Analysis of Finance and Accounting Principles and Practices

This report provides a comprehensive analysis of finance and accounting principles, focusing on cost-volume-profit (CVP) analysis, financial ratios, and Henry Fayol's theory. It begins by outlining the assumptions of CVP analysis, including the categorization of costs into fixed and variable components, the absence of inventory variations, the linear relationship between revenue and cost, and the assumption of a constant selling price. The report includes examples illustrating the calculation and importance of the breakeven point for businesses. It then discusses the significance of financial accounting in providing information for economic decision-making, controlling accounts, evaluating profitability, preventing fraud, and ensuring effective resource utilization. The importance of financial ratios, such as revenue per employee, interest cover ratio, and return on net assets, in measuring business performance is also highlighted. Finally, the report briefly touches on Henry Fayol's theory and its potential benefits for small enterprises. This document is available on Desklib, a platform offering a wide range of study resources, including past papers and solved assignments, to support students' academic endeavors.

Running head: finance and accounting 1
Finance and accounting

Finance and accounting 2
Table of Contents
Introduction......................................................................................................................................3
1. Assumptions of cost-volume-profit analysis...............................................................................3
2. Importance of financial accounting and ratios.............................................................................6
3. Description of the theory of Henry Fayol and advantages of it...................................................8
Conclusion.....................................................................................................................................10
Reference.......................................................................................................................................11

Finance and accounting 3
Introduction
Accounting is the main concept for all the business and shall be carried by taking into
consideration all the factors. In this, there will be various transactions which will be required to
be recorded and for that proper understanding in relation to them will have to be gained. In this
report, all the aspects in relation to the finance and accounting of an organization will be
discussed. The policies will be developed which will ensure effective working. There are several
approaches which can be used and so they shall be identified and implemented in a proper
manner. There is a need to have information about the cost and revenue that is involved in the
business. By that, the evaluation will be made of them so that the relation among them is
determined and with that volume will also be taken into account. There is the cost volume profit
analysis which will be included in the report and all the aspects in relation to that will be
discussed in the report in great detail. The assumptions which have been formulated for the given
approach will be determined. In that, all the points will be covered and with that breakeven point
will also be taken into account. There will be calculations which will be made for the
ascertainment of the breakeven point. By the help of that, the importance of the same for the
business will be identified. After that, financial accounting will be considered and the purpose of
the same will be determined. The ratios which are required for financial purposes will also be
ascertained. In the last part, the Henry Fayol theory will be discussed together with the benefits
which the small enterprise will be availed with the use of that.
1. Assumptions of cost-volume-profit analysis
In all the processes which are undertaken in the business, there are certain costs which are met
and some revenues which are earned. It is necessary that impact which is faced due to change in
the volume shall be identified. For this, there is the need to use the appropriate tool for
analyzation and in that cost, volume profit analysis will be taken into consideration (Liu,
Forgione and Younis, 2012). This is the model in which the change which is taking place in the
volume will be identified and then the manner in which it will be affecting the cost and revenue
will be considered. There will be a relation which exists among all the factors and that needs to
be ascertained. By the help of this approach, it will be made possible. The main assumptions on
which the process is based are as follows:

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Categorization of cost: The main assumption which is made under the CVP analysis is that the
total cost which is incurred is divided into two categories and they are fixed cost and variable
cost. It is necessary that the division of the cost shall be made and the separation of both the
elements is made in an accurate manner. The process which is involved under this is difficult as
it is not easy to differentiate all the costs (Bonacim et al., 2013). The amount of the cost which
the company will be incurring on a regular basis and that too with the equal amount will be
considered as the fixed cost. The other one is a variable cost which is in accordance with the
units which are produced. The total volume will be affecting it as this is calculated on per unit
basis which keeps on changing from period to period.
Inventory variations: Under this theory, it is assumed that there will be no change which will
be taking place in the inventory of the business. It is considered that the company will be
manufacturing the required volume only so that there is no stock which remains at the end of the
period (Navaneetha et al., 2017). So by this, it can be said that the company will neither be
having the opening stick nor the closing stock.
Linear relation among revenue and cost: The assumption states that for a particular level of
activity there will be linear relation among cost and revenue that is made (Machuga, 2012). The
change in volume will be considered for the change in the variable cost as the fixed cost will
remain constant at all levels.
Same selling price: The CVP analysis considers the sale price of any unit to be constant and it
will not be affected by any change which is taking place in terms of volume (Stefan, 2012).
The whole process will also be involving the calculation for the identification of the breakeven
point. This is required in the business as there will be the determination of the appropriate level
of sales which is to be maintained by the organization in order to have the required profits (Bozat
et al., 2014). This concept will be understood in a better manner with the help of the examples
provided below:
Example 1: A clinic by a doctor is established and in that he wants to identify the patients to be
visited so that losses can be avoided. There is the charge of 200 which is taken from each patient.

Finance and accounting 5
The costs are incurred on the patient that amounts to 80 per patient. In addition to that, there is a
fixed cost of 30000.
The breakeven point in this will be calculated so the requirement can be met. There will be the
determination of the contribution for this which will be calculated by deducting the variable cost
from selling price. In the given case it will amount to (200-80) 120 per patient. For the
ascertainment of breakeven point, the identified contribution will be divided by the fixed cost. So
the breakeven point will be as follows:
Breakeven = 30000/120
= 250 patients
From this, it is identified that a doctor will have to attend a minimum of 250 patients in order to
safeguard him from any losses. The breakeven is therefore important to avoid the loss and also
the patients attended above this level will be providing the doctor with the profits. So breakeven
will be the point of no profit and no loss.
Example 2: XYZ Ltd. is manufacturing the chemical boxes and in that it is incurring the costs
associated with each box which include the amount of 5 for direct material and 3 for direct labor.
In addition to this variable production cost is also involved which amounts to 2 per box. The box
will be sold for 15 to each customer. There will be a fixed production cost of 35000 which is
incurred by the company.
Under this case the calculations for breakeven will be made which are as follows:
Contribution per box = 15-5-3-2 = 5
Breakeven point = 35000/5 = 7000 boxes.
The company will have to manage its volume in such a manner that it achieves the target of 7000
boxes. Once this level will be achieved, profits will start to flow in the company. The breakeven
helps the company in ascertaining the level of volume which is required to be undertaken in a
particular time frame (Morano and Tajani, 2013).

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2. Importance of financial accounting and ratios.
In the business, there are various activities which are performed and for that there shall be proper
accounting which will be required to be undertaken. In that, all the financial aspects which are
involved will have to be considered and then the required processes will be carried out. In that
collection of the information will be made and then that will be measured and with that recording
will be undertaken. After that, the records will be used for the purpose of communication which
will be helping in providing the information to all (Griffin and Wright, 2015). There will be
summarizing of the data which will be carried out in this process and then that information will
be used for the purpose of decision making. There are many such important aspects for which the
accounting is carried out and they are as follows:
 The main purpose of financial accounting is to provide the required information to all the
required parties who will be using it for the undertaking of the important economic
decision (Cleverism, 2019). For this, there will be making of records which will be
helpful in analyzing the financial position of the business.
 The control will be established in the company overall the accounts and information that
is available. By this, the chances of errors which are made will be reduced.
 The main aim of the business is to earn the profits and for that, it is necessary that all the
accounts which are made shall be evaluated in an effective manner. This will be useful as
the profit or loss which is made by the organization is identified (EduPristine, 2018).
Therefore it will be possible to take the decisions in regards to the coming period for the
improvement of the results.
 In the company, there are several cases of theft and fraud which takes place and in order
to avoid them, financial accounting will be required. There will be a proper record of the
assets and other properties held by the business which will help in keeping a check on all
of them.
 The amounts of resources which are available in the business are limited and due to that,
it will be required that there shall be an effective utilization of them. The accounts which
are prepared will be providing the way by which the allocation of all the resources can be
made in an adequate manner.

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 There is the mandatory requirement under the law which states that financial statements
shall be prepared by every company for a given duration in the proper format (Freedman,
2018). This results in the undertaking of the financial accounting process.
The financial statements are prepared but then there is the need to make the proper evaluation of
them so that the performance of the business can be measured. For the undertaking of this, there
are various tools which can be undertaken. The most common and important among them is ratio
analysis. This is the technique which helps in measurement of the performance in relation to all
the aspects which are involved in the business. There are several categories which are made
under this and that involve liquidity, profitability and efficiency ratios (Gorton, 2019). There will
be an identification of the business performance in all the areas. The ratios which will be
required to be calculated for the manufacturing entities are as provided hereunder:
Revenue per employee: In this, there will be a calculation of the revenue that will be made by
an employee. The calculation will be made by dividing the total revenue with the total number of
employees. By the help of this, the efficiency of the employees will be ascertained. The
employees will be considered to be highly skilled if the ratio will be high.
Interest cover ratio: In the manufacturing company there are various debts which are taken for
the undertaking of the required operations (Eagen, 2018). For them, there are interests that are
paid by the company and so it is necessary that the interest cover shall be identified. The ability
of the company to repay the amount will be evaluated by the help of this ratio. The cash flow of
the company will be divided by the interest and the result will be the ratio determining the
position of the business.
Return on net assets company: The net assets of the company are used for various purposes
and so it is required that their efficiency shall be tested. For this, the ratio is used in which the
earnings which are made with the help of the net assets are identified and compared (Lan, 2018).
This will be helping in evaluating the profitability and future decisions will be made with the
help of it.

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3. Description of the theory of Henry Fayol and advantages of it
The proper management is required to be followed and for that, there is the need to cover all the
aspects which are involved. This will be done with the help of the theories that are available and
in that the important one is the theory of Henry Fayol. It covers all the main elements which will
be helping in making a business successful as effective communication will be developed. This
will be helpful in creating a strong bond among all by which they will be able to openly discuss
all the relevant factors. The process of management will be improved which is very important for
gaining benefits in any business (Ehiobuche and Tu, 2012). For the better understanding of the
process, there are several principles which are incorporated by Fayol and the description of same
is provided below.
Authority and responsibility: There will be a proper authority with the management which
gives them the right to get the task done according to their requirements. This will be giving
them the right to order the subordinates and that way control will be established. There will be
effective management of the operations by the help of this which is beneficial for the business in
the long run.
Division of operations: In an entity, there are various activities which are performed and all will
be requiring specified skills and talent. In order to make them successful, this principle has been
introduced as all the work will be allocated to various persons in accordance with their abilities
(Kwok, 2014). This will be providing the business with the required results.
Discipline: In the small entities it is necessary that there is a proper discipline which is followed.
By the help of that, the process which is involved will be carried in an effective way and no
issues will be faced.
Unity of directions: There is the aim of the business for which it is undertaken and in order to
accomplish the same this principle of direction is used. Under this, all of the employees will be
asked to work in a combined manner by which attainment of the target will be made possible.
This will be in the overall interest of the entity and it will be able to attain the growth.
Individual interest subordination: All the people working in the company have some or the
other personal interest for which they are available. According to Henry Fayol, the priority in the

Finance and accounting 9
business will be provided to the interest of business and not the personal gain (Shakir, 2014). So,
there will be the completion of the process in accordance with that.
Unity of command: In the company, there are several authorities who provide the guideline but
it shall be ensured that one employee shall be in control of one employer. It means there shall be
no such situation that one person is receiving the orders from many people as that will be
creating the conflicts. By the help of this principle, the confusion and conflict will be avoided
which will be positive for the business.
Remuneration: The employees work for some return which they will be receiving in form of
remuneration. In this, they will be rewarded for the work done and this can be done by giving the
money or also by providing them with other non-financial incentives. The motivations will be
made which will increase their overall efficiency.
Initiative: There will be a setting of the system in which all will be given the right to express
their ideas (Rahman, 2012). These ideas will be identified and also employee satisfaction will
improve.
Centralization: The Company will be using the centralized system in which all the decisions
will be made at the top management and all will not be doing this separately. This will be
helping in attaining the common goals which otherwise will not be possible.
Order: The employees are required to be provided with a good workplace. For this, the security
and other benefits for the staff will be provided by the business.
Equity: All the people involved in the business should enjoy the same rights and there shall be
no discrimination in the same. By the help of this, there will be the establishment of good
relationships among all which is necessary to maintain a good atmosphere in an organization.
Scalar chain: A hierarchy is followed in the company in which there is the undertaking of work
from top management and it goes on till lower management (Dzamtoska-Zdravkovska,
Matlievska, and Denkova, 2013). By this, all will be responsible for their level and this will be
creating the required balance in the business.

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Stability: There will be retention of the employees and for that, they shall be provided with the
remuneration in a stable manner. There will be a proper policy which shall be followed in this
respect.
Esprit de corps: The working will be made in an effective manner when all the workers will be
having good coordination. For this, there will be the development of proper communication
among them so that they can help one another.
By following all of the principles which have been specified by Henri Fayol there will be a
benefit for the manager. They will be able to carry the operations in accordance with the theory
that is set. The formulation of policies will be made by taking all the principles into
consideration and by this the targets will be attained in a better manner (Kitana, 2016). The
issues which exist in the small businesses will be dealt with appropriately by the help of this
which will ensure the benefits for business.
Conclusion
The report that is presented above provides the understanding in relation to the concepts which
are involved in the financial aspects of the business. There are various such components which
require attention and the same is provided in the report. The CVP analysis has been performed
and in that, all the assumptions which are framed have been identified. There is the proper
understanding which is gained from the report in relation to the analysis. The manner in which it
is carried and the impact which is made by this has been identified. There is the involvement of
the breakeven analysis also in which the calculations that are made have been identified with the
help of examples. The manner in which it is detected and the procedure followed is understood.
There are various benefits which will be attained due to this and all of them have been
determined. The main purpose for which financial accounting is undertaken has been discussed
and with that, the identification of the ratios is made that is used in a manufacturing concern. The
explanation for them is provided so that they can be understood by all. The theory of Henry
Fayol is discussed and with that, all the principals involved are also determined. It is used by the
managers of small businesses so that it can be carried in an effective manner and benefits of the
same can be gained.

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