Financial Decision Making: Ratio Analysis of Alpha Ltd (BM414)

This financial decision-making report critically evaluates the roles of accounting and finance within an organization, specifically focusing on Alpha Ltd. It analyzes the company's financial position using ratio analysis for the years 2017 and 2018, calculating key ratios such as Return on Capital Employed, Net Profit Margin, Current Ratio, Debtors Collection Period, and Creditors Collection Period. The report provides a detailed comparison of these ratios, explaining their significance, the reasons behind the observed values, and potential strategies for improvement in the future. It also discusses the importance of accounting and finance departments in managing financial activities, avoiding legal issues, and preparing budgets. The report further elaborates on the roles of the accounts department, including financial accounting, management accounting, tax functions, and auditing functions, as well as the roles of the finance department, including investment, financing, dividend, and working capital functions, providing a comprehensive overview of Alpha Ltd's financial decision-making process.

Financial Decision
Making

EXECUTIVE SUMMARY
The below financial decision making report determine the importance and role of
accounting and finance function within an organization and also critically evaluation of both the
department functions are taken place. Generally, all organization need accounting and finance
function for running and expanding the business in a market economy. It also says that it plays a
key role in every enterprise by analysing the company financial position and goodwill. This
report also analyse the company ALPHA limited two-year financial ratio 2017 and 2018 with the
help of both year ending financial statements. The calculated ratios are return on capital
employed, Net profit margin, Current Ratio, Debtors collection period and creditors collection
period. After calculated these ratios, all ratios definition, comparison, reason of resulted value
and ways to improve the value in future are describe individually. These all are helpful for the
company ALPHA limited in future decision making and forecasting for company.

Table of Contents
EXECUTIVE SUMMARY.............................................................................................................2
INTRODUCTION ..........................................................................................................................4
TASK 1............................................................................................................................................4
Critically evaluation of Accounting and finance department with their roles............................4
TASK 2............................................................................................................................................8
a. Use formulas from below, calculate the ratios for Alpha Ltd from the data given in the
project brief.................................................................................................................................8
b. Comment on the performance of ALPHA LTD. results and position between the two years,
mentioning possible causes and effects for the changes.............................................................8
CONCLUSION .............................................................................................................................11
REFERENCES..............................................................................................................................12

INTRODUCTION
In the below report, the discussion are based on the company APLHA limited financial
decision making over ten years. The company is situated in the part of UK since 1954 and now,
it is planning for expand its operation to other parts of the country. The following report derived
accounting and finance importance along with their different types of roles in a given
organization (Adam, Boadu and Frimpong, 2018). The accounts departments role contain
financial and management accounting as well as tax and auditing function similarly in finance
department include investment, financing, dividend and working capital functions. The next task
of the report shows the company financial position in the year 2017 and 2018 by calculating the
financial ratios of the company. The comparison of these two ratios are also taken place for
analysing the company performance in both the financial years.
TASK 1
Critically evaluation of Accounting and finance department with their roles.
 Define Accounting and Finance Department:
Accounting department provide company account related service and manage its
financial activity. Accounting department is a team of specialised individual who manage
finances of a firm. It manages the preparation of financial statements, general ledger, payments
of bills, creation of consumer bills and payrolls etc (Alencastre Cordi, Rossit and Ajís, 2022).
Accounting department responsible for maintaining the overall economic conditions of company.
Finance department: It is a team of business responsible for handling and obtaining any
finance on the behalf of the Company. Finance department help in controlling incomes and
expenditures in aid to enterprise running with minimal distributions. It is responsible for
managing cash in hand resources, supervising the management and collecting important data for
management control, particularly indicator of financial performance and profit computations.
Importance of Accounting and Finance Department
Accounting and finance department plays an important role in navigating Alpha limited. These
departments keep eye on the all financial transaction of a company. Some important breifly
discussed below:
1. Keep financial records: Accounting department of Alpha limited record all financial
activities in efficient manner. A proper record of finance activities can help company to

understand cash flows and manage its future funds. Finance department can track
incomes and expenditure with the help of accounting records.
2. Avoid legal problems: Proper and accurate financial record helps in follow business law.
Any minor problem could have big inconvenience on tax management. Finance manager
is responsible to understand what expense to deduct and how and when to pay taxes.
Minor mistakes in financial recording can lead Alpha limited towards legal troubles.
3. Prepare budget: Accounting records are helpful in creation of budgets which keeps
business of Alpha limited on track. Budget provide liquidity position of the company and
help in future growth and expansion (Artemova and et.al., 2019). Finance department
provide details regarding income and expenditures which are helpful in decision making
of a budget.
 Role of Accounts Department
1. Financial accounting: It refers to the process of organizing and communicating financial
actions of a company. Financial accounting provide company's financial standings for the
people and investors on many different levels. It involve in recording and summarizing
financial transaction of a company. All the recorded financial transaction calculated in
the documents which called as financial statements or reports. These documents includes
income statements, balance sheet and cash flow statement. Income statement describe
profit and losses of a company, balance sheet provide financial position of the company
in the market and cash flow describe short term position of the company and keep record
of all cash transaction (Chen and Smith, 2019). Financial accounting put all financial
information at one place and make it easier to understand. It communicate the financial
position of the company to the investors or relevant parties. It help in creating financial
statement at the end of each quarter. It plays important role in decision making process.
2. Management accounting: It refers to the process of distinguishing, measuring,
interpreting and communicating financial information to the manager which help in
achieving organisational goal and objectives. It is also known as cost accounting. The
stored data cover all the parts of accounting that inform the management of company
activities related to the cost of product and services owned by the company. Management
determine the business plan of operation with the use of budgets. It compare actual
standard with the budgeted standard to find out any deviations. Management accounting

help in analysing the individual performance in the company. Management accounting
overlap financial accounting in which its reports are based on data that derived from
financial accounting reports. Sometime both the accounting integrated to each other. A
management account appointed by company who report to the financial directors.
3. Tax function: it is a structure of accounting techniques which focused on taxes rather than
the aspect of public financial statements (Fenyves and et.al., 2018). Tax accounting is
performed by the internal revenue code,which has specific rules and regulations that
Alpha limited and other companies mus follow while preparation of tax returns. Tax
accounting focuses on income, deductions, donations and investment gains or losses if
any. It is used by any individual, businesses, companies and corporations. Tax accounting
is a part of accounting which deals in the creation of tax returns and tax payments. It
ensure that tax payments are made on the time. Tax accounting is a complex process
which provide scrutiny regarding how money spent and what is or isn't taxable.
4. Auditing function: Auditing function refers to the audits of financial statements or
examination and evaluation of financial statements of a company. Auditing is performed
by external third party. Auditing ensure that financial information must be fair and
accurate. Auditing is present to determine that the business has confirmed its activities to
the law and accounting principles. It is an important feature of preparing and managing
credibility with its competitors and vendors (French and Vigne, 2019). Accounting deals
in tracking and collecting financial transaction here auditing plays the role of verifying
the accuracy of the reports. If any error found while auditing can create legal issue for the
company.
 Role of Finance Department
1. Investment function: This role of finance department are refers as link between
investment made in the company and interest rate. It is also says that it is function
relationship between investment and rate of interest. The investment are useful for the
company in maximizing the level of income and production by maximizing the
production and total purchases of capital products. The investments contain Plant and
machinery, inventories and shares of another company. The slope of investment function
are always placed in a downward direction. If the company Alpha limited uses this
technique then it is helpful for them in keeping and managing securities for investment

point of view, but they typically offers investors a several types of funds or investment
facilities. These include keeping records, tax management services, portfolio
management and in legal terms.
2. Financing function: The financing is the mostly refers as a major function of the finance
department. It ensure that company all transaction which recorded in the books of
accounts are proper and free from all errors. It is also focus on keeping up to date records
of all income and expenditure transactions (Jednak and Jednak, 2019). If these are not
followed and ensured by the manager of the company Alpha limited then it increase the
risk and poor decision making in an organization. It include several elements at the time
of company expansion that are costs, sales, cash flow ad profit and loss. These all are
functioned in a financing function differently where cost are helpful for making profit,
sales are monitoring the generated amount, cash flows useful in analysing the volume of
cash in the business and profit and loss are in decision making.
3. Dividend function: Dividend is the term which is collected by the shareholder from a
particular invested company. In other words, the dividend is the part of profit which is
distributed by the company to its eligible investors or shareholders. Dividend payment
amount are fixed by the board of directors of the company's (Kuntze and et.al., 2019).
The calculation of dividend are taken place by dividing the dividing per share into market
value of per share. Dividend is also termed as share of profits and retained earnings. The
company paid or give reward of dividend to its shareholders generally on a quarterly
basis period. There are four types of dividends such as cash dividend, stock dividend,
HYBRID dividend and property dividend.
 Working capital function: Working capital function indicate liquidity position of the
company for managing its routine expenses including inventory, account payable etc. It
describe the difference between short term liabilities and current assets. If company has
more current assets over current liabilities that indicate positive condition of the
company. Working capital is used to meet short term obligations of a company. If a
company have enough working capital than it is able to manage payment of employee
and supplier and also meet other obligation like payments of interest and taxes, even if
there is shortage of cash flows. It can also used to finance company growth without
acquisition of debts. It can help a firm in smooth out fluctuations in revenue.

TASK 2
a. Use formulas from below, calculate the ratios for Alpha Ltd from the data given in the project
brief
Ratio Formula 2017 2018
Return on Capital
Employed
(Operating Profit / Total
Assets - current Liabilities)
* 100 35.29 25.64
Net Profit Margin (Net profit / Sales) * 100 12.5 8.75
Current Ratio
Current Assets / Current
Liabilities 2.35 0.93
Debtors Collection
Period (Receivables / Sales) * 365 68.438 73
Creditors
Collection Period
(Payables / Purchases) *
365 77.05 159.68
b. Comment on the performance of ALPHA LTD. results and position between the two years,
mentioning possible causes and effects for the changes
1. Return on Capital Employed
 The purpose of calculating the ROCE is comparing profitability degree across
organizations in respect of capital (Lucey, 2019). To calculate the return of capital
employed two elements are required earning before interest and tax and Capital
Employed.
 What does the ratio indicate about company’s performance(ALPHA Limited): This ratio
shows that how much company is generating profits through its capital.
 Compare 2017 figures with 2018 figures calculated above: The ratio value of 2017 is
35.29 and 2018 is 25.64 that shows in 2017 company return on capital employed is
higher.
 Explain what do these numbers means and how has the figure changed in 2017 as
compared to 2018: The fluctuation ratio in 2017 and 2018 indicates that company
ALPHA limited is done the work effectively in the year 2017. It also figure out that
company is generating more profit in terms of capital employed in its previous year
(2017) as compare to the latest financial year (2018).
 Reasons behind the value of the ratio going down in 2018 as compared to 2017: By
analyzing both financial ratio it can be concluded that company has declining return on
capital in the year 2018. The main reason behind is company is producing less operating
profit.
 Ways to improve the value to the ratio in future: If the company reduces all inessential
expenses in its running business then it resulted the positive impact. In simple words, If

the expenses decreases, the percentage of operating profit automatically increases
(Westermann and et.al., 2020).
2. Net Profit Margin
 The net profit margin is important for the company to measure the overall profitability
position in a specific financial year (O'Connor and Kabadayi, 2020).
 What does the ratio indicate about company’s performance (ALPHA Limited): This
ratio figure out that generated net profit of the company as a percentage of revenue is
3.75% better in the year 2017.
 Compare 2017 figures with 2018 figures calculated above. In 2017 and 2018 value of
ratios are 12.5 and 8.75 respectively that means net profit of the year 2017 is more and
sufficient as per net profit ideal ratio.
 Explain what do these numbers means and how has the figure changed in 2018 as
compared to 2017: By observing both year ratio, it shows that company profitability
percentage is good in the year 2019. The changes in ratio occur due to increasing sales
and decreasing net profit of the company.
 Reasons behind the value of the ratio going down in 2018 as compared to 2017: The
reason of ALPHA limited 2018 decreasing net profit ratio is company uses poor pricing
strategies and inefficient cost framework.
 Ways to improve the value to the ratio in future: For managing the net profit it is
suggestion for the company to increase the price of goods and service and make a good a
structure of cost. The company have to adopt new technologies and ideas to manufacture
its products for increasing the profit volume of the company because the customers
generally acquire or attract on those products which are unique and good in comparison
to other (Yadav and et.al., 2019).
3. Current Ratio
 It is the value which helps the company in covering or repaying the short period
obligation in a given period of time (Pahlevan Sharif, Ahadzadeh and Turner, 2020).
 What does the ratio indicate about company’s performance (ALPHA Limited): It
indicates that company is not having sufficient amount of current assets in the year 2019.
 Compare 2017 figures with 2018 figures calculated above: From the above report,
company is showing that the result of 2017 is more efficient as compare to 2017. the
higher current ratio of the company indicates higher liquidity position of the company.
 Explain what do these numbers means and how has the figure changed in 2018 as
compared to 2017: Generally, the ideal ratio of every organization is 2:1 which means
company have utilized necessary current assets. The above calculated result of both the
year shows that company is fulfilling the needs of current ratio in the year 2017 but it
2018 company current liability is more then current assets that means company is not
execute the needs of this ratio.
 Reasons behind the value of the ratio going down in 2018 as compared to 2017: The main
reason of decreasing assets is increasing current liabilities of the company in the year

2018. The company decreasing ratio indicates that business operation is not managing its
cash in a efficient and effective manner during the financial year.
 Ways to improve the value to the ratio in future: For improving the company current ratio
it is the important to increase the current assets of the company such as inventory. It is
also done by reducing the personal withdraw on the business. If the company pay off its
current liabilities on time then it increase the business liquidity position.
4. Debtors Collection Period
 The calculation of debtors collection period is taken place by dividing the trade
receivables into sales and multiply by 365 (Smith and et.al., 2018). It indicates minimum
time taken by the company to collect its trade debts.
 What does the ratio indicate about company’s performance(ALPHA Limited): Both
year ratio shows company capability of acquiring the debts are decreasing year by year.
 Compare 2017 figures with 2018 figures calculated above: it shows in 2017 company is
powerful or able to gather the debts quickly and timely as compare to 2018 debtors
collection period.
 Explain what do these numbers means and how has the figure changed in 2018 as
compared to 2017: The value of these two year ratio shows company ability in terms of
gathering the trade debts. The increasing level of debtors collection period specify that
company increases its credit sales in the year 2019.
 Reasons behind the value of the ratio going down in 2018 as compared to 2017:
Declining ratio value indicates organization is not making better relation and
communication with their customers and clients in terms of business debts. It also may
be reason of company inefficiency.
 Ways to improve the value to the ratio in future: The major way is to create a good
environment for customers and client or to make a friendly relationship with them. One
more suggestion is that to decrease the credit sales in the market. The clients are also
give payment quickly if the company provide discount to him or if the company started
to take interest on delay payment. By increasing the efficiency in collecting amount are
helpful for the company in changing or decreasing collection days.
5. Creditors Collection Period
 This ratio measure the time taken by the company to repay its creditors. The time are
generally taken as one year or less then one year (Sovaniski, 2020).
 What does the ratio indicate about company’s performance(ALPHA Limited): The two
year financial ratio of the above company states that company is taking more time in
2018.
 Compare 2017 figures with 2018 figures calculated above: The ratios figures that
company ability of paying is creditors are diminishing in the year 2018.
 Explain what do these numbers means and how has the figure changed in 2018 as
compared to 2017: The ratio of creditors collection period of the company in 2017 and
2018 are 77.05 and 159.68 respectively which indicates average time taken to repay

creditors are increasing. It also mean that company is not paid its creditors on timely
basis.
 Reasons behind the value of the ratio going down in 2018 as compared to 2017:
Increasing collection period may be reason of decreasing company is not having as much
amount for payment. It is also a reason of increasing credit purchase if the company is
having more credit purchase then it takes more time to repay.
 Ways to improve the value to the ratio in future: Set up the policies and techniques of
automotive credit control for improving the days of creditors collection period. By
improving the stock control are also helpful in future improving ratio. If the company
shifts or changes its credit purchase to cash purchase in the future then the outcome of the
ratio shows the company good performance in the next financial year.
CONCLUSION
From the above report, it can be concluded that how accounting and finance function are
helpful for the company in managing the company performance and future decision making. It
also specify what type of role is important for a business ALPHA Limited in long run. The larger
effect company take the more it improve its position or goodwill in the market. This above report
also provide the financial ratio of 2017 and 2018 of the company by following the financial
statements respectively. After calculating these ratios company is helpful in figuring in which
year company is more productive and making profit. It resulted that, in 2017 the business of the
company is running in a good or effective way as compare to the year 2018.

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