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REPORTFINANCIAL STATEMENT FOR DIFFERENT
COMPANIES
TABLE OF CONTENTS
INTRODUCTION______________________________________________________3
I. BUDGETING DECISIONS________________________________________4
II. COSTING AND PRICING DECISIONS______________________________6
I. INVESTMENT DECISIONS_______________________________________8
II. KDC_________________________________________________________10
1. THE PURPOSE OF THE MAIN FINANCIAL STATEMENTS________10
2. THE DIFFERENCES BETWEEN THE FORMATS OF FINANCIAL
STATEMENTS FOR DIFFERENT TYPES OF BUSINESS_______________11
3. THE INFORMATION NEEDS OF DIFFERENT DECISION__________16
4. THE IMPACT OF FINANCE ON FINANCIAL STATEMENTS_______18
5. ANALYZE FINANCIAL STATEMENTS_________________________19
REFERENCES_______________________________________________________28
INTRODUCTION
The results of a business’s activities are presented in financial terms in the
form of what are commonly called the “accounts”. “Account” means three statements:
a balance sheet, a profit and loss account, and a cash flow statement.
These statements are described and illustrated in which they are usually
presented based on the information of Kinh Do Corporation and Kim Cuong LTD.
KIM CUONG LTD
I. BUDGETING DECISIONS
1. The original Budgets
A B C Total
Sales (units) 2,000 1,750 1,300 5,050
Sales 200,000 250,000 300,000
750,00
0
Direct material 10,000 13,500 20,500 44,000
Direct labour 22,500 25,000 34,000 81,500
Variable overhead 10,000 13,500 20,500 44,000
Fixed overhead 6,000 9,000 7,500 22,500
Profit 151,500 189,000 217,500
558,00
0
The information per unit
2. The revised budget
After the sales are increased by 30%:
A B C Total
Sales (units) (increased by 30%) 2,600 2,275 1,690 6,565
Direct labour hours needed 5,850 6,500 8,840 21,190
Direct labour hours available 18,000
Surplus/(Deficit) (3,190)
Because direct labour hours available is less than direct labour hours needed,
direct labour hours become a limiting factor. Therefore, we need to calculate
contribution per direct labour hour.
3. Calculate the contribution earned by each product per unit of scarce resource
A B C
Contribution magin (total $) 157,500 198,000 225,000
Direct labour hours (total hours) 4,500 5,000 6,800
Contribution per DLH 35 40 33
Rank (2) (1) (3)
Based on the rank, we can see that product A and B bring higher profits than
product C contributes per direct labour hours. Therefore, all the direct labour hours
available will be used to produce the Sales units of product B first, then, produce A,
alter meet the demand of market, Kim Cuong LTD will produce product C.
4. Allocation of Direct Labour Hours Available
A B C Total
Direct labour hours available 5,850 6,500 5,650 18,000
5. Work out the budgeted production and sales
6. Allocate the fixed overhead to the costs of the products
Total sales ($)
825,000
Total fixed OVH (Total fixed OVH + Advertising cost) 30,500
Fixed overhead per dollar in Sales
0.037
After analysis, the fixed overhead is allocated to the cost of the products:
7. The profit of an extra 3,500 direct labour hours
If an extra 3,500 direct labour hours become available, direct labour will be
limited to 21,500 hours. The limited time higher than 21,190 hours demanded,
therefore, direct labour hour will not become a limiting factor any more. As a result,
the company can produce full the sales demand of products. The additional product
will require more cost; however, fixed cost will not increase.
Therefore, the company can earn $105,551 additional profit if an extra 3,500
direct labour hours become available.
II. COSTING AND PRICING DECISIONS
1. Materials:
a) $22,500 of materials would need to be purchased. This is not yet
owned. It would have to be bought. Therefore, it is relevant to a decision.
b) These materials will be transferred from another contract and they
need to be replaced. Relevant cost is therefore at the replacement cost of $14,000.
c) For some obsolete stock, they had the cost that is fixed at $20,000.
And in the future, they can be sold at $5,000. The relevant cost here is an opportunity
cost of sales revenue forgone at $5,000.
2. Labour cost
For labour cost, $55,000 in the total $100,000 is fixed even though the
contract was undertaken. The relevant cost is therefore ($100,000 - $55,000)
$45,000.
3. Salary
The production manager is paid a salary of $45,000 per year (fixed cost). A
bonus of $7,250 is relevant cost in the future of the contract is successful.
4. Administration expenses
In the future, the relevant cost of administration expenses is $4,325.
5. Fix overhead
The company absorbs its fixed overheads at a rate of 12% per machine hour.
The variable cost is therefore 4,000 machine hours of 88% per machine hour.
Costing and Pricing Decisions
a. Materials (i) purchases 22,500
(ii) from other project 14,000
(iii) obsolete stock 20,000 5,000
b. Labour costs required 100,000
already committed 55,000 45,000
c. Bonus for production manager 7,250
d. Additional administrative expenses 4,325
Total 98,075
Based on relevant cost, the minimum price that the company should set up is
$98,075.
KINH DO CORPORATION
I. INVESTMENT DECISIONS
To invest in a machine in order to increase its profitability, Kinh Do
Corporation must make several assumptions. Furthermore, the company must
estimate annual profit increases after the calculation of straight-line depreciation over
the life of the machines.
1. Annual profit increases estimated
Year A B
1 210,000125,00
0
2 210,000125,00
0
3 170,000150,00
0
4 165,000215,00
0
5 60,000140,00
0
Total profit 815,000755,00
0
Iniatial cost 700,000700,00
0Residual value 60,000 20,000
Firstly, if the manager just looks at the figures, it can be seen that the profit
that machine B brings seems to be more stable than machine A and the residual
value of machine B is much less than machine A ($20,000 compare with $60,000).
Based on total profit that both of them bring after five years, it can be seen clearly
that the total profit of machine A is higher that machine B ($815,000 compare with
$715,000). It means that machine A generates cash flow quicker than machine B.
However, in order to make right decisions, the managers must consider
carefully based on many factors. ARR and NPV are two methods that can help the
managers in making decisions.
2. Calculate the Accounting Rate of Return
Machine A
Machine B
Average profits (5 years) 163,000 151,000
Value of investment initially 700,000 700,000Residual value 60,000 20,000Average value of investment (/2) 380,000 360,000
The accounting rates of return are:
A = B =
The accounting rate of return of machine A is higher than machine B.
Therefore, machine B would be chosen.
3. Calculate the NPV with discounting arithmetic
Total Depreciation 640,000 680,000
Aver. depreciation 128,000 136,000
Machine A
Machine B
Both investments are positive and they can be acceptable. That means the
both machines will earn more than 10% in five years. However, the NPV of Machine
A is $ 464,615 and it is higher if compared with $ 391,382 of Machine B. Therefore,
the company should choose Machine A to invest for its assembly line.
II. KDC
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. 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.
Furthermore, analysts, investors, lenders, etc, can assess the financial health
of the company throughout income statement. By considering with the data in the
past, investors will 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. Based on the balance sheet, reader 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.
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.
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.
2. THE DIFFERENCES BETWEEN THE FORMATS OF
FINANCIAL STATEMENTS FOR DIFFERENT TYPES OF BUSINESS
2.1 The balance sheet
The balance sheet reports on a company's assets, liabilities, and
ownership equity at a given point in time. Based on the balance sheet, reader can
know financial position of the company at that time; it is because balance sheet is
prepared to show the financial position of a business at a given moment.
The basis form of the balance sheet is shown below.
Assets Liabilities
Current AssetsLongterm liabilitiesCurrent liabilities
Fixed Assets Fixed Assets
And it can be shown:
Cost DepreciationNet Book
Value£ £ £
Fixed assetsCurrent assetsCreditors: amounts falling due in
less than one yearCapital and reserves
The net assets of the business are similar for all types of business in the top
half of the given balance sheet. For Limited company, it must use the particular
wording while the partnerships and sole proprietor can change.
The bottom half of the balance sheet shows the owner’s stake
a. Limited company
. A limited company is one whose owners’ liability to pay back debts is limited
to the amount that they put in. In a limited company, the line “Capital and reserves”
must show “share capital” for shareholders and “profit and loss account”. The
example is shown below.
Cost DepreciationNet Book
Value£ £ £
Fixed assets 24,000 13,000 11,000Current assets 14,000 14,000Creditors: amounts falling due in less
than one year(6,500
)(7,000)
7,00018,000
Creditors: amounts falling due in more than one year
(3,000)
15,000Capital and reserves 5,000Share capital 10,000Profit and loss account 15,000
In this kind of business, the main difference is just in “capital and reserves”.
There are many owners in this kind of business, therefore, directors must show the
capital and sub sequent profits earned in the balance sheet in order that any
shareholders can know the profits that they receive.
b. Partnership
To establish a partnership, two or more persons agree to engage in business
in common with a view to profit. In here, partners agree together to share capital
contribution and shares profits. In partnership, the balance sheet must show the
agreed shares of capital contributions and shares of profits for any person into the
company.
Cost DepreciationNet Book
Value£ £ £
Fixed assets 24,000 13,000 11,000Current assets 14,000 14,000Creditors: amounts falling due in less than
one year(6,500
)(7,000)
7,00018,000
Creditors: amounts falling due in more than one year
(3,000)
15,000Capital account 5,000
-Bi 2,000-Ty 3,000-Heo Sua 1,000
Profit and loss account 11,000
The main difference is in the partner’s individual stakes in the business are
represented by capital accounts. Therefore, the owned rates of each partner are
different so the capital account are distributed to the company’s capital are different.
The balance sheet will be required to show these rates.
c. Sole proprietor
A sole trader is a business that is owned by one person, who provides money
to start up the business. For a sole proprietor, the profits or looses are often
transferred into the capital account.
Cost DepreciationNet Book
Value£ £ £
Fixed assets 24,000 13,000 11,000Current assets 14,000 14,000Creditors: amounts falling due in less
than one year(6,500
)(7,000)
7,00018,000
Creditors: amounts falling due in more than one year
(3,000)
15,000Capital 5,000Profit and loss account 15,000
Every assets and capital of the company are owned by one person. The sole
trader directly provides capital to run business and all the profits that it makes belong
to him. Therefore, the balance sheet no needs to divide to too many parts.
II.2 The profit and loss statement
In Profit and Loss statement, the company's income, expenses, and
profits over a period of time are reported. It shows managers and investors whether
the company made or lost money during the period. In here, the profits of the
company through sales, expenses will be presented in order to inform to managers
and investors.
The basis form of the profit and loss statement is shown below.
$
Turnover
Operating profit
Interest
Profit on ordinary activities before taxation
Taxation on ordinary activities
Profit on ordinary activities after taxation
Dividend
Retained profit for the year
Earnings per share
a. Limited company
Million VNDTurnover 3,992Operating profit 1,312Interest (997)Profit on ordinary activities before taxation 315Taxation on ordinary activities (114)Profit on ordinary activities after taxation 201Dividend (143)Retained profit for the year 58Earnings per share 0.015
In limited company, the company must pay dividend for shareholder and also
show earnings per share.
b. Partnership and Sole proprietor
For partnership and sole proprietor, corporation tax is not payable. In the
financial statement, the income tax of each person is not shown although they must
pay it based on the share of the profits.
Differ from the limited company, the financial statement of sole proprietor and
partnership does have dividends. That is because the sole trade get all of the profits
earned and for partnership, the partner, although get the share of their profits, this
may be shown in the balance sheet.
Million VND
Turnover 3,992
Operating profit 1,312
Interest (997)
Profit on ordinary activities before taxation 315
Taxation on ordinary activities (114)
Profit on ordinary activities after taxation 201
Retained profit for the year 201
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 owner’s 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
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.
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 such
as 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
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.
4. THE IMPACT OF FINANCE ON FINANCIAL
STATEMENTS
There are many items such as sales, collection of money, owner’s capital
equity, issue of shares, payment of dividend, purchase of treasury, expenses, cost,
borrowings, payment of principal, etc have an impact on the financial statements.
When the company transacts, each item will affect financial statement.
The first finance transaction should be mentioned is sales. When sales are
made, it increases revenue in Income statement and, associate cost of goods sold, it
affect on the net profit. On the balance sheet, sales make the merchandised goods
decrease and increase cash collected or an account receivable. Therefore, making
good sales would result in good impact on the sales, owner’s equity and the
performance of a company.
Secondly, the company tries to collect money or debt from customers or
partners, etc. It is collection of money. When the company collects money, it
decrease account receivables and increase cash. It is because the company collect
money from their debtors and therefore, these item is converted into cash in the
period paying bill, maybe from 30 to 60 days. It makes current assess on the balance
sheet and capital in the income statement increases. Therefore, collection of money
will raise the capital of the company to ensure the financial position of the company.
Owner’s capital investment is the net capital after issuing every debts. On the
balance sheet, owner’s capital equal to total assets minus total debts. Therefore,
support that total debts doesn’t change, when owner’s capital investment increases,
it will increase total assets and increases chartered capital and total equity on
balance sheet.
The next finance action is issuing of shares. When the company issues new
shares, it will increase interest (more detailed, interest payable) because they need
to spend money to issue new shares to public and also, the company will pay more
dividend to shareholders after a year so it will affect dividend on profit and loss
statement. On the other hand, issuing new shares will generate capital on balance
sheet because when investors buy its shares, they will increase the capital of the
company. After a year, the company must pay dividend annually to their
shareholders. The action will make retained profit for the year decreases on the
income statement.
Not only pay dividend to shareholders, the company also must purchase
treasury shares. It will decreases cash and cash equivalent on balance sheet.
Moreover, it belongs to asset so it will increase indirectly assets of the company.
Borrowing in business is the way to raise their capital and it becomes
common action in any businesses. On the balance sheet, it will increase the figure in
creditors such as bank loan and result of increasing in creditors. On the income
statement, it will increase interest payable and therefore increase interest. From that,
profit ordinary activities before taxation decreases.
On the income statement, payment of interest will contribute to decrease
profit. There are many interests that the company must pay such as payable on bank
overdrafts or payable on debenture stock. On the balance sheet, it will increase
creditors so it will decrease net assets of the company.
Finally, increase in capital from retained earnings and reserves will increase
owner’s equity on the balance sheet.
5. ANALYZE FINANCIAL STATEMENTS
Income Statement (VNDm) Difference2007 % 2008 % $ %
Revenue 1,230,802 100% 1,455,768 100% 224,966 18%COGS 908,825 74% 1,085,980 75% 177,155 19%Gross Profit 321,978 26% 369,788 25% 47,810 15%Operating Profit 244,030 20% -27,749 -2% -271,779 -111%Profit before tax 222,469 18% -61,690 -4% -284,159 -128%Tax -1,659 0% -1,087 0% 572 -34%Profit after tax 224,127 18% -60,603 -4% -284,730 -127%Minority Interest 0% -24,713 -2% -24,713PAT to the Company's shareholders 224,127 18% -85,316 -6% -309,443 -138%Interest expenses 31,710 3% 52,364 4% 20,654 65%
It can be seen from the table that the revenue of Kinh Do increased slowly,
just 18% in 2008 compared with the same period in 2007. However, cost of goods
sold also went up but faster than revenue. These things made the company earn less
profits in 2008 than 2007 (25% and 26% respectively). The result came from the
business activities. It is strongly affected by appraisement policies, market or the
effectiveness of produce.
Administrative expenses, selling expense and others went up rapidly from
77,948 million VND in 2007 to 397,537 million VND in 2008. However, it is because
the company planned to buy stake in Vinabico Confectionery or in Tribeco, Nutifood.
It affected profit before tax by decreasing suddently 128% compared with the figure
in 2007. As a result, profit after tax also faced with a strong decrease for 127% in
2008 compared to one in last year. Therefore, it was difficult for Kinh DO to pay profit
to its shareholders because it loss 85,316 million VND.
Balance Sheet (VNDm)
Current Assets 1,754,629 57% 1,474,434 49%-
280,195 -16%
Cash & Equivalent 530,438 30% 206,808 14%-
323,630 -61% Short term financial investments 522,518 30% 584,291 40% 61,773 12% Provision for short term investments -4,932 0% -58,732 -4% -53,800 1091% Short term receivables 560,318 32% 489,407 33% -70,911 -13% Inventory 136,272 8% 181,656 12% 45,384 33% Provision for inventory devaluation -395 0% -1,165 0% -770 195% Other short term assets 5,082 0% 12,271 1% 7,189 141%
Non-Current Assets 1,312,846 43% 1,508,976 51% 196,130 15% Long term receivables 30,911 2% 31,059 2% 148 0% Fixed assets 480,860 37% 749,092 50% 268,232 56% Long term financial investments 797,351 61% 673,385 45%
-123,966 -16%
Provision for long term investments - -197,257 -15% -51,357 -3% 145,900 -74% Other long term assets 3,725 0% 55,440 4% 51,715 1388%TOTAL ASSESTS 3,067,475 100% 2,983,410 100% -84,065 -3%
Current liabilities 467,800 15% 663,885 22% 196,085 42% Short term debt 263,003 9% 335,922 11% 72,919 28%Non-current liabilities 125,713 4% 172,041 6% 46,328 37% Long term debt 112,410 4% 156,029 5% 43,619 39%
Total Equity 2,453,494 80% 2,075,923 70%-
377,571 -15% Chartered Capital 469,997 15% 571,149 19% 101,152 22% Capital surplus 1,725,694 56% 1,721,014 58% -4,680 0%
Retained earnings 181,798 6% -147,004 -5%-
328,802 -181%Minority Interest 20,468 1% 71,561 2% 51,093 250%TOTAL CAPITAL 3,067,475 100% 2,983,410 100% -84,065 -3%
According to above table, current assets decreased for 16% in 2008
compared to one in 2007, and it reduced the company’s financial sources to convert
their all current assets into cash for funding their daily operational activities. On the
other hand, non-current assets in 2008 was higher than 2007. It can be explained
that at that time, Kinh Do spend much money to buy stake of other business. It also
showed at fixed assets and provision for long term investments.
There was a decrease in total assets in 2008, so total capital also decreased.
All current liabilities, short-term debt, non-current liabilities, and long-term debt
increased much with 42%; 28%; 37%; and 39%, respectively. Kinh Do borrowed
much in order to invest cause of increase in debts.
In conclusion, although total capital of Kinh Do decreased, it just because the
company spent much for investment. The bad financial situation will disappear when
the company gets profits from what it invests.
4.1 Calculate ratios for the year ended and analyze the financial performance
and position of Kinh Do
The financial statements provide information in order to give an overview
about the company’s operation and financial position. Not only look at the information
in the financial statements, a more sophisticated approach than this has been
developed. This is ratio analysis, which involves comparing one figure against
another to produce a ratio, and assessing whether the ratio indicates a weakness or
strength in the company’s affairs. Through ratio analysis, the stakeholders can
interpret trends in the performance year on year and the operation business of
company.
External comparison is the comparison with similar businesses and averages
for the business sector within which the company operates. And the internal
comparison is the comparison with previous periods and forecasts or budgeted
results.
Internal comparison is the comparison with previous periods and forecasts or
budgeted results.
a. Profitability and return on capital
Profit margin: A higher profit margin indicates a more profitable
company that has better control over its costs compared to its competitors.
Therefore, from the result, the profit margin trend is not good.
2007 2008PBIT is measured as Operating Profit 244,030 -27,749 Interest expenses 31,710 52,364PBIT 275,740 24,615Sales 1,230,802 1,455,768Profit margin (PBIT/Sales) 22% 2%
Based on the two figures above, we can see that there is a big
decrease of profit from 2007 to 2008 (22% decreases to 2%). It leads to a loss in
2008.
Asset turnover: It indicates how well the assets of Kinh Do are used
for making sale. The number increases that mean the assets of Kinh Do can make
more sale than previous year.
2007 2008
Sales 1,230,8021,455,76
8
Capital employed includes:1,455,76
8 Non-current liabilities 125,713 172,041
Total Equity 2,453,4942,075,92
3 Minority Interest 20,468 71,561
Capital employed 2,599,6752,319,52
5Asset turnover (Sales/Capital employed) 0.47 0.63 (times)
Return on capital employed (ROCE):It shows how much a business is
gaining for its assets, or how much it is losing for its liabilities. The number ò ROCE
reduces so the business seems not to be good.
2007 2008 Non-current liabilities 125,713 172,041 Total Equity 2,453,494 2,075,923 Minority Interest 20,468 71,561Capital employed 2,599,675 2,319,525 Operating Profit 244,030 -27,749 Interest expenses 31,710 52,364PBIT 275,740 24,615ROCE (PBIT/Capital employed) 10.61% 1.06%
ROCE = Profit margin * Asset turnover
Profit margin Asset turnover ROCE
2007 22% 0.47 10.61%
2008 2% 0.63 1.06%
There was a decrease rapidly on profit before interest and taxation in
2008 if compare with the datum in 2007. It made the profit margin decrease sharply
from 22% in 2007 to 2% in 2008. Even though the company made sale increased in
2008, the rate just went up 18% while the rates of PBIT went down more than 128%.
Furthermore, asset turnover increased a little because the company made sales as
well as control capital employed better.
Both profit margin and asset turnover affect ROCE. However, the rate
tend to decreased sharply, from 10.61% in 2007 to 1.06% in 2008. The profit margin
has fallen too much although the asset turnover increases a little, it has less than
compensated for this.
b. Borrowing
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 are low. The company should regard as a safe limit, it is a
helpful benchmark.
2007 2008Liabilities ratio - Total liabilities includes Current liabilities 467,800 663,885 Non-current liabilities 125,713 172,041Total equities 593,513 835,926Total assets 3,067,475 2,983,410Liabilities ratio (total equities/total assets) 19.35% 28.02%
The figure of liabilities ratio is low. The financial situation of the
company is very safe. However, the ratio has increased from 19.35% to 28.02%.
Therefore, the company should pay attention to control their debts and try to raise
their assets carefully.
Capital gearing ratio a measure of the proportion of a company’s
capital that is prior charge capital. There is no absolute limit to what a gearing ratio
ought to be. But a company with a gearing ratio of more than 50% is said to be high-
geared (Whereas low gearing means a gearing ratio of less than 50%)1.
2007 2008Prior charge capital includes Long term debt 112,410 156,029Total capital includes Non-current liabilities 125,713 172,041
Total Equity 2,453,4942,075,92
3 Minority Interest 20,468 71,561
Total capital 2,599,6752,319,52
5Capital gearing ratio (prior charge capital/total capital) 4.32% 6.73%
The gearing capital ratio of Kinh Do is very low, mainly because of the
small amount of prior charge capital. The company is low geared and it is easy in the
future when it wants to borrow.
1 Managing Financial Resources and Decisions book, page 132
There is a similar ratio to the gearing ratio is the debt/equity ratio
2007 2008Total Equity includes Total Equity include 2,453,494 2,075,923 Minority Interest 20,468 71,561Total equity 2,473,962 2,147,484Prior charge capital 112,410 156,029Debt/equity ratio 4.54% 7.27%
The interest cover ratio shows whether a company is earning enough
profits before interest and tax to pay its interest costs comfortably. An interest cover
of two times or less would be low, and should really exceed three times before the
company’s interest costs can be considered within acceptable limits2.
2007 2008Profit before interest and tax Operating Profit 275,740 24,615Interest payable includes Minority Interest - (24,713) Interest expenses 31,710 52,364Total interest payable 31,710 27,651Interest cover ratio (profit before interest and tax/interest payable) 9 1 (times)
The figures of interest cover ratio in 2007 is very high, exceed 9 times
before the company’s interest cost. It is because in the year 2007, the company
earned much profit compared with interest payable and it earned enough profits to
pay its interest costs comfortably. However, in 2008, although interest payable of
Kinh Do decreased, the company would meet difficult to generate enough profits
before interest and tax to pay interest. Therefore, the company must try to improve
their sales in order to get higher profits.
c. Liquidity and Working Capital Ratios
Current ratio: The ability of a business to meet short-term obligations.
Based on the calculated result, the ability of Kinh Do to pay off its current liabilities
decreases.
2007 2008Current assets 1,754,629 1,474,43
2 Managing Financial Resources and Decisions book, page 133
4Current liabilities 467,800 663,885Current ratio (current assets/current liabilities) 3.75 2.22
Based on the figures, the company, in 2007 was able to convert all
their current assets into cash quicker than its figures in 2008. The financial situation
of Kinh Do in 2008 seem to be worse than 2008, current assets reduced while
current liabilities rose. These numbers made the quick ratio on Kinh Do in 2008
decreased.
Quick ratio: The ability of a company to pay off its short-term
obligations from current assets, excluding inventories. Based on the calculated result,
the ability of Kinh Do to pay off its current liabilities decreases.
2007 2008Current assets less stocks includes
Current assets 1,754,6291,474,43
4 Inventory 136,272 181,656
Current assets less stocks 1,618,3571,292,77
8Current liabilities 467,800 663,885Quick ratio 3.46 1.95
Both the figures show that the company has very high creditors (less
stock and quick turnover). However, the trend decreased from 3.46 in 2007 to 1.95 in
2008, mainly because of current liabilities and inventory. From this, it seems that the
liquidity is not improving. Therefore, the company should pay attention to solve these
problems.
Efficiency ratios:
* Stock turnover ratio:
2007$ (VNDm)
2008$
(VNDm)
Inventory (1) 136,272 181,656
Cost of goods sales (2) 908,825 1,085,980
Stock turnover ratio ((1)/(2) * 365 days)
55 days 61 days
The ratio increases from 55 days in 2007 to 61 days in 2008. It is a signal that
the product of Kinh Do is consumed slowly. The company had no improvement to
manage or control well its liquidity to convert their inventory into cash quickly.
Therefore, the products of Kinh Do seemed to be consumed quickly.
4.2 Summarize
When we look at the financial statement, it shows that the financial
position of Kinh Do decreased. However, there are many good signals for the future
of the company.
Firstly, the sales of Kinh Do increased, it means that Kinh Do has
stable number of customers. Furthermore, asset turnover in 2008 was also higher
than 2007. That mean the assets of Kinh Do can make more sale than previous year.
The next is borrowing. We can see that the figure of liabilities ratio is low. If we
explain it positively, it is because Kinh Do borrowed much to invest much projects.
Moreover, the financial statements don’t show the potential
opportunities in investment. It is guessed that in the period public these financial
statements, the company was planning to expand its market. The costs which were
shown in the financial statement is high cause the profit became low but maybe next
period, this number may increase rapidly. In addition, financial statements don’t show
the cost which contribute to make revenue such as depreciation, management cost
or advertising cost.
In conclusion, the financial position of Kinh Do is safe and investors
could be comfortable to invest to Kinh Do.
CONCLUSION
The objective of financial statements is to provide information about the
financial position, performance and changes in financial position of an enterprise that
is useful to a wide range of users in making economic decisions.
Hopefully, the discussion in this report will be useful to understand more
about financial statements.
REFERENCES
Managing Financial Resources and Decisions book, page 132
Managing Financial Resources and Decisions book, page 133
http://en.wikipedia.org/wiki/Financial_statement
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