Accounting and Financial Management Ratios

Introduction

Accounting and financial management is the process of preparing financial reports for an organisation and managing organisation's financial performance. It is the main responsibility of accountants and managers of the company to appropriately maintain and keep financial and accounting information in the form of financial reports so that internal and external stakeholders can analyse accurate data of the business (Ward, 2012). Actual performance can be determined with the help of various accounting techniques including ratio analysis, capital budgeting and cost of capital. Main aim of this project report is to develop an understanding about the accounting and financial management in the context of an business organisation. Two different companies have been discussed in this report.

First organisation which is provided is Bitmap PLC which is a furniture manufacturing company and executing its business operations in London, UK. Another business entity which is provided for analysing accounting and financial management is Toyland Ltd. This company is based in London and currently manufacturing toys for children. In this project report calculation of accounting ratios, working capital cycle and capital budgeting of two different companies are performed according to the different case scenarios.

Part- A

Introduction

Bitmap Plc is a furniture manufacturing company which is currently operating its business activities in London successfully. Board of directors of organisation have analysed significant changes in the financial statements of Bitmap Plc. Directors of this business entity have asked the management accountant to prepare a report on the financial performance of the organisation (Banerjee, 2012). Various financial ratios have been calculated in this report.

1. Calculation of relevant ratios to analyse organisation's performance

Ratio analysis: 

It can be defined as a qualitative analysis of organisation's performance with the help of various information which is recorded in financial statements of the company. All the internal and external stakeholders use ratios to determine that organisation is performing well or not in the market. In the case of Bitmap Plc, ratio analysis have been conducted for the directors so that they can analyse the cause of changes in financial statements (Blankespoor and et.al., 2013). Various types of ratios are calculated as a management accountant from the financial statements of two years of this organisation below:

Profitability ratios: 

Such type of ratios are calculated by the accountants of the companies in order to analyse the actual profit making ability of the organisation. Following are the ratios that are calculated by management accountant of Bitmap Plc:

  • Net profit ratio:

Formula:

 Net profit after tax / total revenues * 100

Particular

2016

2017

Net profit after tax

3220

4060

Revenues

18000

23000

Net profit ratio

17.89%

17.65%

From the above calculation it has been observed that Bitmap Plc's net profit ratio has been decreased to 17.65% in year 2017 from  17.89% which is for year 2016 (Khan, 2015).

  • Gross profit ratio:

Formula:

Gross profit / total revenues * 100

Particular

2016

2017

Gross profit

9100

12200

Revenues

18000

23000

Gross profit ratio

50.56%

53.04%

While calculating the ratio the management accountant of Bitmap Plc have identified that gross profits of the company have increased in year 2017 which has resulted in increased ratio. 50.56% and 53.04% are the gross profit for year 2016 and 2017 respectively.

Liquidity ratios:

The ratios are calculated to ascertain actual liquid strength of a company (Krakhmal, 2012). Main purpose behind the calculating this ratio is to make future planning for investment and purchasing of business assets. If is it weak than management accountant suggests directors to take appropriate actions. In Bitmap Plc following liquidity ratios are calculated:

  • Current ratio:

Formula: 

Current assets / Current liabilities

Particular

2016

2017

Current assets

4150

5160

Current liabilities

1500

1100

Current ratio

2.77

4.69

From the above calculation it has been analysed that organisation's liquid strength is very good as in year 2016 current ratio was 2.77 and in year 2017 it has increased up to 4.69.

  • Quick ratio:

Formula:

Quick assets / current liabilities

Particular

2016

2017

Quick assets

2350

2800

Current liabilities

1500

1100

Quick ratio

1.57

2.55

From the above calculation it has been analysed that organisation have good liquidity because the ratio of Bitmap Plc in year 2016 and 2017 are more than ideal ratio which is 1:1.

Gearing ratios: 

These ratios are related to organisation's capital structure in which relationship of internal and external liabilities are analysed with each element of organisation. Main purpose of gearing ratios is to determine company's financial stability (Taipaleenmäki and Ikäheimo, 2013).

Management accountant of Bitmap Plc have calculated following ratios for the purpose of analysing company's stability in monetary terms:

  • Debt equity ratio:

Formula: Total debts / total equities

Particular

2016

2017

Total debts

3500

4600

Total equities

12000

15760

Debt equity ratio

0.29

0.29

From the above computation it is assessed that debt equity ratio in year 2017 and 2016 is same which shows that debts and equities has no contribution against the changes  observed by board of directors. In both years that is in 2016 and 2017 debt equity ratio is 0.29.

  • Total asset to debt ratio:

Formula: 

Total assets / total debts

Particular

2016

2017

Total assets

15500

16760

Total debts

3500

4600

Total asset to debt ratio

4.43

3.64

From the above calculation it has been observed that organisation's total asset to debt ratio is decreased in year 2017 when compared to 2016. For both the years this ratio is computed as 4.43 and 3.64 res

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