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Task 4a: Explain the purpose of the main financial statement (such as profit and

loss statement, balance sheet and cash flow statement) of Kinh Do Corporation.

The purpose of a financial statement is to enable a business to establish the result of its

operations over a period of time and to determine its worth at a specific date. Financial

statements are often prepared by business people to assist them in evaluating their

financial condition1.

In addition, the financial statements are important reports. They show how a business is

doing and are very useful internally for a company's stockholders and to its board of

directors, its managers and some employees, including labor unions. Externally, they are

important to prospective investors, to government agencies responsible for taxing and

regulating, to lenders such as banks and credit rating agencies, and to investment analysts

and stockbrokers.2 The owners, managers, shareholders, employees, the bank or lender,

government, investors, customers, vendor and supplier pay attention on companys

situation. The main purpose of financial statement will be shown by elements.

Owners and managers are the important factors in the operation of the company.

They manage and control all activities in business. So that, the financial statement

needs to be shown clearly through the form of financial analysis with a more

detail understanding. It includes profit, expenses, capital, revenue, etc. In runningbusiness progress, the information to make decisions affect strongly to the

maintaining and development of company operations. Besides that, it also effect

to the development of company through knowing clearly how much they earn in

order to compare with cost. From that, they can know their profit and control the

financial in their business and making the decision based on the financial

statement.

Employees are also important in the operation of the company who contribute to

make financial statement. Based on the clearly financial statement, the employees

can create the suitable strategies for the operation of the company. When the

company collects the information of the financial statement, they will show it to

employees to negotiate about the salary of employees. If the salaries make

1 http://www.hbsmc.com/purpose-of-financial-statements/2http://www.ehow.com/about_5474518_importance-financial-statements.html
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employees satisfy, they will continue contributing work for the company. In

contrast, if it is not enough or lower, they can stop working as well as working

performance reduces. Therefore, the financial statement as well as salary is very

important in making decision working of the employees.

Investors also interested in the financial statement of the company because it

affects to their investment money. It shows the financial situation of the company

like current debt, asset of company, working capital of company. Through the

financial statement, they can evaluate the viability of investing in a business. If

they invest to any company without getting profit, they can draw investment. In

other hand, they also need to know the capital of the business because it also

includes the investors capital.

Suppliers also require knowing the financial statement of the company because

they want to prove that the company has enough money to support for material

from supplier. Through the financial statement, the company can not also create

good relationship but also make trust to supplier. Besides the profits, the suppliers

also want to know the expenses that the company spends on buying materials.

Government also needs to know how much the company earn. From that, they can

have an overall view of the business and assess the earning money progress of

company. The government needs the financial information to ascertain the

propriety and accuracy of taxes and other duties. The tax is accorded to the profits

that the company earns as well as the salary of the employees. Therefore, the

company also show their financial statement to the government to consider

whether the employees are received the suitable salaries or not and the company

pay right taxes or not.

Shareholders also play an important role in making capital of company. The

financial statement also needs to be shown for them to make decision in investing

the company or not. Because when the company gets profit, the shareholders are

also divided the part of earning from profits. Besides that, shareholder also want

to assess how effectively management is performing its function and know how

profitably managements is running the operation of business or how much profit

they can afford to recover from the business for their own use. Through showing

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the information about income statement and balance sheet, the company will

create the belief on investing of shareholder.

Besides that, financial statements include an Income Statement, which shows the profit

and loss, Balance Sheet, which is a summary of the Assets, Liabilities and Equity of the

business at a specific date and cash flow statement, which summarizes the receipts and

disbursements of cash during the period.

These financial statements will be explained below:

Firstly, the income statement is one of the three important financial statements that

want company as well as investors to become familiar. It keeps an account of the net

surplus or deficits calculated by considering all the activities in the last financial year.

From that, business can forecast or assess the future performance of the company. The

purpose of the income statement is to show managers of each organization and investors

whether the company made or lost money during the period being reported. So the

income statements is necessary for each company, investors and creditors to determine

the past financial performance of the enterprise, predict future performance, and assess

the capability of generating future cash flows through report of the income and expenses.

Secondly, different from the income statement, which represents a period of time and

the balance sheet , which represents a single moment in time. The balance sheet or

statement of financial position is a summary of the financial balances of a sole

proprietorship , a business partnership or a company .Assets , liabilities and ownership

equity are listed as of a specific date, such as the end of its financial year3. Moreover,

balance sheet has three parts in standard company is assets, liabilities and ownership

equity. The purpose of a Balance Sheet is to report the financial position of a company at

a certain point in time. In addition, it also gives users an idea of the companys financial

position along with displaying what the company owns and owes. This allows users of

financial information to analyze and compare the health of one company to another.

Financial statements provide assessment of a company's profitability, liquidity and

operational efficiency.

3 http://en.wikipedia.org/wiki/Balance_sheet
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hip&prev=/search%3Fq%3Dthe%2Bpurpose%2Bof%2Bbalance%2Bsheet%26hl%3Dvi&rurl=translate.google.com.vn&usg=ALkJrhgzyh2sVs5XDMWKggptRmSgtyaW3ghttp://translate.googleusercontent.com/translate_c?hl=vi&sl=en&u=http://en.wikipedia.org/wiki/Partnership&prev=/search%3Fq%3Dthe%2Bpurpose%2Bof%2Bbalance%2Bsheet%26hl%3Dvi&rurl=translate.google.com.vn&usg=ALkJrhjzYQNxJK6atoF8jGtFPl5jJeKyVwhttp://translate.googleusercontent.com/translate_c?hl=vi&sl=en&u=http://en.wikipedia.org/wiki/Company&prev=/search%3Fq%3Dthe%2Bpurpose%2Bof%2Bbalance%2Bsheet%26hl%3Dvi&rurl=translate.google.com.vn&usg=ALkJrhh6hC8fuFFRtGFoLpeIzMRr0axUighttp://translate.googleusercontent.com/translate_c?hl=vi&sl=en&u=http://en.wikipedia.org/wiki/Asset&prev=/search%3Fq%3Dthe%2Bpurpose%2Bof%2Bbalance%2Bsheet%26hl%3Dvi&rurl=translate.google.com.vn&usg=ALkJrhg3FbkNOfxSa1ebGJDuACTV0qSlVAhttp://translate.googleusercontent.com/translate_c?hl=vi&sl=en&u=http://en.wikipedia.org/wiki/Liability_(financial_accounting)&prev=/search%3Fq%3Dthe%2Bpurpose%2Bof%2Bbalance%2Bsheet%26hl%3Dvi&rurl=translate.google.com.vn&usg=ALkJrhgd3L7Mnffz3vuDx7uwmyqFdoRelghttp://translate.googleusercontent.com/translate_c?hl=vi&sl=en&u=http://en.wikipedia.org/wiki/Ownership_equity&prev=/search%3Fq%3Dthe%2Bpurpose%2Bof%2Bbalance%2Bsheet%26hl%3Dvi&rurl=translate.google.com.vn&usg=ALkJrhj4XvGodqkE3HYjfVr-CtGI0YK73Qhttp://translate.googleusercontent.com/translate_c?hl=vi&sl=en&u=http://en.wikipedia.org/wiki/Ownership_equity&prev=/search%3Fq%3Dthe%2Bpurpose%2Bof%2Bbalance%2Bsheet%26hl%3Dvi&rurl=translate.google.com.vn&usg=ALkJrhj4XvGodqkE3HYjfVr-CtGI0YK73Qhttp://translate.googleusercontent.com/translate_c?hl=vi&sl=en&u=http://en.wikipedia.org/wiki/Financial_year&prev=/search%3Fq%3Dthe%2Bpurpose%2Bof%2Bbalance%2Bsheet%26hl%3Dvi&rurl=translate.google.com.vn&usg=ALkJrhgu6fVl8Qk3_uB5EKvOzC0ApIyPTw

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The balance sheet must follow the following formula:

Assets = Liabilities + Shareholders' Equity

Therefore, the balance sheet, along with the income and cash flow statements, is an

important tool for investors to gain insight into a company and its operations. So by

having a balance sheet a small business owner quickly get a handle on the financial

strength and capabilities of the business.

Cash flow statement is a financial statement that shows how changes in balance

sheet accounts and income affect cash and cash equivalents , and breaks the analysis

down to operating, investing, and financing activities4. The purpose of cash flow

statement is making investors or organizations understand better about using information

the past sources of cash. It also predicts the businesss ability to generate positive cash

flow in future. The cash flow statement is able to meet its obligations; it means that it can

establish Kinh Dos ability to pay its bills. Beside that, it ascertains whether the business

cash is coming from operations mostly or from other sources instead. Most interested

parties will prefer that cash flows come mostly from operations. The last purpose of cash

flow statement is to understand the effect of investment and financing activities on the

operation of the business5.

Retained earnings are reported in the shareholders equity section of the balance

sheet. Retained earnings are reported in the shareholders' equity section of the balance

sheet. Companies with net accumulated losses may refer to negative shareholders' equity

as a shareholders' deficit. A complete report of the retained earnings or retained losses is

presented in the Statement of retained earnings or Statement of retained losses.

In accounting, retained earnings refer to the portion of net income which is retained by

the corporation rather than distributed to its owners as dividends. Similarly, if the

company makes a loss, then that loss is retained and called variously retained losses,

accumulated losses or accumulated deficit. Retained earnings and losses are cumulative

from year to year with losses offsetting earnings.6

4 http://en.wikipedia.org/wiki/Cash_flow_statement5 http://www.udel.edu/UMS/itv/demo/hrim382demo/lecture06.pdf6http://en.wikipedia.org/wiki/Retained_earnings
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Task 4b: Describe the differences between the formats of financial statements

(profit and loss statement and balance sheet) for different types of business such as

sole proprietor, partnership and limited company

Sole proprietorship

A sole proprietorship known as a sole trader or simply proprietorship is a type of

business entity which is owned and run by one individual and where there is no legal

distinction between the owner and the business. All profits and all losses accrue to the

owner (subject to taxation). The sole proprietorship can be organized informally, is

not subject to much federal or state regulation, and is simple to manage and control.

Partnership

A partnership is a type ofbusiness entity in which existing between 2 or more persons

who join to carry on a trade or business. They contribute money, property, labor or

skill and expect to share in the profit and loss of business. Partnerships are often

favored overcorporations for taxation purposes, as the partnership structure does not

generally incur a tax on profits before it is distributed to the partners.

Corporation

A corporation is a legal entity that is created under the laws of a state designed to

establish the entity as a separate legal entity having its own privileges and liabilities

distinct from those of its members. There are many different forms of corporations,

most of which are used to conductbusiness. Early corporations were established by

charter. Most jurisdictions now allow the creation of new corporations through

registration.

Limited Liability Company

A limited company is acompany in which the liability of the members or subscribersof the company is limited to what they have invested or guaranteed to the company.

Limited companies may be limited by shares or by guarantee. And the former of

these, a limited company limited by shares, may be further divided into public

companies and private companies. Who may become a member of a private limited
http://en.wikipedia.org/wiki/Business_entityhttp://en.wikipedia.org/wiki/Business_entityhttp://en.wikipedia.org/wiki/Corporationhttp://en.wikipedia.org/wiki/State_(polity)http://en.wikipedia.org/wiki/Separate_legal_entityhttp://en.wikipedia.org/wiki/Businesshttp://en.wikipedia.org/wiki/Companyhttp://en.wikipedia.org/wiki/Companyhttp://en.wikipedia.org/wiki/Share_(finance)http://en.wikipedia.org/wiki/Business_entityhttp://en.wikipedia.org/wiki/Business_entityhttp://en.wikipedia.org/wiki/Corporationhttp://en.wikipedia.org/wiki/State_(polity)http://en.wikipedia.org/wiki/Separate_legal_entityhttp://en.wikipedia.org/wiki/Businesshttp://en.wikipedia.org/wiki/Companyhttp://en.wikipedia.org/wiki/Share_(finance)

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company is restricted by law and by the company's rules. In contrast anyone may buy

shares in a public limited company.7

1. Sole Proprietorship

Income statement for the year ended 31 December 2006

$

Sales 159,270

Cost of sales - 90,875

Gross profit = 68,395

Other income:

Interest income 2.356

Operating expenses:

Accountancy fee - 800

Depreciation of property, plant and equipment - 2,500

Donation - 500

Electricity & water - 3,340

Insurance premium - 2,000

Printing & stationery - 1,697

Rental of premises - 12,000

Salaries - 35,579

Upkeep of office - 3,547

Telephone charges - 1,285

Traveling, petrol &charge - 2,648

- 65,896

Net profit for the year 4,855

Retained profit B/F 27,654

Retain profits C/F 32,509

Balance Sheet as at 31 December 2006

7http://en.wikipedia.org/wiki/Limited_company
http://en.wikipedia.org/wiki/Limited_companyhttp://en.wikipedia.org/wiki/Limited_companyhttp://en.wikipedia.org/wiki/Limited_company

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$

Non-current assets

Property, plant and equipment 15000

Current assets

Inventories 5,200

Trade receivables 6,000

Other receivables, deposits & prepayments 3,458

Cash and bank balances 10,639

25,297

Current liabilities

Trade payable - 3,588

Other payables and accruals - 2,575

6,163

Net current assets 19,134

34,134

Financed by:

Capital 15,000

Retained profit 32,509

Net drawings - 13,375

34,134

2. Limited Company


$

Sales 159,270

Cost of sales - 90,875

Gross profit = 68,395

Other income:

Interest income 2.356

Operating expenses:

Accountancy fee - 800

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Depreciation of property, plant and equipment - 2,500

Donation - 500

Electricity & water - 3,340

Insurance premium - 2,000

Printing & stationery - 1,697

Rental of premises - 12,000

Salaries - 35,579

Upkeep of office - 3,547

Telephone charges - 1,285

Traveling, petrol &charge - 2,648

- 65,896

Net profit for the year 4,855

Retained profit B/F 27,654

Retain profits C/F 32,509


$

Non-current assets


Current assets

Inventories 5,200



Amount due by shareholder 13,375 Note 2


38,672

Current liabilities


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- 6,163


47,509

Financed by:

Capital 15,000

Retained profit 32,509

47,509

3. Partnership


Analyzed as follow:

Partner A Partner B Total

$ $ $

Shared net loss for the year - 22,587 - 15,058 - 37,645

Less:

Interest on partners drawings - 1,500 - 2000 - 3,500

Add:

Partners salary 15,000 20,000 35,000

Partners commission 3,000 2,000 5,000

Interest charged on partners capital 2,500 3,500 6,000

Net profit for the year - 3,587 8,443 4,855

Note 1 Note 1


$

Non-current assets

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Current assets

Inventories 5,200




25,297

Current liabilities



6,163


34,134

Financed by:

Partner A Partner B Total

$ $ $

Capital account 9,000 6,000 15,000

Current account

Balance B/F 45,874 24,280 70,154

Shared net loss for the year - 22,587 - 15, 058 - 37,654

Net drawings during year - 12,000 - 5,000 - 13,375

Balance C/F 11,287 4,222 19,134

20,287 10,222 43,134 8

The different between the formats of financial statements (income statement and balance

sheet) for different types of business such as sole proprietorship, partnership and limited

company.

8http://learnaccounting.wordpress.com/2007/12/21/three-most-common-types-of-small-businesses-%E2%80%93-sole-proprietorship-partnership-and-private-limited-company/partnership-example-of-income-statement-and-balance-sheet-part-3-of-3/
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Each company will have different economic sectors so they use different financial

statements with different format that satisfy those sectors. The financial statements

collect the financial records form the sales and purchases produce, the net taxable profit

or loss for each month. Different types of business use different formats.

For sole traders, the financial statement for sole traders is simple; because the report is

just serve for the owner of the company. So, it is not complex, it may not have the

balance sheet and income statement. The report just needs to show the profit and loss

account compared to a public limited liability company which will have to prepare based

on international financial reporting standard (IFRS) and generally accepted accounting

principle (GAAP).

If financial statements are not prepared based on standards it is difficult to compare with

other organizations.

For partnership, the financial statement has relation to the interests and the profit of the

ones contributes the capital of the company. The target of the financial statement is

shown the balance sheet, profit, income, outcome and the loss statement. When making

financial statements, the income statement would usually be prepared first because the

net income or loss becomes a part of the statement of partners capital. The statement of

partners capital is prepared second because the ending partners capital balances become

part of the balance sheet. The statement just focused on analyzing the capital and profits

of the company that are is circulated inside the company.

For limited company, the financial statement must reflect the current, non-current assets,

liabilities, sales, profits, cost of income tax payable and earning per share.9

Task 2c: Describe the information needs of different decision makers (internal and

external users)

1. Internal users

Managers play important roles in business because they manage, control

and supervise whole activities of Kinh Do Corporation. Obviously, they

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need information about the companys current financial situation and what

it is expected to be in the future. Managers can understand easier which

was shown under the form of financial analysis with more details. It

includes profits, expenses, capitals, revenue, etc. Therefore, the financial

information of company make manager controls the business efficiently

and makes important decisions in running their business.

Shareholders are also important in increasing the capital for the company.

So they also need to know the information about profit of the company to

make decisions in investing the business is running their businesss

operation and they can afford to withdraw from the business for their own

use. Thus shareholders profit will be depending on how much the profit

which the company earns. Therefore, the company has to provide all

financial information (income statement, balance sheet) to make the trust

on investing by shareholders. Besides that, income statement and balance

sheet are real evidences of whole performance for the benefits of

shareholders who will be very interested in all information.

Employees should be provided a right number in information about the

companys financial situation. The employees need to know in order to

make collective bargaining agreement about their salaries with theirowners. The company should show exactly about the information of

operating expenses in order that whether the employees were paid enough

salaries. Moreover, when the staffs satisfy with their salary, it will become

their motivation to help them try more in working.

2. External users

Investors also need to be known about the profits of the company to

assess the profitable of business. When the profits of company decrease or

increase, it will prove the operation process of company. Moreover, the

investors also want to know about the capital of company which includes

investors capital. The main reason investors need is that they can see the

viability of investing to consider whether they should continue to invest or

not. Moreover, they also forecast how much they can get profit from their

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investment money. Additionally, the investors need to pay attention to

know about the payout ratio which is cash dividend over net income.

Financial institution is an institution that provides financial services for

its clients or members. Probably the most important financial service

provided by financial institutions is acting as financial intermediaries.

Most financial institutions are highly regulated by government 10 . When

the company lends money to run business or make other things, they are

required with letting the bank or lender know about the profit of company.

When their profit is high, it means that the company operates well and

they can be able to pay the interest as well as the loan. In addition, the

banker or lender also wants to know about liabilities which the company

borrows money from another banks or lenders. Besides that, Kinh Do also

concern on knowing the cash flow of the company to consider that if the

business has enough cash to pay for loan as well as the short-term liquidity

indicators such as current ratio of the company.

Customers also need to be known about the financial information because

the inventory turnover is the most concern on the customers. If the

inventory is high, it means that the storage space is excessive and the

products can be over expired date. However, if the inventory is not enoughto supply for customers, it means that the company will have a loss of sale

because of stock shortages. Besides that, it proves that the operation of

business and affects to the making decision of purchase of Kinh Dos

products.

Government is very important for the company to pay tax for the

government. The tax is based on the profit of the company that they earn,

so far with the company is owned by the government, the tax will be based

on the salaries of the employees. Therefore, the government needs to

know about the expenses of salaries to consider if the employees are

received with the suitable salaries or not. They also require information in

order to provide a basis for national statistics. From that they can

10http://en.wikipedia.org/wiki/Financial_institution
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understand the current situation and then they can decide to give the

accuracy of taxes.

Suppliers are also an important factor because they supply materials to

produce products for company. So Kinh Do needs to provide the financial

statement information for suppliers to have large quantity from suppliers.

The main purpose of showing the information for suppliers is make

decision easier about selling materials to the company. They also want to

know the profits of company whose the business are earning. Besides

notice the profits, the suppliers also need to known the expenses that the

company spends on buying materials.

Task 2d: Describe the impact of finance on the financial statement.

Firstly, with the money comes from the sale, there is also no impact to the income

statement, but it has impact on balance sheet and cash flow. While selling Kinh Dos

products, they collect money as cash from their customers so it is a chance for them to

increase the cash assets of company. Sometimes, there are many customers who did not

pay money at that time buying products but they make contracts and pay later. Therefore,

when the company has many contracts in selling, the cash in capital will increase.

Secondly, there is no impact with income statement in the money of the owner.Moreover, that budget influents on changing so that it affects to the balance sheet. Thus

in this statement it makes an increase assets. Furthermore, when Kinh Do Corporation

does business, they should stable their capital to do so the money which gets from the

owner also makes an increase the capital as well as cash for operation of the company.

Thirdly, when the company wants to invest capitals for their business they can borrow

money from the banks or lenders that mean the money comes from the bank can be affect

to income statement, balance sheet as well as cash flow. For each statement, the company

has to pay each different interest. On the other hand, it also goes up loans of the company

at the bank. That means when the company borrows too much money for their company,

it also increases the liabilities of the company. From that, the company can increase the

cash of the company in the cash flow statement because of borrowing the cash from the

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bank. Additionally, it also decreases the cash in expenses of working capital of the

company because of paying the interests for the banks.

Fourth, when the company operates their business, there are some people who also want

to buy shares from the company to earn the profits with the company. That means thecompany has to pay dividends for their shareholders. Thus it will increase the expenses in

income statement of the company. However, selling shares to the shareholders help the

company raise their capital; it means the capital will increase. Moreover, when the

company sells shares, it leads to the asset will increase because of share belonging to

assets. Thus in order to pay dividends for their shareholders, the company also decreases

the cash flow.

Finally, the money can come from the investors. During doing business, there are many

investors will invest their money for the company in order to make the company goes on

effectively. By doing this, the investors will help the company increase the capital as well

as the total asset of the company. Additionally, investing the money from the investors is

cash so that they also make the cash flow of the company increasing. However, when the

company earns the profits, they also have to repay for their investors so it will decrease

the expenses of the company. it means it impacts to the income statement.

From all analyzing, we can see that with each different types if finance, they have

different purpose and effects to financial statement. So with this effect, the company can

refer and make decisions so that they can earn more profits as well as satisfy with their

shareholders in doing business.

Task 4c: Analyze financial statements using appropriate ratios and comparisons,

both internal and external

Overall analysis

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2007 2008

Income Statement (VNDm) VNDm VNDm VNDm %

Revenue 1,230,802 1,455,768 224,966 18.28%

COGS 908,825 1,085,980 177,155 19.49%

Gross profit 321,978 369,788 47,810 14.85%

Operating Profit 244,030 (27749) (271779) -111.37%Profit before tax 222,469 (61690) (284159) -127.73%

Tax (1,659) (1087) 572 -34.48%

Profit after tax 224,127 (60603) (284730) -127.04%

Minority Interest (24713) (24713)

PAT to the companys shareholders 224,127 (85316) (309443) -138.07%

Interest expense 31,710 52,364 20,654 65.13%

Balance sheet (VNDM)

Current assets 1,754,629 1,474,434 (280195) -15.97%

Cash & Equivalent 530,438 206,808 (323630) -61.01%

Short term financial investments 522,518 584,291 61,773 11.82%Provision for short term investments (4932) (58732) (53800) 1090.84%

Short term receivables 560,318 489,407 (70911) -12.66%

Inventory 136,272 181,656 45,384 33.30%

Provision for inventory devaluation (395) (1165) (770) 194.94%

Other short term assets 5,082 12,271 7,189 141.46%

Non-current assets 1,312,846 1,508,976 196,130 14.94%

Long term receivables 30,911 31,059 148 0.48%

Fixed assets 480,860 749,092 268,232 55.78%

Long term financial investments 797,351 673,385 (123966) -15.55%

Provision for long term investstments (197257) (51357) 145,900 -73.96%

Other long term assets 3,257 55,440 52,183 1602.18%

TOTAL ASSETS 3,067,475 2,983,410 (84065) -2.74%

Current liabilities 467,800 663,885 196,085 41.92%

Short term debt 263,003 335,922 72,919 27.73%

Non-current liabilities 125,713 172,041 46,328 36.85%

Long term debt 112,410 156,029 43,619 38.80%

Chartered capital 469,997 571,149 101,152 21.52%

Capital Surplus 1,725,694 1,721,014 (4680) -0.27%

Retained earnings 181,798 (147004) (328802) -180.86%

Total equity 2,454,494 2,075,923 (378571) -15.42%

Minority Interest 20,468 71,561 51,093 249.62%

TOTAL CAPITAL 3,067,457 2,983,410 (84047) -2.74%

Change

Analysis: According to above table, the cost of goods sold was increased faster than

revenue, 19.49% and 18.28% perpectively. Moreover, in 2007, the company earns a great

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percentage of total revenue about 1,230,802 VNDm and 1,455,768 VNDm in 2008. Thus,

Kinh Do company need to control the cost of goods sold increase lower than the revenue

in order to avoid getting loss. In addition, it also had an impact on gross profit because

gross profit that the company got in 2007, accounted for 321,978 VNDm ( about 26.16%)

of total revenue, but this percentage decreased to 369,788 VNDm (about 25,4%) in 2008.

Overall, the economy of Kinh Do company in 2008 meets many difficult that was proved

through the number of profit before tax with -61,690 VNDm. They faced with inflation,

raw material and input costs cost that affected to the profit of company. Moreover, the

company must cope with the impact of the global financial crisis, export difficulty,

purchasing power in the domestic market decreased, the special influence the results

financial investment activities of the company. The main reason that affected to the

economy of Kinh Do Company is inflation.

According to the balance sheet information, the current assets decreased from 2007 to

2008 (15.97%) meanwhile the current assets accounted for 57.20% of total percentages of

total assets in 2007 and 49.42% that of t in 2008. It mean the currents assets has a large

percentages of total assets that Kinh Do had, but in fact, it faced a decrease in 2008. In

2007, cash and equivalent occupied 30.23% of total current assets but it reduce to 14.03%

in 2008. This mean that the operation of company go down in controlling cash flow and

remain cash in hand to fund daily operation activities. For short term financial

investment, it increases to 11.82% from 2007 to 2008. Provision for short term

investments was 4932 VNDm in 2007 and goes up strongly 58732 VNDm. Besides that,

inventory, provision for inventory devaluation and other short term assets increase to

33.30%, 194.94% and 141.46% respectively. In addition, non-current assets increase to

14.94%. Furthermore, the percentage of fixed assets accounted for 480,860VNDm in

2007 and 749,092 VNDm so it has a large number in non-current assets. Generally, total

assets decrease for 2.74%. In overall, current liabilities, short term debt, non-current

liabilities, long term debt, chartered capital and Minority interest increase. Besides that,

capital surplus, retaining earning and total equity reduce. From that, it leads to total

capital decrease for 2.74%.

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Therefore, the company should have a proper strategy or plan to deal with this situation

and have appropriate actions to increase their revenue at a faster speed than cost of goods

sold and other expenses by controlling costs and expenses tightly.

Profitability and Return on Capital

2008 2007

VNDm VNDm

Non-current liabilities 172,041 125,713

Total Equity 2,075,923 2,453,494

Minority interest 71,561 20,468

Capital employed 2,319,525 2,599,675 (a)

2008 2007

VNDm VNDm

Operating profit -27,749 244,030

Interest expenses 52,364 31,710

PBIT 24,615 275,740 (b)

2008 2007

PBIT 24,615 275,740

Capital employed 2,319,525 2,599,675

ROCE 1.1% 10.6%(b)/(a)

We can see clearly that the Return on Capital Employed ratio (ROCE) show how

much profit Kinh Do earn from the investments the shareholders have made in their

company. Although the capital employed decreased, profit before interest and tax

decrease strongly, PBIT shows a 91% decrease between 2007 and 2008. We can see that

ROCE in 2007 is more than 2008 (10.6% > 1.1%) this means the possibility of making

profit in 2007 is better than 2008, because Kinh DO has many innovations in making

product in 2007.

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Profit Margin and Assets turn over

2007 2008

Sales 1.230.820 1.455.758 a

PBIT 275740 24615 bCapital employed 2.599.675 2.319.525 c

Profit margin 22% 2% b/a

Assets turn over 0,47345149 0,62761039 a/c

ROCE 11% 1%

From the net profit margins above, when we compare the gross and the net profit

margins, we can get a good impression of their non-production and non-direct costs such

as administration, marketing and finance costs. It is convinced that although the gross

profit margin of Kinh do in 2008 is lower than in 2007, the net profit margin is decrease

(from 22% in 2007 to 2% in 2008).

Borrowing

2008 2007

Current liabilities 663.885 467.800

Non-current liabilities 172.041 125.713

Total liabilities 835.926 593.513 ( c )

Total assets 2.983.410 3.067.475 (d)

Liabilities ratio 28% 19% ( c )/(d)

The table show the liabilities ratio goes up to 9% from 2007 to 2008. Liabilities ratio

indicates how many percent of liabilities over the total asset. The higher the liabilities

ratio is, the more creditor of the business and therefore the ability of funding itself is low.

If the liabilities ratio is more than 50%, it means most of its assets are from liability and

therefore its fear of bankruptcy is high.

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Capital gearing ratio

Prior charge capital 156.029 112.410

Long term debt 156.029 112.410

Total capital 2.319.525 2.599.675 (f)

Non-current liabilities 172.041 125.713Total equity 2.075.923 2.453.494

Minority interest 71.561 20.468

Capital Gearing ratio 7% 4% (e)/(f)

2008 2007

The capital Gearing ratio increase for 3% from 2007 to 2008 (from 4% (2007) to 7%

(2008)). That means its disadvantage for Kinh Do because capital gearing ratio is the

main factor that was used in analysis the capital structure of a company.

Debt/ Equity ratio

2008 2007

Prior charge capital 156,029 112,410 (g)

Total Equity 2,075,923 2,453,494

Minority interest 71,561 20,468

Total Equity 2,147,484 2,473,962 (h)Debt/Equity ratio 7% 5%(g)/(h)

From these results of Debt/ Equity ratio on the above table, Kinh Do Company increased

from 5% in 2007 to 7 % in 2008.

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Liquidity and Working capital ratios

2008 2007

Current assets 1,474,434 1,754,629 (i)

Current liabilities 663,885 467,800(j)

Current ratio 2.22 3.75 (i)/(j)

2008 2007

Current assets 1,474,434 1,754,629

Inventory 181,656 136,272

Current assets less stock 1,292,778 1,618,357 (k)

Current liabilites 663,885 467,800 (l)

Quick ratio 1.95 3.46 (k)/(l)

Current ratio decreases from 2007 to 2008 for 1.53% and quick ratio also reduce 1.51%.

Current ratio assess whether a business has enough current assets to pay off its currentliability. The higher the current ratio is, the more possibility of paying its current

liabilities. Both the current ratio and the quick ratio offer an indication of the companys

liquidity position.

Efficiency Ratios

DSO (Days Sales Outstanding): DSO is usually regarded as a relatively poor

measurement of the credit department's effectiveness. DSO is influenced by activities

beyond the control of the credit department.

DSO= (Total Accounts Receivables/Total Credit Sales) x Number of Days in the period

that is being analyzed

2007 2008

Current receivables

30.91

1 31.059

Total credit sales

1.754.62

9 1.474.434

Number of days

36

0 360DSO 6 days 8 days

From the table above, we compared with 2008, in 2007, Kinh Do has a result DSO

increase. It means the number of disputed invoices and deductions will increase and it

shows the fact that the number of errors made in order entry increase.

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Stock Turnover ratio:

This ratio is obtained by dividing the 'Total Sales' of a company by its 'Total Inventory'.

Inventory Turnover Ratio = Net Sales / Inventory

It could also be calculated as:

Inventory Turnover Ratio = Inventory /Cost of Goods Sold*365days

2008

Cost of goods sold 1.085.980

Total Inventory 181.656

Stock Turnover Ratio 61 days

2007

Cost of goods sold 908.825

Total Inventory 136.272

Stock Turnover Ratio 55 days

The stock turnover ratio helps to assess a companys liquidity; an increase in creditor

days is often a sign of lack of long term finance or poor management of current assets,

resulting in the use of extended credit from suppliers, increased bank overdraft, etc.

Task 3a: Analyze budgets and make appropriate decisions based on given

information above.

1. Original Budget

A B C Total

Sales (units) 2,000 1,750 1,300 5,050Sales 200,000 250,000 300,000 750,00

0Direct material 10,000 13,500 20,500 44,000Direct labor 22,500 25,000 34,000 81,500

Variable overhead 10,000 13,500 20,500 44,000Fixed overhead 6,000 9,000 7,500 22,500Profit 151,500 189,000 217,500 558,00

0

2. Per unit information

A B C

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Selling price per unit 100.00 142.86 230.77Direct material per unit 5.00 7.71 15.77Direct labor per unit 11.25 14.29 26.15Variable overhead per unit 5.00 7.71 15.77Direct labor hours (total hours) 4,500 5,000 6,800

Direct LH per unit 2.25 2.86 5.23

3. Estimated Demand for Sales Increases (30%)

The sales of each product is increased 30% which lead to the increase of cost ofdirect material, direct labor hours, and variable overhead.

A B C Total

Sales (units) (increased by 30%) 2,600 2,275 1,690 6,565Direct labor hours needed 5,850 6,500 8,840 21,190Direct labor hours available 18,000Deficit 3,190

(based on Original Budget) A B C

Contribution margin (total $) 190,000

236,500

279,500

Direct labor hours (total hours) 4,500 5,000 6,800Contribution per DLH 42.22 47.30 41.10Rank 2 1 3

According to the contribution per labor hour, the company can easily determine the rank

of each product to be more profitable. The rank is the priority to produce the products in

order. In this case, the company can make B product first then the next is A product and

C product.

4. Allocation of Direct Labor Hours Available:

Hour available: 18000

Hours to produce product = Sales units * Direct LH per unit

Hours to produce product B: 2275*2.86 = 6500 hours

Hours to produce product A: 2600*2.25 = 5850 hours

Hours to produce product C: 5,650 (18,000 1,2350)

A B C Total

Direct labor hours available 5,850 6,500 5,650 18,000

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When time is limited to 18,000, the labor hours for producing C is reduced to 5,650

hours.

The units of products C: 5650/5.23= 1080 units

5. Revised Budget for Sales Increases (30%)

A B C Total

Sales (units) 2,600 2,275 1,080 5,955Sales 260,00

0325,000

249,265

834,265

Direct material 13,000 17,550 17,033 47,583Direct labor 29,250 32,500 28,250 90,000Variable overhead 13,000 17,550 17,033 47,583Fixed overhead* 9,505 11,882 9,113 30,500

Profit 195,24

5245,518

177,836

618,599

The fix overhead will change after adding $8,000 of advertising campaign. The

table below will estimate the fixed overhead per dollar in sales which help to calculate

the fix overhead of each production.Total sales ($) $834,265

Total fixed OVH 30,500Fix overhead per dollar in sales $0.04

6. Extra profit based on Extra 3,500 direct labor hours

Additional Sales (units) 610

Additional Sales ($) 140,735

Additional Direct material 9,617Additional Direct labor 15,950Additional Variable overhead 9,617Additional Fixed overhead

Increase in Profit 105,551

The profit will increase: $ 119906

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Task 3b: Calculate unit costs and make pricing decisions using relevant information

given in the scenario

Analyze information given in the scenario:

(a) Material: $22,500 is incremental cost so it is relevant cost. The relevant cost of

materials is $14,000 which would be replaced if the contract is carried out.

$14,000 of materials would be needed if the contract work goes ahead. Besides,

the original cost is not relevant because it is a historical cost, so the disposable

value is also added $5,000

(b) The labour cost of $100,000 is irrelevant cost. In other hand, $55,000 would be

incurred. Thus, incremental cost is $100,000 - $55,000 = $45,000

(c) Salary of $45,000 per year: it is irrelevant cost

Bonus of $7,250: it is incremental cost, thus it is relevant cost

(d) Additional administrative expense incurred is estimated to be $4,325. Thus, it is

incremental cost. So, it is relevant cost.

(e) Fix overhead is irrelevant cost

Calculate unit costs (minimum price):

Note $

Material (a)

(i) Incremental cost 22,500

(ii) Incremental cost 14,000(iii) Opportunity cost 5,000

Incremental cost (b) 45,000

Bonus of cost (c) 7,250

Incremental cost (d) 4,325

Total 98,075

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The acceptable price for the contract should be $98,075 plus an amount of profit which

we can negotiate with the customer to make a reasonable price.

Task 3c:Assess the viability of a project using investment appraisal statement

Net present value (NPV)

Net Present Value= Total Present value initial cost

Net present Value of machine A

Year Cash flow$

Present value factor10%

Present value$

0 (700.000) 1.000 (700,000)

1 338.000 0.909 307.273

2 338.000 0.826 279.339

3 298.000 0.751 223.8924 293.000 0.683 200.123

5 248.000 0.620 153.988

NPV 464.615

NPV= TPV- Initial cost= 464.615

Net present Value of machine B

Year Cash flow$

Present value factor10%

Present value$

0 (700.000) 1.000 (700.000)1 261.000 0.909 237.273

2 261.000 0.826 215.702

3 286.000 0.751 214.876

4 351.000 0.683 239.738

5 296.000 0.620 183.793

NPV 391,382

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NPV= TPV- Initial cost= 391.382

The machine a will be chosen because NPV of machine a is higher than NPV of

machine B

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mfr_2_kylie

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