Financial Decision-Making Report: Ratio Analysis of Alpha Limited

This report delves into the crucial aspects of financial decision-making, emphasizing the role of management accounting techniques in assessing and improving financial performance. The report begins with an introduction to financial decision-making and its importance for organizations, followed by an exploration of various management accounting techniques such as financial planning, financial statement analysis, budgetary control, and ratio analysis, using ASDA Stores Limited as a case study. The report then calculates and analyzes key financial ratios for Alpha Limited, including Return on Capital Employed, Net Profit Margin, and Current Ratio, providing insights into the company's financial health and performance over two years. The analysis highlights trends, identifies potential issues, and offers recommendations for improvement, making it a valuable resource for understanding financial management and decision-making processes. The report concludes with a discussion on the importance of these techniques for planning, controlling, and making informed financial decisions.

DECISION MAKING

INTRODUCTION
Financial decision-making is a process of taking decisions as per analysis of financial
reports of companies (Kumar and Goyal, 2015). These decisions are very crucial for companies
because as per it, organizations manage their financial resources. Under project report, role of
management accounting techniques such as financial planning, financial statements analysis,
budgetary control etc. and analysis is included. All these management accounting techniques are
very important because these are linked with financial and non financial information of
companies. Along with, company's financial performance is assessed on the basis of given
financial data of a company. Apart from it, different kind of financial ratios are calculated as per
the given income statement and balance sheet. The accounting and financial functions play an
important role because on the basis of these functions companies make their financial statements
as well as evaluate actual financial position (Knežević, Stanković and Tepavac, 2012). Without
these accounting and finance functions, this can be difficult for companies to manage their
financial resources.
For better understanding about process of financial decision making, in report ASDA
stores limited has been selected which is also known as ASDA. This is a British super market
retailer whose headquarter is at Leeds in West Yorkshire, United Kingdom. Company's product
portfolio is large that contains a wide range of products such as groceries items, food products,
clothing and fashion items for men, women, kids etc. The company was founded about 70 years
ago on 19 February, 1949 by Peter and Fred Asquith. It has 30 % of market share of UK in
grocery market. As per the information of year 2019, there are 633 stores at all around of UK and
number of employees are 165000.
Main body
TASK 1.
Role of MA technique for decision-making.
The term management accounting is involved in providing monetary and non monetary
informations to the managers so that they can look forward (Palepu and Healy, 2013). Some MA
techniques that are very crucial for companies such as:

 Financial planning- This is a kind of accounting technique that is linked with the process
of making financial plan on the basis of estimation of future income and expenses
(Zopounidis and Doumpos, 2013). Such as in ASDA company, the financial planning can
be useful because on the basis of it, they can manage their financial resources in an
effective manner. As well as this can help to them in better allocation of fund to the
various kind of activities.
 Analysis of financial statements- The financial statements consist different types of
statements like income statement, balance sheet, cash flows, ratio analysis etc. The proper
analysis of these financial statements can be helpful for companies to evaluate actual
position. Like in selected ASDA company, analysis of financial statement can be useful
for evaluation of their financial position.
 Historical cost accounting- The term historical cost accounting can be defined as an
accounting which is used for assets as per the generally accepted accounting principles
(Richard, Kirby and Chadwick, 2013). Such as in above ASDA company, the value of
assets can be measured as per original cost.
 Standard costing- It can be defined as a kind of costing technique that is related to
estimating the future cost of various activities. This process of estimating of cost is
known as standard costing. Like in above ASDA company, they can use this accounting
technique for proper estimation of future cost of manufacturing activities so that they can
compare actual cost with this estimation.
 Budgetary control- This is related to the management of financial performance of
companies with the use of preparation of budgets (Delen, Kuzey and Uyar, 2013). Under
above ASDA company, they manage the financial performance by preparing the budgets
such as cash budget, operating budget etc.
 Marginal costing- It is a kind of costing technique in which both costs(fixed and variable)
are considered in different ways. Like fixed cost as periodic cost and variable cost as
product cost. For example in above company, they may use this costing technique for
preparation of income statement under this costing technique.
 Fund flow statement- It provides detailed information regarding to change in financial
position of companies for a particular time period (Kabir, Sadiq and Tesfamariam,

2014). With the use of this technique, above ASDA company can assess their financial
position.
 Cash flow statement- It contains information related to flow of cash in an organization. It
is prepared by three kind of activities like operating, financing and investing activities. In
ASDA company, they can manage the activities regarding to flow of cash.
 Revaluation accounting- This is a type of accounting which is related to assessing the
company's value by making difference between assets' fair market value and original
cost. Such as in the above company, they can find out variation between the fair and
original value of their available assets.
 Statical and graphical technique- These techniques are related to the analysing and
presenting the financial activities of companies by help of graphs (Epstein, Buhovac and
Yuthas, 2015). Under this, the interpretation of graphs is done to evaluate the financial
position. Like the above selected company can assess their financial position by
interpretation of their financial statements in form of charts and graphs.
 Communicating- This technique of management accounting is linked with
communicating the financial and non financial informations with managers so that they
can make further decisions.
So these are the techniques of management accounting.
Critical analysis- The above mentioned management accounting techniques are too crucial for
companies because these are helpful in providing the detailed information regarding to financial
and non financial aspects. Herein, below importance of these techniques is mentioned below:
 Measurement of performance- These techniques are crucial in the context of assessing the
actual performance of companies' operations. Such as standard costing technique can be
helpful for above ASDA company in comparing actual occurred cost with estimated cost.
If actual cost is less then estimated cost then company's financial performance will be
strong.
 Enhance the efficiency of business- Another importance of these techniques is that these
are helpful for enhancing the efficiency of companies. This is so because management
accounting technique such as financial planning can be useful for improving the

efficiency of companies. Like in ASDA company, these techniques are useful for
enhancing efficiency of their various manufacturing activities.
So these are common benefits of management accounting techniques for companies. Apart from
it, these techniques are useful for planning, controlling and decision making. This is so because:
 Importance in planning- The management accounting techniques are useful for making
effective planning (Agarwal, 2014). This is so because there are a wide range of
techniques such as financial planning, marginal costing etc. On the basis of these
techniques companies can make proper estimation and can plan effectively. Such as in
the above ASDA company, they can make their financial plan with the use of
management accounting techniques.
 Importance in controlling- Another benefit of management accounting technique is that
these techniques help in controlling of business activities effectively. It is so because with
the use of these accounting techniques companies such as ASDA company can control
their manufacturing activities.
 Importance in decision-making- Along with these management accounting techniques are
important for taking decisions (Jetter and Walker, 2017). Such as in aspect of above
ASDA company, they can take financial decisions for expanding their business in UK in
next ten years.
So these are some additional importance of the management accounting techniques in ASDA
company. As well as they are planning to expand their business, hence these accounting
techniques can play a crucial role for them.
TASK 2.
(a) Ratio calculation:

(b) Comment on Alpha limited' s financial performance:
In the above part (a) different kind of ratios are calculated for year 2017 and 2018. The
Alpha limited company can assess their issues and problems effectively by proper analysis of
these ratios. Along with these ratios can also beneficial in the context of various kind of internal
and external stakeholders, shareholders, investors. This is so because these ratios are reflecting
the actual financial position of above Alpha limited company. Herein, below organisation's
financial condition is analysed on basis of two years financial ratio:
 Return on capital employed ratio: The Return on capital employed ratio is a kind of ratio
that helps in measuring a company's efficiency in order to earn profits from capital

employed. This ratio can be useful for companies in context of evaluating the financial
performance. Basically, this ratio defines relation between the profit before interest & tax
and capital employed. Herein, the selected company, Alpha limited, they calculate this
ratio to evaluate the amount of return which they are generating from capital. In the year
2017, their return on capital employed ratio is of 19.60% that decreased by 5% and
became of 14.08% in the next year 2018. It is showing that above organisation's
efficiency to gain the profitability from capital has been decreased in year 2018 in
compare to year 2017. Herein, it is important to know to the manager of above company
that their main issue of decreasing this ratio is the higher operating expenses in year 2018
as compare to year 2017. Their operating expenses are of £300 that increased by 12.5%
and became of £337.50. Though, they increased their amount of capital in next year 2018
but their ratio decreased. So overall, they should focus on minimising the operating
expenses so that their R.O.C.E can be decrease.
 Net profit margin- It is a kind of ratio that is computed with an objective to find out the
profitability of organisations during a particular time period (Hernes and Sobieska-
Karpińska, 2016). It is being showed in the symbol of %. If this ratio is higher then
company's financial position will be considered strong. While if this ratio is lower then
financial position will be weak. Along with the net profit ratio is being checked by
shareholders and investors so that they can make invest accordingly. Herein, the aspect of
above selected organisation, Alpha limited the NP is of 12.5% in year 2017 that fell down
by 30% in next year 2018 and became of 8.75%. This shows that above organization's
financial position is not good in current year as compare of previous year. The key issue
of decreasing in this ratio is increasing in the amount of operating expenditures and fixed
costs. While net sales and net profit amount is decreased in year 2018 as compare to year
2017. Such as in the year 2017, their net profit was of £300 that decreased by 12.5% and
became of £262.50 in year 2018. So it can be commented on the performance of
company as per the net profit ratio is that their financial condition is weaker in year 2018
compare to year 2017. As well as this is important for company which they should focus
on reducing the fixed cost expenditures so that net profit can be increase and their net
profit may increase. Apart from it, if net profit will decrease year by year then
shareholders and investors will not show any interest to make investment.

 Current ratio- This is a type of ratio that is computed to assess the liquidity position of
companies. In other words, by calculation of current ratio organisations can evaluate
about their cash position for payment of short-term debts. This ratio stats relation
between current assets and liabilities. The ideal current ratio is 2:1 that means a company
should have 200% assets for making payment of 100% liabilities. If companies do not
have enough current assets then it can impact to their working capital requirement. Such
as in aspect of above selected organisation, their current ratio is of 2.34 times in year
2017 that decreased by 60.25% and became of 0.93 times. This is a huge decrease in the
ratio between year 2017-18. In year 2018, organisation's financial condition was good
because they have sufficient amount of cash for making payment of short term debts. As
well as their working capital requirement is also fulfilling. On the other hand, in year
2018 this ratio was fell down by 60.25% and was of 0.93 times. This ratio is not matching
as per the ideal ratio of company as well as they do not have enough current assets for
making payment of their short term debts. In this case, the main reason of decreasing
ratio is increasing in current liabilities by huge margin. While their current assets did not
increase by more criteria. Such as their CL were of £322.50 that increased by 244.18%
and became of £1110. Except from it current assets increased by just 36.63%. Hence, it is
important for the financial manager of above organisation that they should try to
minimising the current liabilities because it the key issue of poor liquidity condition of
company.
 Debtors collection period- It is a kind of ratio that is calculated to find out the time period
which is taken by companies to collect the debt amount from debtors. The main objective
of calculating this ratio is to assess those debtors who are making delay for payment of
credit amount. This is so because if debtors make payment on time then companies will
like to make credit transaction with them. On the other hand, if debtors do not make
payment on time then these kind of debtors are being consider insolvent. By calculating
this ratio, organisations can manage the bed debts by identify insolvent debtors. This ratio
is being calculated by dividing average debtors from credit sales. Additionally, this ratio
is presented in form of days. On the basis of above Alpha limited company's ratio, this
can be find out that their debtors collection period in year 2017 is of 68 days which raised
in year 2018 and became of 73 days. This indicates that company is taking too much in

collection of their debt amount from debtors in year 2018 compare to last year. In this
case, it is important to their managers that they should try to reduce the total time of
collection from their debtors. As well as try to prevent the credit transactions with those
debtors who are making payment over due date. This can minimise the their collection
period from debtors.
 Creditors payment period- It has been defined as a type of financial ratio that is computed
by companies to assess time period which is taken by them for making payment to their
creditors (Dinçer and Yüksel, 2018). If this ratio is higher then it can impact to reputation
because this will indicate that company is taking too much time for payment. Herein, the
above selected organisation their creditors payment period is of 73 days that raised by a
big difference in upcoming year and became of 160 days in year 2018. It is indicating
that organization is taking too much time in making payment of their creditors. The main
issue of this condition in above company is that they are making more purchasing on
credit basis and not making payment on time. Herein, it is important for above company's
managers that they should focus on minimising the credit transactions from creditors. As
well as they should make credit transaction from those creditors who give more time
period to make payment. Otherwise if they will take more time making payment then
their reputation will be depreciated and they will not able to make credit purchase in
future.
CONCLUSION
As per the project report, this may be concluded that companies should take the financial
decisions on the basis of proper evaluation of financial reports. In the project report, importance
of MA techniques in aspect of planning, controlling and decision-making is included. As well as
different types of MA techniques like financial planning, historical cost accounting, budgetary
control etc. are concluded. In next part of project report, different financial ratios are computed
such as R.O.C.E., net profit ratio, current ratio, debtors collection period and creditors payment
period. Along with these ratios are used to make suitable comment on company's financial
performance. As well as ratios are calculated of both year 2017-18 to find out the variation in
both years financial condition.

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