Report on Financial Decision Making, Accounting & Finance - Alpha Ltd

This report provides a comprehensive analysis of financial decision-making within Alpha Ltd, encompassing accounting and finance functions, along with ratio analysis. Task 1 details the roles of accounting and finance within Alpha Ltd, illustrating key concepts with examples and explaining the structure of financial statements. Task 2 focuses on ratio analysis, calculating metrics such as return on capital employed, net profit margin, current ratio, and average collection period for debtors and creditors. The significance of these ratios for users is highlighted, and the outcomes are supported with related comments, cause-and-effect explanations. The report concludes by emphasizing how financial statements and ratios work together to depict the company's performance and reveal the underlying reasons behind the outcomes, supported with references.

B10195
Financial Decision
Making

EXECUTIVE SUMMARY:
This project consists of two parts; Task 1 and Task 2. First task carries report on accounting and
financing functions within Alpha Ltd., it will evaluate role of both with certain illustrations for
better clarification of concepts. Alpha Limited is a manufacturing company which is based in UK
and established in 1954; the upcoming target of company is to expand in other parts of UK in 10
years. Financial statements structure with elements use in it is explained in Task1. On the other
hand Task 2 focuses on outstanding tools ratio analysis; calculation of various ratios like return
on capital employed, net profit margin, current ratio and average collection period for both
debtors and creditors has done. Significance of these ratios to users will provide more knowledge
and acknowledgement. The outcomes of ratios are supported with related comments, cause and
effect of the result. Overall financial statement and ratios work together to show performance of
the company and also reveals cause behind outcomes.

Table of Contents
EXECUTIVE SUMMARY:...............................................................................................................
INTRODUCTION...........................................................................................................................1
TASK 1
Role of accounting and finance within ALPHA:.............................................................................2
TASK 2
A. Calculations:.........................................................................................................................6
B. Comments on the performance of ALPHA LTD. results and position:...............................8
CONCLUSION:............................................................................................................................11
REFERENCES..............................................................................................................................12

INTRODUCTION
Financing and Accounting plays a major role together but they have different functions; to show
financial health of company; financial statement plays a major role in evaluating company’s
assets performance; additional to this it also helps in knowing details about non-performing
assets of the organization. Bookkeeping is progressively about exact revealing of what has just
occurred and consistence with laws and benchmarks. Account is tied in with looking forward and
growing a pot of cash or alleviating misfortunes. On the off chance that you like intuition as far
as a more extended time skyline you might be more joyful in fund than in bookkeeping. Decision
making is the process of choosing best alternatives among available choices. In case of Alpha;
company has to take decision on various issues such whether to buy or manufacture the product;
how to raise funds equity or debts; how much credit should be allowed to debtors, etc. Taking
proper decision on right time is the main key to success. Each budget summary has a heading,
which gives the name of the element, the name of the announcement, and the date or time
secured by the announcement. The data gave in fiscal summaries is essentially budgetary in
nature and communicated in units of cash. The data identifies with an individual business
undertaking.
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TASK 1
Role of accounting and finance within ALPHA:
Accounting: It is the process of recording day to day transactions into accounting books such as
Journal, ledger, sales, purchases and petty cash book. Its main objective is to follow double book
keeping principle while recording business transactions (Ingersoll, 1987).
Financing: It is the process of arranging of funds for operational activities specially for fulfilling
working capital requirement of the company. It involves activities such as purchasing and
investing which use by various economic systems (Schall and Haley, 1979).
Difference between financing and accounting:
The contrast among fund and bookkeeping is that bookkeeping centers on the everyday
progression of cash all through an organization or foundation, while account is a more extensive
term for the administration of benefits and liabilities and the arranging of future development
(Schwartz, 1998).
ALPHA uses mix of both financing and accounting to prepare its financial statement:
Accounting
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Financing
Financial statement

It’s impossible for any business to survive only on one accounting concept, It is the soul
everything being equal and the shared factor by which most business execution is estimated both
inside and remotely. The bookkeeping and fund office is at the focal point of any association and
is answerable for guaranteeing the productive money related administration and budgetary
controls important to help all business exercises.
The various roles of accounting and financing within ALPHA Company are discussed below:
1. Financial Accounting: This is worried about keeping record everything being equal,
utilizing the twofold passage accounting framework and planning last records reasonable
for meeting the different administrative necessities for statutory revealing, the stock trade
and tax collection specialists. The individual answerable for this capacity in generally
medium to enormous associations is the money related bookkeeper, who will regularly
answer to the account chief.
2. Financial Systems: Medium-to huge estimated associations may utilize a frameworks
bookkeeper, who will dissect the monetary data needs of an association and audit existing
frameworks. Manager is answerable for the plan and support of monetary frameworks
and for giving an interface between the account and innovation/frameworks divisions.
Inside the bookkeeping and money work frameworks bookkeeper may answer to the
budgetary bookkeeper, the board bookkeeper or monetary chief.
3. Budgeting: The future estimation of expenses on the basis of past sales trend is known as
budgeting. It helps organization in making planning, control and making proper decision.
For example; Alpha wants to expand its business within 10 years in UK; so to fulfill this
goal it requires proper plan about how to achieve this target; how to raise fund from
various resources and how much employee it requires. Budgeting will help company in
estimating the total budget requires achieving desired aim. To get budget successful; it
necessary that company should control and monitored its cost regularly.
4. Management Accounting: The Management accounting is worried about the
examination and control of budgetary data to aid the everyday tasks of an association.
Generally medium-to enormous estimated organizations will have an administration
bookkeeper liable for this capacity who will answer to the money related executive.
The Accounting and monetary bookkeeping are regularly founded on data
gotten from the money related bookkeeping records. For instance, the 'real' consumption
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figures appeared in the executives records will be taken from the money related
bookkeeping records. In some cases money related bookkeeping and the executives
bookkeeping are coordinated. A case of this would be the completely coordinated
standard costing framework where the money related records are organized so as to give
cost and the executive’s data straightforwardly.
5. Taxation: Most enormous organizations will have a tax collection office managing all
expense issues. In a littler organization this might be dealt with by the fund executive or
potentially the monetary bookkeeper.
Just as everyday tax assessment the executives and revealing, all choices made by
an organization will have charge suggestions and these should be recognized and
incorporated with the dynamic procedure and money related plans. In addition to the fact
that tax has to be represented money should be made accessible at the ideal time to pay it
to the specialists. Duty does, in this manner, influence money arranging and spending
plans.
Tax avoidance is illicit and, furthermore, most nations likewise have hostile to
shirking laws. It is the expense division's obligation to guarantee that all laws are
conformed to. As in the case of Alpha; companies has two choices of raising fund; either
by issuing equity shares or through debt financing. If company goes with raising fund by
issuing equity funds; then it has to pay heavy tax on both net earnings and dividend
payment to shareholders; on the other hand, debt financing relief company from paying
high amount of taxes (Ingersoll, 1987).
6. Preparing financial statement: This is the main role of both financing and accounting;
as discussed earlier financial statement is the mix approach of both financing and
accounting technique. It shows how much earnings generate by company at the end of
financial year, its financial health and liquidity nature. Financial statement report of
Alpha shows figure of balance sheet, income statement, cash flow statement and
statement of changes in owner’s equity or shareholders’. The monetary record gives a
preview of a substance starting at a specific date. It list the element's benefits, liabilities,
and on account of a partnership, the investors' value on a particular date. The salary
articulation presents an outline of the incomes, gains, costs, misfortunes, and total
compensation or overall deficit of an element for a particular period. This announcement
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is like a moving image of the substance's tasks during this timeframe. The income
proclamation condenses an element's money receipts and money installments identifying
with its working, contributing, and financing exercises during a specific period. An
announcement of changes in proprietors' value or investors' value accommodates the start
of the period value of a venture with its completion balance (DeFranco and Lattin, 2007).
Things as of now revealed in budget summaries are estimated by various qualities
(for instance, recorded cost, current cost, current market esteem, net dependable worth,
and present estimation of future incomes). Chronicled cost is the customary methods for
introducing resources and liabilities.
Notes to fiscal summaries are useful revelations annexed as far as possible of budget
reports. They give significant data concerning such issues as deterioration and stock
strategies utilized subtleties of long haul obligation, annuities, leases, personal duties,
unforeseen liabilities, techniques for union, and different issues. Notes are viewed as an
indispensable piece of the budget reports (Fabozzi, 2010). Timetables and incidental
revelations are likewise used to introduce data not gave somewhere else in the fiscal
reports.
Elements of financial statement:
 Assets: These are the investment made by Alpha to run its business. Assets are of
two types; current and non-current. Current assets are those which can be
converted into cash before one year; while non-current assets or fixed assets
cannot be converted into cash before one year.
 Comprehensive income: It is the change in net assets transactions during a year. It
doesn’t include those transactions which results from investments or any other
incomes.
 Distribution to owners: Any reduction in net assets of Alpha Company due to
transferring of assets, providing services and acquiring liabilities for owners
comes under this category.
 Equity: It is the balancing figure which remains with Alpha after deducting total
liabilities (Non-current and Current both) from total assets. The balance sheet of
Alpha shows equity of £1,162.50 as on 2017 and £1,425 in 2018.
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 Expenses: This are also know as expenditures or cost involve in acquiring assets;
it is treated as outflow for the business.
 Incomes: Also know as gain or earnings; it is earned by Alpha in buying and
selling activities. Incomes are cash inflows for the company and increase its net
worth. Without it business cannot run for longer period of time.
 Investment by owners: Increase in net assets of Alpha can be resulted from
receiving funds from other company as investment.
 Liabilities: It is the amount which increases net assets; because company should
raise its fund for the equal amount of its equity. It is the responsibility of Alpha to
payback its outstanding taken from suppliers, banks or other business firms on
time, to maintain its credibility in market (Arnold, 2012).
7. Treasury and financial planning: Financing and accounting plays major role in
maintain proper fund through great financial planning. Treasury is the reserves of Alpha;
which is handled to pay working capital expenses and at the time of expansion of
business. Normally treasurer has direct link with financial department; because he is
responsible for efficient provision, investment and fund utilization (Brigham, 1996).
8. Creating value: Inside the setting of the strategy the fund chief has a duty to make
esteem. This should be possible through, for instance, getting the most ideal acquiring
rates, cutting/controlling costs, decreasing money related dangers, improving obligation
assortment, better money the executives and numerous different exercises (WEBSTER,
2014).
TASK 2
A. Calculations:
(i) Return on Capital Employed:
Return on capital employed
2017 2018
£ '000 £ '000 £ '000 £ '000
EBIT £300 £262.5
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Capital Employed
Total Assets £2,235 £4,035
Less: Current Liabilities £322.5 £1,913 £1,110 £2,925
Return on Capital Employed (A÷ B) 16% 9%
(ii) Net Profit Margin:
Net Profit Margin
2017 2018
£ '000 £ '000
A Net Profit £300.0 £262.5
B Net Sales £2,400.0 £3,000.0
Net Profit Margin (A ÷ B) 13% 9%
(iii) Current Ratio:
Current Ratio 2017 2018
£ '000 £ '000
A Current Assets £757.5 £1,035.0
B Current Liablities £322.5 £1,110.0
Current Ratio (A ÷ B) 2.35 0.93
(iv) Average Receivable days/ Debtors Collection Period:
Debtors Collection Period 2017 2018
£ '000 £ '000 £ '000
A Average Debtors
a. Debtors at the beginning of year £450
b. Debtorrs at the end of year £600
Average Debtors {(a + b)/2} £450 £1,050
B Net Credit Sales £2,400 £3,000
Debtors collection period
{(A÷B)×365} 68.44 127.75
(v) Average Payable Days/ Creditors Collection Period:
Creditors Collection Period 2017 2018
£ '000 £ '000
A Trade Payables £285 £1,050
B Cost of Sales £1,725 £2,250
Creditors collection period
(A÷B)×365 60.30 170.33
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B. Comments on the performance of ALPHA LTD. results and position:
Alpha Ltd. has shown decrease in net earnings as compared to 2017, due to increase in
expenses by 30.4% and increase in sales by only 25%. After analyses of Alpha Ltd’s
income statement; it was found that besides more sales revenue from previous year, its
closing stock is more than 2017’s closing inventory, which shows inappropriate planning
and forecasting by company (Lucarelli and Brighetti, 2010). Alpha has outstandingly
manage its operating expenses with increase in revenue but fails to control total finance
cost which double of previous year. In part A of task 2; some of various ratio analyses
tool used to get more performance related information of the company.
I. Return on capital employed: This ratio indicates total earning received by the
company from the capital invested by owner. Alpha Ltd’s return on capital
employed shows that it has earn 16% of net profit out of £1.9 million capital
employed by owner. Capital employed calculated by subtracting current liabilities
from total assets. This ratio also shows how efficiently company is utilizing its
assets to generate sales revenue; higher the ratio better it is. It has been noticed
that company’s ROCE is declined by 7% in 2018; which indicates company has
inefficiently utilized its funds (Wilson, 2016).
Cause: The main cause behind this mismatch ROCE is more capital employed
and less revenue generated. As in previous year; company has shown good
growth, but in current year its total earning before tax and interest is declined,
instead of increase in capital employed.
Affect: Declined ROCE value can affect the image of company in the market. It
will decrease the share value of company and also change the mind of investors;
as investors avoid spending money on business having declining growth. It will
also affect company’s credibility to pay back its debts and liabilities due to
shortage of funds because of less cash inflows.
II. Net Profit Margin: This ratio reveals percentage of earnings earn by company out
of net revenue. It also clarifies how much percentage of revenue is consuming by
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expenses like operating, cost of sales and selling & distribution. Higher the ratio
better for the company. Alpha Ltd net margin ratio shows that company earning is
13% of net sales in 2017; but in 2018 it reduced to just 9%. Which is not
acceptable at market level? Company needs to review its strategy to improve this
ratio; to avoid further declining in next year (Peterson and Fabozzi, 1994).
Cause: The main reason behind this declining might be increase in expenses by
the company. But fail to generate sales revenue in 2018; last year’s net profit was
0.3 million on 2.4 million pound sales; while in 2017 instead of 3 million pound
sale, company’s net earning has declined to 0.26 million pound; due to failure in
maintaining variable cost.
Affect: Low net profit margin Affects Company’s retained earnings and reserves.
Company could be collapsed if wastage of funds on unnecessary sales activities
stopped. It requires supervision and proper financing model to handle this issue.
Unless Alpha’s finance team manage to control excess cost; company will not
able to increase its total net profit; and this will also affect liquidity of firm.
III. Current ratio: It shows relationship between current assets and liabilities; for
current ratio two elements; current assets has to be divided by current liability to
find solvency rate of company in paying its liability through its short term assets.
The ideal ratio is between 2:1 to 1:1; in the case Alpha Ltd.; in 2017 it was 2.35:1
and 0.93:1 in 2018. In both year; company fails to stand between ideal ratio; more
than 2 indicates unnecessary blockage of liquid fund, while below 1 raise the risk
of bankruptcy or selling long term assets to meet current requirements (Chishti
and Barberis, 2016).
Cause: The main cause behind excess of current assets might be more debtors and
inventories hold by company; sometimes unused cash and bank amount increases
the current ratio. But sometimes holding excess current assets by company; is due
to meet emergency situation like strike, boom in the market or urgent payment to
its creditors. But usually more current assets show inefficiency of business to run
its business.
Affect: Over current assets can impact Alpha Ltd. in many ways; for instance
excess current assets may relief its shareholders from bankruptcy situation but at
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