MBA 7001

Accounting for Decision Makers

 Table of Contents
Task A........................................................................................................................................3

01. Key Purpose of Accounting and Users of Accounting Information............................3

02. Selected Accounting Policies and Their Importance...................................................5

03. Analysis of Financial Performance and Financial Position Based on Financial Ratio
Calculations............................................................................................................................7

04. Difference Between Accrual Basis and Cash Basis of Accounting..........................10

Task B......................................................................................................................................11

01. Cost Classifications and Relevant Costs for Decision Making.................................11

02. Analysis of New Product Launch Based on Cost- Volume- Profit Analysis............12

03. Limiting Factor Analysis for Optimum Product Mix Selection....................................13

Task C......................................................................................................................................14

01. Importance of Capital Investment Decisions............................................................14

02. Project Evaluation Based on Capital Budgeting Techniques....................................15

Task D......................................................................................................................................17

Importance of Budgeting, Conventional Approach, Alternative Approaches and Relevant

Frequency of Operational Budget Preparation.....................................................................17

References................................................................................................................................19

List of Figures
Figure 1: Statistical Calculation of Liquidity Ratios..............................................................7

Figure 2: Statistical Calculation of Profitability Ratios.........................................................8

Figure 3: Statistical Calculation of Efficiency Ratios............................................................8

Figure 4: Statistical Calculation of Solvency Ratios..............................................................9

Figure 5: Capital Budgeting Evaluation...............................................................................15

Task A
01. Key Purpose of Accounting and Users of Accounting Information
Accounting is the language of business. The primary objective of Accounting is the
systematic recording of monetary transactions and events in relation to a certain fiscal period
of a particular business organization. Accounting delivers both financial and non-financial
information to the readers of financial accounts, specifically prospective investors, creditors,
and lenders, to assist them in the process of making economic decisions about the economic
entity that they are interested in. The maintenance of an appropriate accounting system is
really essential for every business organization irrespective of the size and industrial sector
that the business operates in, because the decisions of the stakeholders are significantly based
on financial information derived from accounting records and statements (Garg, n.d.).

The key objective of accounting can evaluated in detail. It is the subject stream that keeps
orderly records of financial transactions that the organization carries out with various parties.
If not for accounting, human memory would have had to carry a heavy burden to memorize
all the financial transactions that took place, in most situations, would have been impossible.
Accounting safeguards company assets from unauthorized and improper usages. Even the
proprietors are being provided with a lot of information in relation to the amount of funds that
they have invested within the organisation. The information certifies that the funds are not
continually kept in reserve or underutilized. As accounting assures descriptive record
maintenance of periodic revenue and expenditure, the operational loss or profit relevant to the
financial period can be assessed at the end of the fiscal year. The managerial staff, fund
providers, lenders, and others can determine whether or not the business has proven to be
profitable with the aid of the profit and loss account. If it does not prove to be lucrative or
profitable, the reasons can be looked into, and the appropriate corrective actions can be
implemented (Garg, n.d.).

Identically to the profitability, the current financial standing of the organization can be
ascertained with the use of financial information derived through accounting. The balance
sheet acts as a metric for determining the corporate financial wellbeing. Accounting
information aids rational decision making by dragging the necessary level of attentiveness of
the executive bodies on important business areas. Most importantly, accounting makes a huge
contribution by acting as an information system. It is the main method that collects, analyse
and communicate economic information for both external and internal parties to take proper
decisions (Garg, n.d.).

As stated, the tremendous importance of accounting is not merely limited to accounting

professionals but at the same time numerous parties are making use of financial information
generated through accounting systems. The parties who are located outside the organization
are external stakeholders. The main external interest groups are investors, creditors and
lenders. Investors make use of accounting information to have a comprehensive
understanding about the financial health of the organization. They need to assess the past
performances and based on those information, they should decide whether the future
prospects would be fine or not. Accounting enables them to choose whether to keep their
funds with the organization in the long run or not. Creditors and lenders also have to assess
whether the organization is in a favourable condition to make on time payments. They have
concerns with the liquidity position of the organization and accounting allows them to
comprehend whether the cash position is satisfactory or not (Garg, n.d.).

Groups within the organisation that showcase an interest on accounting information are
known to be internal users. They are mainly the managers and employees. Management
coordinates and oversees each and every financial transaction of the business. They are
responsible for strategy formulation and rational decision-making. They are accountable for
the fund owners and always it is mandatory to assure that their funds are being appropriately
utilized and managed. Accounting information further assists the management to appraise the
job performance of the co-workers. Accounting is the core system that facilitates the
corporate management at planning and controlling functions. Budgeting, pricing decisions
and capital projects are some of the prominent examples that accounting performs its role in
relation to financial planning and monitoring. Employees need to know whether the
organization is financially stable and able to make them accurate payments (Garg, n.d.).
02. Selected Accounting Policies and Their Importance
For the information supplied in the financial accounts to be properly understood , accounting
policies are crucial. The accounting principles that an organization utilized to prepare and
present the financial statements should be stated in unambiguous terms. Since several
accounting standards permit different treatments for the same transaction or item, it is crucial
to disclose accounting rules. If the accounting policies are not clearly specified, readers of
financial records would not be competent at comparing the financial data with that of other
business organizations that operate in the same industry. As a result, by disclosing the
selected policy, it will be easier for readers and users of financial statements to make rational
decisions. The effect of accounting policies on the profit and loss accounts and the balance
sheet of the reporting organization within the sector will also be visible to the users (Alayemi,
2015).

Similarly, accounting principles are fundamentals in the accounting system that guide current
and potential work whilst maintaining comparability and consistency of the financial record
keeping process. Application of accounting principles ensures that the information are being
presented in good faith, objectively and in a flexible manner. Accountant is the main
responsible party for selecting, interpreting and applying suitable accounting policies and
principles that are matching with the corporate strategies and external influential factors
(PĂTRAŞCU, 2014).

The practical application of accounting policies have been explained in relation to Galadari
Hotels PLC.

Recognition and Measurement of Property, Plant and Equipment (PPE)

PPE line items, which are classified as non current assets, are initially valued at cost. These
components would then get reported at cost less amortization and depreciation that have
accrued over time (Galadari Hotel (Lanka) PLC, 2021). According to the Historical Cost
Principle, fixed assets are recorded at cost in accordance with corporate policy. The guiding
concept states that when an asset is acquired by a corporation, its original cost should be
noted in the financial records. When the value of an asset is getting appreciated over time as
the result of unstable market conditions, the historical cost approach indicates conservative
accounting, protecting the asset from being overvalued (Touvila, 2021).
Recognition of Revenue

In accordance with SLFRS 15, "Revenue from Contracts with Customers," Galadari Hotels
accounts for its revenue. Thus, the business determines its revenue in line with the revenue
recognition principle when the service obligation is provided to its customers ( (Galadari
Hotel (Lanka) PLC, 2021). Since this impacts the reliability and uniformity of corporate
operations, it is essential to determine revenue in the relevant term of income generation
(O'Brien, 2021). In accordance with the matching principle, which specifies that the debits
and credits should match, pertinent expenses are charged in tandem to the revenue made
during the year (Borad, 2018).

Stock Valuation

The corporation values its inventory at the lower of cost and net realizable value. Similar to
PPE valuation, the corporation uses a conservative accounting technique in this instance as
well (Galadari Hotel (Lanka) PLC, 2021). The rule states that a business should select the
less favourable option when faced with two suitable options for registering an item in order to
avoid overstating assets in the financial records (Borad, 2018)

Moreover, the weighted average cost approach is utilized for inventory valuation (WAC).
Every stock item, composing food and drinks, other consumables, engineering supplies, and
fuel stock, are valued in accordance with WAC, according to the corporate annual report
(Galadari Hotel (Lanka) PLC, 2021). They are specifically indicated in the notes for users of
the financial statements in accordance with the fully disclosure accounting concept.
Readers of financial statements can compare firm performance across financial periods due to
this fact.
03. Analysis of Financial Performance and Financial Position Based on Financial
Ratio Calculations
The financial health of Galadari Hotels have been assessed based on the liquidity,
profitability, efficiency and solvency ratios that were calculated for the company for the most
recent couple of financial years.

The ability of a firm to offset its current liabilities with its current assets is shown by its
liquidity ratios. The estimates show that in 2021 in comparison with 2020, current ratio as
well as the liquidity ratio have decreased. The main cause of this decline is the rise in short-
term financial liabilities. The recovery of the financial position following the global
pandemic has, however, led to an increase in the cash ratio (Galadari Hotel (Lanka) PLC,
2021). By paying off debt, utilizing long-term finances, handling accounts payable and
receivable effectively, and reducing unneeded expenses, the company can increase its current
and quick ratios (Maverick, 2021).

Liquidity Ratios
Year
2021 2020 Varience
Current Ratio
Current Asset/ Current Liabilities 4.33957 5.38167 -104%
Quick Ratio
(Current Assets- (Inventory+prepayments))/ Current Liabilities 4.27425 5.30475 -103%
Cash Ratio
Cash and Cash Equivalents/ Current Liabilities 0.13211 0.06214 7%

Figure 1: Statistical Calculation of Liquidity Ratios

Profitability ratios show how well a company can produce profits. The performance of all
measured profitability ratios improved in 2021, showing a slow process of recovery from the
unanticipated crisis. The profitability ratios of prior financial years had been severely
damaged due to operational restrictions caused by health regulations and travel limitations.
As measured with regard to one rupee of invested assets and equity, the corporate ability to
create high returns has decreased along with the reduction of the gross profit and net profit
figures. Yet, the situation is fine in comparison to the prior year. 
 Profitability Ratios
Year
2021 2020 Varience
Gross Profit Ratio
Gross Profit/ Sales *100% 34% 27.28% 6%
Net Profit Ratio
Net Profit/ Sales *100% -62% -101.22% 39%
Return on Assets Ratio
Net Income/ Average Total Assets -3% -5.24% 2%
Return on Equity Ratio
Net Income/ Average Shareholder's Equity -4% -5.84% 2%

Figure 2: Statistical Calculation of Profitability Ratios

Efficiency ratios show the level of effectiveness that a business operates at managing its
short-term assets and short-term liabilities. As assessing those statistical indications, all were
positively effected instead of the payable turnover.  In compared to the prior year, the
organizational capacity to pay its debts, its ability to settle its inventory, its ability to collect
money from customers, and its ability to generate income have all improved. Addressing
customer needs through online platforms, providing home delivery choices during
lockdowns, signing partnerships with creditors for beneficial credit facilities, delaying
unneeded charges, and providing rebates are a few of the possibilities for the future
expansion of the business.

Efficiency Ratios
Year
2021 2020 Varience
Inventory Turnover Ratio
Cost of Goods Sold/ Average Inventory 9.04 8.86 18%
Asset Turnover Ratio
Net Sales/ Average Total Assets 0.056 0.05 0.38%
Receivable Turnover Ratio
Credit Sales/ Average Receivables 6.01 5.20 81%
Payable Turnover Ratio
Credit Purchases/ Average Payables 1.00 1.24 -24%

Figure 3: Statistical Calculation of Efficiency Ratios

Solvency ratios are used to estimate the corporate financial leverage. As  these ratios compare
owner funds to external borrowing funds, investors place a high value on these ratios.
Through all financial periods, the corporation keeps its debt ratio to equity ratio at a minimal
percentage. Despite a minor increase in the debt ratio, the financial health of the firm has not
been materially affected. So, the hotel is not immediately exposed to liquidation risk,
according to solvency ratios.

Solvency Ratios
Year
2021 2020 Varience
Debt to Equity Ratio
Total Debt/ Total Equity 0.15016 0.13186 2%
Debt Ratio
Total Debt/ Total Assets 0.13056 0.1165 1%
Equity Ratio
Total Equity/ Total Asset 0.86944 0.8835 -1%

Figure 4: Statistical Calculation of Solvency Ratios

Overall, the corporate  financial functioning and financial standing are not particularly

positive for 2021. It is anticipated that everything will return to normal in the upcoming
financial periods. Although there has been a drop, the current and acid test ratios are
nevertheless maintained at 2:1 and 1:1, correspondingly, in accordance with industry
standards. Also, even if the debt ratio has gone up, it is still below 0.4, which is good for the
business . Ratios of profitability and efficiency have shown outstanding growth.

Taking into account all of the aforementioned information, it can be said that the corporation
has managed to enhance its operations in some way following the pandemic and can do so
further in the future by implementing far more effective procedures.
04. Difference Between Accrual Basis and Cash Basis of Accounting
A company must utilize accrual accounting rather than cash accounting in order to comply
with widely accepted accounting rules when keeping accounting records of financial
transactions. According to accrual accounting principle, all transactions and events are
documented as they happen, irrespective of the input or outflow of cash. In contrast, cash
basis accounting takes the monetary impact into consideration. Because of this reason, cash
inflows and outflows for a period would not perfectly get matched with the revenues and
expenses recorded on the income statement. The income statement, in particular, shows the
transactions that took place at the start and close of the fiscal year.   The cash flow shows the
amount of money the company made throughout the specified accounting year. Moreover,
non-cash eleements like depreciation, investment gains or losses, etc. are included in the
income statement. The  revenue, cost, and cash flow statistics indicated under the income
statement would be out of synchronization because of the aforementioned reasons (Tudor,
2017).
Task B
01. Cost Classifications and Relevant Costs for Decision Making
Direct costs are the cost items which can be easily connected with a specific cost object. It
can be either a product, departmental unit or a project. For instance, if a garment
manufacturing factory is taken into consideration, fabric and the salaries for sawing machine
operators are considered to be direct costs. In contrast, indirect costs are the expenses relevant
to running the business and managing operations. These are overhead expenditure that
contribute the entity as a whole. For instance, electricity, and salaries for supervisors are
deemed to be indirect overheads (Business News Daily, 2023).

The two cost types that are related to production volume are variable costs and fixed costs.
Whereas fixed costs are periodic expenses that show no relationship to the volume of activity,
variable costs, which are typically known as direct costs, are expressed as a function of
output volume. The known fixed costs exist regardless of changes that are made to the output.
They have a linkage to the time rather to the output. Fixed costs are incurred regardless of
how many sales units are sold out, so managerial attention is basically required when adding
fixed expenses to the organization because of their inevitability. Some notable instances of
variable expenses are the spendings on raw materials, the cost of labour, delivery fees, and
packaging charges. Examples of fixed costs include rent, insurance, managerial salaries, and
interest fees. (Drury, 2018).

Relevant costs are expenses that matter while making economic decisions. A cost is
considered relevant if it might change as a result of a certain decision being taken. The choice
should alter the cash flows, either increasing or decreasing them. If a cost is relevant, it
should have an impact on operations in the future and fluctuate depending on the available
possibilities. Examples of pertinent costs are future cash flow, opportunity costs, avoidable
expenses, and incremental costs (Auburn University, n.d.).
02. Analysis of New Product Launch Based on Cost- Volume- Profit Analysis
Cost- Volume- Profit Analysis (CVP) is a cost accounting technique that is commonly known
as the Break- Even analysis is used by organizations to evaluate the impact of cost and
volume changes on operating revenue and profitability. As the activity volumes are changing,
the financial outcomes too vary. Accordingly, the business organization should have the
understanding on the minimum sales volume that it requires to make profits. For that
particular purpose, the break even point is getting calculated (ACCA, n.d.).

The determination of the lowest possible manufacturing units needed by an enterprise to

cover its fixed expenses and variable costs is the fundamental goal of the break-even point
(BEP) calculation. It can either be calculated graphically or numerically. The knowledge
gathered from break-even analysis would allow the company to foresee the income needed in
terms of producing profits. The key for employing this tool is distinguishing the volume of
production that would be necessary for the earned revenue to equal the entire cost of
production. If the total amount of costs were offset with the increased revenue, there would
be neither profits nor losses (Kampf, et al., 2016).

Under the first recommendation, the sales price per unit would get increased up to £125. That
would result in a zero profits situation. The management can take a decision either to produce
the product or not. At the same time, assuming that all other prevailing factors would remain
constant, the company needs to sell one unit of the product for at least for a price of £125 to
end up with a revenue that would compensate the business for the time and financials that it
invested for keep producing the product, at the activity level of two thousand units.

The next recommendation, which is to downgrade the quality of raw materials, acquire them
at a low cost and using unskilled labour at a low cost, would certainly decrease the cost of
production and might result in a profit at the same sales price. It would be a feasible option
for the company, financially, to get rid from deriving a loss from the new product sales. Still,
as the total quality of the new product would get negatively impacted, it would cause a
definite, adverse, long-term impact on the sales as the customer satisfaction may fall at a low
rate.
03. Limiting Factor Analysis for Optimum Product Mix Selection
A constraint that prevents a business from increasing sales is referred to as a limiting factor.
It is a method for maximizing production while taking into consideration a variety of
limitations (Wikiaccounting, 2023). It is merely a scarce resource with a lack of supply
(Acorn Live, n.d.). The limits are essentially tied to the supply of manufacturing resources,
including labour hours, demand, machine hours, and the availability of raw materials (Ali,
2020). Making decisions based on limiting factors is now an essential component of
management accounting. When resources are limited for manufacturing, a business strives to
optimize its contribution margin per unit by directing limited resources to the creation of
goods and services that would provide the organization with the highest contribution per unit
(Civil Services India, 2023).

The corporation can choose the most efficient manufacturing mix while optimizing the
revenue by using the process outlined below.

The company must first precisely define its maximum sales volume as well as the limiting
issue that prevents it from achieving that level. Prior to production, the corporation must
calculate the contribution per unit for every production unit in terms of maximizing the
contribution at the presence of a limiting factor. The contribution per product must then be
split by the amount of scarce resources needed to manufacture that specific unit. Starting with
the resource with the highest contribution yield, one can rank according to the amount of
production produced per unit of the restricted resource (Civil Services India, 2023).

The described limiting factor analysis has several drawbacks of its own. Most importantly,
production is constrained to meet optimum consumer demands (Civil Services India, 2023).
Moreover, this approach is only valid if one limiting factor is present. More thorough analysis
should be done for many limiting factors to help in decision-making (Wikiaccounting, 2023).
Thus, limiting factor analysis requires that all of those aspects be taken into account at the
procedure of decision making.
Task C
01. Importance of Capital Investment Decisions
Capital investment projects, which are prominent financial decisions, are being undertaken by
business organizations while keeping long-term business growth in mind. The capital outlay
that is being made today would result in a huge economic earning in the future. Capital
investment decisions include acquisition of assets such as lands, constructing manufacturing
plants, and automation of manufacturing processes. As these decisions are consist of several
unique characteristics, the importance of such decisions are really high (Drury, 1994).

Capital investments require a lot of funds to be invested at once. Once the investment
decision was made, it is irreversible in nature, therefore the risk of making such decisions are
certainly risky (Drury, 1994). Therefore, the management is particularly responsible with the
investment decisions. Shareholders expect a maximum level of return for the funds that they
invest in the business. Hence, the management is accountable for the proper administration of
the funds of investors. Taking all these facts into account, the capital investment decisions
have to be made with a proper risk and return assessment (Pinkasovitch, 2022).

The returns of the project are quite uncertain and would get generated in the long term of
business operations. The funds would get tied up for an extended period of time. Therefore,
when a high number of alternative options would be available, the decision have to be taken
with a careful analysis and selecting the best option that derives the optimum benefits
(Franklin, et al., 2019).
02. Project Evaluation Based on Capital Budgeting Techniques
It cannot be merely decided that the project is viable based on the fact that the future cash
inflows exceed the current cash outflow. That is because the future cash flows have to get
adjusted for time value of money (TVM). The TVM principle demonstrates how, because of
its potential earning possibility, the value of money acquired today is not the same as the sum
that is to be obtained in the future (Mubarak & Nobanee, 2022). Consequently, the cash flows
have to be discounted and based on the discounted cash flows, the management have to make
decisions.

The given project can be assessed with various project appraisal methodologies. Among
them, net present value, internal rate of return and payback period are the most acceptable
methods.

Year 0 1 2 3 4 5
Initial Investment -400
Cash Inflows 100 100 100 100 100
NCF -400 100 100 100 100 100
DF @ 15% 1 0.87 0.756 0.658 0.572 0.497
DCF -400 87 75.6 65.8 57.2 49.7

NPV -166.50
IRR -6%

Payback Period -400 87 75.6 65.8 57.2 49.7

-313 -237.4 -171.6 -114.4 -64.7

Figure 5: Capital Budgeting Evaluation

Net present value is a terminology that implies the variation between cash inflows and cash
outflows of a certain project that to be undertaken for a lengthy period of time. Negative NPV
indicates that the project is not going to generate a greater return than the initial investment.
Generally, the management would favour the project only if the NPV is a positive value.
The discounting rate used when NPV is equal to zero is known as the internal rate of return
(IRR). This approach is used to evaluate the viability of new investment initiatives. IRR is
considered acceptable if it is higher than the cost of capital (COC) percentage. Similar to
NPV, a project with a higher IRR is preferable. However, under the given circumstance, IRR
is a negative figure which is unacceptable.

Payback is the time that a certain project would consume to return the initial capital outlay.
Lesser the payback, the project is acceptable. However, under this situation, even at the end
of the project, the initial capital outlay cannot be earned back. Hence, the project is not viable
to get implemented.

As according to all three project appraisal techniques, investing in the proposed project is not
a suitable decision for the organization.
Task D
Importance of Budgeting, Conventional Approach, Alternative Approaches and
Relevant Frequency of Operational Budget Preparation
The main purpose of budgeting as a managerial tool is to plan and manage anticipated
business operations. One source document that gives the organization a broad overview of the
accomplishment or failure of the desired business operations and goals is a thorough budget.
A company can successfully distribute its limited resources for carrying out operations by
using the budgetary planning process. Budgets can be used to assess operational outcomes
and take the needed remedial action. So it operates as a controlling tool. Periodic adjustments
are required because timely updated budgets result in well formed financial choices (Indeed
Editorial Team, 2021).

In the given scenario, the organization is trying to adopt the incremental budgeting approach.
The budget for the recent financial period or the true performance is used as the base for the
incremental budgeting method, which adds little amounts to the following month. For
variations over the time period, such as inflation, anticipated rises or falls in expenses and
sales prices, incremental amounts are adjusted. Making incremental budgets is a simple and
adaptable process. It is simple to comprehend. It takes relatively little time and money to
prepare. While a consistent strategy is employed across the accounting periods, departmental
conflicts are occurring at a very low level. Since all other elements remain unchanged, it is
simple to identify changes because they can be easily tracked (ACCA, n.d.).

However, incremental budgets are having some specific downfalls. Without adequately
analysing them, it is presumed that the prevailing expenses will continue into the following
period. There is absolutely no need to prove using the current costs. With this method,
divisions might not have a stated objective to cut expenses and increase operational
efficiency. Without a particular performance goal for the management, disorganizations in
present periods would naturally carry over to the following fiscal year (ACCA, n.d.).
As alternative options to address these issues, new budgetary techniques including zero-based
budgeting, activity-based budgeting and beyond budgeting have got developed. Zero-based
budgeting considers the base as zero and no prior references would be made. All the
divisional activities are getting reviewed and detailed targets are being set for each separately
(ACCA, n.d.). Activity based budgeting recognizes non-value adding activities that enhance
operational costs (CGMA, 2013). Beyond budgeting suggests a management approach for
keeping control across an enterprise in place of all conventional procedures. The organization
is given challenging goals with attainable expectations. Beyond budgeting is more widely
accepted than standard number-crunching budgeting procedures in the present decentralized
organizational structures (Schmidt, 2023).

Frequency of operational budget preparation cannot be specifically stated and getting differ
according to the emergence of managerial necessities. They need to be revisited and amended
more frequently. Hence the process is significantly valuable at the same time very
challenging (Ewing Marion Kauffman Foundation, 2016).
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