Introduction to Accounting and Finance: Performance Analysis Report

This report provides a comprehensive analysis of financial performance using ratio analysis, focusing on the financial statements of Gray Plc. It examines profitability, efficiency, liquidity, and investment abilities through various ratios, including ROCE, operating margin, gross profit margin, inventory turnover, accounts receivable and payable days, current and acid-test ratios, earnings per share, and price-earnings ratio. The report also includes a section on budgetary control systems, identifying their objectives and exploring the concept of participative budgeting in relation to these objectives for Great Manor Plc. The analysis covers the years 2019 and 2020, offering insights into the financial health and operational efficiency of the companies, and assessing the impact of changes in financial metrics. The report concludes by summarizing the key findings and implications of the financial analysis and budgetary control systems.

Introduction to Accounting
& Finance
1

ABSTRACT
Accounting deals with the financial information of an entity to make an observation about its
financial performance and position. This information is further used for making informed
decision by both internal stakeholder like management of the entity and external stakeholders
like shareholders and investors. In the report below the assessment of different ratios is
conducted in order to learn about the on-going performance of the company. Along with it the
report also revolves around the concept of budgetary control system and examined it objectives
in relation with participative style of budgeting.
2

Table of Contents
ABSTRACT.....................................................................................................................................2
INTRODUCTION...........................................................................................................................4
SECTION A.....................................................................................................................................4
Performance Analysis.................................................................................................................4
SECTION B...................................................................................................................................16
Budgetary Control System........................................................................................................16
Concept of participative style of budgeting..............................................................................18
CONCLUSION..............................................................................................................................19
REFERENCES..............................................................................................................................20
APPENDIX....................................................................................................................................21
Ratio Calculation.......................................................................................................................21
3

INTRODUCTION
Information collected, summarised and presented in books of accounts makes the basis
for further decision-making in an entity (Reid, 2020). This report aims at assessing different
concepts related to the accounting and financial performance of the entities. The report contains
two sections. In the first section, comparative performance analysis of Gray Plc for two years has
been carried out with the help of ratios calculated using the information contained in financial
statements. In the second section, concept of budgetary control system and its objectives have
been identified for Great Manor Plc. Further, concept of participative style of budgeting in terms
of the identified objectives is also discussed.
SECTION A
Performance Analysis
In order to analyse performance of the Gray Plc, ratio analysis has been performed below
for two years ending 31st March 2019 and 31st March 2020:
Profitability analysis
 Return on Capital Employed (ROCE)
Ratio 31st March 2019 31st March 2020
Return on Capital Employed 31.85% 5.64%
4

Return on capital employed of the company is used to assess profitability and capability
of the company to earn profit that company without regards to interest or taxes (Heeringa, West
and Berglund, 2017). Therefore, it takes into account operating profit and determines its relation
with capital structure employed in the company. In other words, it reflects the amount of profit
company is able to generate against 1 GBP of capital employed and hence, higher ROCE is
considered better. It can be seen from above table that company had a ROCE of 31.85% in 2019
while it declined to only 5.64% in 2020. This is huge decline and shows profit making
capabilities of the company in a negative light. This can be owed to sharp decline in operating
profit and can have a negative repercussions both in terms of volatility in operations as well as in
attractiveness amongst the investors.
 Operating Margin
Ratio 31st March 2019 31st March 2020
Operating Margin 10.85% 1.75%
5
31st March 2019 31st March 2020
0
5
10
15
20
25
30
35 31.85
5.64
Return on Capital Employed

This is another profitability ratio which is used to assess capabilities of company in
converting its operational revenue into operational profit (Niedzwiecki, 2018). It disregards non-
operational expenses like finance cost and tax payments. Since, it reflects the capabilities of
company in generating profit against its revenues, higher the ratio is, better it is considered. From
the above table, it can be identified that operating margin of the company in 2019 was 10.85%
which declined to mere 1.75% in 2020. This is huge decline and can be owed to good change in
cost of sales. Company had made larger proportionate purchases than sales and together with
operational expenses, they failed to convert it into high operating margin. This presents
operational capabilities of company in a negative light.
 Gross Profit Margin
Ratio 31st March 2019 31st March 2020
Gross Profit Margin 22.10% 15.26%
6
31st March 2019 31st March 2020
0
2
4
6
8
10
12 10.85
1.75
Operating Margin

Alike Operating margin, gross profit margin also assesses the level of conversion of sales
revenue into gross profit (Curtis, Comiskey and Dempsey, 2016). From the above table, it can be
identified that gross profit margin of the company in the year 2019 was 22.1% while it fell to
15.26% in the the year 2020. This can be owed to sharp shift in cost of sales especially purchase
components. This can be an indication of poor inventory management of the company or may
lead to product pricing adjustments or any other adjustment that company has to make in through
the year. However, no such assumption is stated and therefore, it can be interpreted that it can
lead to changes in pricing of the products which is generally not received well by customers.
And, in case company decides against changing prices, it will have to suffer lower margins
which would disrupt financial management of the company further.
Efficiency analysis
 Inventory Turnover Days
Ratio 31st March 2019 31st March 2020
Inventory Turnover Days 56.58 days 56.71 days
7
31st March 2019 31st March 2020
0
5
10
15
20
25 22.1
15.26
Gross Profit Margin

Inventory turnover days demonstrates the average time that company would be taking to
sale off its inventory (Ginesti, Caldarelli and Zampella, 2018). In other words, it is used to
determine the efficiency of sales. Therefore, lesser the inventory turnover days are, better it is
considered. From the above table, it can be identified that inventory turnover days in the year
2019 was 56.58 days while it increased to 56.71 days in 2020. There is a slight increase in the
ratio and this could be owed to any changes in regular operational process. However, cash of the
company is trapped in inventories and till the time, inventories are not realised into cash, this
cash would not be available to company and therefore, company must try to improve its
inventory turnover days.
 Accounts Receivable Days
Ratio 31st March 2019 31st March 2020
Accounts Receivable Days 37.72 days 34.92 days
8
31st March 2019 31st March 2020
56.5
56.55
56.6
56.65
56.7
56.75
56.58
56.71
Inventory Turnover days

Accounts receivable days demonstrates the average time that company would be taking to
collect payment from its trade debtors (Lamon, 2020). It is a part of the cash conversion cycle of
the company. Shorter the time debtors would take to make payment, better would be the position
of the company. Therefore, lesser the accounts receivable days are, better it is considered. From
the above table, it can be identified that accounts receivable days in the year 2019 was 37.72
days while it improved to 34.92 days in 2020. This shows improvement in the performance of
the company in collecting cash from its debtors. This is a positive sign for the cash conversion
cycle of the company and needs to be maintained such performance steadily.
 Accounts Payable Days
Ratio 31st March 2019 31st March 2020
Accounts Payable Days 46.44 days 49.40 days
9
31st March 2019 31st March 2020
33.5
34
34.5
35
35.5
36
36.5
37
37.5
38 37.72
34.92
Accounts Receivable days

Accounts payable days demonstrates the average time that company would be taking to
pay off its trade creditors. It is a part of the cash conversion cycle of the company (Tian and Yu,
2017). Longer the time company can hold payments of creditors within business, better would be
the position of the company. Therefore, higher the accounts payable days are, better it is
considered. From the above table, it can be identified that accounts payable days in the year 2019
were 46.44 days while it improved to further 49.40 days in 2020. This shows improvement in the
performance of the company in retaining cash within business. However, it is important that
company maintains such performance and has achieved this improvement with revised
negotiations with creditors so that they can be admitted into the system.
Liquidity analysis
 Current Ratio
Ratio 31st March 2019 31st March 2020
Current Ratio 1.86 : 1 1.57 : 1
10
31st March 2019 31st March 2020
44.5
45
45.5
46
46.5
47
47.5
48
48.5
49
49.5
46.44
49.4
Accounts Payable Days

Current Ratio of a company helps determine its short term liquidity i.e. it assesses the
capabilities of current assets of company to finance its current liabilities (Kruis, Speklé and
Widener, 2016). Current ratio of 2:1 is considered as ideal as it reflects a comfortable position
that company has twice current assets than its current liabilities to finance. From the above table,
it can be analysed that company had a current ratio of 1.86 in 2019 and 1.57 in 2020. In absolute
terms, company does not have bad current ratio however, in comparative terms, its performance
has negatively slid. This can be owed to greater change in current liabilities than current assets
and can lead to disruptions in the working capital management of the company.
 Acid Test Ratio
Ratio 31st March 2019 31st March 2020
Acid Test Ratio 0.84 : 1 0.63 : 1
11
31st March 2019 31st March 2020
1.4
1.45
1.5
1.55
1.6
1.65
1.7
1.75
1.8
1.85
1.9 1.86
1.57
Current Ratio

Acid Test Ratio of a company also helps in determining short term liquidity of the
company i.e. it assesses the capabilities of quick assets of company to finance its current
liabilities (Jones, 2017). It is also known as quick ratio. Quick assets refers to those current assets
which can be converted to cash very quickly. Therefore, inventories are reduced from current
assets to arrive at figure of quick assets. Acid Test ratio of 1:1 is considered as ideal as it reflects
a comfortable position that company has sufficient quick assets that it can convert into cash to
finance its current liabilities. From the above table, it can be analysed that company had a current
ratio of 0.84 in 2019 and 0.63 in 2020. In absolute terms, company does not have bad quick ratio
however, in comparative terms, its performance has negatively slid. This can be owed to greater
change in current liabilities than quick assets and can lead to disruptions in the working capital
management of the company.
Investment ability analysis
 Earnings per share
Ratio 31st March 2019 31st March 2020
Earnings per share 0.28 0.02
12
31st March 2019 31st March 2020
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9 0.84
0.63
Acid-Test Ratio

Earnings per share of a company reflects the profitability of company against its shares.
In other words, as it name suggests, it tells the earning that a shareholders gets from holding one
share of the company (Rubin, Segal and Segal, 2017). Therefore, higher EPS of the company
represents more profitable situation for the company. From the above table, it can be seen that
company had an EPS of 0.28 in 2019 which had a huge decline in 2020 and reached the level of
0.02 only per share. This can be owed to huge decline in the profit in the year 2020 as shares
outstanding have been same for both the years. This would have negative repercussion on the
attractiveness of the shares of the company amongst investors which will lead to the fall in
market capitalisation of the company.
 Price earnings Ratio
Ratio 31st March 2019 31st March 2020
Price Earnings Ratio 9.09 81.82
13
31st March 2019 31st March 2020
0
0.05
0.1
0.15
0.2
0.25
0.3 0.275
0.018
Earnings per share

Price earnings ratio helps company determine the current share price which is relative to
the per-share earnings of the company (Zeller, Kostolansky and Bozoudis, 2019). It is also a
market ratio like earnings per share and takes into factor market price per share and EPS at a
point of time. From the above table, it can be seen that price earnings multiple for year 2019 was
9.1 while it reached to huge 81.82 in 2020. It can be owed to both difference in market price and
earnings per share. Higher Price Earnings ratio could have meant that stock of the company is
over-valued or that investors are still expecting a high growth rate from the company in the
future. This could lead to unnecessary pressure over the management of the company to perform.
Financial structure analysis
 Interest Coverage Ratio
Ratio 31st March 2019 31st March 2020
Interest Coverage Ratio 13.5 times 1.47 times
14
31st March 2019 31st March 2020
0
10
20
30
40
50
60
70
80
90
9.1
81.82
Price Earnings Ratio

Interest coverage ratio determines the capabilities of company's profit to pay off interest
on outstanding liabilities. It serves multiple purpose for a company. It uses finance cost so it tells
about debt management of the company (Korol, 2018). It determines the impact of paying off
finance cost in the profitability of the company and hence, is a profitability ratio. Additionally, it
helps establish relation between equity and debt of the company and therefore, is a gearing ratio.
From the above table, it can be seen that interest coverage ratio for year 2019 was 13.5 times
while it declined to only 1.47 times in 2020. This decline can be owed to reduction in operating
profit in 2020 and shows decline in capabilities of paying off interest in the year when it has
taken additional debt. This could lead to disruption in financial management of the company.
 Gearing Ratio
Ratio 31st March 2019 31st March 2020
Debt-to-equity Ratio 0.87 1.37
Equity-to-assets Ratio 0.53 0.42
Debt-to-Assets Ratio 0.47 0.58
15
31st March 2019 31st March 2020
0
2
4
6
8
10
12
14
13.5
1.47
Interest Coverage Ratio

Gearing ratios helps company assess the relationship between its borrowed funds and
owners' funds. In other words, these ratios are used to determine the degree up to which
company's activities are financed by the equity and debt, separately and jointly. From the above
table, it can be seen that three ratios have been calculated for the company which includes debt-
to-assets ratio (DTA), debt-to-equity ratio (DTE) and equity-to-assets (ETA) ratio. In the year
2019, company had a DTE of 0.87, DTA of 0.47 and ETA of 0.53 while they changed to 1.37
DTE, , 0.58 DTA and 0.42 ETA in the year 2020. DTA assess the relationship between debt and
total assets of the company and higher ratio can be representative of higher leverage and high
risk at investment. DTE assesses the relationship between debt and equity and increment in the
ratio could indicate higher leverage and higher risk to shareholders. ETA assesses the
relationship between equity and assets of the company and reduction in the ratio can be
reflection that more of the debt is used to pay off assets than equity. In summary, company does
not reflect comparatively positive gearing position.
SECTION B
Budgetary Control System
Budgetary Control System is a system of procedures that an entity employs to ensure that
its revenue and expenditure management remains as close to the financial plan as it expects. This
system first involves preparation of various budgets for the entity and then on the basis of those
16
31st March 2019 31st March 2020
0
0.2
0.4
0.6
0.8
1
1.2
1.4
0.87
1.37
0.53
0.42
0.47
0.58
Gearing ratios
Debt-to-equity Ratio
Equity-to-assets Ratio
Debt-to-Assets Ratio

prepared budgets, targets are established for the employees of the company to achieve. Actual
performance of the employees are regularly monitored and compared against the budgetary
standards. Variance are recognised to develop and execute corrective actions. Therefore, in a
nutshell, budgetary control system is a complete cycle of process which starts from planning for
budget to controlling the performance (Mack and Goretzki, 2017).
Great Manor Plc is an international company and is engaged in manufacturing alternative
electric cars. Budgetary control system will help it develop effective standards that will enable it
to optimally utilise its resources as well as minimising its wastes. Company can employ
budgetary control system within its operations and enjoy the benefits of its various objectives.
Few of the objectives of Budgetary Control system through which Great Manor Plc can enjoy
huge benefits are mentioned below:
 Planning – The first objective of budgetary control system is it helps in planning for
annual operations as well as distribution of scarce resource available to the respective
company. Great Manor Plc is involved in manufacturing electric cars for the international
market. The market for such cars is limited at present but is one of the most promising
sectors for the future. Therefore, company should prepare budget plan in accordance with
the past performance and in anticipation of the future sales.
 Co-ordination and communication – The second objective is of developing
coordination and communication. A company requires to prepare various departmental
budgets which are then combined together to form a master budget. These budgets are
prepared in accordance with the aims and objectives of the company. Budgetary control
requires all the departments within company to come together and achieve the targets as
decided in the master budget. To ensure effective completion of the targets,
communication process within company would improve and there will be better co-
ordination among various teams in the company and thus the agenda of bugetory control
system accomplishes (Schmitz, 2020).
 Controlling – All types of budgets facilitates controlling function as well, hence it is the
third most important objective of budgetary control system. It acts as pre-determined
targets against which performance of the personnel or department is measured. This
monitoring and controlling leads to identification of variances between the budgeted
17

performance and actual performance and further, becomes the basis for corrective actions
allowing the firm to take control and work accordingly.
 Performance evaluation – Another objective which servers the company of the
budgetary control system is Performance evaluation of the operations and functions of the
company. Budgets are a good tool to motivate personnel in the company as well as
facilitate evaluation of performance against standards of the entire system and processes
of the entity.
Concept of participative style of budgeting
Participative style of budgeting is inclusive budgeting. In other words, unlike imposed
budgeting, this style of budgeting involves lower levels of management in the budget preparation
process. Purpose of this style of budgeting is to give some sense of ownership to the lower level
managers. This is capable of providing two fold benefits to the company - one, it will increase
their commitment with the company and second, lower level managers are better informed about
about the usage of resources and therefore, will be able to suggest better achievable targets
(Mazikana, 2019).
Management of Great Manor Plc must implement the budgetary control standards for the
benefits it is capable to provide to the company. There can be two styles of budgeting process -
imposing and participative. In imposed budgeting, senior management set the standards for lower
levels to achieve while in participative budgeting, all levels of management come together to set
standards that are both realistic and optimal. Therefore, just as production manager stated,
participative budgeting should be employed in the company. To implement the participative style
of budgeting with the objectives identified earlier company must first of all, create a team of
finance managers that will be responsible for implemenMack, S. and Goretzki, L., 2017Schmitz,
S. O., 2020Mazikana, A. T., 2019Saxena, M. S. and Ylaoutinen, S., 2016ting budgetary control
system.
This team would involve with all levels of management to identify the expectation of
senior management with junior level to achieve and of junior and middle level managers from
the senior management. Team must first of all identify all the financial resources that the
company has, in relation with the past performance of the company as well as anticipation of the
future. It must them involve all the departmental head to know about their needs and scopes that
they would be able to achieve if provided with better budgets (Saxena and Ylaoutinen, 2016).
18

This information must then be cross checked with senior management to develop budgets. These
budgets must then be bifurcated into departmental and team targets to be achieved by them.
These targets will be going to be inter-dependent and inter-related with various departments.
Therefore, clear communication standards and process must be identified and established which
will not only facilitate smooth co-ordination and co-operation but will also help in responsibility
fixation in the future. Performance of the targets must be regularly monitored according to
hierarchy such as of team members by managers and of managers by their superiors.
Performance must be regularly monitored and standards would act as controlling tools which
would help in identifying variance and developing corrective actions. Budgets prepared must be
flexible enough to accommodate mid-period changes.
CONCLUSION
Above report is aimed at exploring financial and non-financial information of an entity to
develop an informed decision that will enable it to take the organisation to the path of growth
and development. It was observed in the report that with the help of financial accounts, a
company can generate various financial ratios that will enable it to assess its comparative
performance either over the years or with industry average to know about standing against
industry benchmarks. Further, it was identified in the report that budgetary control system helps
company plan a roadmap to its expected financial plan. Budgetary process can be imposed or
participative, depending upon the management of the company. However, participative forms of
budgeting involve all levels of management in the budgeting process and help it prepare better
and effective budgets.
19

REFERENCES
Books and Journal
Curtis, E. A., Comiskey, C. and Dempsey, O., 2016. Importance and use of correlational
research. Nurse researcher, 23(6).
Ginesti, G., Caldarelli, A. and Zampella, A., 2018. Exploring the impact of intellectual capital on
company reputation and performance. Journal of Intellectual Capital.
Heeringa, S. G., West, B. T. and Berglund, P. A., 2017. Applied survey data analysis. CRC press.
Jones, S., 2017. Corporate bankruptcy prediction: a high dimensional analysis. Review of
Accounting Studies, 22(3), pp.1366-1422.
Korol, T., 2018. The implementation of fuzzy logic in forecasting financial ratios. Contemporary
Economics, 12(2), pp.165-188.
Kruis, A. M., Speklé, R. F. and Widener, S. K., 2016. The Levers of Control Framework: An
exploratory analysis of balance. Management Accounting Research, 32, pp.27-44.
Lamon, S. J., 2020. Teaching fractions and ratios for understanding: Essential content
knowledge and instructional strategies for teachers. Routledge.
Mack, S. and Goretzki, L., 2017. How management accountants exert influence on managers–a
micro-level analysis of management accountants’ influence tactics in budgetary control
meetings. Qualitative Research in Accounting & Management.
Mazikana, A. T., 2019. The Effect of Budgetary Controls on the Performance of an
Organization. Available at SSRN 3445247.
Niedzwiecki, D., 2018. Reporting of Results: Data Analysis and Interpretation. Oncology
Clinical Trials: Successful Design, Conduct, and Analysis, p.303.
Reid, W., 2020. The meaning of company accounts. Routledge.
Rubin, A., Segal, B. and Segal, D., 2017. The interpretation of unanticipated news arrival and
analysts’ skill. Journal of Financial and Quantitative Analysis, 52(4), pp.1491-1518.
Saxena, M. S. and Ylaoutinen, S., 2016. Managing Budgetary Virements. International Monetary
Fund.
Schmitz, S. O., 2020. Budgetary Control–the Backbone of MCS. In The Future of Management
Control is Fair (pp. 13-29). Springer Gabler, Wiesbaden.
Tian, S. and Yu, Y., 2017. Financial ratios and bankruptcy predictions: An international
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Zeller, T., Kostolansky, J. and Bozoudis, M., 2019. An IFRS-based taxonomy of financial
ratios. Accounting Research Journal.
20

APPENDIX
Ratio Calculation
31st March
2019
31st March
2020
Profitability Ratios
EBIT 243 47
Total Assets 1054 1266
Current Liabilities 291 432
Capital Employed = Total assets – Current Liabilities 763 834
Return on capital employed = EBIT / Capital Employed 31.85 5.64
Operating Profit 243 47
Revenue 2240 2681
Operating Margin = Operating Profit / Revenue 10.85 1.75
Gross Profit 495 409
Revenue 2240 2681
Gross Profit Margin = Gross Profit / Revenue 22.1 15.26
Efficiency Ratios
Opening Inventory 241 300
Closing Inventory 300 406
Average Inventory = (Opening Inventory + Closing Inventory) / 2 270.5 353
Cost of Sales 1745 2272
Inventory Turnover Days = Average Inventory / Cost of Sales
*365 56.58 56.71
21

Opening Receivable 223 240
Closing Receivable 240 273
Average Receivable = (Opening receivable + Closing receivable) /
2 231.5 256.5
Net Credit Sales 2240 2681
Accounts Receivable Days = (Average Receivable / Net Credit
Sales)*Number of days 37.72 34.92
Opening Payables 183 261
Closing Payables 261 354
Average Payables = (Opening payable + Closing payable) / 2 222 307.5
Cost of Sales 1745 2272
Accounts Payable Days = (Average Payables / Cost of
sales)*Number of days 46.44 49.4
Liquidity Ratios
Current Assets 544 679
Current Liabilities 291 432
Current Ratio = Current Assets / Current Liabilities 1.87 1.57
Current Assets 544 679
Inventories 300 406
Quick Assets = Current Assets – Inventories 244 273
Current Liabilities 291 432
Acid Test Ratio = Quick Assets / Current Liabilities 0.84 0.63
Investment Ratios
Profit after tax 165 11
Outstanding shares at the year end 600 600
22

Earnings per share = Profit after tax / Outstanding shares at
the year end 0.28 0.02
Market value per share (MPS) 2.5 1.5
Earnings per share (EPS) 0.275 0.02
Price Earnings Ratio = MPS / EPS 9.09 81.82
Financial Ratios
Profit before interest and tax 243 47
Interest expense 18 32
Interest Coverage Ratio = PBIT / Interest expense 13.5 1.47
Gearing Ratios
Total Debt 491 732
Total Equity 563 534
Debt-to-Equity Ratio = Total debt / total equity 0.87 1.37
Total Equity 563 534
Total Assets 1054 1266
Equity-to-assets Ratio = Total equity / Total assets 0.53 0.42
Total Debt 491 732
Total Assets 1054 1266
Debt-to-Assets Ratio = Total debt / total assets 0.47 0.58
23