Financial Decision Making Report: Amazon & Alpha Ltd - BM414 Analysis

This report delves into the intricacies of financial decision-making, providing a comprehensive analysis of the subject. It begins with an introduction to the key functions of accounting and finance and their importance, supported by relevant theories. The report then focuses on Amazon, a multinational e-commerce giant, examining its financial practices and the application of various management accounting techniques, including financial planning, financial statement analysis, cost accounting, and others. A critical evaluation of these techniques is presented, highlighting their strengths, limitations, and impact on Amazon's operations. Furthermore, the report includes a detailed analysis of Alpha Ltd., involving ratio calculations such as return on capital employed, net profit margin, and current ratio. It also comments on Alpha Ltd.'s financial performance, identifying potential causes and effects for the changes observed over a two-year period. The report concludes with a summary of the findings, emphasizing the significance of financial decision-making in business and the practical application of accounting principles.

FINANCIAL DECISION
MAKING

TABLE OF CONTENTS
INTRODUCTION.......................................................................................................................................3
TASK 1.......................................................................................................................................................3
Critical evaluation of the role of accounting and finance in Amazon......................................................3
CONCLUSION...........................................................................................................................................7
TASK 2.......................................................................................................................................................7
A. Ratio analysis of Alpha limited...........................................................................................................7
B. Performance of ALPHA LTD. and causes and effects for the respective changes in two years..........8
CONCLUSION.........................................................................................................................................11
REFERENCES..........................................................................................................................................12

INTRODUCTION
Financial decision making is the process that helps the organisation to have effective
decision making with respect to liabilities or equity of the firm (Xue and et.al., 2019, April). This
helps the business to establish its respective financial goals and have the risk management
strategies in hand. Accounting and finance plays crucial role to manage the business effectively
by having control over different expenses. There are different functions of accounting and
finance such as creating budgets and different financial records as it helps the business to make
effective decisions with respect to growth of business. It also helps to analyze financial
performance of organisation by reviewing the financial records and develops business strategies
for making huge profit for the firm.
Present study is based on a well-known multinational E-commerce company Amazon
that was founded in the year 1994 by Jeff Bezos. There are about 750,000 working employees at
Amazon who are having their focus over e-commerce, AI, cloud computing and also digital
streaming. Company is working effectively through technological innovation and is the world’s
largest online marketplace. It is having its retail site that is amazon.com that is working on sales
revenue model where it takes a minimum sales price of all the respective items and allows
different companies to advertise their products over here. Company has generated US$232.887
billion revenue for 2018 and its market capitalization in early 2020 was US$1 trillion. Amazon is
working effectively with the help of different management accounting techniques such as margin
analysis, constraint analysis, capital budgeting, inventory valuation and also trend analysis
technique. With the help of all these techniques business is able to increase its efficiency and
profitability. It helps to simplify the decision making of business in its financial statements and
leads to cost transparency. Company can easily achieve its objectives with flexibility in its
financial management.
TASK 1
Critical evaluation of the role of accounting and finance in Amazon
Role of management accounting techniques in planning, control and decision-making
process:-

Managers at Amazon use the respected financial data and use it in order to advice the
business to use right accounting techniques for the development of the organisation and this is
termed to be management accounting.
There are different management accounting techniques that Amazon use for planning,
control and decision-making process. Amazon work with contingency theory that is its structure
depends on the technology and different managerial processes. This theory provides descriptive
theory of management accounting systems that is usually based on thinking that the MAS is
contingent to structure of the business. It is quite understandable from this Theory that a single
management accounting system cannot work for all the respective organizations and different
systems are required to implemented on bases of the actual need of the business(Armitage, Webb
and Glynn, 2016).
There are different management accounting techniques that are having different role and
importance for the business and are as following:-
 Financial Planning:- It is very important for the business to make proper financial
planning in order to achieve the business objectives. Amazon is able to achieve its
business objectives with the help of an effective planning as it helps the business to
correctly manage its cash flow and personal finances. Managers at Amazon are having
their keen eye on cash and debt levels (Adam, Frimpong and Boadu, 2017).
 Financial statement analysis:- Organisation use different financial statements like
profit and loss statement or balance sheet that are used at different period. This helps
managers at Amazon to understand the rate of growth with the help of comparative
financial or common size statements and with the ratio analysis of the business.
 Cost accounting:- It is the cost associated with product, process, department etc. In the
cost accounting the cost data is compared with a predetermined one and this helps the
managers at Amazon to decide the respective cause for this difference in cost so that they
can work for its improvement.
 Fund Flow analysis:- This analysis helps Amazon to find out the movement of fund
from one period to another and this analysis is useful to find out whether the funds are
used properly within the year or not by making a comparison with previous year
(Humand Yan, Alibaba Group Holding Ltd, 2019).

 Cash flow analysis:- This analysis is helpful to find out the actual movement of cash
from one period to another. The reason of the respective cash balance is analyzed by
Amazon and accordingly business takes it financial decisions (Fletcher Jr, and Rose,
2019).
 Standing costing:- Amazon use this technique as it helps the business to find different
measures to reach the standard and understand the reasons of deviations that may arise.
This cost is generally predetermined cost and provides yard stick in order to measure
what actual performance of business will be there.
 Marginal costing:- This cost is used by Amazon to fix its selling price and helps the
business to select the best sales mix. This works effectively for the use of raw materials
and makes the buying decision more working. This technique is based on fixed cost.
Variable cost and also contribution(Chukalla, Krol and Hoekstra, 2017).
 Budgetary control:- It is important for the business to understand the future financial
needs and Amazon works effectively for the same, with the help of budgetary control
technique. This helps the business to have a control over the financial performance and
the operations of the business can be directed in right direction with its help (Mohamed,
Kerosi and Tirimba, 2016).
Critical Analysis of the role of management accounting techniques and the way they enhance
practices of Amazon:-
Management accounting techniques are having an effective role on business activities of
Amazon as it manages the business activities more effectively with the help of applications of
different budgeting and planning strategies. However, management accounting techniques are
having some of its limitations as it depends on the personal biasness of an individual and that can
affect the objectivity of different recommendations that are given by the managers at Amazon.
Not only this, these techniques can only provide a useful data but cannot prescribe the effective
actions that Amazon can take for its business (Odia, 2019, June).
The financial planning helps the business at Amazon to have clear sets of ideas about
how to obtain required funds and prevents the business from not going to any direction where
they will not be succeeded. However, it is too costly process as there is a need of experienced
financial advisers and it is also time consuming in nature. On the other hand the financial

statement analysis technique helps the business to reveal the earning of the business at Amazon
per year and there may be changes that the sales may fluctuate, but financial planners at the
organisation are able to identify the accurate pattern with respect to sales figure. This statement
is also useful for future planning and this somehow reflects the budget of the business. However,
it is totally based on the pattern of market that is the data is based on different conditions at
market. The figures may get change over the years and it is only a one time analysis that cannot
make future decisions at that one time and needs several financial statements.
The Cost accounting technique is helpful for Amazon to eliminate the wastes and
inefficiencies by setting a standard for everything(Bouwens, 2017). This technique helps
Amazon in cost reduction and identifies different reasons for profit and loss. It helps by giving
advice about what to buy and choose between the alternatives. However, the associated cost is
not same over the years and as a result cost data is not highly useful. The installation of cost
accounting system generally requires maintenance of different useful records and that usually
leads to heavy expenditure. On the other hand Fund Flow analysis provides substantial insights
of the business and highlights the financial changes that are occurring at different positions of the
firm. However, there is lack of originality seen and does not reveals the realistic comparison of
the company with respect to profit making(Humand Yan, Alibaba Group Holding Ltd, 2019).
Cash flow analysis helps Amazon to know its liquidity status and it also helps the top
management to coordinate with the respective financial operations. It also helps to evaluate the
performance with the comparison of actual cash statement with projected cash flow statements.
On the other side Standing costing technique helps the business to have an improved cost control
and business can have useful information in order to have managerial planning and effective
decision making.
Marginal costing is helping mangers at Amazon to determine the associated cost and
have control over the production. It is a short term profit planning and ensures that the decisions
taken can yield maximum returns(Chukalla, Krol and Hoekstra, 2017). However, it is quite
tough for the business to separate all the respective costs into fixed and variable. On the other
side, Budgetary control maximizes the profits of the firm and aims for a proper planning and
coordination. It provides effective tools for managerial performance of the business. However,

the change in future conditions may affects the budget negatively as it is been prepared by the
managers on certain assumptions.
CONCLUSION
From the above report it is been concluded that the management accounting techniques
are having a great advantage for the Amazon as it helps the business to manage its funds with the
use of effective techniques. These techniques are having an effective role to plan, control and for
making an effective decision making process. These techniques brings best practices for the
business as it helps to improves the cost management and it also leads to better control of
compliance with budgets. It helps Amazon to allocate the respective cost of different
departments and with the use of cost management tools, business can have an effective
management accounting plan.
TASK 2
A. Ratio analysis of Alpha limited
Calculation of Ratios 31-DEC-2017 31-DEC-2018
Return on capital employed = Operation Profit ×100
Capital Employed
{(657-300) /
[1477+(757-
322)]}*100=
34.26%
{(750-337.50) /
[3000+(1035-
1110)]}*100= 13.41%
Net Profit Margin = Net Profit ×100
Sales Revenue
[300/2400]*100=
12.5%
[262.50/3000]*100=
8.75%
Current ratio = Current Assets
Current Liabilities
757/322.50=
2.347
1035/1110= 0.932
Debtors collection period = Trade Receivable ×365
Credit Sales
[450/2400]*365=
68.43
[600/3000]*365= 73
Creditors collection period = Trade Payables ×365 [285/1350]*365= [1050/2400]*365=159.68

Credit Purchases 77.05
B. Performance of ALPHA LTD. and causes and effects for the respective changes in two years
Accounting ratios and their importance in business:-
Accounting ratio is an expression that is used to measure the business efficiency and also
profitability and is analyzed with the use of financial report of the organisation. There is a
interrelationship between different items of the financial statement and are generally revealed
with the use of different accounting ratios (Asogwa and Onyekwelu, 2019). These ratios are
useful for the business internal management and also to the respective investors and creditors.
The ratio analysis is the best tool for the business in order to measure the profitability, liquidity
and also solvency. Ratio analysis leads to preparation of an effective budget and also to prepare
future plans of the business. This also helps to communicate meaningful information to the
respective financial managers so that right decision can be analyzed. Government also takes
various financial policy decisions on bases of the results of this analysis of different ratios.
Return on capital employed:-
This financial ratio measures the profitability and efficiency with which its capital is been
used at the firm. This generally measure the way profit is been generated by Alpha Ltd. with
respect to its capital. This ratio is helpful for the business as it captures the monetary return on
both equity and debt. Most of the investors use this for having investment portfolio and Alpha
ltd. can have best strategy in hand with its use. It also helps in the comparison of the organisation
with its other competitors. However, this ratio is calculated on book value and that is the reason
return is usually not reflective (Murtala and et.al., 2018).
From the above calculations it is been interpreted that the return on capital employed of
Alpha Ltd. for the year 2017 is 34.26% and for the year 2018 is 13.41%. It can be analyzed that
the company have to work on its operating expenses as it is affecting the business profitability
from 2017 to 2018. Return on capital employed has been reduced from 34.5% to 13.41% and it
may affect the business negatively. Alpha Ltd. is required to improve its operating profit without
increasing in capital employed. Other option is to maintain the operating profit and reduce the

value associated with capital employed. This will help the business to increase its return on
capital employed over next years.
Net Profit Margin:- From all the operating expenses, interest, taxes and also dividends, a
percentage of revenue remains and that is been deducted from company’s total revenue, that is
been referred to as Not profit margin. This ratio is useful for Alpha Ltd. as it highlights the cost
efficiency of the business and track respective performance at different period of time. It
generally assesses the financial health of the organisation so that different measures can be taken
for its improvement. However, it is not helpful for the business in order to compare its profit
margin with other competitors (Yasa and Wirawati, 2016).
From the above calculations it is been interpreted that the Net profit margin of 2017 is
12.5% and of 2018 is about 8.75%. It is been analyzed that the net profit over the year have
been declined and Alpha ltd. is required to work on it in order to improve its productivity. For
the same business is required to increase its revenue by selling its products at a higher price
level. Another option for the business is to reduce its cost by finding cheapest raw materials. This
strategy will help the business to increase its net profit over coming years.
Current ratio:- It is the ratio that helps the business to have clear understanding whether they
are having sufficient resources to meet the short term obligation of the firm. A comparison is
been conducted between the current assets and liabilities and accordingly analysis is been done.
This ratio gives a clear idea about the operating cycle of Alpha ltd. and helps the business to plan
a inventory storage mechanisms. It also shows management efficiency of the business in selling
its products. However, the inventory may lead to overstatement of the ratio and in seasonal sales
period it may get unstable (Liu and Sun, 2019).
From the above calculations it is been interpreted that the current ratio of 2017 is 2.347
and of 2018 is about 0.932. It can be analyzed that the current ratios of year 2018 are less as
compared with that of its previous year. Business is required to change some of its strategies in
order to work more effectively and to gain business profitability. For the Alpha Ltd is required to
improve its current assets with the rise of its shareholder’s funds. Business can also have faster
conversion cycle or can pay off current liabilities of 2018 so that the current ratios can be
increased over next years.

Debtors collection period:- This ratio is having its focus over the amount of time that is taken
to collect the respective trade debts and it is generally been observed that smaller is the time for
collecting organisational debts, business will become more efficient. This ratio is useful for
Alpha Ltd. to increase its sales and bring new are of opportunity. By having defined credit
policies, this ratio can work more effectively.
From the above calculations it is been interpreted that the Debtors collection period of
2017 about 68.43 days and of 2018 is about 73 days. It is been analyzed that the performance of
business is not well in 2018 as compared with that of 2017 as previously business was able to
collect its debts in just 68 days and now it is taking 73 working days. Business is required to use
different strategies like reducing trading terms or by hiring a part time debtor collector. Business
have to charge interest for outstanding debts and have cease supply for non-payments, then only
these days can be reduced and business performance can be improved.
Creditors collection period:- It is the average number of days in which the business payout its
suppliers. It is trade payable by average daily purchases for the given period of time. This ratio
helps the business to have a clear understanding about the duration in which they can pay their
bills, invoices to different suppliers or to other businesses. Business can credit or debit its days
by negotiating with its respective suppliers and by offering discounts. Company can have
improvement in its payment terms and also in their stock control (Abdulazeez and et.al., 2018).
From the above calculations it is been interpreted that the Creditors collection period of
2017 about 77.05 days and of 2018 is about 159.68 days. Business is going down in terms of
collection period over the year and is required to adopt different strategies for its improvement.
Alpha ltd. have to negotiate payments terms with the respected suppliers or offer discount for
early repayment. Payment terms can be changed and business is also required to improve the
stock control.
CONCLUSION
From the above report it is been concluded that the Alpha Ltd. performance have got
down over the year as business is not working effectively for its growth. It is important for the
business to change its previous strategies as the ratio analysis clearly states that they are quite

poor and not relatable with the business profitability. Business is required to make some changes
so that it can get improved over coming years. For the same Business is required to work on the
operating profit of the business and can also find the cheapest source of raw materials in hand.
Business can improve its current assets with the rise of its shareholder’s funds. Business can also
reduce its trading terms and can offer discount for early repayments. Finally report concluded
that these strategies can work effectively for improvement of business profitability.
REFERENCES
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