Finance and Accounting for Managers: Ratio Analysis & Decisions

This report provides a comprehensive analysis of financial concepts relevant to managers. It begins with multiple-choice questions covering fundamental finance topics. The report then identifies and discusses the needs of various users of financial statements, linking these needs to relevant financial ratios. A significant portion of the report is dedicated to calculating and interpreting financial ratios for a company across multiple years, assessing its profitability, liquidity, efficiency, and financial stability. Furthermore, the report evaluates investment proposals using techniques like Net Present Value (NPV) and Internal Rate of Return (IRR), highlighting the limitations of the payback period method and emphasizing the importance of considering the time value of money. Finally, the report delves into portfolio analysis, calculating mean and variance of returns for different assets and discussing investment strategies for risk-neutral and risk-averse investors. The assignment concludes by explaining the relationship between risk and return in financial investments. This document is available on Desklib, a platform offering a variety of study tools and resources for students.

Finance and
Accounting for
Managers

Contents
INTRODUCTION...........................................................................................................................3
Section A.........................................................................................................................................3
Solve the following MCQs..........................................................................................................3
Section B..........................................................................................................................................4
Question 1. Answer the following questions...............................................................................4
Question 2. Define the below mentioned decision making terms along with their roles in the
organisation..................................................................................................................................5
Section C..........................................................................................................................................6
Question 1. Analyse the financial ratios......................................................................................6
Question2. Explain why Pay back method should not be used alone without any other
investment appraisal technique along with the comments of two scenarios...............................7
Question 3. Address the following questions............................................................................10
Decide the portfolio which is best on the basis of risk neutral investor and which one is best
from the perspective of risk averse investor along with the reason...........................................11
Explain the relationship between risk and return......................................................................11
CONCLUSION..............................................................................................................................12
REFERENCES..............................................................................................................................13

INTRODUCTION
Finance refers to all the activities linked with the allocation and management of funds in
the organisation. Accounts can be defined as the process of recording all the transactions in
books and extracting some useful information from them. It is very important for managers to
control both the actions (Aifuwa and Embele, 2019). The report is divided into three sections.
First section relates to MCQs. Second one analysis the various users of financial statements and
their needs along with respective ratios. Third one deals with calculating ratios and decisions on
some investment proposals.
Section A
Solve the following MCQs
1. The decisions related to organisation are related to borrowing and allocation of funds.
Select the option which is not a financial decision that a financial manager is expected to
take part in?
Answer: B. Bookkeeping decision
2. Horizontal analysis is used to review the financial statements of the company over a
period of time.
Answer: A. True
3. Boss is not good in management of finances. It is asking about the future value of money.
What would be told to it?
Answer: B. It is the nominal future sum of money that a particular total of amount is worth
enough at a specified data in future considering a certain interest rate.
4. Select the one which is not an investment appraisal technique?
Answer: C. Calculus
5. According to the information provided calculate the pay back period? Investment
£50,000
1st year returns £30,000
2nd Year returns £30,000
3rd Year returns £30,000
Answer: C. 1 Year 8 Months

6. Identify the example of systematic risk?
Answer: A. Inflation rates
7. CAPM formula is used for the calculation of cost of equity. At the time of using its, what
is the risk free rate of interest.
Answer: B. Interest that an investor expects for a risk-free investment over a period of time.
8. When current assets is £ 20000 , Non-current liabilities is £ 20000 and Current Liabilities
£10000. calculate the current ratio?
Answer: B. 2
9. Identify the way of reducing risk in the portfolio of investments?
Answer: B. Diversification
10. Users of financial statements are interested in its various sections. Liquidity does not
show the ability of the organisation in setting off its short term obligations as they fall
due.
Answer: B. False
Section B
Question 1
1. Name any 7 users of financial statements along with their needs.
The most important users of financial statements are as follows:
1. Company management- They are the managers and directors of the organisation.
They are interested in knowing the financial health of the company along with its
liquidity and profitability. Financial statement will help the administration to build
profit plan , expansion plan and to know where improvement is required.
2. Competitors- They compete against the business for which they desire to gain access
of the financial statements of the company. They extract knowledge of firm from that
and tries to frame their own strategies (Cohen, Bisogno and Malkogianni, 2019). It
helps them to know their financial position in the market also to provide information
related to cash flow statement and would help in influence courses of action.
3. Customers- they are the people that takes the supplies from the companies for the
products. They take a look at the financial statements to view financial abilities of
these companies so that they can provide them goods in right time. It helps customers

to come across the true and right financial stability of a supplier. Also to know
if the business would sustain in the long run.
4. Employees- Staff members of the frim are also in the demand of these statements in
detail for understanding the whole business in detail so that they can know what is
going on in the company and can get involved more into it (Glendening, Mauldin and
Shaw, 2019). It helps them to make and take monetary related decisions. Statement
also helps to know financial adaptability and performance of the company during the
year.
5. Governments- These authorities are interested in knowing that the companies coming
under their jurisdiction are making full payments of their taxes or not. To know
whether the company is following tax policies strictly or not and if it practice any
unfair trade or malpractices.
6. Investment analysts- they have to give suggestions to the companies regarding the
securities in which they can make investment. The knowledge of financial statements
will help them in making this decision. It helps to know whether the company is
financially sound or not and if investing in it would be risky or fruitful for anyone.
7. Investors-they feels the need of having full knowledge of these reports for assuring
that they are the person who makes investment in the organisation (Landi and
Sciarelli, 2019). For them it is important to know if the organisation they are planning
to invest has good return on investment or not.
2. Indicate the ratios that will be helpful for the above mentioned users in addition to the
point they are looking for in that ratio.
Question 2
1. Financing decision- These decisions are taken by the managers related to the finances of
the company. It can be related to the acquisition of assets, arranging of funds, expenditure
management or for working activities. It is helpful to firms in evaluating the different
opportunities available for acquiring funds.
2. Investment- These relates to the decisions relating to investments in the companies or for
acquiring some capital. This would help firms in managing the funds of the company
(Lassoued, Attia and Sassi, 2017).

3. Dividend- The decision of giving dividend to the shareholders is taken by the companies.
It depends on the profits earned by the firms and the amount of profits that will be
retained by the business for its future tasks.
4. Working capital decision- This is the actions taken by the companies for retaining its
working capital and financing its daily operations. This helps the firm in ensuring that it
is holding enough money to fund its regular activities and can easily satisfy its short term
debts.
Section C
Question 1
Calculation of accounting ratios
Profitability ratios
Ratios 2018 2019 2020
Gross Profit Ratio = Gross
Profit/Net sales*100
286/840*100 =
34.04%
336/981*100 =
34.25%
323/913*100 =
35.38%
Net Profit Ratio = Net
earnings/Net sales*100
49/840*100 =
5.83%
55/981*100 = 5.60% 40/913*100 = 4.38%
Return on Investment = Net
profit before interest, tax
and dividend/capital
employed*100
100/100*100 =
100%
122/100*100 = 122% 104/100*100 =
104%
Liquidity ratios
Ratios 2018 2019 2020
Current Ratio = Current
Assets/Current liabilities
394/133 = 2.96:1 502/180= 2.79:1 506/186= 2.72:1
Quick Acid Ratio =Current
Assets- Inventory/Current
liabilities
394-237/133 =
1.18:1
502-303/180= 1.11:1 506-294/186=
1.14:1

Efficiency ratio
Ratios 2018 2019 2020
Asset Turnover Ratio = Net
sales/average total assets
840/606 = 1.39 981/748 = 1.31 913/770 = 1.19
Accounts Receivable days =
Receivables/sales*365
105/840*365 =
46 days
141/981*365 =
52 days
160/913*365 =
64 days
Accounts Payable days=
creditors/purchases*365
53/554*365 = 35
days
75/645*365 = 42
days
75/590*365 = 46
days
Financial stability ratio
Ratios 2018 2019 2020
Debt-to-equity Ratio = total
debt/shareholders’ equity
74+53/399 =
127/399 = 0.32
138+75/430 =
213/430 = 0.5
138+75/446 =
213/446 = 0.48
Debt-to-asset = Total
debt/Total assets
127/606 = 0.21 213/748 = 0.28 213/770 = 0.28
Investor ratio
Ratios 2018 2019 2020
Earnings per share = (net income-
preferred dividends)/average outstanding
common shares
49/100 = 0.49 55/100 = 0.55 40/100 = 0.40
From the above calculated ratios, it is determined that the position of company is not very
good. It is performing less as compared to the previous year. In 2020, profitability ratios are
falling when compared with 2019. Its net profit has decreased with a great percentage. But the
liquidity position of the firm is good. Though it is also reducing but the ratio is good enough for
paying its short term debts. The efficiency ratios of the business is deteriorating. Its payment
collection period is more than the time period in which it makes payments to its creditors. This
shows that the company is always in need of high liquidity which is not a good sign. Overall the
company is financially stable as its debts are less than the capital acquired by it through shares.
The earning per share of the company is also acceptable.

Question 2
Scenario 1
Year Cash flows Discount rate = 10% Discounted cash flow
1 7000 0.909 6363
2 5000 0.826 4130
3 5000 0.751 3755
Total 14248
NPV = total cash inflows – initial cash outflow
14248 – 10000 = £ 4248
If the amount of £ 10000, in invested in bank, the on the interest rate of 10%, the returns
earned would be 10000 * 10/100 * 3 =£ 3000
Formula used for calculating IRR is:
Let the higher discounting rate be 14%
Year Cash flows Discount rate = 14% Discounted cash flow
1 7000 0.877 6139
2 5000 0.756 3780
3 5000 0.675 3375
Total 13294
NPV = 13294 – 10000 = £ 3294
IRR = LDR + [(NPV1/NPV1-NPV2) *(HDR-LDR)]
= 10+[(4248/(4248-3294)*(14-10)]
= 10 + [4248/954*4]
= 10+17.81
= 27.81%
It is highly recommended that the company should invest in the machine. It will give the
returns of Euro 4248 in three years. If this amount is invested oin the bank it holds the capacity

of providing only the interest of Euro 3000 at the same rate of interest. Also the IRR rate of the
investment is very high that is around 27.81 %. This is a good opportunity of making profits.
Drawbacks
 In NPV, the business can choose the cost of capital by its own wish. It can be higher or
lower which can slip the opportunity of making investment in a good deal from the
hands of the organization (Ramachandran and Kakani, 2020).
 The method of IRR does not consider the size of the project and also the picture
presented by it is incomplete.
Scenario 2
Year Project A (cash
flows) £
Cumulative cash
flow
Project B (cash
flows) £
Cumulative cash
flow
0 (100000+30000) -130000 (100000+30000) -130000
1 10000 -120000 7000 -123000
2 8000 -112000 7000 -116000
3 8000 -104000 7000 -109000
4 8000 -96000 7000 -102000
5 1000 -95000 10000 -92000
6 2000 -93000 12000 -80000
7 1600 -91400 15000 -65000
According to the above calculated payback period, none of the two projects holds the
capacity to repay the complete investment in even 7 years. But looking at the trend followed by
both the cash inflows, it can be said that the second opportunity can be profitable in subsequent
years. This is because in case of first offer the net cash received is continuously fluctuating and is
also reducing while the other one is simultaneously increasing.
But it is recommended that the investing party should not rely on these results only
because the payback period does not consider the time value of money which is a very important
concept. The value of cash received in future will be lower as compared to its present figure. It is

necessary to opt other appraisal techniques of investment for deriving the correct analysis like
net present value method.
Question 3
1. Calculate the mean and Variance of return on each asset and explain the results.
Date Company A Company B Company C
31/12/10 12% 7.5% 4%
31/12/11 13.5% 8.6% 4%
31/12/12 14% 4.4% 4%
31/12/13 14% 2.2% 4%
31/12/14 14.1% 1.25% 4%
31/12/15 12% 0.3% 4%
31/12/16 10% 3.3% 4%
31/12/17 5.5% 4.8% 4%
31/12/18 4.2% 5.5% 4%
31/12/19 2.2% 6.2% 4%
sum 101.5 44.05 40
Mean 10.15 4.41 4
variance 1.02 0.44 0.4
The mean values of the returns of the three companies are 10.15, 4.41, 4.00 respectively.
It is very high for company A as compared to organization B&C. there is also high variance in
three firms analysed above. It shows that A is earning very high profits and is also focusing on
providing returns to its shareholders. But it is also analysed that the returns of A are highly
spread while the company B is somehow stable. Looking at business C it is stable at 4.00% for
the last 10 days. No fluctuation is seen in their returns. But the real analysis depends on the size
of the company. The true picture demands more information and data from the market.
2. Calculate the expected return for each portfolio.

Strategy 1. 50% in company A and 50% in Company B
Expected return= (Return A*Probability A) + (return B*probability B)
= (10.15*50/100) + (4.41*50/100)
= 5.075+2.205
= 7.28
Strategy 2. 100% in company A
= (10.15*100/100)
= 10.15
Strategy 3. 50% in company B and 50% in Company C
= (4.41*50/100) + (4*50/100)
=2.205+2
= 4.205
Decide the portfolio which is best on the basis of risk neutral investor and which one is best from
the perspective of risk averse investor along with the reason.
According to the calculations made above, the best chosen portfolio is Strategy 2. The
expected return on this is more than the other offers. It brings the return of 10.15 as compared to
others of 7.28 and 4.205 respectively. This is very good option for a risk neutral investor. It holds
the capacity of bringing high profits to the investing party. But the money invested in it means to
block the complete money in the same portfolio.
But when looking from the point of view of risk averse investor, it is recommended that
the person should go for strategy 1. The return expected from this strategy is less than the second
option but there is diversification in this. The returns are totally based on expectations and there
is no confirmation of same profits. The profits of A are fluctuating which shows that it can even
earn more or less in future. So, it is good to be safe by investing in different schemes.
If the investor wants to be more secure, then it is advisable to go for strategy 3. The
return from company C are more stable and are safe to be invested. Though the profits are less as
compared to other two strategies but the investing party can averse more risk.
Explain the relationship between risk and return.
Risk and return are highly correlated. It is an old saying that more is the risk, more it holds
the capacity to earn profits. It means that the investing activities which are riskier can earn more
profits for the holders, while those which are less risky, the income received from them is also

low. Though the risk of loss in high risk investments is very big. Investor who are not risk averse
can go for more risk taking for earning higher income.
CONCLUSION
From the above analysis, it can be concluded that there are various users of the financial
statements and they all requires the information from these reports for taking their various
decisions. The firms also decide their various actions on the basis of these reports. The ratios
are also prepared on the basis of these reports only. They present the performance of the
company. Further, the investments made by the firms are based on the analysis made by
experts with the help of appraisal techniques. But even they link many of the risks associates
with them in addition to the returns drawn from them.