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 running business 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
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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

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.
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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 activities 4. 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

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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 of business 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 over corporations 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 conduct business. Early corporations were established by charter. Most jurisdictions now allow the creation of new corporations through registration.

Limited Liability Company A limited company is a company in which the liability of the members or subscribers of 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

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 Cost of sales Gross profit Other income: Interest income Operating expenses: Accountancy fee Depreciation of property, plant and equipment Donation Electricity & water Insurance premium Printing & stationery Rental of premises Salaries Upkeep of office Telephone charges Traveling, petrol &charge Net profit for the year Retained profit B/F Retain profits C/F 800 2,500 500 3,340 2,000 1,697 12,000 35,579 3,547 1,285 2,648 65,896 4,855 27,654 32,509 2.356 = 159,270 90,875 68,395

Balance Sheet as at 31 December 2006

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$ Non-current assets Property, plant and equipment Current assets Inventories Trade receivables Other receivables, deposits & prepayments Cash and bank balances Current liabilities Trade payable Other payables and accruals Net current assets 3,588 2,575 6,163 19,134 34,134 Financed by: Capital Retained profit Net drawings 2. Limited Company Income statement for the year ended 31 December 2006 $ Sales Cost of sales Gross profit Other income: Interest income Operating expenses: Accountancy fee 800 2.356 = 159,270 90,875 68,395 15,000 32,509 13,375 34,134 5,200 6,000 3,458 10,639 25,297 15000

Depreciation of property, plant and equipment Donation Electricity & water Insurance premium Printing & stationery Rental of premises Salaries Upkeep of office Telephone charges Traveling, petrol &charge Net profit for the year Retained profit B/F Retain profits C/F

2,500 500 3,340 2,000 1,697 12,000 35,579 3,547 1,285 2,648 65,896 4,855 27,654 32,509

Balance Sheet as at 31 December 2006 $ Non-current assets Property, plant and equipment Current assets Inventories Trade receivables Other receivables, deposits & prepayments Amount due by shareholder Cash and bank balances 5,200 6,000 3,458 13,375 Note 2 10,639 38,672 15000

Current liabilities Trade payable 3,588

Other payables and accruals Net current assets

2,575 6,163 32,509 47,509

Financed by: Capital Retained profit 3. Partnership Income statement for the year ended 31 December 2006 Analyzed as follow: Partner A $ Shared net loss for the year Less: Interest on partners drawings Add: Partners salary Partners commission Net profit for the year 15,000 3,000 - 3,587 Note 1 20,000 2,000 3,500 8,443 Note 1 35,000 5,000 6,000 4,855 - 1,500 - 2000 - 3,500 - 22,587 Partner B $ - 15,058 Total $ - 37,645 15,000 32,509 47,509

Interest charged on partners capital 2,500

Balance Sheet as at 31 December 2006 $ Non-current assets

Property, plant and equipment Current assets Inventories Trade receivables Other receivables, deposits & prepayments Cash and bank balances Current liabilities Trade payable Other payables and accruals Net current assets Financed by: Partner A $ Capital account Current account Balance B/F Shared net loss for the year Net drawings during year Balance C/F 45,874 - 22,587 - 12,000 11,287 20,287 24,280 - 15, 058 - 5,000 4,222 10,222 9,000 Partner B $ 6,000 -

15000 5,200 6,000 3,458 10,639 25,297 3,588 2,575 6,163 19,134 34,134 Total $ 15,000 70,154 - 37,654 - 13,375 19,134 43,134
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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.
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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
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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 their owners. 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

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 enough to 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
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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

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 the company 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

Income Statement (VNDm) Revenue COGS Gross profit Operating Profit Profit before tax Tax Profit after tax Minority Interest PAT to the companys shareholders Interest expense Balance sheet (VNDM) Current assets Cash & Equivalent Short term financial investments Provision for short term investments Short term receivables Inventory Provision for inventory devaluation Other short term assets Non-current assets Long term receivables Fixed assets Long term financial investments Provision for long term investstments Other long term assets TOTAL ASSETS Current liabilities Short term debt Non-current liabilities Long term debt Chartered capital Capital Surplus Retained earnings Total equity Minority Interest TOTAL CAPITAL

2007 2008 Change VNDm VNDm VNDm % 1,230,802 1,455,768 224,966 18.28% 908,825 1,085,980 177,155 19.49% 321,978 369,788 47,810 14.85% 244,030 (27749) (271779) -111.37% 222,469 (61690) (284159) -127.73% (1,659) (1087) 572 -34.48% 224,127 (60603) (284730) -127.04% (24713) (24713) 224,127 (85316) (309443) -138.07% 31,710 52,364 20,654 65.13% 1,754,629 530,438 522,518 (4932) 560,318 136,272 (395) 5,082 1,312,846 30,911 480,860 797,351 (197257) 3,257 3,067,475 467,800 263,003 125,713 112,410 469,997 1,725,694 181,798 2,454,494 20,468 3,067,457 1,474,434 206,808 584,291 (58732) 489,407 181,656 (1165) 12,271 1,508,976 31,059 749,092 673,385 (51357) 55,440 2,983,410 663,885 335,922 172,041 156,029 571,149 1,721,014 (147004) 2,075,923 71,561 2,983,410 (280195) -15.97% (323630) -61.01% 61,773 11.82% (53800) 1090.84% (70911) -12.66% 45,384 33.30% (770) 194.94% 7,189 141.46% 196,130 14.94% 148 0.48% 268,232 55.78% (123966) -15.55% 145,900 -73.96% 52,183 1602.18% (84065) -2.74% 196,085 41.92% 72,919 27.73% 46,328 36.85% 43,619 38.80% 101,152 21.52% (4680) -0.27% (328802) -180.86% (378571) -15.42% 51,093 249.62% (84047) -2.74%

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

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%.

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 VNDm 172,041 2,075,923 71,561 2,319,525 2007 VNDm 125,713 2,453,494 20,468 2,599,675 (a)

Non-current liabilities Total Equity Minority interest Capital em ployed

Operatingprofit Interest expenses PB IT

2008 VNDm -27,749 52,364 24,615

2007 VNDm 244,030 31,710 275,740 (b)

PBIT Capital employed R OCE

2008 24,615 2,319,525 1.1%

2007 275,740 2,599,675 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.

Profit Margin and Assets turn over

Sales PBIT Capital employed Profit margin Assets turn over ROCE 2007 2008 1.230.820 1.455.758 275740 24615 2.599.675 2.319.525 22% 2% 0,47345149 0,62761039 11% 1% a b c b/a a/c

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 663.885 172.041 835.926 2.983.410 28% 2007 467.800 125.713 593.513 ( c ) 3.067.475 (d) 19% ( c )/(d)

Current liabilities Non-current liabilities Total liabilities Total assets Liabilities ratio

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.

Capital gearing ratio

Prior charge capital Long term debt Total capital Non-current liabilities Total equity Minority interest Capital Gearing ratio 156.029 156.029 2.319.525 172.041 2.075.923 71.561 7% 2008 112.410 112.410 2.599.675 (f) 125.713 2.453.494 20.468 4% (e)/(f) 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 156,029 2,075,923 71,561 2,147,484 7 % 2007 112,410 (g) 2,453,494 20,468 2,473,962 (h) 5 % (g)/(h)

Prior charge capital Total Equity Minority interest Total Equity D eb t/E qu ityra tio

From these results of Debt/ Equity ratio on the above table, Kinh Do Company increased from 5% in 2007 to 7 % in 2008.

Liquidity and Working capital ratios

2008 1,474,434 663,885 2 .2 2
2008 1,474,434 181,656 1,292,778 663,885 1 .9 5

Current assets Current liabilities Current ra tio

2007 1,754,629 (i) 467,800 (j) 3 .7 5 (i)/(j)

2007 1,754,629 136,272 1,618,357 (k) 467,800 (l) 3 .4 6 (k)/(l)

Current assets Inventory Current assets less stock Current liabilites Quickra tio

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 current liability. 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

30.91 Current receivables Total credit sales Number of days DSO 1 1.754.62 9 36 0 6 days 360 8 days 31.059 1.474.434

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.

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 Total Inventory Stock Turnover Ratio 2007 Cost of goods sold Total Inventory Stock Turnover Ratio 908.825 136.272 55 days 1.085.980 181.656 61 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 Sales (units) Sales Direct material Direct labor Variable overhead Fixed overhead Profit 2. Per unit information A B C A 2,000 200,000 10,000 22,500 10,000 6,000 151,500 B 1,750 250,000 13,500 25,000 13,500 9,000 189,000 C 1,300 300,000 20,500 34,000 20,500 7,500 217,500 Total 5,050 750,00 0 44,000 81,500 44,000 22,500 558,00 0

Selling price per unit Direct material per unit Direct labor per unit Variable overhead per unit Direct labor hours (total hours) Direct LH per unit

100.00 5.00 11.25 5.00 4,500 2.25

142.86 7.71 14.29 7.71 5,000 2.86

230.77 15.77 26.15 15.77 6,800 5.23

3. Estimated Demand for Sales Increases (30%) The sales of each product is increased 30% which lead direct material, direct labor hours, and variable overhead. A B Sales (units) (increased by 30%) 2,600 2,275 Direct labor hours needed 5,850 6,500 Direct labor hours available Deficit to the increase of cost of C 1,690 8,840 Total 6,565 21,190 18,000 3,190

(based on Original Budget) Contribution margin (total $) Direct labor hours (total hours) Contribution per DLH Rank

A 190,00 0 4,500 42.22 2

B 236,50 0 5,000 47.30 1

C 279,50 0 6,800 41.10 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) Direct labor hours available A 5,850 B 6,500 C 5,650 Total 18,000

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%) Sales (units) Sales Direct material Direct labor Variable overhead Fixed overhead* Profit A 2,600 260,00 0 13,000 29,250 13,000 9,505 195,24 5 B 2,275 325,00 0 17,550 32,500 17,550 11,882 245,51 8 C 1,080 249,26 5 17,033 28,250 17,033 9,113 177,83 6 Total 5,955 834,26 5 47,583 90,000 47,583 30,500 618,59 9

The fix overhead will change after adding $8,000 of advertising campaign. The table below will estimate the fixed overhead per dollar in sales which help to calculate the fix overhead of each production. Total sales ($) Total fixed OVH Fix overhead per dollar in sales $834,265 30,500 $0.04

6. Extra profit based on Extra 3,500 direct labor hours Additional Sales (units) Additional Sales ($) Additional Direct material Additional Direct labor Additional Variable overhead Additional Fixed overhead Increase in Profit The profit will increase: $ 119906 610 140,73 5 9,617 15,950 9,617 105,55 1

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 (a) $ 22,500 14,000 5,000 45,000 7,250 4,325 98,075

Material (i) Incremental cost (ii) Incremental cost (iii) Opportunity cost Incremental cost Bonus of cost Incremental cost Total

(b) (c) (d)

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 0 1 2 3 4 5 Cash flow $ (700.000) 338.000 338.000 298.000 293.000 248.000 Present value factor 10% 1.000 0.909 0.826 0.751 0.683 0.620 NPV Present value $ (700,000) 307.273 279.339 223.892 200.123 153.988 464.615

NPV= TPV- Initial cost= 464.615 Net present Value of machine B Year 0 1 2 3 4 5 Cash flow $ (700.000) 261.000 261.000 286.000 351.000 296.000 Present value factor 10% 1.000 0.909 0.826 0.751 0.683 0.620 NPV Present value $ (700.000) 237.273 215.702 214.876 239.738 183.793 391,382

NPV= TPV- Initial cost= 391.382 The machine a will be chosen because NPV of machine a is higher than NPV of machine B