Bucks New University, BM414: Finance and Accounting Importance Report

This report delves into the crucial role of finance and accounting within business organizations, using Alpha Manufacturing Limited as a case study. It explores how accounting provides a framework for recording transactions, preparing financial statements, and assessing a company's financial health, including profitability, liquidity, and solvency. The report emphasizes the importance of financial statements, such as the income statement, balance sheet, and cash flow statement, in providing stakeholders with a clear picture of the business's performance. Furthermore, it examines the significance of financial ratios in analyzing financial data, identifying weaknesses, and comparing performance over time. The discussion also covers various aspects of finance, including financial management, sources of finance (equity shares, loans), and the impact of financial decisions on a company's stability and growth. The report highlights the interdependency of accounting and finance as essential pillars for organizational success. The assignment also includes the importance of ratio analysis in financial statement, and how the analysis helps in formulating plans for the development of the business.

Running head: IMPORTANCE OF FINACE AND ACCOUNTING IN ORGANISATION
IMPORTANCE OF FINACE AND ACCOUNTING IN ORGANISATION
Name of the Student
Name of the University
Author Note

1IMPORTANCE OF FINACE AND ACCOUNTING IN ORGANISATION
Table of Contents
Introduction:...............................................................................................................................2
Discussion:.................................................................................................................................2
Response to question (1):.......................................................................................................2
Response to question (2):.......................................................................................................8
Conclusion:..............................................................................................................................12
References:...............................................................................................................................13

2IMPORTANCE OF FINACE AND ACCOUNTING IN ORGANISATION
Introduction:
Accounting and Finance play a pivotal role in the business world. The concept of
accounting and finance establish the pillar of the business, thus, accounting and finance are
the languages of business. Accounting helps to record the transaction of the business
organisation and finance helps to meet the required capital of the business. A business cannot
exists without the contribution of accounting and finance. In the present situation, there is a
remarkable change observed in the areas of accounting and finance. Further as a part of
accounting and finance ratio analysis plays one of the most important roles for the
development of the business organisation. Thus it can be said that a ratio is a tool that
measures the performance of the business. Moreover, it is one of the most useful tools that
explain the profitability and liquidity position of the business organization irrespective of
their nature to the stakeholders of that company. Thus the report on the importance of finance
and accounting defines the concept and objective in the context of the Alpha Manufacturing
Limited.
Discussion:
Response to question (1):
With the help of accounting the professionals able to prepare the financial statement
of the business organisation at end of the financial year and it provides a brief detail
regarding the profit earning capacity, liquidity position and solvency position of the
organization (Roberts and Wang 2019).
According to the annual report of Alpha Manufacturing for the year 2018, the proper
accounting system helps to determine the gross profit and the cost of sales of the

3IMPORTANCE OF FINACE AND ACCOUNTING IN ORGANISATION
organization. As per the report, the gross profit has increased to £25261. Again with the help
of accounting the company has prepared a concrete financial report which reflects the total
amount of revenue of £66009 and the total amount of expenditure for the year ended 2018
amounts to £628. Since accounting system helps the professional in determining the total
value of the asset and the liability of the organization, therefore, the total value of the non-
current assets amount to $75936 at end of the financial year 2018. Again, from the balance
sheet the current asset of the organization amount to £31016 at the end of the year 2018.
From the balance sheet, it is observed that there is an increase in total assets for the year
ended 2018 as compared to the previous year 2017. Again as per the balance sheet, the total
amount of current liabilities is £10714 and the total amount of non-current liabilities amount
to £3678. Since the cash from proper accounting system helps to determine the cash flows of
the business, thus, from the cash flow statement of Alpha Manufacturing states that there is
an increase in cash generated from operating activity for an amount of £5473 (£11337-£5863)
for the year ended 2018. It indicates that there is sufficient cash available within the company
to carry on the day to day business. Again in from the cash flow statement it can be found
that the company has paid a dividend to the shareholders, issued ordinary shares to raise
capital. With the help of accounting the Alpha Manufacturing has maintained a proper and
adequate cash balance at the end of the year 2018 (Alphafmc.com. 2019).
Accounting provides a business framework to run the business and provide a true picture of
the financial condition of the business to the stakeholders. Here, the annual report of the
Alpha Manufacturing states that the company is concerned about satisfying the interest of the
stakeholders. The company provides all the details in the form of annual reports every year
and the updates the official website of the company with all the latest information to present a

4IMPORTANCE OF FINACE AND ACCOUNTING IN ORGANISATION
clear ideal and the prospect of the business towards the investors, clients, employees and the
government (Alphafmc.com. 2019).
The concept of accounting helps the business organizations in recording the
transactions by providing various methods such as accrual basis of accounting and cash basis
of accounting. As per the annual report of Alpha Manufacturing Limited, it is found that the
company follows accrual basis to find out the accounting receivables and the accounting
payables. The annual report of Alpha Manufacturing Limited discloses that the directors of
the company have decided to adopt the going concern concept while preparing the financial
statements. According to the director at the time of approving the financial statement they
have a justified expectation that the company have adequate resources to conduct the
operation of the business in the future. Further, the directors state that the company has
followed this concept to prepare the consolidated statement, consider the reasonable changes
to improve the performance (Warren and Jones 2018 ).
The area of accounting is not limited to the area of recording and summarizing the
transactions. The concept of accounting also shapes the area of audit, taxation, management
accounting and consultancy services (Schroeder, Clark and Cathey 2019). From the annual
report of Alpha Manufacturing, it is found that the company follows the accounting
guidelines provided by GAAP and IFRS to prepare the group financial statement. Further, the
company follows the Company’s act 2006 of UK and implies proper internal control to avoid
the occurrence of fraud and error while recording the transaction. Further, the audit report of
the company states that financial statement discloses all the relevant information after
satisfying the all the guidelines provided by IFRA and highlights the key audit matters
relating to the operational risk such as revenue recognition and the recoverability of the
investment in subsidiaries and the intercompany debtors. According to IFRS and the

5IMPORTANCE OF FINACE AND ACCOUNTING IN ORGANISATION
International Accounting Standard Board of Accounting new standards are introduced
relating to financial instrument (IFRS 9), lease (IFRS 16) and revenue from contracts with the
customers (IFRS 16). Though the company has adopted the standards there is no significant
impact observed in the performance of the company.
The concept of finance refers to the process of managing the money in the way of
invest, saving, lending, borrowing, budgeting and forecasting. There are various types of
finance such as government or public finance, corporate finance and personal finance (Wang,
Zhang and Hu 2019). The term finance describes the activities related to banking, credit,
leverage or debt, credit, capital markets and investments. Therefore finance refers to the
process of arranging the desired fund (Alex and Felicia 2019). The concept of finance
originated from the theories of micro and macro-economics. One of the most basic theory is
the time value of money which mean a dollar today is more valuable than a dollar in future.
Money is the most important factor to run a business organization, therefore, finance guides
and helps to make a prudence decision regarding the long term funding strategy and cash
flow (Barasa 2018).
Therefore the effectiveness of finance depends on the proper implementation of
financial management. The financial management is an application of general management
principles which emphasizes the controlling and planning of the proper utilization of financial
resources of the organization and helps the management to take the necessary decision
regarding the procurement of fund. In other words, it is an act of financing the firm’s
resources to maintain the flow of required fund, assets and satisfy the overall goal of business
(Lakshmi 2018).
There are numerous source of finance that fulfils the requirement of the fund and these
sources are as follows:-

6IMPORTANCE OF FINACE AND ACCOUNTING IN ORGANISATION
Equity Share Capital
Preference Share Capital
Debenture and Bonds
Retained Earnings
Loans from the financial institutions
Other sources (Thompson 2018)
Therefore in cash flow statement of the chosen company reveals that Alpha
Manufacturing has increased the required fund through the issue of ordinary share capital for
an amount of £34348 during the financial year 2018. Again the consolidated statement of
change in equity shares reflects that the company has issued £77000 equity shares from the
beginning of the financial year that is 1st April 2017. The advantage of raising fund through
the issue of shares are as follows:-
Financing through the issue of shares is a fixed source of fund and the company has no
burden of liability since the equity shares are not redeemable (Pilbeam 2018).
Issue of shares strengthens the financial stability of the company. As a result, the company
can able to borrow funds from the financial institutions (Chinthalapati and Tsang 2019).
Since payment of the dividend is not compulsory the company can reinvest it for further
growth and development of the company (Goncalves and Lehmann 2019).
Again the noncurrent liabilities of the company states that the Alpha manufacturing has
converted all its loans and advances into ordinary equity shares. This type of convertible loan
provides quick financial assistance to the owners of the business and the burden of paying a

7IMPORTANCE OF FINACE AND ACCOUNTING IN ORGANISATION
fixed rate of interest get reduced and as a result, the company could able to maintain a sound
cash flow system (Tenca, Croce and Ughetto 2018). Therefore it can be said that finance
plays a crucial role in the development of the business, since, it stops over the investment of
in fixed assets, maintains proper balance in between cash outflow and cash inflow, it helps
the business organizations in establishing proper planning. Again the effective financial plan
helps to maintain sufficient fund to satisfy the requirement of working capital. Thus
accounting and finance are the pillars of business organization (Block et al. 2018).
Response to question (2):
Ratio is the indicator of two mathematical expression which defines the relationship
of two accounting figures. Here in this context ratio means the accounting ratio or financial
ratio. The term financial or accounting ratio refers to the comparison of two or more financial
information which can be used for analysing the financial data of a particular company.
Therefore it is one of most important tool that is used by the stakeholders to measure the
profitability, liquidity, financial status and strength of the business.
The financial statements such as profit and loss account and balance sheet provide
information related to the value of asset and the amount of revenue earned by the company
for a particular period. These statements cannot figure out the strength, weakness, of the
organisation. In this context ratio analysis helps to determine the capacity of the business
organization by analysing the financial statements properly. Therefore it can be said that
ration analysis not only compare the different numbers from the balance sheet, income
statement and the cash flow statement but also it compares the numbers against the previous
financial year, the company, industry and the economy in general. Therefore, the main role
of ratio analysis in the context of financial statement are as follows:-

8IMPORTANCE OF FINACE AND ACCOUNTING IN ORGANISATION
Analysing financial statement: Accounting ratio analyses the financial statements to
understand the financial position of the company. The main objective of the financial
statement analysis is to represent the financial soundness of the organisation to the users of
the financial statement such as investors, governments, management of the company,
creditors and financial institutions.
Identification of weakness: Accounting ratio helps the business organisation in determining
the weaknesses of the operating system of such organisation. According to the decisions of
ration analysis the management need to analyse the weakness and take the proper measures to
rectify such problem.
Comparing the performance: The main objective of ratio analysis is to compare the
performance of the company over the years and with other companies of a particular industry.
Further the company can measure the performance on the basis of other company.
Formulation of plans: Since accounting ratios analyses the financial statements of the past
years therefore, it would be easier for the company to establish a future trends of the
organisational performance. According to the decision the company would able to formulate
future plans for the development
There are various types of ratios such as liquidity ratio, leverage ratio, Activity or
efficiency ratio and profitability ratio. The liquidity ratio states that how a company converts
the current assets into cash within a short period of time. Further it is used to measure the
capability of the business to pay the short term liability to run the business properly. If the
company failed to pay the short term debt of the company then it affect the credibility of the
company and the credit ratings of such business organisation. Liquidity ratio is measured

9IMPORTANCE OF FINACE AND ACCOUNTING IN ORGANISATION
with the help of current ratio, quick ratio, working capital ratio, cash ratio and interval
measure ratio.
Here in this study the current ratio of the Alpha Manufacturing Company defines that
there is an increase in current ratio which is amounts to 2.3488 in the year 2017 and again in
the year 2018 the current ratio has decreased to 0.932. The acceptable rate of current ratio is 2
to 1. The decrease in current ratio defines that there is an increase in short term debt and
decrease in current asset. On the other hand high current ratio defines that the company is
able to meet the short term liabilities. Thus from the annual report of the company it can be
said that the company is not in a position to meet the short term liabilities .As a result it
would affect the credit rating and solvency position in the future. The figure shows the
current ratio of Alpha Manufacturing Limited.
Fig: Current ratio
Again the profitability ratio is used to measure the operational efficiency and the profit
earning capacity of the firm. Further this ratio reflects the final result of the business
operation. The management of the business organisation aims to increase the profitability
ratio to maximise the profit. Again the profitability ratio is measured with the help of gross
profit ratio, net profit ratio, operating profit ratio and expense ratio. Here in the net profit
margin ratio of Alpha Manufacturing Company states that in the year 2018 the net margin
ratio is 8.75 and in the year 2017 the net profit margin is 12.75. Therefore it can be said the

10IMPORTANCE OF FINACE AND ACCOUNTING IN ORGANISATION
company has failed to maximise the profit in the financial year 2018. Thus it can be said that
it will affect the firm’s revenue earning capacity in the future. The figure shows the decrease
in the net profit margin of the firm.
Fig: Net profit margin
The activity ratio or the performance ratio helps to know the performance of the
company. Again this ratio is determined with the help of receivable turnover ratio, payable
turnover ratio, current asset turnover ratio, capital turnover ratio, total asset turnover ratio,
fixed asset turnover ratio, debtors collection period and creditors collection period.
Debtors collection period is one most important tool that measure the efficiency of the
company. As per the concept of Debtors collection period the company refers to the average
time period to collect the debts. Therefore, if the collection period decreases then the
company able to collect the money with in less time period and it could meet the required
fund more efficiently. Therefore, in the case of Alpha Manufacturing Company the debtors
turnover ratio has increased to 73 days in the year 2018. The increase in the ratio means the
company could receive the payments within less time period. On the other hand the creditors
collection period refers to the average period with in which a company able to settle the debt.
If the liquidity position of the company is not good then such business organisation cannot
pay the debt with in the time period. Therefore in case of the chosen company creditors
collection period has decrease in the financial year 2018 as compared to 2017 for an amount
of 159.6875. It means that the company have to repay the debt with in less time period.

11IMPORTANCE OF FINACE AND ACCOUNTING IN ORGANISATION
Fig: Creditors collection period
Fig: Debtors collection period
Again according to the return on capital employed also helped the company to
determine the profitability of the company. In this case there is a decrease in the capital
employed in the year 2018. The ROCE (Return on Capital Employed) always need to be
greater than the amount of the borrowings of the company.
Fig: Return On Capital employed
Return on capital employed is used to determine that how efficiently the company is
using the profit from its capital. In the year 2018 there is a decrease in return on capital
employed which can be said that the company cannot able to generate profit from the capital.
Therefore, it can be said that company need to improve the ROCE.