Financial Decision Making: Accounting, Finance & Ratio Analysis

This report examines the roles of accounting and finance departments in organizational decision-making, focusing on financial accounting, management accounting, tax functions, and auditing functions. It discusses investment, financing, dividend, and working capital functions within the finance department. The report also explores various sources of finance for business growth and expansion, including company loans, firm overdrafts, enterprise credit cards, and crowdfunding. Furthermore, it includes a ratio analysis, computing and interpreting gross profit margin and return on capital employed (ROCE) to assess the company's financial performance and efficiency. The analysis highlights changes in ratios between 2018 and 2019, attributing them to factors like cost of sales and operating expenses, and suggests areas for improvement.

Financial decision
making

Table of Contents
INTRODUCTION...........................................................................................................................1
Task 1...............................................................................................................................................1
Part A: Accounting and Finance departments.............................................................................1
Part B: Sources of finance for the growth and expansion of business: ......................................4
Task 2 ..............................................................................................................................................5
Part A: Compute the ratios below...............................................................................................5
CONCLUSION..............................................................................................................................11
REFERENCES .............................................................................................................................12

INTRODUCTION
In this report it helps to understand that how this two departments one is accounting and
another is management helps the organization to achieve its goals and objectives and good
decision making with the proper planning and strategy and assist in maintaining the portfolio of
business so that investor can invest more funds in the organization for the growth and its
development In this below report it also discuss about the various source of finance which helps
to expand the business and maintain stability in long run(Al-Sartawi and Reyad, 2019.).
Therefore, it is also talk about the various types of ratios which shows the performance and how
it helps to improve the efficiency in business.
Task 1
Part A: Accounting and Finance departments
Accounting department: The main function of this department is to protect the information of all
goods and services that the company pays and it also make confirm that all the business expenses
should be paid on time(Jang and et.al., 2018.).
(1.) Financial accounting function: This department manage the past details of all transactions so,
that company can easily check for the audits. It can also use it for making the budgets and
reports, reducing the expenses and increment of profits and it Also available for the growth
opportunities and financial forecast. The main functions are:
 This concept manage the financial records of the business and maintain daily financial
transactions of the organization it involves sales, purchase, receipt and payments.
 It assist the firm for achieving the common objectives through analyse the records to
make and implement it into the financial policies.
(2.) Management accounting function: This concept of management helps manager into the
organization for good decision making. In other words it identified, analysed and interpreting the
data and helps in communicating to the manager so, that manager of the company take better
decision on that basis. It includes some main functions:
 It helps the manager to plan and forecast the task because its main part of the
organization to meet its financial goals.
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 The another function of management is to organize the activity of the business and
division of work among the employees so, that everyone should start to perform its
individual task(Krische and Mislin, 2020.).
(3.) Tax function: This is also a main function of the accounting department to manage and
control the risk related with tax and some other purpose also like; explain the task, plan the task,
forecast the problem and contribute in group decisions. It may involve some functions:
 It's very important for the company to aware about the tax policies. If firm not to pay
higher taxes then they need to understand that the transaction should not exceed it limits.
 It's important for every organization provide information to its stakeholders for the
stability of the business.
(4.)Auditing function: This function of accounts department is the main part of the organization
for determining the accuracy in financial statement of the business which is prepared by the
organization. In other words it also show the perfection of financial statement which shows the
current stability and efficiency of the company. In may involves some functions:
 This function of auditing analyse the essence, timing and extension of the audit
procedure so, that auditor necessary to find the accounting of business.
 The another main role of auditing function is to confirm the presence of assets into the
organization. The auditor who audit the assets of the company need to check the
existence of assets.
Finance department: This department is responsible for the problem related to financial statement
and also control the income and expenses of the organization(Lewis, 2019.).
(1.) Investment function: This function show the relation between the interest rate and
investment of the company. It involve some functions:
 If company invest money in new and innovative technology then it provide long-term
benefits to the company. On the other hand if investment is done by proper planning then
it provides better results to the company and helps in creating the goodwill of the firm
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because investment in new technology specially if it is introduce for the welfare of the
people provide more benefits.
 Income level of investor also depend upon on the income. If income is high then high
investment if it's low then less investment(Li and et.al., 2020.).
(2.) Financing function: This concept of finance function includes the acquiring and using of
funds shows productivity in the firm activity. It assist to control and plan of financial resources.
 In this function its important to do proper planning of investment if planning is efficient
and show long term benefits then the company should adopt that planning of investment.
Its important to do planning for the long term purpose also because if company invest his
money in some company then he analyse the risk related with that company in which
company want to invest his money and it also check the portfolio of the company and
company past years performance and profitability.
 Its important to maintain the reports of loans and advances so, it can easier to recover the
amount of loan to the debtors of the business.
(3.) Dividend function: when company earn surplus profit in any year and decide to distribute the
profit in a form of dividend among the shareholders of the company.
 After earning profit it pay dividend to the equity and preference shareholder of the firm.
Every business first priority is preference shareholder and then equity shareholder. When
company earn profit in business then it first distribute the amount to its member of the
company then its preference shareholder of the firm and the remaining profit distributed
among the equity shareholders of the business.
 Dividend should be paid only from the profits of the company the amount of surplus
money company earn in a form of profit distributed among the shareholders. If company
earn loss in some year then the amount also deducted from the invested money of the
shareholders they also suffer loss of the company.
(4.) Working capital function: This concept of working capital assist to recover all of a company
short term expenses due within one year.
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 Growth an expansion of business depends upon the portfolio of investment and they use
cheap source of finance for the development of firm. If company actually want to grow in
long run then they need to maintain company portfolio on a daily basis because every
investment is based on the portfolio of the business. If the company create its attractive
and profitable portfolio then company can also increase their funds and think about the
growth and development of the firm
 Company earn high profit in case it save the financial expenditure and maintain short-
term assets and liabilities of the business. Basically in this point company can earn high
profit only in that case when it reduce it cost and increase the revenue of the business it
only possible when business proper utilize the resources and stop do wastage of resources
then it can reduce the company expenses and company more focus to increase the net
sales of the firm.
Part B: Sources of finance for the growth and expansion of business:
 Company loans and advances: Sometimes business take a loan from the bank or
government sectors because of generating funds into the company(Nicholls, 2020.).
These loans helps business for the development and growth of the organization. There are
two types of loans:
▪ Secured company loans: In this types of loans borrower put some security against
loans like house and shares of the company. If it fail to pay the loan amount then
the loan provider forfeit it assets.
▪ Unsecured company loans: In this concept borrower not put any security against
the amount of loan.
 Firm overdrafts: The concept of bank overdraft is also same as firm overdraft it is also a
important source of finance for the short-term purpose. Every business use its current
account to make payments which increase its available balance of current account. It can
also say that organization owes the bank money when balance of current account goes
below zero.
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 Enterprise credit cards: In this step it also a another source of short term business finance
which helps to make payment of organization like expenses of organization and any
interest paid of business. It's also important to pay the balance of credit card within its
credit free duration.
 Crowdfunding: It is one important source of finance for the organization. It this concept it
includes small amount of investment is done by the lot of peoples. It also divided into
two types:
1. Based on equity: company issue equity in market and get lots of funds from the
peoples.
2. Based on loan: company can ask crowdfund loan it is also an another source of
financing.
Task 2
Part A: Compute the ratios below
Gross profit Margin: This ratio shows that the how much part of each dollar business protect in
their firm. In other words its also measure the direct expenses of the business or cost of sales
from the net sales of the enterprise.
 This ratio helps in determining the performance of the company and analyse the
efficiency of the business by comparing the gross profit of past year.
 Gross profit margin = Gross profit / Net sales *100
Year 2018,
= 3500 / 10000 *100
= 35%
Year 2019,
= 3265 / 11500 *100
= 28.39%
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 A very big reason to change the ratio of 2018 and 2019 is company is less efficient in the
year 2019 as compare to 2018 because in financial statement it shows that the cost of
sales is higher as compare to the 2018 and that is the reason for decrement in gross
profit(Al-Sartawi, 2018).
 The only way to Improve the gross profit ratio of the company is its necessary to
decrease the value in cost of sales of the business in near future.
Operating profit margin: This profit ratio is important to measure the overall profitable
situation of the activities performed by the employees to achieve the goals.
 This ratio also helps to analyse the performance of the business in which how much
revenue a company create from the sales of profit after paid wages or raw material but
before paying interest or tax.
 Operating profit margin: operating profit / Net sales *100
Year 2018,
= 2765 / 10000 *100
= 27.65 %
Year 2019,
= 2305 / 11500 *100
= 20.04
 The biggest reason to change the ratio of 2019 as compare to 2018 is its less efficiency in
2019 and its incurred high operating expenses and decrease the operating profit of the
company.
 The area of improvement in operating profit ratio is they have to utilize all the resources
with no wastage and helps in decrement of operating cost and increase the profit ratio in
near future(Bogan, Geczy and Grable, 2020.).
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ROCE (Return on capital employed): This type of ratio assist the business to analyse the
company profitability and capital efficiency of the organization. It also helps to identify how
business easily generate the revenue from its capital(Col and Haugen, 2022.).
 This ratio helps to know the company performance through checking the profitability of
the organization and productivity of the business.
 ROCE = Earning before interest and tax / capital employed
Capital employed = Fixed assets + working capital
Year 2018,
= 2765 / 8755
= 31.58 %
Year 2019,
=2305 / 10211
= 22.57 %
 The reason to change in the ratio of 2019 is because in this company can' create enough
profit from the capital of the business and not showing less productivity in the firm.
 The need of improvement in this ratio is company try to reduce its expenses and earn
more profit and improve its efficiency to earn high profit in near future.
Current ratio: This ratio is helps to calculate the organization ability to pay it's short- term
commitments or those due within one year. It also compare the current assets and current
liabilities of the business.
 This ratio also helps to find the business performance through check the higher efficiency
of the ratio shows in which year to pay its debt obligations(Dawson, 2021.).
 Current ratio = Current assets / Current liabilities
Year 2018,
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= 1175 / 970
= 1.21:1
Year 2019,
= 2110 / 512
= 4.12:1
 The reason to change the current ratio of the company is high efficiency to pay it short-
term debt obligations as comparison to the year 2018.
 There is no need of improvement in the year 2019 because the current liability of the
company is less as compare to 2018 that means organization is high efficient to pay its
short-term debt obligations.
Quick ratio: This ratio is also very important to measure the business ability to pay its current
liabilities of the business and without sell any stock or hire additional financing.
 This ratio also helps to check the company performance by showing the amount of
percentage of business debts. So, that it could be pay off very soon by converting assets
into cash(GROSU, ROBU and ISTRATE, 2020.).
 Quick ratio = Current assets – stocks / Current liabilities
Year 2018,
= 1175 – 350 / 970
= 0.85:1
Year 2019,
= 2110 – 674 / 512
= 2.8:1
 The reason to change the quick ratio of the company in 2019 is high efficiency to pay its
firm debts commitment.
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 In the year 2019 business no need to show improvement in quick ratio neither current
ratio because efficiency in this ratio is better to pay firm's debts.
Inventory turnover days: This financial ratio shows that how much time a firm take to sell and
replace its stock during a particular point of time(Hao and et.al., 2021.).
 The inventory turnover ratio also shows the firm performance. In general, the
performance of the company depends on the higher turnover ratio it also enjoys more
liquidity.
 Inventory turnover ratio = Cost of goods sold / average inventory
Year 2018,
= 6500 / 512
= 12.6 times
Year 2019,
= 8235 / 512
= 16.08 times
 The reason to change the ratio of 2019 is because its higher cost of sales as compare to
the 2018 and its incurred higher inventory turnover ratio.
 There is no need of improvement in this Year 2019 because in this ratio if inventory
turnover ratio is higher than it shows more productivity in the company.
Debtor's collection period: It helps in measuring the collection of debts. In other words if
company take less time for the collection then it shows high efficiency and high time shows less
efficiency(Himanshu, Singh and Kumar, 2020.).
 The ratio shows higher productivity when the company take less time for the collection of
debts obligations.
 Debtor collection period = 365 / sales on credit / accounts receivable
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Year 2018,
= 365 / 10000 / 760
= 27.74 days
Year 2019,
= 365 / 11500 / 1340
= 42.54 days
 In 2019 company takes short time to pay for its debt commitment and increase it
productivity in business.
 There is no need of improvement in the year 2019 because the efficiency of the company
already higher .
Creditors collection period: This ratio helps in measuring the time period for the recovery of
loans. Higher time shows higher productivity(Hutahayan, 2020.).
 This ratio help to know the company performance if it takes high time for debt collection
then it shows high efficiency.
 Creditor's collection period = 365 / cost of sales / trade payable
Year 2018,
= 365 / 6500 / 920
= 51.6 days
Year 2019,
= 365 / 8235 / 495
= 21.94 days
 The reason to change the ratio of 2019 is because it shows less productivity and takes so
much time for the collection of debts.
 There is high need of improvement in the ratio of the year 2019 its important to improve
the efficiency in business.
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