Question:
Task 1:
A.C. 1.1 – Assess the relationship(s) between a financial system/function and other systems/function in an organisation
A.C. 1.2 – Describe the systems of accounts and financial statements used to control a financial system
A.C. 1.3 – Analyse financial information contained in a set of accounts or financial statements
Task 2:
A.C. 2.1 – Construct a budget for an area of management responsibility
A.C. 2.2 – Develop budgetary control systems comparing actuals with planned expenditure
A.C. 2.3 – Discuss corrective actions to be taken in response to budgetary variations
A.C. 2.4 – Identify conflicts that can occur with management control systems and how these could be resolved or minimised
Task 3:
A.C. 3.1 – Define the current and potential sources of finance that support organisational activities
A.C. 3.2 – Evaluate the distribution of finance in support of organisational activities
A.C. 3.3 – Evaluate the monitoring and control of finance employed in support of organisational activities
Solution:
Re: A.C. 1.1
The financial function is the bloodstream of any organization regardless of size, type and ownership structure. Though the importance of financial excellence is usually associated with business organizations that exist to make profit for their owners, the significance of an effective financial system cannot be undermined for not-for-profit (NFP) organizations as these organizations need to ensure the expenditures are controlled and are in line with the overall objective of the NFP.
To assess the financial performance of any organization a set of financial statements is used.
- Profit and loss account
- Balance sheet
- Cash flows statement
- Statement of changes in owner’s capital
- Notes to the financial statement
Another very critical purpose financial function serves is planning and control.
It is important to note that financial function is interwoven with the rest of the organizational functions such as operations/production, estimation, business development, HR & administration etc.
Financial function and operations/production:
Operations and production require financial resources e.g., materials, labor and other capital assets to generate production. Financial function is interrelated as sourcing of the resources require decisions that have financial implications such as credit terms, lease or buy, own or outsource etc.
Financial function and estimation:
Estimation function in a construction company works to bid for new tenders. These tenders are against bill of quantities (BOQ). These tenders are carefully prepared in close coordination with financial function as these have huge financial implications so far as a construction company is concerned. Financial function challenges the assumptions, incorporates inputs such as cost of performance, advance payment and letter of credit.
Financial function and business development:
Business development function exists to look for new projects. Input from financial function is pivotal to this characteristic to ensure that all new projects are in line with the overall business strategy and financial goals.
Financial function and HR & administration:
Financial function is interrelated to HR & administration that deals with movement of staff that have financial implications.
A.C. 1.2
Re: A.C. 1.2
System of accounts:
A system of accounts follows the a process flow in order to provide useful economic and financial information to the users of financial statements.
Description of financial statements:
In sub task A.C.1.1 familiarizes us with the financial statements. We will now describe briefly below each of those five elements:
- Profit and loss account:
Profit and loss account or income statement, as the name signifies, is a statement that shows us results of operations of any business organization. In simplistic terms a profit and loss account shows how much profit or loss a business has made over a period of time. Main elements in a typical income statement include:
- Sales revenue: Money earned by for example
selling ice cream
- Cost of sales: Money spent on making ice cream that was sold
- Gross profit: Difference between sales and cost of sales
- Operating expenses: Spending on common organizational overheads
- Net profit: Net income after deducting all expenses from the operating profit.
- Balance sheet:
Balance sheet is the statement that reflects the financial health of the business. Main elements of balance sheet are:
- Assets: What the business owns
- Liabilities: What the business owes to outsiders
- Owner’s equity or capital: Shareholding or the owners of business
- Cash flow statement: It has following
components:
- Operating: Main business operations
- Investing: Cash inflow/outflow on assets to generate more revenue
- Financing: Cash inflow/outflow from financing the business e.g., equity or debt
- Statement of changes in equity: This statement shows how owner’s equity has changed and what has caused changes in the owner’s capital
- Notes: These are explanatory notes usually cross-referenced with above four financial statements in order to provide further details.
Other financial control systems:
Other than the above below tools are also used to control the financial system:
- Budgets: Set limits and targets in line with overall organizational goals
- Financial plans : Provide a look ahead
Re: A.C.1.3
Following set of financial statements is used to analyze the financial information:
| ABC Company Limited | |
| Profit & loss account | |
| For the year ended Dec 31, 2016 | |
| Pounds | |
| Sales | 613 633 |
| Cost of sales | (368 180) |
| Gross profit | 245 453 |
| Operating expenses | (134 999) |
| Operating profit | 110 454 |
| Income tax (30%) | (33 136) |
| Net profit | 77 318 |
| ABC Company Limited | ||||
| Balance sheet | ||||
| As on Dec 31, 2016 | ||||
| Pounds | Pounds | |||
| ASSETS | LIABILITIES | |||
| Current assets | Long term liabilities | 662 033 | ||
| Cash and bank | 183 825 | |||
| Accounts receivables | 621 067 | Current liabilities | ||
| Total current assets | 804 892 | Accounts payable | 97 533 | |
| Total liabilities | 759 566 | |||
| Fixed assets | 311 228 | |||
| Total assets | 1 116 120 | OWNER’S EQUITY | ||
| Share capital | 100 000 | |||
| Retained earnings | 256 554 | |||
| Total owner’s equity | 356 554 | |||
| Total liabilities and equity | 1 116 120 |
Performance measures: These measures are used to gauge the financial performance of the business.
| Return on capital employed (ROCE) | = | 110 454 | ||
| 1 018 587 | ||||
| Return on capital employed (ROCE) | = | 11% | ||
| Return on equity (ROE) | = | 110 454 | ||
| 356 554 | ||||
| Return on equity (ROE) | 31% | |||
| Gross profit margin | = | 245 453 | ||
| 613 633 | ||||
| Gross profit margin | = | 40% | ||
| Net profit margin | = | 77 318 | ||
| 613 633 | ||||
| Net profit margin | = | 13% | ||
| Operating profit margin | = | 110 454 | ||
| 613 633 | ||||
| Operating profit margin | = | 18% |
Financial status measures: These ratios are used to gauge the financial position/health of the business.
| Current ratio | = | 804 892 | ||
| 97 533 | ||||
| Current ratio (times) | = | 8.25 | ||
| Current ratio | = | 183 825 | ||
| 97 533 | ||||
| Current ratio (times) | = | 1.88 | ||
| Working capital ratio | = | 707 359 | ||
| 97 533 | ||||
| Working capital ratio (times) | = | 7.25 | ||
Analysis:
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