Financial Decision Making: Tesco Plc and Alpha Ltd Analysis

This report delves into the realm of financial decision-making, encompassing the critical roles of accounting and finance within businesses, exemplified by Tesco Plc. It explores accounting functions like financial, cost, and management accounting, highlighting their impact on budgeting, cost control, and operational efficiency. The report then analyzes the financial functions of financing, investing, and dividend activities, emphasizing their importance in fund management and strategic resource allocation. Furthermore, the report undertakes a comprehensive financial ratio analysis of Alpha Ltd, calculating key ratios such as return on capital employed, net profit margin, current ratio, and collection/payment periods. Based on these calculations, the report assesses Alpha Ltd's performance from a potential investor's perspective, providing insights into the company's efficiency, profitability, and financial health. The analysis reveals the need for improved fund utilization and strategic financial planning to enhance overall business performance.

FINANCIAL
DECISION MAKING

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................3
MAIN BODY...................................................................................................................................3
Task-1..........................................................................................................................................3
Task-2..........................................................................................................................................7
CONCLUSION..............................................................................................................................11
REFERENCES..............................................................................................................................12

INTRODUCTION
Financial decision-making is the process of making the decision regarding the finances
and funds of the business. This involves the decision of acquisition and utilization of money
within the business so that management able to manage the smooth functioning of business. The
present report will cover two tasks (Naim, 2022) The task 1 of the report will cover the critical
evaluation of role of accounting and finance within Tesco Plc. The report will also cover the
examples of Tesco Plc in order to enhance the viability and reliability of information. Further,
the task 2 of the report will cover the calculation of different financial ratio of Alpha Ltd based
on their financial statement. On the basis of calculation of ratio, the report will also comment on
the performance of the Alpha Ltd from a potential investors' perspective. Lastly, the report will
comment on the performance of the business based on its financial ratios.
MAIN BODY
Task-1
Accounting and financial functions-
Accounting refers to set of practises where business related transactions are taken into
books of accounts, here finical information are collected, classified, recorded and summarized to
serve organizational purposes, this is an essential process since in the modern era of business
without proper data a business can not be run with proper efficiency. The scope of accounting is
getting expanded with the progress of time, but the main streams are financial accounting, cost
accounting, management accounting (ALAWAQLEH, 2021)
Role of accounting functions-
The roles of accounting functions are widely ranging, since in the modern era of business
the accounting functions are getting expanded, at the same time their role is also getting
augmented. There are different branches of accounting such as financial accounting, cost
accounting, management accounting etc.
Financial accounting-
Financial accounting is one of the oldest branch of accounting where all business
transactions that can be measured in the monetary value are identified, measured, recorded and
presented in order to meet organizational needs. For instance- Tesco plc which has presented its
financial accounts in order to bring better decision-making capability in benefit of the
organization. With the help of financial statements it can be seen that in the year 2019-20 Tesco

financial services made profit of around 1068 million pounds at the same time it came down to
735 million pounds in the year 2021. So on the basis of the information it can be deciphered that
there is need to pay attention to its practise that how it is getting operated and which areas are
having need to be reformed (McLaney and Atrill, 2020)
The role of financial accounting is very mammoth, it helps to make budgets for the entity.
Budgets are one of the easiest type of planning which aids the entity to eradicate variations and
making operation process errorless. Budget making is only possible if there are sufficed amount
of financial data is available, so with this regard the role of financial accounting is very much
viable. For instance- other sectors of the entity are working good, in the year 2021 TESCO plc
made profits of 48848 million pounds in UK for its business activity, so it may go for higher gain
which is possible with better control on funds and operations.
Financial accounting assists the controlling of funds and operations. The success of an
entity lies in the success of their operations and funds management so pertaining to the notion,
financial accounting plays vital role. It makes the task simpler to manage operations.
Cost accounting-
Over the time with the changing market circumstances the market propositions are also
getting changed, now the entities are price takers, so they have need to reduce their costs and
maximize their revenues. For fulfilment of the aim cost accounting which is one of the most
prominent branch of accounting is making the way barrier-less.
It aids to keep proper control on the cost of the entity. The entity may keep all relevant
information about their cost factors so can control it with higher efficiency, if the cost is well
managed then their would not be issues of revenue. For instance- in the market Sainsbury, M&S
and many such entities are placing tough competition before TESCO so with cost leadership it
can eradicate the potential troubles (Faridi, Nawazn and Bibi, 2022)
Cost accounting is also helpful to hike efficiency of the operation. Since here all different
realms such as material, labour, overheads are taken into focus, on every and each element there
is strong surveillance is kept, it enables business to improve its efficiency.
One of the biggest advantage is to know variations. Now there are range of cost
techniques such as variance analysis, standard costing, unit costing etc. are available which are
making the act of cost management simpler, with the help of these techniques the entity can
eradicate all potential troublemakers and can hike its market performance.

Management accounting-
This is the newest branch of accounting, over the time it has been experienced that there
must be such special branch which only deals in benefit of management and aids them to make
healthy and lucrative decisions.
It drives managerial decision-making and eradicate sort of element of irrational
predictions. Management accounting is having a lot of dimensions such as ratio analysis,
common size statements, fund flow statement, cash flow statements etc. For instance- Despite
having higher competition and even in the time of pandemics, TESCO plc was able to make
bigger profits with the help of proper management, it made around 825 million pounds in UK in
February 2021
Tesco plc is having around 31% market share, it has been growing from so long the fact
can not be denied that there are intensive efforts of management which made it possible for the
entity and still it is getting thrived in these competitive environment (Deegan, 2019)
Role of financial functions-
Finance is also known as blood of an entity. In the modern era of entrepreneurship there
is need to manage the funds with intensive efficiency, if the funds are not well managed then
would affect the entity in adverse manner. There are mainly there activities of financial functions
such as financing, investing and dividend related activities, whose efficiency leads the
performance of an entity as a whole.
Financing activities-
For an entity there is need to have sufficient funds to manage its bushiness activities, if
funds are not available in adequate amount then the business would not be able to work with full
efficiency. So the role of financing activities is gigantic in nature. Here the financial managers
are supposed to arrange funds on right time, on least cost and also consider some other aspects
such as least control on decision-making etc.
Financing is becoming more rigorous since now in the modern business environment
there are multiple factors affecting organizational performance, so their success hugely lies in
their funds arrangement decision. If they are having funds form such avenues which are turning
bigger cost then will affect their financial efficiency so it is a significant tool.

For instance- TESCO plc which is one of the biggest retail giant of the nation, in the year
2022 the entity was having around 24.68 billion USD, net worth, with the progress of time it is
also acquiring more funds for its expansion and enhancement purposes.
Investment activities-
After arranging funds it is essential to ensure, where the funds should be used, and how it
should be allocated, if the resource allocation is not much efficient then the entity would not be
able to carry out its operations with proper efficiency so with this regard the role of financing
activities is prominent. The funds are having their cost, if they are not being used efficiently then
would be pouring on bigger cost which will affect operational and financial ability of an
organization.
If the arranged amount is not invested as it should be then in absence of improper
investment policy the funds will be misused so here the role of financial activities is lucrative for
organizational performance.
For instance- TESCO plc is having its well-structured investment methods so can feed
the business in absolute manner. In the first quarter of 2022, the working capital were around
9.522 billion UDS. It shows that the retail giant is very much conscious about its working capital
and operational efficiency.
Dividend activities-
The final but one of the most significant act of financial activities is dividend policy. At
once when an entity generates the profits then it is essential to decide that how those funds are to
be used, if they are not being used appropriately then the entity would be inclined in negative
direction (Liang, Zhao and Hong, 2019)
Over the time the market competition is also growing with quick rate. So there is strong
need to take advantage of prevailing market circumstances. Here it is decided that how much
amount of the revenues are to be kept as retained earning and how much should be distributed. It
makes the task of entity simpler to nurture its funds related needs.
For instance- being a retail giant TESCO is having great responsibilities in the market
and it strives to keep its position bigger which is only possible with better management of funds
and operations. In the year 2021 TESCO distributed around 7.7p per share as next dividend, it
shows that the entity is making great profit yet avoiding distributing the profits and investing that

back, in order to take advantage of prevailing market circumstances (Ahmad, Abid and Maqbool,
2021)
Task-2
a) Ratio calculation-
1) Return on capital employed-
Formula 2017 2018
Total Assets 2,235 4,035
Current liabilities 322.50 1,110
Capital employed = Total assets- Current liabilities 1,912.5 2,925
Profit after financial
costs
300 262.50
Add: financial cost 75 150
EBIT 375 412.5
375/1,912.5×1
00
412.5/2,925×100
Return on capital
employed for the years
= EBIT/ Capital employed 19.60 14.1025
2) Net profit margin Ratio-
Formula 2017 2018
Net Profit margin ratio = Revenue- cost/ Total
Revenue×100 (Hatefi, 2019)
300/675×100 262.50/750×100
Net Profit margin ratio 12.5% 8.75%
3) Current Ratio-

Formula 2017 2018
Current assets at the
end of year
757.50 1,035
Current liabilities at
the end of year
322.50 1,110
Current ratio Current Ratio= Current Assets-
Current Liabilities
2.3488 0.9324
4) Average Receivable collection ratio-
Formula 2017 2018
Net credit sales for the
year
2,400 3,000
Average receivables
for the year
450 600
2,400/365 3,000/365
Average collection 6.5753 8.2191
Average receivables/ average
collection
450/6.5753 600/8.2191
Average receivable
collection period
68.43 days 73 days
5) Average Payable days-
Formula 2017 2018
Net credit purchase for
the year
1,350 2,400
Average payable for
the year
285 1,050

1,350/365 2,400/365
Average payment 3.6986 6.5753
Average payable/ average
payment (Zhang, et al. 2020.)
285/3.6986 1,050/6.575
Average payable days 77.05 days 159.68 days
b) Comments on the performance of ALPHA Ltd-
From the calculations above it can be concluded that the entity was having sort of
negative relative performance. With this regard above some ratios were calculated, and they are
suggesting as-
1) Return on capital employed-
As it can be seen that the return on capital employed is showing negative trends for the
entity. This ratio tells that how efficiency the capital is being used by the entity. Higher the ratio
is considered good for the entity. For the year 2017 it was 19.60%, which came down to
14.1025% in the year 2018. Here it can be said that the entity did not utilize its funds in
appropriate manner. So there is need to work on that (Pianezze, et al. 2019)
There may be a range of reasons behind this fall, but the most rational reason would be
EBIT factor. The entity hiked its total assets to 4035000 pounds yet it did not hike its revenues
and despite having higher investments it just generated EBIT of 412500 million pounds, it might
have been strong reason of such poor performance. As an investor it is essential to see weather
the entity is using the funds appropriately or not. So here it can be concluded that form the point
of view of an investor it is not looking much viable source of investment.
2) Net Profit Margin Ratio-
ALPHA Ltd was having its Net Profit margin ratio 12.5% in the year 2017 but it got
toppled in the year 2018 and came down to 8.75%. it shows that the entity has performed below
its capacity and did not make good profit as it was supposed to do. The entity is having higher
cost of purchase it may be potential cause of its poor performance. Higher the margin shows that
there is good ability of the entity to control its operational efficiency but here it can be seen
performing poorly (Dance and Imade, 2019)

The most rational reason might be it higher cost. Since for the year 2018 the total
revenues of the company were higher than the previous year yet it did not make higher profits.
The cost it generated had been bigger which might be essential reason of its lower generation of
profit. The toppling margin on revenue is a matter of contemplation. As an investor it is
significant to know the ability of organization to turn its revenues into net profit. If it is lower
than it deciphers poor cost management which might cause severe results to the entity.
3) Current ratio-
Current ratio presents the liquidity position of an entity. How it is managing its cash and
cash equivalent. It is said that if there is not adequate liquidity to pay short term debts then the
entity may have horrendous consequences so this is one of the most salient ratio.
For ALPHA Ltd the ratio is also showing poor performance, since for the year 2017 it
was 2.34:1. It is considered to be good if it is around 1.5:1 but higher current ratio can not be
justified. If there is bigger amount of liquidity is available then it may affect organizational
performance. At the same time for the year 2018 it came down to 0.93:1. This is worse situation
and shows that now the company is not having sufficient funds to repay its short term debts.
There may be ample number of reasons but the most rational one is their short term funds
policy which is not working as it should do. As it can be seen in the financial statements of the
entity that for the year 2017 the debtors were around 450000 million pounds which came up to
600000 million pounds so ALPHA led did not recover its short term debts on time (Stanley,
2020)
Being an investor it would be not a good decision to make investments in such entity
which is not having sufficient cash to pay its short-term creditors. It may affect it in long run and
may be possible it loses its operational efficiency.
4) Average receivable collection period-
Average receivable collection period is the ratio which evaluate the collection related
efficiency of the organization. That how it is turning its debtors into cash, if the ratio is having
the least days it shows higher capacity of turning debts into cash. With this regard the
performance of ALPHA Ltd is not looking satisfactory. For the year 2017 it was 68.43 days
which raised to 73 days in the year 2018 (Campisi, et. al. 2019)
It might have caused by their inappropriate receivable policy, there must be well
articulated policy to deal with the debtors, for instance offering them attractive discounts,

alluring them with some other offers etc. but here the entity might be failed and due to their
inefficiency these days are being hiked.
For an investor it is essential to see how the entity is dealing with its debtor, here the
performance is not satisfactory so from investor point of view it would not be a good alternative
to make investment. The entity is not able to collect funds on time which may take it to generate
bad debts so there is no rational in making investment.
5) Average Payable period-
Average payable period is the ratio which articulates that how faster the entity is making
payment to its creditors. Here it can be observed that for the year 2017 it has been 77.05 days,
which surged to 159.68 days in the following year.
It is utterly unsatisfactory, In the market if the entity is not making payments to its
creditors on time then it may bring severe consequences of it. One of the most potential cause
would be its improper cash management, the entity is suffering form liquidity crisis, the current
ratio for the year 2018 was below 1. It shows that ALPHA Ltd is struggling with poor liquidity
status, which might have led it to this. There may be poor creditor or payment management, for
the entity it is prominent to have some strategy to manage its payment, but form the ratios above
it seems like missing the notion which is being such escalation in days of making payment.
From an investor point of view it is essential to see how the entity is making payments to
its creditors if it is not doing it well and taking more time than there may be mistrust take place
which would be pouring on negative results (Perini, et al. 2019)
So from the evaluation above it can be concluded that the performance of ALPHA Ltd is
looking vulnerable and it is not looking viable to go for making investment. Since it is
performing unsatisfactory in all the realm the entity is not able to management its cash,
payments, debtors, operations etc. In such predicament it would not be a smart decision to go for
investment.
CONCLUSION
After summing up the above information, it has been concluded that the overall
performance of Alpha Ltd is poor in the current year as compared to previous year. Further, it
has been also concluded that the investor of the company should not reinvest their money in the
business because currently company are not performing well. The report has also concluded the

role of accounting as well as finance in the management and success of business including the
real-world example of Tesco plc. The report has been further concluded the importance of
accounting and finance department within the organization and how they play vital role in the
acquisition and utilization of money.