Assignment Sample on ACFI1203 Financial Decision Making

Introduction

Financial performance of any organisation depends on profitability as well as efficiency of organisation. There are different types of techniques and processes adopted by the financial management of an organisation in order to evaluate the organisation’s financial performance. An organisation is fiercely focused on profitability and efficiency ratio to identify a company’s financial health as well as evaluate the organisation’s future financial growth. Depreciation on assets is an important factor for reducing an organisation’s profit. Nevertheless, it is most important for an organisation that considers depreciation to calculate actual profit or loss for a certain period of time. Finally, all factors give an impact on the balance sheet of the organisation that indicates the actual financial position of the organisation.

Task A

Calculation of annual depreciation (Souls Food)

Table 1: Depreciation

(Source: Toma and Ionescu, 2018)

Souls food is a UK based food industry that has operated their business for the last fifteen years. The organisation has some assets and liability for performing its business activities in its local area. Organisation has plant and machinery for £ 151,200 that is depreciated for over ten years. Besides, the company also has a motor vehicle for delivering their food door to door. That’s total value is £52,000 it is also depreciated by 25% that decision is taken by the organisation’s financial management. Total depreciation is calculated on both assets are£ 15,120 for plant and machinery and£ 13000 for motor vehicles. Total depreciation that is charged to the profit and loss account is£ 28000. This value also reduces the value of the assets of the organisation.

Calculation of non-current assets (Souls Food)

Table 2: Non-current assets

(Source: case study)

Non-current assets refer to those assets that are held by an organisation for a long period of time. This type of asset value is a big value. Non-current assets are value of those assets which is organisation purchases for use long period and that play vital role for performed organisation different types of business operations. non-current liability arises in any organisation due to organisation is taken a loan of big amount, as well as organisation, is arise capital for new branches and expanding business in global market. Soul’s food has non-current. Total value of non-current assets of the organisation is£ 175,080 that is shown in the assets of the balance sheet of the organisation.

Task B

Profitability of Rolls Royce Holdings Plc

Operating Profit

Table 3: Operating profit

(Source: rolls-royce.com, 2021)

The operating profit of Rolls Royce Holdings Plc (RRH) for 2020 and 2020 is -16.8% and 5.2%. RRH faces loss in 2020 due to Covid pandemic situation. Besides, the company also faced a decrease in total revenue of the organisation by 3,687 (case studies). This indicates RRH is facing a massive sale in 2020. This decrease in sales also reduces an organisation’s operating profit as well as gross profit. Gross margin of RRH for 2020 and 2019 is (4.4) % and 15.4%. An organisation must improve revenue as well as reduce operating costs to improve operating margin as well as gross profit of the whole organisation. As opined by Toma and Ionescu, (2018), operating profit is calculated by deducting the operating expenses of the organisation from the total revenue of the organisation. Operating expenses refers to those expenses which are spent by the company to operate basic operations for manufacturing processes such as “cost of raw materials”.

Net profit

Table 4: Net profit

(Source: rolls-royce.com, 2021)

Net profit is the actual income of any business entity. This is final and accurate profit for the company. This is calculated by deducting all expenses of an organisation from the total revenue of the organisation. Net profit of RRH for 2020 and 2019 is -34.0% and 2.0% (rolls-royce.com, 2021). The company is able to generate 2% net profit in 2019. Nevertheless, the organisation faces massive losses in 2020. As argued by Goni and Budiarso, (2018), net profit is evaluated through less overhead and administrative expenses for improving organisational performance in the market and simple organisational processes. Company has a massive loss due to low revenue and massive financial cost. The organisation has a financial cost for a loan that is taken by the organisation for improving organisation working capital as well as adopting DSC for operating business activities in Covid pandemic. The organisation has tax for 2020 and 2019 is 39 and 277 (rolls-royce.com, 2021). organisation‘s net profit after tax is (3,997) and 306 (rolls-royce.com, 2021). The company has a massive tax burden in 2019. Nevertheless, the organisation is able to generate profit. On the other hand, organisations with little tax in 2020 will face losses.

Task C

Gearing Ratio and Debt Ratio of Rolls Royce Holdings Plc

Gearing Ratio

Table 5: Gearing Ratio

(Source: rolls-royce.com, 2021)

Gearing ratio refers to the organisation’s actual amount of equity and debt. Thus assist an organisation to evaluate their portion of capital in total liability of organisation. This ratio is calculated by dividing the non-current liability of RRH Company by equity fund plus the non-current liability of the company. RRH gearing ratio for 2020 and 2019 is 0.807 and 0.860. RRH has non-current assets for 2020 and 2019 is 20,464 and 20,629 (rolls-royce.com, 2021). Besides, total equity of the company is 4,875 and 3,354. This indicates that organisations have a maximum portion of capital from other sources than equity. Organisation needs to improve their capital through equity sources. There are several benefits for selected equity for acquiring capital such as it has low cost of capital and low risks. As opined by Shygun and Mychak, (2019), an organisation calculates a gearing ratio to evaluate the actual amount of different sources of finance that an organisation utilises to meet financial needs. Further and it is important for any organisation that must be focused to select equity shares for acquiring finance for a long term time. As stated by Diener, (2020), these steps may assist companies to reduce financial costs as well as avoid risks that consist in other modes of finance. Here RRH plc is also focused on improving their share capital that it seems in the annual report of the company. The company improved their equity capital by nearly 1531.

Debt equity ratio

Table 6: Debt equity ratio

(Source: rolls-royce.com, 2021)

Debt equity is a technique for finding the debt portion of an organisation in the total liability of a company. Debt equity ratio of the company is 7.05 and 10.62 for 2020 and 2019. RRH is a global level automotive organisation thus it is important for companies to improve their debt portion to improve market value of the company as well as operate business operations without any financial issue. In this context total liability of RRH is 34,392 and35, 620 two years (rolls-royce.com, 2021). As opined by Nariswari and Nugraha, (2020), the organisation’s total liability is reduced as compared with 2019’s liability which means organisation is focused to reduce their liability for acquiring more funds from other financial sources.

Task D

Financial performance of Rolls Royce Holdings Plc

Financial position is an important key for a global based organisation to improve its growth in the international market. Rolls Royce Holdings Plc has operated its business in more than 25 countries for more than 10 years. There are too many competitors of organisations such as Honeywell. As opined by Kiarie and Kirori, (2019), financial performance of an organisation is evaluated through income statements as well as cash flow statements for two years. Organisation financial performance in 2019 is better in contrast with 2020 financial performance of the company. Nevertheless organisation needs to improve their performance even business is affected but Covid pandemic. Net profit for 2019 is 306 that are reduced to a loss of 3,997. The company is involved in the automotive business that has performed well in the past two years. Massive numbers of people are shifting to owning cars and vehicles. Nevertheless, the organisation faces loss in 2020. Besides, the revenue of the organisation is also down as compared with revenue of the previous year. Financial position of an organisation is mainly evaluated through the balance sheet of a company for more than one year. As opined by BANSAL and KUKKAR, (2019), the total assets of the organisation are 29,517 32,266 for 2020 and 2019. This indicates RRH has reduced their total assets as compared with 2019’s assets. Organisation has sold some fixed assets. Besides, companies are also reducing their current assets such as cash and short term investment. On the other hand, the liability of the organisation is also deceased. The total liability of RRH is 34,392 and 35,620. The organisation total liability is reduced by 1128.

Importance of financial position in business

A better financial position is assisting an organisation to take any business. Nevertheless, the financial decision must be as per organisation current financial position. A business must have more assets than liability this may give a positive impact on different types of stakeholders for involvement in business. As opined by Pradipta, (2017), this type of financial position makes a simple growth and improvement process in different host countries as well as in the global market. In this context, the financial position of RRH is not too good as a contract with 2019’s financial position. As opined by Ichsan et al. (2021), the organisation may face different types of business issues while expanding business as well as increased capital of the company. Total assets and fixed assets of the company are decreased with the value of assets decreased or the company may sell assets of the company to meet short term financial needs.

Calculation of Conversation cash flow

Table 7: Calculation of Conversation cash flow

(Source: rolls-royce.com, 2021)

Conversation cash flow of organisation

Conversation cash flow is a continuous process of calculating actuarial inflow or outflow of cash. Besides it assist an organisation to value the actual value of converted in free cash of operating profit of company. As opined by Afiezan and Wijaya, (2020), RRH may consider this for improving their financial performance as well as easily converting operating profit into free cash. As argued by Ali and Ormal, (2018), the conversational cash flow of the organisation is -16.82 days and 6.95 days in 2020 and 2019. This indicates the organisation needs minimum time to convert operating profit for free as compared with 2020’s conversation period.

Conclusion

This rapport is to assist any business organisation to calculate an effective depreciation that is suitable for profit and loss as well as value of machinery. Depreciation exists in any business. It is calculated on those assets which fail to work after a certain period of time. Besides, depreciation must be considered by any organisation to calculate actual profit and value business. Furthermore, depreciation has also affected profitability of an organisation firstly reducing net profit and secondly increasing price of final product. Besides operating profit and net profit is the main element for any business for evaluating profitability as well as position in the business.

Reference

Journals

Afiezan, A., Wijaya, G. and Claudia, C., 2020. The Effect of Free Cash Flow, Company Size, Profitability and Liquidity on Debt Policy for Manufacturing Companies Listed on IDX in 2016-2019 Periods. Budapest International Research and Critics Institute-Journal (BIRCI-Journal), pp.4005-4018. Available at:https://scholar.archive.org/work/hjkcirt2qzgf7ltv3qizt74a44/access/wayback/http://www.bircu-journal.com/index.php/birci/article/download/1502/pdf

Ali, U., Ormal, L. and Ahmad, F., 2018. Impact of free cash flow on profitability of the firms in automobile sector of Germany. Journal of Economics and Management Sciences, 1(1), pp.57-67. Available at:https://kardan.edu.af/data/public/files/usmanali-lidaormal.pdf

BANSAL, D.S.K. and KUKKAR, D.P., 2019. Analysis of Debt-Equity Ratio in Reliance Industries Ltd. Interpretation, 230156, pp.198687-00. Available at: https://aiirjournal.com/uploads/Articles/2020/11/4805_20.DR.%20SANJEEV%20KUMAR%20BANSAL%20&%20%20DR.%20PANKAJ%20KUKKAR.pdf

Diener, F., 2020. Empirical Evidence of a Changing Operating Cost Structure and Its Impact on Banks’ Operating Profit: The Case of Germany. Journal of Risk and Financial Management, 13(10), p.247. Available at: https://www.mdpi.com/1911-8074/13/10/247/pdf

Goni, Y.M. and Budiarso, N.S., 2018. Analysis calculation of depreciation fixed assets according to financial accounting standards and tax laws as well as impact on taxable income in PT. Massindo Sinar Pratama Manado. ACCOUNTABILITY, 7(01), pp.11-20. Available at: https://ejournal.unsrat.ac.id/index.php/accountability/article/viewFile/19072/18633

Ichsan, R.N., Suparmin, S., Yusuf, M., Ismal, R. and Sitompul, S., 2021. Determinant of Sharia Bank’s Financial Performance during the Covid-19 Pandemic. Budapest International Research and Critics Institute (BIRCI-Journal): Humanities and Social Sciences, 4(1), pp.298-309. Available at:https://pdfs.semanticscholar.org/f022/fdbbbd29795e57846eae6d1545a92a2052b4.pdf

Kiarie, J., Kirori, G.N. and Wachira, D., 2019. Moderating Effect of Gearing Ratio on the Relationship between Loyalty Programs and Financial Performance of Selected Firms in Service Industry in Kenya. Journal of Economics, 3(1), pp.1-14. Available at: http://stratfordjournals.org/journals/index.php/journal-of-economics/article/download/319/498

Nariswari, T.N. and Nugraha, N.M., 2020. Profit Growth: Impact of Net Profit Margin, Gross Profit Margin and Total Assests Turnover. International Journal of Finance & Banking Studies (2147-4486), 9(4), pp.87-96. Available at: http://ssbfnet.com/ojs/index.php/ijfbs/article/download/937/712

Shygun, M. and Mychak, N., 2019. Ratio analysis for operations with non-current assets held for sale. Przestrzeń, Ekonomia, Społeczeństwo, (15/I), pp.149-167. Available at: http://yadda.icm.edu.pl/yadda/element/bwmeta1.element.desklight-d45e7a75-52be-4a47-94b5-b477e6234a8e/c/RATIO_ANALYSIS_FOR_OPERATIONS_WITH.pdf

Susanto, Y.K., Pradipta, A. and Djashan, I.A., 2017. Free cash flow and earnings management: board of commissioner, board independence and audit quality. Corporate Ownership and Control, 14(4-1), pp.284-288. Available at: https://dergipark.org.tr/en/download/article-file/365370

Toma, M., Ionescu, L. and Founanou, M., 2018. Analysis applied to the impact of depreciation methods of immobilized assets on financial performance. Journal of science and arts, 18(4), pp.985-992. Available at: https://www.icstm.ro/DOCS/josa/josa_2018_4/a_14_Toma_M_981-988.pdf

Websites

rolls-royce.com ,2021; annual report of Rolls Royce Holdings Plc available at: https://www.rolls-royce.com/~/media/Files/R/Rolls-Royce/documents/annual-report/2020/2020-full-annual-report.pdf