Financial Decision Making Report: Ratio Analysis and Accounting Roles

This report delves into the critical aspects of financial decision-making, exploring the roles of accounting and finance within business entities. The report begins by evaluating the functions of accounting and finance, using Continental Clothing Limited as a case study to illustrate their practical applications. It highlights how accounting functions, such as record-keeping and financial statement preparation, support informed decision-making, while finance functions, including fund allocation and profit planning, contribute to organizational success. The second part of the report focuses on the financial performance evaluation of Alpha Limited. It includes the calculation and interpretation of key financial ratios, such as return on capital employed, net profit margin, current ratio, and debtors collection period, providing insights into the company's profitability, liquidity, and efficiency. The analysis of these ratios offers a comprehensive view of Alpha Limited's financial health over a specified period, with detailed calculations and interpretations to support the findings. This report offers a comprehensive analysis of financial decision making.

FINANACIAL
DECISION MAKING

Contents
INTRODUCTION...........................................................................................................................3
Task 1...............................................................................................................................................3
Evaluation of role of accounting and finance.........................................................................3
CONCLUSION................................................................................................................................8
Task 2...............................................................................................................................................8
Calculation of ratios as per the given information about Alpha limited................................8
CONCLUSION..............................................................................................................................13
REFERENCES..............................................................................................................................14

INTRODUCTION
Financial decision-making can be described as a kind of mechanism wherein decisions
are made according to the financial reporting and statements review. The annual statements and
accounts are very important in the decision-making sense (Kicia, 2016). It is because financial
reports contain all sorts of information about businesses ' corporate activities. A company's
financial data can help the company to make different decisions relating to its business
operations. In the lack of complete review of the financial statements, companies can face the
issue of determining the actual financial position. The project report is based on two tasks which
consists different information. Task one is about role of accounting and finance for business
entities and for better understanding of task one a company has been selected that is Continental
clothing limited. This company deals in manufacturing of cloths and located in London UK.
While second task is about financial performance evaluation of Alpha limited company and for
this purpose different ratios are computed.
Task 1
Evaluation of role of accounting and finance.
In the aspect of business entities, the role of finance division and accounting department
in a corporate enterprise is too crucial. It is s because long-term sustainability and high income
can be gained because of these two divisions. For any company, both the terms accounting and
finance are important, that is because both have connections to the corporate operations.
Organizations need to follow accounting and finance principles so that they can determine the
efficiency of their operations. In this report, different uses of these terms are specified in the
sense of Continental clothing limited. Herein, below role of accounting and function are
mentioned in such manner:
Accounting Function:
The term accounting can be described as a kind of method linked to the formal reporting
of corporations ' monetary transactions. The accounting essentially involves all sorts of rules and
standards that businesses must obey (Arianti, 2018). In other words, the concept accounting
executes an organization's core tasks that are useful to the client and involves tracking,
summarizing, and evaluating the various activities related to finance. The businesses who want

to manage their financial status efficiently than it's important than this is crucial for them to
record their financial transactions according to the regulations of accounting. These accounting
functions are too useful for above chosen business entity, Continental clothing company. As by
help of different functions they become able to make a systematic sequence of recorded financial
outcome. Herein, below some key roles of accounting are mentioned which are as followings:
 Beneficial in keeping record: The accounting is very helpful in holding financial
transaction and statements in a structured manner. Due to this businesses can check out
the details from their sales department from the past year. It also enables to companies to
determine and perceive only cash transactions while conducting various business
activities. It is too crucial role of accounting because most of the crucial decisions are
being taken in accordance of recorded financial data of past years. Such as in the aspect
of Continental clothing limited plc they use accounting process for recording all business
transactions in a systematic manner. Their accountant applies different kinds of
accounting functions which help their managers to find out needed information in less
time. By doing so, accountants of above company take right decision on the grounds of
recorded financial information.
 Decision-making: It also allows companies to make right judgement regards to different
activities and to report the relevant financial transactions in the best way possible. For
instance, in Continental clothing Limited, they take important decisions on the basis of
their accounting information. Like if they want to take decision about purchasing of new
material for upcoming time period than accounting information about sales of last year
can help them in taking right decision (Florendo and Estelami, 2019). In addition, due to
this their profitability increases. This is so because if a company takes right decision than
it becomes easier for managers to gain higher revenues. Same as in the above company
they produced higher net income that is mentioned below:
All data in GBP
million
2016 2017 2018
Revenue 40550 44010 44404

 Different aspects of accounting: The accounting provides different forms of assistance to
companies by range of aspects. The accounting is not limited to any particular form of
recording financial data. There are different types of accounting methods such as
management accounting, financial accounting, cost accounting and many more. Each of
them plays a key role for companies. Such as in the aspect of above Continental clothing
limited company, they get benefit of various aspects of accounting for managing different
functions and operations. Such as by help of management accounting their internal
department takes right decisions for inner aspects. It becomes possible due to prepared
internal reports under this accounting.
 Helps in preparation of financial statements: For a company like Continental clothing
limited, accounting plays an important part in the preparation of annual reports with
information recorded income and expense (Osamor and Grady, 2016). The accounting
requires the firms to report their different financial transactions in conjunction with the
operations as well as detailed description of these activities in the context of a trail
balance and financial statements. So this is also a key role of accounting.
Finance function:
The word "financial function" can be described as an activity that systematically relates
to the regulation and management of capital. The finance functions are essential accounting

component of the business. The role of finance functions is too crucial for business entities. This
is because it is impossible to companies to survive in competitive environment if they do not
manage their operations and activities in an effective manner. In the context of above
Continental clothing limited company, detailed analysis of role of finance function is mentioned
below in such manner that is as follows:
 Helps in rising of funds- An organization needs to have enough amount of financial
resources in order to satisfy different business functions for activities. The department of
financing may help the business to raise money (Bentley and Teeguarden, 2018). For the
increasing of the money, manager of finance will retain a strong debt-to-equity ratio and
due to this it will be easier for companies to have enough amounts of funds. Such as in
the context of above Continental clothing limited company, they raise funds by help of
getting information about each source of finance and this information is provided by
finance department of above company. In addition, their managers take critical
information by help of finance department in order to take right step for raising funds
from less expensive resources.
 Allocation of funds- The finance function assists the organization in making successful
and reliable decision-making by taking into account certain considerations such as the
scale of business and its potential for expansion, the manner in which funds are collected,
etc. Basically, allocation of funds in a corrective manner is too crucial for business
entities because right distribution of funds help in efficient usage of resources (Rubin and
Patel, 2017). Such as in the context of above Continental clothing limited company, they
make allocation of funds in an effective manner by help of appropriate finance functions.
By help of this function of it, they allocate funds in accordance of need of each
department. Such as sales department needs higher funds and they allocate funds
accordingly.
 Profit planning- An organization's financial department plays a critical role for making
effective planning of profitability. Eventually, in the absence of better planning this can
be difficult for companies to sustain in competitive environment (Wong, Holmes and
Schaper, 2018). The profit planning can be described as strategies to utilize the money
that the company receives. In other terms, the finance department of a corporation aims to
include the different ways on which an organization wants to spend the money. In the

context of above company, they make profit planning in accordance of guidance of their
finance function. Basically, this function enables to above company to make better
planning of profits which leads to higher profit. Herein, below example of profits for last
three years is mentioned below in such manner:
All data in GBP
million
2016 2017 2018
Revenue 2803 2985 2897
 Helps in understanding capital market- Companies like Continental clothing
limited, trade their securities at the stock exchange. In this context, role of finance
manager increases because on the basis of availability of information, companies
take decisions for making purchasing and selling of securities in the stock exchange.
Such as in the aspect of above company, they trade their securities in an effective
manner and gains profits (Dincer, Şenel Uzunkaya and Yüksel, 2019). It becomes
possible because they utilise key information from finance department and after
that take further decisions. The managers of above company invest capital into
various aspects as per need of returns and by doing so they earn higher amount of

return. Herein, below return on capital of above company is mentioned in such
manner:
All data in % 2016 2017 2018
ROC 15.88% 15.96% 14.24%
CONCLUSION
On the basis of Task 1 of project report this can be concluded that both accounting and
finance functions are crucial for businesses. In the report a vital range of accounting
functions are included that shows that each function has own significance. As well as report
concludes that Continental clothing limited enhanced their financial position by help of
different accounting function.
Task 2
Calculation of ratios as per the given information about Alpha limited.
(i)Return on capital employed- This may be described as a sort of ratio measured to find the
degree of generating profitability of a company. This calculation measures the return on the

capital employed (Ahrens and Bosch-Rosa, 2019). There is a particular formula in order to
compute this ratio which is as: operating profit / capital employed.
In the context of Alpha limited company, calculation of this ratio has been done below in such
manner:
Return on capital employed: Operating profit/ capital employed*100
For year 2017= 375000/1912500*100
=19.60%.
For year 2018= 412500/2925000*100
= 14.10%
Working Note:
Calculation of operating profit:
Particulars 2017 2018
Gross profit
Less- Operating expenditures
675000
(300000)
750000
(337500)
Operating profit 375000 412500
Calculation of capital employed:
Particulars 2017 2018
Total assets
Less- Current liabilities
2235000
322500
4035000
1110000
Capital employed 1912500 2925000
(ii)Net profit margin- It can be described as a sort of ratio that represents a company's net income
over a specific duration. The value of net profit is being presented in the income statement of
companies at the end of an accounting year (Park, 2018). This is calculated by a particular
formula that is as follows: Net profit / Net sales * 100. In the context of Alpha limited company,
calculation of this ratio has been done below in such manner:
Net profit ratio= Net profit/ sales*100
For year 2017= 300000/2400000*100

=12.5%
For year 2018= 2625000/3000000*100
=8.75%
(iii) Current ratio- It can be described as a form of ratio related to the assessment of company's
liquidity status. Eventually, this ratio shows that whether a company has sufficient funds to cover
day-to-day expenditures or not (Jung, Glaser and Köpplin, 2019). It ensures that businesses
should have 2 times of current assets I order to make payment of one times of current liabilities.
The ideal current ratio is 2:1 and companies should maintain this. This is calculated by a
particular formula that is as follows: Current assets / current liabilities. In the context of Alpha
limited company, calculation of this ratio has been done below in such manner:
Current ratio= Current assets/ current liabilities
For year 2017= 7575000/3225000
= 2.34 times
For year 2018= 1035000/1110000
= 0.93 times
(iv) Debtors collection period- It is a type of ratio which is related to calculation of estimated
time period that may occur in order to cover debt amount during a particular time period (Maia
and Handschuh, 2018). To compute this ratio, there is a formula which is as follows: Average
receivables/ sales* 365 days. Below in the context of Alpha company, this ratio is calculated for
two years:
Debtors collection period= Average receivables/ sales*365 days
For year 2017= 450000/ 2400000*365 days
= 68 days
For year 2018= 600000/3000000*365 days
= 73 days
(v) Creditors payment period- It can be described as a ratio, which shows the overall period
taken by the company for payment of their creditors. In addition this ratio is calculated in terms

of days and computed by formula which is: Average payable/ purchase* 365 days. Below in the
context of Alpha company, this ratio is calculated for two years:
Creditors payment period= Average payables/ purchase*365 days
For year 2017= 285000/1350000*365 days
= 77 days
For year 2018= 1050000/2400000*365 days
= 160 days
Comment on performance- Under above mentioned section of report, ratios for two years of
2017 and 2018 for Alpha limited company are determined. Such ratios are too significant as they
contribute to analyse of organisation's efficiency in different aspects. It helps businesses in order
to assess challenges and advantages. Herein, below performance of Alpha limited has been
analysed by help of different types of ratios:
 Return on capital employed- The goal of this ratio is to determine efficiency of a
business entity in order to produce return on capital (Anderson, Bake and Robinson,
2017). In the sense of Alpha Limited company this can be find out that the ratio
decreased dramatically from 19.06 percent in 2017 to 14.10 percent in 2018. There is
decline of 5% in year 2018 in the efficiency of company to generate return on income.
This condition demonstrates that the business cannot successfully gain return on the
money invested. The primary explanation for this decline is also that operating income
which has been reduced in a significant manner throughout both of years. This implies
that the business spends the money, but does not receive a expected profit. The Alpha
limited company should concentrate on growing the net income from different types of
operations. In addition, the company should make invest on capital only in the case when
they are generating higher amount of revenues from its operations. It is so because return
on capital, highly depends on volume of operating profit during a particular time frame.
 Net profit ratio- This measure shows a company's ability to achieve net income on
generated sales revenue (Ahmed, Ramakrishnan and Noreen, 2017). It is being calculated
in terms of percentage. If the net income ratio is high, the financial success of the
business is considered good. In the above-mentioned Alpha limited, the net income

performance for 2017 and 2018 is 12.5% and 8.75%. This demonstrates that the net
income productivity of the business is low. The reason of this decline in net profit ratio is
decreasing in net income in year 2018. The business condition of company states that
their production expenses and fixed costs are high relative to revenue. Although their
gross income, on the other side, increases 20% in year 2018 compared with 2017 but net
profit decreased in year 2018. That is because the manufacturing costs are higher as well
as other costs increased. In fact, the above-mentioned business should concentrate on
reducing the gross spending and other costs. It is so because their sales revenue is higher
but net income is decreasing and reason of this lower performance is higher amount of
expenditures.
 Current ratio- The current ratio is a form of ratio which defines about liquidity position
of company as well as also classifies difference between availability of current assets and
liabilities (Safari, Mansori and Sesaiah, 2017). The current ratio in the sense of Alpha
Limited corporation is of 2. 34 times in 2017, indicating that the business has higher
amount of current assets to cover its short-term liabilities. As in this year, the business
follows the 2:1 perfect ratio criterion. In fact, this ratio dropped by 60.25% in 2018 and
became of 0.93 times which is too lower and poor as compare to previous year. So
company's liquidity position is weaker in year 2018 as compared to year 2017. This
variation in current ratio of company is because of raised current liabilities in year 2018.
In year 2017 value of current liabilities was of just £ 322,500 but in next year it raised by
244 percent to become of £110,000 in year 2018. However, their current assets also
raised but not as their current liabilities. The performance of the business in 2018 is not
good. The management of the above-mentioned business should focus on minimising
their current liabilities because of the poor liquidity condition in 2018. As well as they
should focus on enhancing the current assets because if they will have enough amount of
assets to make payment of liabilities than it will be beneficial for them.
 Debtors collection period- In order to determine the number of days of credit to be
charged by debtors, companies compute this ratio. The business entities can predict for
debtors' efficiency and can decide whether they should make credit transaction with them
or not by help of this ratio. With respect to Alpha Limited company, this can be find out
that their debtors collection period was of 68 days in 2017 which raised in next year and