such finance acquired. An entity can acquire finances for long term i.e., for more than
3 years, medium term i.e., for less than 3 years but for more than 1 year or short term i.e.,
for less than 1 year (Morozko, Morozko and Didenko, 2018). There are various sources
of finance including own shares, own debentures, loans and advances from the bank,
bank overdrafts, trade credits from the creditors, letter of credits, commercial paper, etc.
Disclosure of such finances in the financial statements is very crucial as it will be
affecting the liabilities of the entity and thus fair presentation shall be done for its
stakeholders. Associated British Food (ABF – UK) will also be requiring a large amount
of financing to keep its operations running and such financing will be from various
sources of various nations and thus reporting requirements will vary nation wise.
c. Dividend Function – Functions regarding dividend of any entity falls under its Dividend
Function. It includes decisions regarding how much dividend to be paid, when is to be
such a dividend paid, whether the company has enough surplus profits or reserves to pay
such dividend, etc. Applicable accounting principles and standards shall be followed for
declaration, presentation, disclosure and utilization of reserves and surplus (Ma, Zheng
and Yang, 2021). It is to be noted that board of directors will be deciding the rate of
dividend and this rate will be sent for approval by shareholders in the general meeting.
Associated British Food (ABF – UK) is currently showing the annual dividend
yield of 2.01% and declared last dividend on 17 December 2021 at the rate of 13.8p. It is
to be noted that dividend can be either declared in mid of the year i.e., interim or at the
end of the year i.e., general dividend (Kadim, Sunardi and Husain, 2020). Also, dividend
pay-out ratio will be depending upon the current year profits and in case of no or
inadequate profits, general reserves of the previous years can be utilized.

d. Working Capital Function – Such a function will include working capital requirements
of the entity to fuel the day to day operations of the entity like acquisition of inventory,
repayment of short term debts, payment of administrative expenses, payment of
operational expenses. The entity arranges for short term or medium term finances for
such function being the most appropriate form of finances for such working capital
requirements. Associated British Food (ABF – UK) will also requires such working
capital to fuel its day to day operations.
TASK – 2:
Calculation of ratios of Alpha Limited:

Interpretation of the ratios:
 Return on Capital Employed – In the above case, earnings before interest and tax is
calculated by adding finance cost to the net profit. Such finance cost is the interest cost
on the 10% loan notes. In the calculations shown above, it can be observed that the return
on capital employed decreased from 0.20 in 2017 to 0.14 in 2018.
Such a decrease is due increase in the capital employed at a greater rate than the
increase rate of the earnings before interest and tax. This shows that Alpha limited is
losing its efficiency in generating returns out of the capital employed by it and this is not
a favourable indication and company shall employ methods to either increase the
earnings before interest and tax or decrease the capital employed.
 Net Profit Margin –Alpha Limited as per the above calculations, shows a decrease in the
net profit margin from 12.50% in 2017 to 8.75% in 2018.
Such a decrease in net profit margin shows decreasing profitability of the
business. On analysis, it can be seen that the reason for such decrease in net profit margin
is due to decrease in net profit as net sales revenue is increasing when compared to
previous year. Reasons for decrease in net profits is due to increase in operating expenses
which is reasonable as it is increasing in line with the sales revenue but increase in
finance cost by 100% is due to the new loan the company took in the current year but
sales revenue did not show the corresponding change in the current year as compared to
the previous year.
 Current Ratio –As per the above calculations, current ratio of the Alpha Limited
dropped from 2.35 in 2017 to 0.93 in 2018 (Hosaka, 2019). This shows that the company
will not be able to meet its current obligations fully as the current ratios is less than 1.
Average standard ratio shall be anywhere between 1.5 and 3. The sudden drop in
the current ratio is due to high increase in the current liabilities by more than 2 times and
such increase in the current liabilities includes a major portion of high rise in the trade
payables but trade receivables did not increase corresponding such rise in trade payables.
Immediate measure shall be taken by the company to improve the current ratio as

degraded current ratio will reduce the future credibility of the company in paying off its
current obligations thereby hampering its financial position in the market.
 Accounts Receivable Period –. As per the above calculations of Alpha Limited, the
accounts receivable period has increased from 68.44 or approximately 68 days in 2017 to
73 days in 2018 which shows that the company will averagely take more number of days
in current year to realize the dues from its debtors.
The company needs to keep such increase in days in check to avoid shortage of
funds to fuel its daily operations. This can be done through renegotiation of the payment
terms with the customers, giving reasonable discounts to the customers on early payment
of their dues, regular intimation of such unpaid dues to the debtors, the processes of such
intimation to the debtors can be automated to achieve consistency and reduce manual
work, etc.
 Accounts Payable Period –As per the above calculations of Alpha Limited the accounts
payable period increased from 60.30 or 60 days in 2017 to 170.33 or 170 days in 2018.
This is an extraordinarily steep rise in the accounts payable period and is not at all a
favourable indicator for the company.
Such an increase in the average payable period is due to whopping increase in the
accounts payable in the current year as compared to the previous year (Jiang, 2022). The
accounts payable in the current year increased at more than 2 times of the previous year
i.e., from £285,000 in the previous year to £1,050,000 in the current year. Such an
increase is due to corresponding increase in the purchases in the current year as compared
to the previous year. Delayed payments will negatively affect the credit position of the
company therefore, too high payable period is not beneficial in spite of the fact that more
time available with the company to pay its dues to the creditors the better.
From the above interpretation it can be observed that return on capital employed shows an
unfavourable indication as it is decreasing, net profit margin also shows an unfavourable
indication as it is decreasing, current ratios again show an unfavourable indication as it is
decreasing, accounts receivable period also shows an unfavourable indication as it is increasing
and accounts payable period again shows an unfavourable indication as it is increasing

(Financial Ratio Analysis: What Every Investor Should Know Before Investing, 2021).
Therefore, all the ratios show unfavourable indication and thus it is recommended not to invest in
such a company from the perspective of a potential investor (Acosta-González, Fernández-
Rodríguez and Ganga, 2019). Also, the company needs to formulate and implement strict
methods and measures to improve its accounting ratios to avoid facing any unwanted hardships
in the future and to promote better profitability in the future.
CONCLUSION
Accounting and finance department of any entity are very crucial as it will keep track of all
the payments as well as receipts and products & services dealt by the entity. Also, the funds
required by the entity will be arranged and managed here to meet the requirements of the entity.
The above formulated report contains various functions of accounting and finance department of
Associated British Foods (ABF) like dividend function, working capital function, tax function,
auditing function, etc. Such functions need to be managed by the entity as it operates at
multinational level making the operations wide spread, complicated and hard to manage.
Accounting ratios are an important tool of financial decision making based on the financial
quantitative information taken from the financial statements of the entity to show the efficiency
and effectiveness of the operations of the entity and a ratio thereby improving the operations of
the entity.

REFERENCES
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financial failure using macroeconomic variables and accounting data. Computational
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Ascani, I., Ciccola, R. and Chiucchi, M. S., 2021. A structured literature review about the role of
management accountants in sustainability accounting and reporting. Sustainability. 13(4).
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networks. Expert systems with applications. 117. pp.287-299.
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Dividend Policy. Finance & Economics Review. 2(2). pp.13-26.
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algorithm for solving price-dividend functions of continuous time one-dimensional asset-
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Marjanović, D. and Domazet, I. S., 2021. Foreign Direct Investments: A Key Factor for Business
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Online
Accounting and Finance: Why Is It Important to Your Business? 2022. [Online]. Available
through: <https://www.freshbooks.com/hub/accounting/why-is-accounting-and-finance-
important >
Financial Ratio Analysis: What Every Investor Should Know Before Investing. 2021. [Online].
Available through: <https://www.winvesta.in/blog/financial-ratio-analysis/>
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