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REPORT
FINANCIAL 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

750,000

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

558,000

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

210,000

125,000

2

210,000

125,000

3

170,000

150,000

4

165,000

215,000

5

60,000

140,000

Total profit
815,000

755,000

Iniatial cost
700,000

700,000

Residual 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

700,000
Residual value

60,000

20,000
Average 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, pr...

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