Financial Decision Making: Ratio Analysis & Panini Ltd Assessment

This report provides a comprehensive financial analysis of Panini Ltd, a medium-sized company producing perishable goods. It begins by differentiating between the accounting and finance departments, detailing their respective functions such as financial accounting, management accounting, tax functions, auditing, investment, financing, dividend, and working capital management. The report then delves into various sources of finance suitable for medium-sized enterprises aiming to expand, including debenture and equity share issuance. A significant portion of the report is dedicated to ratio analysis, calculating and interpreting key financial ratios like gross profit margin, operating profit margin, return on capital employed, current ratio, and quick ratio, using financial data from 2018 and 2019. Each ratio is defined, its indication explained, results compared across the two years, reasons for changes identified, and improvement suggestions provided, aiming to inform investment decisions regarding Panini Ltd. The analysis helps in understanding the profitability, efficiency, and liquidity of the company, offering recommendations for investors.

FINANCIAL DECISION
MAKING

Table of Contents
INTRODUCTION...........................................................................................................................3
MAIN BODY...................................................................................................................................3
TASK 1............................................................................................................................................3
Part a: Accounting and Finance departments...............................................................................3
Part b: Sources of Finance...........................................................................................................6
TASK 2............................................................................................................................................7
Part a: Calculation of the ratios....................................................................................................7
Part b: Analysis of Ratios Calculated..........................................................................................9
Recommendations......................................................................................................................12
CONCLUSION..............................................................................................................................13
REFERENCES................................................................................................................................1

INTRODUCTION
Financial decision making is an important task performed in every organization. It is
concerned with making of most optimum investing, financing, dividend and working capital to
be maintained decisions.
Panini Ltd is a medium-sized company that makes perishable products, bread. The
organization working with employees more than a hundred but less than a thousand
are categorized under medium sized companies.
In this report the meaning of accounting and finance departments will be discussed along with
the number of functions each department performs. The report will provide an overview of some
sources of finance for the medium sized organization with the aim of expansion.
Further in this report the ratios will be calculated on the basis of the financial statements
provided for the given company. The report will analyse numerical result arrived from the
calculation of each ratio individually. Report will include recommendation for the investors to
make their decision for investing in Panini Ltd or not.
MAIN BODY
TASK 1
Part a: Accounting and Finance departments
Accounting department: The accounting department is that department of an organization that
does all the tasks related to be financial aspect of the company. The department of accounts is
responsible for the identification of the transactions that are financial from the various day to day
business transactions, recording of the identified transactions, summarizing, preparation and
analyzing of the financial statements for the end users (Saraswati and et.al, 2020). This
department is responsible for various roles such as budgeting, proper maintaining of reports,
legal compliance, inventory management and payroll. The end user of the financial statements
are external stakeholders of the organization mainly. The accounting department keep financial
controls and record the statement details for the future references.
a) Financial accounting function: The accounting department of the organization is
responsible the performance of the financial accounting function. Through the financial
accounting function, it is meant that the department will identify, record, summarise,
interpret and analyse the financial statement. The financial statements of the company
are prepared by the accounting department.

b) Management accounting function : Management accounting function plays a vital role
in the company as it helps managers to make effective decisions which can provide
support to achieve business goals. The function of management accounting is to
communicate, identify, interpret and analyse the detailed information about company
performance which helps them to achieve business objectives (Fogarty, 2021). With the
support of management accounting department the company is able to know about what
is happening in the company and can easily measure the financial information using
various effective techniques and tool which helps them to make interpretation. Not only
this, management accounting functions is useful in planning which helps them to work
effectively for the success of business. Plus, controlling, reporting, evaluating,
coordination is basic and important function which management accountant plays to
achieve goals.
c) Tax function- The another major function of accounting department is to handle the tax
function within the company from which they can track all the income which is taxable
and company has to pay. By using tax function the accounting department is able to
ensure that payment is done on time to avoid any kind of tax penalties which can harm
the performance of the company (Al-Amawi, 2022). Accounting department of the firm
plays a very important role as it can help the company to make decision related to tax
liabilities. They are capable to manage the tax matters which helps them to achieve goals.
They are responsible for file returns and settle down the tax liabilities which support the
company to avoid any kind of uncertainty in the future. Tax accountants keep track on the
company transaction so that they can know how much is left to pay and how much is
already paid. By going through all the accounting report they make important decisions
and summarize on the basis of that.
d) Auditing function- Accounting department in which auditors are working plays a vital
role as they ensure that all the accounting informations and statements made in the
financial statement of the company are very accurate and provides truthful information
(Al-Amawi, 2022). They are responsible for assuring the financial statements of the
company are true and fair. They keep track on accuracy of financial reporting which
helps them to know about the performance. Without auditing function,. The company
cannot able to perform its financial activities as it helps them to achieve their goals. With

the help of auditing function the company is able to verify the accuracy of financial
reporting. Not only this, the company can easily detect fraud and any errors/ mistakes
with the help of auditing function. They are responsible for maintaining the records and
do verification of the books of accounts which helps them to know about what is
happening in the company.
2. Finance department: finance department plays a vital role in the company as they keep
providing the importance data about financial transactions which helps managers to make
effective decisions that can impact the future (Roles and responsibilities of a finance
department, 2022). With the help of management team finance, the company is able to
analyse its efficiency and assess the risks involved. This department ensure the timely
provision of funds for the operations related to business. They always focus on managing
funds so that it can provide effective benefit to company's financial position. In short,
they control the outgoing and incoming of cash flows and also they advise senior
management team and owner of the company for long term goals like how to reduce
unnecessary expenses.
3. a) Investment Function – as we all know that finance department is very important
department in the company as they clarify financial plans, managers can make finance
related decisions with the help of senior management team. By having investment
function the company is able to avoid misuse of funds and make decision where to make
investment and where not (Canellas and et.al., 2021). The investment manager always
advise company to know about the debt amount so that it would provide benefit to firm
and avoid any uncertainty of cash in the future. If the company make investment in
wrong funds then they can face issues while on the other side if the firm make investment
in right funds at right time with right business then they can earn more profit. All these
roles and responsibilities are covered under-investment function of accounting
department.
4. b) Financing Function- This function is responsible for finance related activities like
controlling and planning of financial resources (Jia, 2020). They can make decisions on
utilization of funds and acquiring the funds for efficient operations which can helps
managers of the company.

5. c) Dividend Function- This function of financial department provide information
about distribution of earned profits by the company. By having this function, managers
can easily know about whether to retain the earnings profit or to make distributes to the
company's shareholders (Fogarty, 2021). The finance manager of the company can decide
an optimum dividend policy which can increase the value of firm in the market.
6. d) Working capital function- with the support of this function finance manager of the
company can help business not only cover their financial obligation but also focus on
improving their performance and boost their earning to achieve profits.
Part b: Sources of Finance
1. Debenture Issue: The small and medium sized firms can fulfill there fund requirements
for the expansion purpose through the issue of debentures to the individuals or other
financial institutions. This gives the business entities the advantage of tax benefits as the
interest payments are tax deductible.
2. Equity Share Issue: Another common way of raising funds is to issue equity shares to
the public. Company can sell shares that contains the part of ownership of the company
in exchange of money received by the equity shareholders.

TASK 2
Part a: Calculation of the ratios

Part b: Analysis of Ratios Calculated
(i) Gross profit margin
a) Definition: Gross profit ratio or gross margin ratio is an accounting ratio used to know
about the profitability of the company. The gross profit margin is calculated by dividing

the gross profit earned by the firm in a period by the revenue sales made by the firm in
the same period and multiplying the result by 100.
b) Indication: The ratio indicates the high profitability of the company.
c) Comparison of results of year 2018 & 2019: The profitability of the firm reduced in the
current year as compared to the year 2018.
d) Reasons for Changes: The Panini Ltd’s revenue from sales increased by 1500 whereas
the gross profit fell by 250, it is the reason behind the declining trend in the ratio result.
e) Improvement suggestions: For improving the ratio of gross profit margin Panini Ltd will
have to cut the cost on expenses that are directly related to the production process.
(ii) Operating profit margin
a) Definition: Operating profit margin is defined as the ability of the company to earn profits
from its revenue sales after providing for its operating costs (Pantelidis and Zezou, 2018).
b) Indication: The ratio indicates the profitability of the company by showing the amount of
operating income as a percent of revenue sales.
c) Comparison of results of year 2018 & 2019: Panini Ltd experienced low operating profit
margin this year as compared to the previous year.
d) Reasons for Changes: The operating profit of the Panini ltd fell by 460 pounds in the
current year but the revenue sales seen an upward trend.
e) Improvement suggestions: For improving the operating margin Panini Ltd should focus
on increasing its operating income.
(iii) Return on capital employed
a) Definition: ROCE is defined as the return experienced by the company by effective
deployment of the resources it owns (Conzuelo‐Rodriguez and Naimi, 2018).
b) Indication: The efficiency of Panini Ltd to generate returns out of the capital employed
by the company.
c) Comparison of results of year 2018 & 2019: There is a declining trend from the year 2018
to 2019.
d) Reasons for Changes: Increase in the capital employed by 1456000 pounds with the fall
of 460000 pounds in the operating profit.
e) Improvement suggestions: Reduction in the operating expenses.
(iv) Current Ratio

a) Definition: Current ratio is defined as the measure of the ability of the company to pay for its
short term liabilities (Maheshwari, Maheshwari and Maheshwari, 2021).
b) Indication: Efficiency of Panini Ltd to pay for its current liabilities. And the inefficiency
of the company to use its current assets in an optimum manner.
c) Comparison of results of year 2018 & 2019: The ratio of current assets by current
liabilities for the Panini Ltd increased in the current year, which is not good for the
company.
d) Reasons for Changes: Reduction in the current liabilities by 458000 pounds along with
the increase in current assets by 935000 pounds in the year 2019.
e) Improvement suggestions: For maintaining the current ratio at an optimum value the firm
should sell its inventories more quickly and produce goods with the materials on credit
basis. Alternatively firm can use its cash in long term investment purchasing.
(v) Quick Ratio
a) Definition: Quick ratio is defined as a measure of company’s liquidity by analyzing its
efficiency to pay for its short term obligations with its liquid assets(Walmsley and et.al., 2018).
b) Indication: The ratio computed value for Panini Ltd indicates that the firm is being less
risk oriented by maintaining too much liquid assets.
c) Comparison of results of year 2018 & 2019: On comparing the results of quick ratio of
both the years it is clear that the ratio has increased.
d) Reasons for Changes: The ratio increased as the massive increase is observed in the
quick assets this year.
e) Improvement suggestions: The using of quick assets to purchase securities will improve
the ratio for Panini Ltd.
(vi) Inventory turnover days
a) Definition: It is defined as the time in days or months the firm takes to replace whole of its
inventory (Sorrentino, Smarra and Briamonte, 2020).
b) Indication: It indicates the sales volume efficiency of the firm. The ratio indicates that
the efficiency of the Panini Ltd reduced in the year 2019.
c) Comparison of results of year 2018 & 2019: The inventory turnover increased in the
current year by 10 days.

d) Reasons for Changes: Much lower increase in the cost of sales with respect to higher
increase in the inventory at the end levels.
e) Improvement suggestions: Smart pricing strategy with effective marketing will help
Panini Ltd to improve its ratio.
(vii) Debtor’s collection period
a) Definition: The average period of collecting the amount back from the debtors (Vo and
et.al., 2019).
b) Indication: It indicates that the efficiency of the company has reduced to recover the
debtors payment amount.
c) Comparison of results of year 2018 & 2019: The collection period of the company
increased as compared with the previous year.
d) Reasons for Changes: The reason for the change is non payment of the amount company
owe from its debtors against credit sales made for longer period.
e) Improvement suggestions: Making the terms of credit sales more clearer and offering of
discounts on early payments by debtors will improve the collection period.
(viii) Creditor’s collection period
a) Definition: The average period a firm takes to pay back its suppliers giving supplies on
credit.
b) Indication: it indicates that company efficiency needs to focus on to achieve business
goals in order to avoid any uncertainty.
c) Comparison of results of year 2018 & 2019: the creditors' collection period of the
company decreased as compared with the previous year.
d) Reasons for Changes: the company takes time 16 days in the year 2019 to settle its debts
with trade suppliers this is the reason for change.
e) Improvement suggestions: in order to improve creditors payment period, the company
needs to negotiate payment terms and conditions with their creditors and suppliers.
Recommendations
On the basis of the financial accounting ratios analysis it is advisory for the potential investors
of the Panini Ltd. that they should not make investment in the company has it company has
shown declined trend for the current year.