the purpose of the main financial statements

7/28/2019 The Purpose of the Main Financial Statements

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1. THE PURPOSE OF THE MAIN FINANCIAL STATEMENTS

Financial statements of Kinh Do Corporation present the flow of money into,

through and out of a business. Each statement has different purpose and provides

the information about the financial situation of the company. There are three main

financial statements: profit and loss statement, balance sheet and cash flow

statement.

a. Profit and loss statement

Profit and loss statement is also known as an income statement is to

summarize the profit and loss during a period such as a month, a quarter or a whole

year. This statement documents the revenues and expenses during the given time so

that the managers of Kinh Do calculates the net profit. In the income statement, the

ability of Kinh Do to make profits and manage costs is shown and from them,

profitability of the company is summarized. The income statement represents the

performance of the company in a certain time.

Based on the income statement, the company can find out the areas are over

or under budget. It provides important insights into how effectively management is

controlling expenses, the amount of interest income and expense. By the way

considering the activities in the pass, Kinh Do can analyze and forecast or assess the

future performance of the company. Moreover, managers of Kinh Do can analysis the

income statement in order to find out the areas of its business which need to be

improved. Furthermore, based on the income statement, Kinh Do can plan strategies

to generate revenues or control costs in order to earn more profits.

Investors, creditors, etc are able to based on income statement to determine

the past performance in order to assess the current financial situation or company

the financial health of Kinh Do with others so that they could decide to invest into the

company or not. For the company, there are many information the managers must

analysis to manage activities and generate more profits. It shows the revenue that

the company has earned or which cost that the company has spent much, etc.

b. Balance sheet

The balance sheet gives the financing structure of Kinh Do: assets, liabilities

and capital at a given moment in time. The balance sheet shows the financial

position of a company at the end of a period. The balance sheet reflects all the

assets, creditors and capital of the company in general.


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Firstly, the balance sheet is the important document to research and assess

all the assets of the organization by monetary unit such as USD, pound or Vietnam

Dong. Based on the balance sheet, user can evaluate the financial position at that

time and thus, can identify the trends and the area of receivables and payables as

well as assess current financial condition of the company at the period time.

For managers, it shows whether the company earned or loss money during

the period time. Thus, managers could analyze, evaluate in order to predict the future

opportunity for their business so that they could plan strategies to lead their business

to success.

Normally, the statement helps any one analyzes and predicts the funds that

would be utilized in the future. The balance sheet states the business event at a

certain time. This is analyzed based on a comparison with the previous balance

sheet and the reports of other activities.

The balance sheet is very important for not only Kinh Do but also any

organizations. This not only reflects the general and detailed the status of assets and

capital but also a convincing demonstration if the company would like to submit to the

bank or for business partners when they would like to coordinate with Kinh Do.

c. Cash flow statement

The statement detailed the reasons why the amount of money changes in the

accounting period. It reflects all changes in currency by three activities: trading,

investment and finance.

It lets the managers know how much money they have in the beginning and

how many are left at the end of the period. Next, it describes how much money the

company has earned and spent within a specific time period. In detailed, cash flow

statement provides the information that which areas the company spends fund.

Investors and analysts analysis the cash flow statement to assess how the company

generates funds in order to decide to invest to the company or not.Cash flow statement helps user could assess many information need. Firstly,

user could assess the ability to make money of Kinh Do through considering the

amount of money that Kinh Do had already earns. From that, user will know in

detailed that amount of money is much or not, from which activities and from that, he

or she can assess the profitability in the future.

Next, it assesses the ability to settle up of the organization. In business, there

are many transaction need to be settle up; and from that, it shows the ability to pay of

the company such as the ability to pay back on time, factor of safety of the company

or even the ability to pay dividend by money, etc. Moreover, it assesses the


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effectiveness of the company throughout the way they invest; buy share, bond or

loan, etc.

Furthermore, it can help the company draft budget for next year. For example,

if Kinh Do does not have much money, it may need to spend more savings.

Conversely, if the company's money is plentiful, it will have the opportunity to make

several new investment projects. It also shows whether Kinh Do has the ability to

convert accounts receivable into cash or not - and basically, that facilitates the ability

to pay the company debts. Debt payment capacity is the ability to pay the bills.

In conclusion, cash flow satatement is a useful tool for any users. The first

purpose of it is to provide information about the liquidity, ability to use money of the

managers. Secondly, users will know the change in assets, liability and equity. In

addition, it not only provides the current information but also indicate the amount,

timing and profitability of future cash flows.

3. THE INFORMATION NEEDS OF DIFFERENT DECISION

There are two kinds of users of the accounting information: internal users and

external users. The internal users are people within the organization such as board of

directors, managers and employees. The external users are people such as

shareholders, lenders or government, etc.

1. Internal users

Internal users need to know financial statements in order to assess the

performance of Kinh Do Corporation. Based on financial statements, they will

analyze the information whether the company achieves objectives, earn enough

profits or not. They also calculate the dividends that are needed to pay for

shareholders. In addition, compared with the previous years, they will estimate the

trend in order to plan the strategies for their future.Board of directors: Every organizations run business in order to get profit.

Income statement shows profits and loss at the end of the year and based on it,

board of director know the net income as well as the whole picture of business after

a year. Furthermore, he can strategy to encourage sale or control costs so that its

business could run better in the next year. In balance sheet, board of director can

assess the current assets, current liability and owners equity in a given time in order

to plan directly. Financial statements show the situation of the company as well as

present any things which are relate to their profits. Therefore, the directors of a


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company must observe the financial statements in order to revise and implement

their business objectives.

Managers: After board of directors are managers in the company. Their

duty is to analyze, control and report to their supervisors. Managers need to know the

financial statements in order to manage the business activities. Before board of

directors analyzes financial statement, managers must understand what happen in its

business in order to provide solution. For example, if managers analyze balance

sheet and identify that stock-in-trade is much, that means there are some problem in

management stock and he must find out solution to sell them.

Shareholders: Normally, shareholders care about profit which the company

can earns in order to be paid dividend. Shareholders will base on financial statement

to assess the profitability of the company in order to decide whether they should

continue to invest or not. Furthermore, as the owners, they will plan a strategy to

control the business of the company in order to ensure there investment resources.

Employees: For employees, they need to know the financial information of

the company such as profit or loss in order to fulfill their responsibilities. The financial

situation of Kinh Do has a big impact on employees. When the company generates

much revenue, employees may receive bonus. On the other hand, if the company

loss, the salary of them will be affected. Furthermore, blue-collar needs are different

from white-collar needs. For blue-collar, what they order may just common financial

information from the financial statements such as revenue, net profit, etc. For white-

collar, they need more than that. They could order and analyze more detailed

information such as how much the company has spent for some activities. From that,

they may negotiate about working condition or complaint or suggest their ideas to

solve its business problem.

2. External users

For external users, they really would like to know how well the performance of

Kinh Do, the health of the financial position in order for them to make decision suchas loan, investment, etc.

Investors: Financial statements provide necessary information for them to

research previous and present information in order to assess, evaluate risk possibility

or opportunity of the company to make decision investment or not. Based on the data

in financial statement, potential investors will analyze the trends, financial position

and profitability of the company. More detailed, they can colligate not only financial

statement but also many resources to assess the management of the company

before deciding to invest or not. For them, the most importance is that the ability to

get back money that they have invest, profitability and the risks which affect their


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investment. Current revenue as well as the stability of revenue are what they care.

Therefore, they focus on the profitability, financial condition of the company because

they affect the ability to pay dividend and the ability to past bankruptcy.

Creditors: Based on the information in financial statements, creditors can

know the ability, the fresh financial situation of the company. It is very important for

banks to make decision lend or not. Analyzing the past financial statements, creditors

can assess the efficiency of investment projects. Income statement will shows them

the ability to make profits. Relying on balance sheet, they can know the assets,

capital account in order to ensure their investment. The ability to pay back debt of

business is the important thing that creditors would like to know throughout analyzing

financial statements. For suppliers, profitability is less important than the ability to

provide cash in order to pay for short term debt of enterprise. Besides, banks provide

long term debt to business. They care about the ability of the company to earn

enough profit to pay interest in the whole time of debt. Thus, financial statements are

the first thing to attract creditors should invest into the company or not.

Tax office and government: The tax office needs to know the financial

statements of the company in order to ascertain the propriety and accuracy of

amount of taxes. For government, they can determine proper duties declared and

performed by the companies. Furthermore, based on this they can assess, classify

the company in order to make the punishment or not, etc.

Suppliers: Suppliers are also business partner of Kinh Do. There are two

main reasons that they need to require the financial statements. Firstly, they need

the information in order to manage make the company must follow the contract.

Secondly, they need information to run their investments. Based on the information

of the financial statements, suppliers will analyze any ratios such as ROCE, liabilities

ratio, current ratio, etc to assess the safety of their investment as well as consider

the delayed time for Kinh Do to pay back. Through the financial statement, the

company can not also create good relationship but also make trust to supplier.Customers: A company cannot exist without customers. Therefore,

customers play an important role in the company. Normally, customers have many

choices. Therefore, they will compare products as well as any company with others

to choose the most suitable option. Customers need to know an overall view of the

business so that they can assess the performance of a company. Therefore,

revenue, cost of goods sold, tax, profit, etc are some information that they need to

know. For example, combine these information, customers could assess the price of

a product is suitable or not. They also assess the responsibility of the company with


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social by the tax fee that they pay. Through showing the information, the company

could create the belief of customers.

the purpose of the main financial statements

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