Financial Decision Making Report - Tesco & Alpha Ltd Analysis

This report delves into the critical aspects of financial decision-making, exploring the intertwined roles of accounting and finance within an organization. It begins by defining these functions and illustrating their significance, particularly using the examples of Tesco. The report then examines the different types of accounting and finance, such as management accounting, cost accounting, and financial planning, and their specific applications. Furthermore, the analysis includes a practical segment involving the calculation and interpretation of profitability, efficiency, and liquidity ratios for Alpha Limited over two financial years. The conclusion summarizes the key findings and emphasizes the importance of informed financial management for organizational success.

FINANCIAL
DECISION MAKING

Table of Contents
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
Role of Accounting & Finance in an organisation.......................................................................1
TASK 2............................................................................................................................................6
Calculation of Ratios....................................................................................................................6
CONCLUSION................................................................................................................................9
REFERENCES..............................................................................................................................10

INTRODUCTION
Financial Management is a process of decision making through which finance managers
of a firm manage various elements of Financing Mix such as Debt, Equity and Capital Structure
so that they can take decision related to expansion, diversification and investment. Managers of
business firms also makes decisions by evaluating and analysing financial statements such as
Income Statement, Statement of cash flow and Balance Sheet. Further, for making efficient
decision managers of a firm uses different functions such as Accounting and Finance. The below
report explains role of Accounting and Finance Function in an organisation like Tesco. Further,
this report also calculates different types of profitability, efficiency and liquidity ratios of Alpha
Limited of two financial year to evaluate companies performance.
TASK 1
Role of Accounting & Finance in an organisation
Accounting
Accounting is a method of classifying and recording financial transaction of an
organisation. This method is used for the purpose of disclosing financial information of a
company by collecting and analysing all the financial data. Thus, accounting plays an important
role in a business firm.
According to (Minnis and Sutherland, 2017), Accounting helps a business organisation in
analysing its profits, revenues, cost and expenses. Further, accounting also play a role in
managing cost, assess amount of taxes and helps company in analysing various investment
projects and alternatives.
It is necessary for all companies to follow a standard accounting procedure and
accounting principles. Tesco is a UK based retailer which offer groceries and other merchandise
in many countries across the globe. As this company is covering a large market it is essential for
firm to record and maintain operational and financial transaction.
As per the view of (Vanauken, Ascigil and Carraher, 2016), accounting is classified in
different types according to the functions and departments such as Management Accounting,
Cost Accounting and Corporate Accounting. Thus, it is also examined that this function is not
operated without accounting.
Finance
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Finance is an activity through which an organisation is able to manage its monetary
resources and funds. As per the view of (Berger, Minnis and Sutherland, 2017), without money a
firm is able to procure its resources and assets as a result performance of a company gets
declined.
Further, it is essential for a firm to manage and acquire so that it is able to estimate its
future expenses and investments. Further, finance also plays a vital role in managing risk,
minimising cost and in making various decisions related to investment and expansion. Tesco also
uses finance function in its organisation to manage and maintain financial so that company can
diversify its operations in new market which in turn maximises Brand Image and profitability of
the firm(The Role of Accounting in Business. 2016).
As per the view of (Lakis and Masiulevičius, 2017), Accounting and Finance Function is
very important for an organisation because Accounting depicts financial information such as
profit and expenses of past year whereas Finance helps business in projecting companies futures.
Further, both these functions benefits a business firm by resolving their operational and financial
problems.
Role of Accounting Function
Most important types of Accounting are Management Accounting and Financial
Accounting. Tesco is able to set its future goals and objectives with the help of financial
accounting whereas with the help of management accounting company can attract its customers
and investors by disclosing financial information.
Decision Making- For operating business of a company in an efficient and effective
manner its is necessary for manager to make various decisions and formulate strategies so that it
can achieve profits in long run. Managers of Tesco is unable to make decisions if they do not
have detailed information related to Assets, Liabilities, Income and Expenses and all these
information is presented by company through Management Accounting Function. Thus, this
function of accounting play a role in disclosing financial information of company to internal
managers so that they can make future decisions and plans.
This function of accounting is beneficial for every business firm as with this managers
are able to select most viable and feasible investment alternatives by using all accounting
information. Management Accounting Function also play a significant role in formulating rules
and regulation for the companies workers so that they can perform business activities according
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to the guidelines. For Example- Tesco is aiming to maximise its sales volume for which manager
has to give guidelines to employees so that they can interact with customers and improve
products and services according to customers demand. For which managers are required to make
decisions(Rouxelin, Wongsunwai and Yehuda, 2017).
Accounting for Government Regulations- It is mandatory for each and every business
running within an organisation to follow rules and provisions given by government of a country
in which it is operating its business. Thus, Tesco is also liable to follow all the government
policies and laws applicable on its business operations. For example- Tesco has to pay its tax
liability on time and if company is not able to pay taxes on time than it has to pay penalties and
this has an direct impact on companies Brand Image. Thus, for paying taxes on time it is required
for Auditor and Financial manager of Tesco to assess amount of its adequate income which
becomes possible with detailed and accurate information of accounts.
Assessment of adequate income is possible with the help of Auditing Function of
Accounting. As with the help of this function finance managers and accountants of company can
minimise errors in accounts and financials. Further, this function plays a role in encouraging
companies in paying all the taxes applicable on its business on time.
Cost Accounting- Cost Accounting Function of Accounting play role in Cost
minimisation and managing all the necessary cost of company so that it can set high profit
margin and provide optimum utilisation of available resources. This function is also significant
for Tesco as with this production manager of company is able to measure price of each of
products & services offered by companies. With the help of this accounting function managers of
Tesco can record prices of products at a different level of production units. So, that company can
maximise sales volume, customer base and market share.
E.g. Tesco offer its services through Super Market, Hyper Market, Shopping Malls and
Departmental Stores. For expansion of companies market share it required by firm to establish
more stores in new country or market and for that it has to determine cost of establishment of
each store and select the most profitable alternatives. This becomes possible by Cost Accounting
Function of Accounting(Moroney and Trotman, 2016).
Discloser of Financial Information- Stakeholders of a business organisation are its
assets as they helps business firms in enhancing their profitability and customer base. Thus, it is
essential for every company to disclose its financial information to its external users so that they
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can rely on offerings of a company. All the financial information is disclosed to users by
preparation financial statements such as Statement of Profit & Loss, Cash Flow Statement and
Balance Sheet. These statements cannot be prepared without books of accounts. Thus,
Accounting Function also plays an important role in discloser of financial information.
It is essential for Tesco to disclose amount of dividend distributed to its shareholders so
that they can make further decision of making investment. Amount of dividend is also calculated
and decided by with the help of management accounting function.
Preparation of Budget- Budget is an estimation of future income and expenses which
helps a company in running its operations according to the availability of funds and financial
resources allocated to each business activity. Budget is prepared on the basis of historical data by
the financial managers of Tesco. Detailed information of a companies books of accounts are
required for making future financial plan. Thus, management accounting function also play role
in preparation of budget(O'Hare, 2016).
Further, with the help of information provided in books of accounts enable finance
manager of Tesco in calculating and analysing various ratios which helps company in comparing
its efficiency, profitability and liquidity from the last year. Thus, role of accounting function also
includes analysis and calculation of ratios.
Role of Finance
Finance function is used by Tesco to check its solvency, liquidity and feasibility so that
company can enter in to acquisition, diversification, merger and amalgamation in near future.
Financial Planning- Future Financial planning of a company such as setting up of
financial goals (Profit Maximisation and Market Expansion) is done on the basis of availability
of monetary and non monetary Financial resources. Thus, Chief Executive Officer of Tesco has
to manage its financials foe the purpose of future planning.
Finance Function also play a role in providing detailed information about investments
and assets of company with which Tesco can evaluate its returns risk, By assessing risk and
return of each investment company make future plans of investment. If current investments are
profitable than company make a plan for same class of assets. Role of finance function is also
budget preparation as it is prepared on the basis of availability of funds. Further, various plans
such as raising capital through equity issue, management of bonus, increment in salary of
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employees and formulation of marketing strategies is formulated by management of Finance
(Finance Function).
Financial Forecasting- Future of a company is projected on the basis of its liquidity and
solvency or its capacity of generating cash inflows. Further, liquidity and efficiency of
operations of Tesco is evaluated on the basis of Finance Function thus this function is also
important in future forecasting. Forecasting related to future sales volume, profits, customer base
and demand for products and services are done with the help of Finance Function(McInnis, Yu
and Yust, 2018).
For Example- Tesco wants to increase its profits by 30% by the financial year 2020 than
company and its current financial statements are showing that companies business is viable and it
can attract more customers in future on that basis firm can make a forecast of sales volume.
Management of Risk- Risk Management is the most important role played by Finance
Function. Finance function helps business firm in managing evaluating financial resources. Thus,
by evaluating various investment made by Tesco its manager can asses risk of in those
investments and according to that makes plans for minimising risk.
Further, various risk which affects business of Tesco such as change in interest rate,
Taxation Policy, Accounting Principles & Policies and change in Customers taste and preference
are minimised by analysing impact of this risk on companies financials. Finance function provide
details of financial information with which managers of company are able to evaluate impact.
For Example- Changes in Tax Rates increases cost of products and services offered by
Tesco. This risk is minimised by company by minimising cost in proportion to an increase in tax
rate.
Money Management- Cash of a company is managed by using function of Finance.
Managers of Tesco can invest its available cash in a profitable and efficient investment by
evaluating different alternatives. Return generated from each investment alternatives such as
Debt, Equity and other securities is evaluated by using methods like capital budgeting so that
company can make best investment decision. Investment function of Finance is play a role in
effective and efficient management of money.
For Example- Tesco has enough idle cash with it and company wants to utilise this cash
than this cannot be possible without finance function. Further, with this function company make
investment in an alternatives which is less costly and more profitable. Finance Function also play
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a role in waste management by minimising wastage. Management of cash also helps company in
its future growth and expansion.
Further, role of finance function is allocation of funds because without money Tesco
cannot operate its business and framework of organisation is also decided on the basis of its
liquidity. Various function in company such as marketing, production, distribution , human
resources and information technology cannot perform their task if without money and that
becomes possible with the help of Finance Function only(Kogadeeva and Zamboni, 2016).
TASK 2
Calculation of Ratios
Return on capital employed (ROCE)
Return on Capital Investment is calculated by managers of Alpha Limited to check its
Profitability. This ratio measures ability of a company of generating profits from invested
capital. Financial efficiency and effectiveness of a company is evaluated with ROCE.
Shareholders invest in shares of company in accordance with this ratio higher the ROCE more
investors show interest in purchasing shares of company(Camin and et.al., 2016).
Formula
Return on capital employed= (Earning Before Interest & Taxes/Capital Employed)*100
Here, Amount of Capital Employed is derived by subtracting Current Liabilities of
company from its Total Assets.
Particulars 2017 2018
Earning Before Interest & Taxes(EBIT) 375 412.5
Capital Employed
(2235-
322.50)=1912.5
(4,035-
1110)=2925
Ratio:Return on capital employed (ROCE) 19.60% 14.10%
From the above table it is evaluated that efficiency and profitability of Alpha Limited is
showing a decreasing trend during the financial year 2018 as compared to financial year 2017.
As ROCE Ratio of Alpha Limited has reduced to 14.10% in the year 2018 from 19.60%
(Robinson, and et.al., 2015).
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Net Profit Margin Ratio
A profitability ratio which calculates amount of profit generated by business
organisations from its sales revenue is known as Net Profit Margin Ratio. This ratio is calculated
after deducting all types of operating and non operating expenses from sales revenue such as
Interest Rates and amount of Tax. Thus, this ratio shows net proportion of profit earned by
company from selling its products and services.
Formula
Net Profit Margin = (Net Profit/ Sales)*100
Particulars 2017 2018
Sales 2400 3000
Net Profit 300 262.5
Ratio: Net profit margin 12.50% 8.75%
After analysing Net Profit Ratio of Alpha Limited from the above table it is interpreted
that firm is earning less amount of profit in 2017 as compared to previous year which shows that
there is a decrease in sales volume of company and increase in operating or non operating cost.
Net profit of Alpha Limited is reduced to 8.75% from 12.50%(Kogadeeva and Zamboni, 2016).
It is recommended to company to formulate various strategies so that customers gets
aware about its products and services and company is also required improve its production
techniques so that it can develop an innovative product by minimising cost. This in turn enhances
sales volume and profitability of business firm.
Current Ratio
A Liquidity Ratio with which every business can check capability of paying short term
liabilities from its available assets are known as Current Ratio. If Current Ratio is high than
Alpha Limited is having sufficient assets to pay its current obligations. 2:1 is an idle current ratio
and a firm is require to maintain this ratio to achieve liquidity(Easton and Sommers, 2018).
Formula
Current Ratio= (Current Asset/Current Liability)
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Particulars 2017 2018
Current Assets 757.5 1035
Current Liabilities 322.5 1110
Ratio:Current Ratio 2.34 0.93
By analysing above table it is evaluated that a financial position of Alpha Limited is not
good in the year 2018 company is making losses as it is unable to make payment of its liabilities
from its current assets. This also reduces profits of company and this shows that companies
operations are not satisfying its customers. Further in the financial year 2017 Alpha Limited is
having sufficient resources to meet its current obligations. Current Assets of company is more
than its current liabilities in 2017 thus, in 2017 its current ratio is 2.34 whereas in 2018 this ratio
is 0.93.
Decrease in this ration also affects working capital of company which in turn reduces
operational efficiency of firm.
Debtor Collection Period
Debtors are customers to whom goods are sold on credit. Debtor collection period is an
efficiency ratio calculated by business firms to evaluate no. of days in which debtors make
payment of trade debts. Higher collection period is not a good indicative for Alpha Limited as it
reduces working capital & liquidity of company. Thus, company has to manage is collection
period.
Formula
Debtor Collection Period = (Average Account Receivable/ Net
Sales)*365
Particulars 2017 2018
Net Sales 2400 3000
Average Account Receivable 450 600
Ratio: Debtors Payment Period 68 days 73 days
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Ratio calculate in above table shows that Alpha Limited is collecting payment from its
debtors in 73 days in 2018 whereas in 2017 debtors are taking 68 days in making payment of
trade debts. Thus, it evaluated that company is facing difficulty in collecting amount from its
debtors as there is an increment of 5 days in collection period. It is also reviewed that with the
increase in collection period of debtors there is a reduction production process and output level
due to decrease in working capital.
Creditors Payment Period
It is also an efficiency ratio which helps a company in measuring its solvency. This ratio
measures how much time company is taking in making payment to its suppliers of raw materials.
Higher Credit Payment Period is not good for company as which affects solvency of a company.
Alpha Limited has to check its efficiency by calculating this ratio and if their is an increase in
this ratio than managers of firm are required to take action to improve its performance
(Edwards, Schwab and Shevlin, 2015).
Formula
Creditors Payment Period= (Trade Payables/ Cost of
Sales)*365
Particulars 2017 2018
Cost of Sales 1350 2400
Trade Payable 285 1050
Ratio:Creditors Payment Period 77 days 159 days
From the above table its is evaluated that Alpha Limited is facing problem in making
payment to its trade suppliers as there is an increase in Creditor Collection Period during the
financial year 2018 as compared to 2017. More of operations of company is running from the
capital raised from loan which in turn affects solvency of company. Further, it is outlined that
this ratio is increased by 82 days.
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CONCLUSION
The above stated report outlined role and benefits of Accounting functions and Finance
Functions. Further, this report concludes that finance and accounting function helps mangers of
Tesco in improving its efficiency and performance by enabling them in making various
important decisions through financial informations constructed from financial statements and
books of accounts. Furthermore, the above report concluded with comparison of different ratio of
last two years of Alpha Limited.
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REFERENCES
Books and Journals
Berger, P.G., Minnis, M. and Sutherland, A., 2017. Commercial lending concentration and bank
expertise: Evidence from borrower financial statements. Journal of Accounting and
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Camin, F., and et.al., 2016. Stable isotope ratio analysis for assessing the authenticity of food of
animal origin. Comprehensive Reviews in Food Science and Food Safety. 15(5). pp.868-
877.
Easton, M. and Sommers, Z., 2018. Financial Statement Analysis & Valuation, 5e.
Edwards, A., Schwab, C. and Shevlin, T., 2015. Financial constraints and cash tax savings. The
Accounting Review. 91(3). pp.859-881.
Kogadeeva, M. and Zamboni, N., 2016. SUMOFLUX: a generalized method for targeted 13C
metabolic flux ratio analysis. PLoS computational biology. 12(9). p.e1005109.
Lakis, V. and Masiulevičius, A., 2017. ACCEPTABLE AUDIT MATERIALITY FOR USERS
OF FINANCIAL STATEMENTS. Journal of Management. 2(31).
McInnis, J.M., Yu, Y. and Yust, C.G., 2018. Does Fair Value Accounting Provide More Useful
Financial Statements than Current GAAP for Banks?. The Accounting Review. 93(6).
pp.257-279.
Minnis, M. and Sutherland, A., 2017. Financial statements as monitoring mechanisms: Evidence
from small commercial loans. Journal of Accounting Research. 55(1). pp.197-233.
Moroney, R. and Trotman, K.T., 2016. Differences in auditors' materiality assessments when
auditing financial statements and sustainability reports. Contemporary Accounting
Research. 33(2). pp.551-575.
O'Hare, J., 2016. Analysing financial statements for non-specialists. Routledge.
Robinson, T.R., and et.al., 2015. International financial statement analysis. John Wiley & Sons.
Rouxelin, F., Wongsunwai, W. and Yehuda, N., 2017. Aggregate cost stickiness in GAAP
financial statements and future unemployment rate. The Accounting Review. 93(3).
pp.299-325.
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