Assignment 2 Group work (2 students per group)

SCENARIO THANH VINH FINANCIAL PERFORMANCE AND DECISION MAKING

Thanh Vinh Company, one of the leading companies specializing in design, interior decoration
and manufacture furniture for office, factory, school, hospital, and home in Viet Nam. Thanh
Vinh has decorated successfully for many projects of well-known international and local clients.

The company also provides combined services of design, furniture manufacture and interior
decoration departments, is able to offer a Turnkey service which guarantees all project will be
successfully completed to a high quality standard within budget and time frame.

A. Budgeting Decisions
3.1

Analyse budgets and make appropriate decisions based on given

information above
B. Costing and Pricing Decisions
3.2

Explain the calculation of unit costs and make pricing decisions using

relevant information given in the scenario

C. Investment Decisions:

3.3

Assess the viability of a project using investment appraisal techniques

Task D. Financial Performance:

4.1.

Discuss the main financial statements (such as income statement,

balance sheet and cash flow statement) of Pontoon Subsidiary Co. of Thanh
Vinh Company Ltd.:
Pontoon Ltd is subsidiary of Thanh Vinh Company manufactures precision equipment,
and the directors have decided that finance of approximately 2 million is required to
modernise its production facilities. They estimate that, at current sales levels, this
investment will have the effect of reducing cost of sales by 1 million. The industry in
which Pontoon is engaged is subject to wide-ranging fluctuations in sales and profits. The
directors are uncertain about which method of finance would be most appropriate and are
currently considering the following three options:
issue of additional shares;
issue of debenture stock at an interest rate of 12% per annum and
redeemable in 20 years time;
obtaining a bank overdraft.

The following gives some information concerning the industry, together with a summary
of the financial statements of the company for the two years ended March 31, 2011.

Ratios

Industry
2011

Pontoon

Pontoon

Ltd

Ltd

2011

2010

Net profit before tax and interest to capital employed

15%

20%

17%

Net profit before tax and interest to sales

10%

11%

10%

1.5 times

1.9

1.7

Asset turnover

Gross profit to sale

35%

32%

32%

Current (working capital) ratio

2.2:1

2.4

2.4

Quick (acid test) ratio

1.1:1

1.0

1.1

Average age of debtors

73 days

45

34

Average age of stock

206 days

116

83

3 times

01:01

0.3

0.3

7 times

N/A

6.0

Interest cover
Gearing ratio (long-term loan capital/shareholders funds)
Price/earnings ratio

The stock valuation and debtors valuations at March 31, 2010 were 2.5 million and 1.7
million respectively. The effective tax rate is 50%.

Financial statements are the primary means of communicating important accounting

information about a business to those who have an interest in the business. These statements
are models of the enterprise in that they show the business in financial terms. As is true of all
models, however, financial statements are not perfect pictures of the real thing. Rather, they
are the accountants the best effort to represent what is real. For major financial statements
are used to communicate accounting information about a business: the profit/loss account,
the balance sheet and the statement of cash flows.
Profit and loss account: A profit or loss account is a record of revenue generated and
expenses incurred over a given period. Many people consider it the most important
financial report because it shows weather a business achieved its profitability goal. The
profit and loss account can also is called the Statement of financial performance.
The period accounting chosen will depend on the purpose for which the statement is
produced. The profit and loss account which forms part of the 'published' annual accounts
of a limited company will be made for the period of year, commencing from the date of
the previous year's accounts.

2011
000

2010
000

000

Sales (Credit)

23,500

20,500

Cost of sales

16,000

14,000

Gross profit

7,500

Distribution costs

2,000

Administration costs

3,000

000

6,500
1,900

5,000

2,600

4,500

Operating profit

2,500

2,000

Interest payable

300

300

Profit before taxation

2,200

1,700

Taxation

1,200

1,020

Profit after taxation

1,000

680

525

280

475

400

Dividends paid and proposed

Retained profit for the year
- Discuss: Profit and Loss Accounts
- Indicate the company operations are profitable

- From 2010 to 2011: tend to increase in all aspects (sales, costs, profit, dividends paid,
retained profit)
Looking at this statement, it shows the profit that the company achieves in 2011 is higher
than 2010, increasing from 680,000 to 1,000,000 even though taxation and costs such as
distribution cost, administration cost, cost of sales are bigger than the previous year.
However, because of

the dividends paid and proposed is more than 2010 (525,000

compared with 280,000), it makes the retained profit grows not much, just increasing
75,000 as compared to 2010. Therefore, the company should adjust this item order to get
more profit for the next year.
Balance Sheet:

The purpose of a balance sheet is to show the financial position of a business on a certain
date, usually the end of the month or year. For this reason, it often is called the statement
of financial position and is dated as of a specific date. The balance sheet presents a view
of the business as the holder of resources, or assets, that are equal to the claims against
those assets. The claims consist of the companys liabilities and the owners equity in the
company.
2011
Balance Sheets

000

Tangible fixed assets

2010
000

000

7,315

000
8,550

Current assets
Stock

5,100

3,200

Debtors

2,900

1,900

Prepayments

100

100

Cash at bank

600

590

8,700

5,790

2,025

1,100

275

280

1,300

1,020

3,600

2,400

Creditors amounts falling due within one year

Trade creditors
Proposed dividends
Taxation

5,100

3,390

12,415

11,940

10% debenture stock

3,000

3,000

NET ASSETS

9,415

8,940

3,000

3,000

Total assets less current liabilities

Creditors amounts falling due after more than one year

Capital and reserves

Share capital ordinary shares of 1 each

Profit and loss account

6,415

5,940

9,415

8,940

Demonstrate the company expands the scale of production and business activities

From 2010 to - 2011: the increase in assets and equity

In balance sheet, the company shows a good sign in their business. They sells more
stocks in 2011 with 5,100,000 as compared to 3,200,000 in 2010 while the money
customers pay for the company raising from 1,900,000 to 2,900,000. This means the
amount of cash of the company increase 10,000. Although the liabilities of the
organization in 2011 increase more than the year before, the company are still in secure
finance since the current ratio in 2011 is 2.42 (the ratio is calculated in 4.3), meaning
they have more asset and the ability to pay short-term by changing assets into cash easily.
In conclusion, Pontoon Ltd has a good business and make a profit. If someone is a
partnership or an investor, he/she should invest to the company because it has more asset,
easily to pay short-term debt and make more profit.

Cash flow statement:

As cash flow statement explains between profit and cash and also shows where a business
gets its capital from what uses it puts the capital to. Only large companies are required to
produces a cash flow statement, through smaller companies can do so if day wish. Cash
flow statement is related directly to the other three financial statements and focus on its
liquidity.

4.2.

Compare appropriate formats of financial statements for different types

of business (income statement and balance sheet for different types of business
such as sole proprietorship, partnership and limited company):
Similarities:
In this case, the different types of business includes partnership, sole proprietorship and
limited company. All of them need income statement and balance sheet in order that they can
know about the company's financial activities.

There are three kinds of financial statements: cash flow statements, balance sheet and income
statements.
Income statements: income statements states revenue first then expenses. By
subtracting expenses from revenue net income is calculated. It is the most simplified
income statements and most service providers use this process. Income statement for
a manufacturing or retail store operation is very difficult. The first line of the income
statement is for revenue or gross income, followed by subtraction of cost of
manufactured or goods sold. This provides a gross income amount. The second
section is lists of all expenses include administrative or general costs, selling and so
on. Operation income is calculated by subtracting all expenses from gross income.
The last section subtracts any other expenses, taxes, interest expense to arrive at the
net income of the business.
Balance sheet: it shows the shareholders equity, liabilities and assets of the business.
The total assets are equal to total shareholders equity and liabilities. The first section
is lists of all assets include equipment, real estate, investments, cash and other
business holdings. The next section is list of all liabilities includes any loans or
account payable and last section is shareholders equity. This balance sheet is suitable
for small company but for larger company, the business often breaks it down to
current and long term assets and liabilities.
Cash flow statement: it shows the actual flow of cash in and out of the business. It
helps investors and others to determine if the business is having difficulty managing
its cash flow. It starts with the cash flow from operations, followed by cash flow from
investing and cash flow from operations. Each category shows incoming and
outgoing cash from the business. The ending cash flow should be equal to the amount
of cash the business has on hand.
Differences : Although these type of business use income statement with different purpose.
4.2.1. Sample Format of Financial Statements for Sole-Proprietorship
Income Statement
XYZ Co
STATEMENT OF PROFIT OR LOSS FOR THE YEAR ENDED 31 DEC 20X2

000

000

000

Revenue
Sales
Less Sales Returns
Net Sales
Less Cost of Goods Sold
Opening Inventory
Plus Purchases
Less Purchase Returns
Plus Freight Inwards
Customs Duty
Goods available for sale
Less Closing Inventory
Cost of goods sold
Gross Profit
Add Other Income
(list)

XXX
(XX)
XXX
XX
XX
(XX)

XX
X
X
XX
(XX)
XX
XX
X
X

Less Expenses
Distribution costs
(list)
Administrative expenses
(list)
Finance costs
(list)

X
XX

XX

X
XX

XX

X
XX

XX

Total expenses
Profit (loss) for the year

X
XXX

XXX
XXX

Balance Sheet
XYZ Co
BALANCE SHEET FOR THE YEAR ENDED 31 DEC 20X2
Assets

000

000

000

Non-Current assets
Property

XXX

Motor Vehicle

Less: Accumulated Depreciation

X
XX

Machinery

Less: Accumulated Depreciation

X
XX
XXX
XXX

Current assets
Stocks

XXX

Trade Debtors

XXX

Prepayments & Deposits

XXX

Cash and Cash at Bank

XXX
XXX

Total assets

XXX

Liabilities & Proprietors equity

Proprietors equity
Capital

XXX

Retained Earnings

Current Year Earnings

X
XX

Less: Drawings

XX
XXX
XXX

Liabilities
Non-current liabilities
Long term loans
Current liabilities

XXX

Trade Creditors

XXX

Short-term loans

XXX
XXX

Total Liabilities & Proprietors equity

XXX

Note:
Balance sheet should be prepared based on accepted accounting principles and standards.
This is only a sample format to serve as a guide on how a balance sheet may be presented.
Some pointers when preparing a balance sheet:
Stock value (if any) in the balance sheet should be same as closing stock reflected in profit
and loss statement (P&L)
Current year profit/earnings in the balance sheet should be the same as net profit in the
P&L
Total Assets = Total Proprietors equity & Liabilities
4.2.2. Sample Format of Financial Statements for Partnership
Partners Capital Accounts:
Capital Accounts
Date

Details

Partners
A

1/10/X1

31/12/X1

Bank

Bal c/d

Date

Details

C
X

Partners
A

B C

X X

1/1/X1

Balance b/d

30/6/X1

Bank

31/12/X1

Goodwill

X X

31/12/X1

Revaluation

X X

X X

X X

X X

31/12/X1
Partners Current Accounts:

Balance b/d

Partners current accounts

Date

Details

Partners
A

1/1/X1

Balance b/d

31/12/X1 Interest on debit bal

Date

Details

Partners
A

1/1/X1

Balance b/d

X X

31/12/X1

Interest on credit bal

X X

31/12/X1 Interest on drawings X

31/12/X1

Interest on capital

31/12/X1 Share of losses

31/12/X1

Loan interest

31/12/X1 Drawings

31/12/X1

Shares of profits

Balance c/d

X
X

1/1/X2

B C

Balance b/d

X
X

Balance c/d

1/1/X2

Balance b/d

X X
X X
X

X X

Appropriation Account for the year ended 31 December 20X1

000

000

Gross profit

Other partnership expenses

(X)

Interest on loan extended by partners to business

(X)

Profit for the year

Other comprehensive income/< expenditure >

Total comprehensive income for the year

Distributable income (profit for the year)

Salaries: A

X
(X)

Interest on capital/current accounts:

A

X
(X)

Balance of profit

Share of profit ( as per profit sharing ratio )

A

X
X

Balance Sheet
000
Capital accounts

000

X
Current accounts

(X)

X
X
X

Note: Partner B had a debit balance in the current account and therefore this is
subtracted from the other credit balances
4.2.3. Sample Format of Financial Statements for Limited Company
Income Statement
XYZ Co
INCOME STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE
INCOME FOR THE YEAR ENDED 31 DECEMBER 20X2
20X2
000

20X1
000

000

Revenue

XXX

XXX

Cost of sales

(XXX)

(XXX)

Gross profit

XXX

000

XXX

Other income

XXX

XXX

Less: Expenses
Distribution costs

(XXX)

(XXX)

Administrative expenses

(XXX)

(XXX)

Other expenses

(XXX)

(XXX)

Finance cost

(XXX)

(XXX)

Profit before Tax

XXX

XXX

Income tax expense

(XXX)

(XXX)

Profit for the year

XXX

XXX

Gains on property revaluation

XXX

XXX

Total comprehensive income

XXX

XXX

Other comprehensive income:

for the year

Balance Sheets
XYZ Co
BALANCE SHEET AS AT 31 DECEMBER 20X2
20X2
000

20X1
000

000

000

Assets
Non-current assets
Property, plant and equipment

XXX

XXX

Good will

XXX

XXX

Other assets

XXX

XXX
XXX

XXX

Current assets
Inventories

XXX

XXX

Trade receivables

XXX

XXX

Other current assets

XXX

XXX

Cash and cash equivalent

XXX

XXX

Total assets

XXX

XXX

XXX

XXX

Equity and liabilities

Equity
Share capital

XXX

XXX

Retained earning

XXX

XXX

Other components of equity

XXX

XXX
XXX

XXX

Non-current liabilities
Long-term borrowings

XXX

XXX

Long-term provisions

XXX

XXX
XXX

XXX

Current liabilities
Trade and other payables

XXX

XXX

Short-term borrowings

XXX

XXX

borrowings

XXX

XXX

Current tax payable

XXX

XXX

Short-term provisions

XXX

XXX

Current portion of long-term

Total equity and liabilities

XXX

XXX

XXX

XXX

Cash flow statement:

STATEMENT OF CASH FLOWS YEAR 20X2
000
Cash flow from operating activities
Cash receipt from customers

XXX

Cash paid to suppliers and employees

(XXX)

Cash generated from operations

XXX

000

Interest paid

(XXX)

Income taxes paid

(XXX)

Net cash from operating activities

XXX

Cash flows from investing activities

Purchase of property, plant and equipment

(XXX)

Proceeds from sale of equipment

XXX

Interest received

XXX

Dividends received

XXX

Net cash used in investing activities

(XXX)

Cash flow from financing activities

Proceeds from insurance of share capital

XXX

Proceeds from long-term borrowing

XXX

Dividends paid*

(XXX)

Net used in financing activities

(XXX)

Net increase in cash and cash equivalents

XXX

Cash and cash equivalents

at beginning of period (Note)

XXX

Cash and cash equivalents

at end of period (Note)

XXX

Formats of

Types of business

financial
statement
Partnership

Sole proprietorship
Announce

Limited company

Income

- Provide how much profit -

the - Tell about the results

statement

the

company

the

company's

and

how much loss the meaning it helps the activities

over

generates company's profitability, of

organization
result,

has. As

basing

on

a company can know the specified

this flow

of

sales

accounting

and period. It shows the

statement helps partnership expenses over a period final

profit

after

can decide to invest capital of time. Besides it also taxation or dividends

for the company.

shows how much profit paid.

the firm is generating
such as gross profit and
net profit . Therefore,
the owner can find the
strength and weakness
to

manage

his/her

company.
- Corporation tax is not

- Corporation tax is

payable; The partners pay - Corporation tax is not payable

personal income tax on payable; The owners
their share of the profits, pay personal income
but this is not shown on the tax on their share of the
business

financial profits, but this is not

statements.
- Dividends are not paid;

shown on the business

financial statements.

The partners will get a - Dividends are not

share of the profit; This paid; The owners will
split may be shown at the get all of the profits
bottom of this financial earned and there is no
statement.

equivalent to dividends
in

this

statement.

financial

- Dividends are paid;

Profits

can

be

distributed

to

shareholders

as

dividends or retained
in the business to help
future activities.

Balance Sheet

Each partner has a "capital The

equity

section The equity section of a

account" and a "current would include owner's corporate

account."
-

The

balance

equity, which is money sheet has two main

capital

account:

money the partner has put

into the business.

an entrepreneur pours sections:

into a business and it is
reduced by drawings of
the owner

- The current account is the

- Contributed capital:
the

money

the

company has received

from selling its stock.

partner's accumulated share

of the company's profits.

- Retained earnings:

Each

the

partner's

current

accumulated

account is reduced by any

profits of the company

"drawings" the partner has

since it was founded,

made from the company.

minus any dividends it

Owners are entitled to take

has

some of the company's

shareholders.

profits for personal use.

paid

to

The equity section also

When they do so, it's a

commonly

drawing, and it comes out

discloses

how many shares of

of the current account.

stock the company has

outstanding.

Each

outstanding

share

represents

an

equal

slice of the company's

equity.

4.3.

Interpret

financial

statements

comparisons, both internal and external:

using

appropriate

ratios

and

Ratios for similar firms in the same industry for 2011 are:
Internal
Profitability ratios
Industry
2011

2011

2010

15%

20%

17%

Net profit before tax and interest to capital employed

(ROCE) = Net profit before interest and taxation/Capital
employed

The ROCE has been improved year-to-year. The ROCE of Pontoon from 2010 to 2011
has been higher than the ROCE earned by similar firms. --> Measuring the high profits earned
for 1 each invested in this company's stock
Gross profit to sale = Gross profit/Sales

35%

32%

32%

The gross profit margin of 32% was stable from 2010 to 2011 and lower than similar
firms. It indicated that the company's cost of sales is higher than similar firms. It's considered to
modernise the company's production facilities.
Asset turnover = Sales/Assets

1.5 times

1.9

1.7

This company has achieved sales growth of 15% from 20,500 to 23,500 between
2010 and 2011. Here, the company's asset turnover is 1.9 times and similar firms' is 1.5
times in 2011. This will help the company to make higher return on capital employed
than similar firms.
Liability and gearing ratios: In the balance sheet of any company, long- term debt
which consists of things such as business loans is an important element. The reason
for this is it refers to money the company owes which it does not expect to pay next
year. The long-term debt ratio of Pontoon in 2011 (31.8%) was smaller than 2010
(33.6%). As a result, it reflects a great sign for the organization because debt shrinks
and cash increase.

Gearing ratio (long-term loan capital/shareholders

1
0.3
0.3
funds) = Long-term loan capital/Shareholders funds
Unlike liquidity ratios, the capital gearing is concerned with the company's long
term capital structure. In comparing with similar firms, this gearing YOY (year on year)
of the company is so small. It's considered to increase long term loans if the company
need to finance the purchase of new fixed assets.
The gearing ratio measures the proportion of firm debt to equity and the
company's business activities. If the ratio is high, meaning the company must face with
financial risk. In this case because the gearing ratio of Pontoon Ltd is very low (0.3) as
compared to industry averages (1), meaning they will not meet any financial risk .
Interest cover = Net profit before interest and

3 times

taxation/Interest charges
The ratio indicated the company's earnings can very well cover the interest payments
on its debts. The company has bigger number of interest cover (8 times), meaning they
can easily meet its interest obligation from profits.
Liquidity and working capital ratios
Current (working capital) ratio = Current assets/Current

2.2:1

2.4

2.4

liabilities
The company's ratio is higher than similar firms. Therefore, it will help the
company to have enough current assets to meet its future commitments to pay-off its
current liabilities. However, the company should have over-investing in working capital
and so tying up more funds in the business than it needs to.
Current ratio reflects the company's ability its short-term debt obligation, such as
account payable, wages,

or accrued taxes.

This ratio is evaluated through three

situations. Firstly, if the ratio is greater than 1, meaning the company can meet its shortterm debts obligation without stress. Secondly, if it is equal to 1, the company have to
consider their assets . Finally, if the current ratio is less than 1, the company do not have
enough assets to pay debts and have problem with its bill. For Pontoon Ltd ,it had an
increase current ratio from 2.41 to 2.42 in 2011. This number was greater than 1, so it
was proved that the firm has more assets and they can pay short-term debt easily.

Quick (acid test) ratio = (Current assets - stocks)/Current

1.1

1.0

1.1

liabilities
The quick ratio is in the trend of similar firms. It's supposed that the company can
continue in its business with the level of liquidity.
External
Net profit before tax and interest to sales = Net profit

10%

11%

10%

before tax and interest/sales

The profit margin (Net profit before tax and interest to sales) has been improved
from 2010 to 2011. In 2011, the company earned net profit on sales higher than those of
similar firms.
Average age of debtors = (Debtors x 365)/Sales

73 days

45

34

Although the company's ratio looked so good in comparing with similar firms, it
was increasing year on year. This is indicative of a poorly managed credit control
function.
Average age of stock = (Stocks x 365)/Cost of sales

206 days

116

83

The stock days showed an indication of how soon stock is convertible into cash.
For comparing changes year on year, the lengthening stock days year on year indicates a
slowdown in trading or a build-up in stock levels.
Besides, the company takes about more than 1 months to receive payment of customer while its
rival is more than 2 months (45 days average of debtors compared with 73 days ). The same with
average age of stock, Pontoon Ltd takes 116 days to sell stock while its competitors must take
206 days.

Price/earnings ratio = Share price/The earnings per share

7 times

N/A

6.0

The high P/E of the company indicates strong shareholder confidence in the
company and its future.
After analyzing ratios from both internal and external, we can see that the subsidiary of Thanh
Vinh company is in good business through these index. Therefore, with such balance sheet, the

company can make good impression for investors or shareholders. Consequently, it had better for
the firm issue additional shares to increase their cash and raise more capital so that they can
continuing selling products and invest to next projects.

Conclusion:
With the recommends as mentioned above, it should be to issue of debenture stock at the
interest rate of 12% per annum with tenor 20 years to modernization of the company's production
facilities.
Especially, the option of obtaining a bank overdraft would only be a short-term credit and
make the company's liquidity ratios going worse. In the other hand, the option of additional
shares would not help the company to take the advantage of tax shield as well as it makes the
cost of capital higher and higher because of shareholders' requirement of high earnings.
Making financial decisions and evaluating the financial performance are very important
Thanh Vinh Company. Therefore, before making decisions, the company needs analyze budget
carefully. Additionally, Thanh Vinh Company should use technique effectively to assess the
viability of each project in order to consider what project they should invest in. Besides,
company should use appropriate formats of financial statements for different types of business.
Understanding that will help company develop stably in the marketplace.