Part D. Task 4 - Managing Finance - Assignment ii.doc

8/10/2019 Part D. Task 4 - Managing Finance - Assignment ii.doc

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T+sk $& in+ni+, "er0orm+ne3

6&*& $isuss te m+in 0in+ni+, st+tements (su +s inome st+tement7

.+,+ne seet +nd +s 0,ow st+tement) o0 "ontoon Su.sidi+r- Co& o0 T+n

Vin Comp+n- !td&3

"ontoon #td is susidiary of Thanh Vinh Company manufactures precision e!uipment,

and the directors have decided that finance of appro$imately %& million is re!uired to

modernise its production facilities. They estimate that, at current sales levels, this

investment will have the effect of reducing cost of sales y %' million. The industry in

which "ontoon is engaged is suject to wide-ranging fluctuations in sales and profits. The

directors are uncertain aout which method of finance would e most appropriate and are

currently considering the following three options(

issue of additional shares)

issue of deenture stock at an interest rate of '&* per annum and

redeemale in &+ years time)

otaining a ank 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 arch ', &+''.

RatiosIndustry

2011

"ontoon

#td

2011

"ontoon

#td

2010

Net profit efore ta$ and interest to capital employed '/* &+* '0*

Net profit efore ta$ and interest to sales '+* ''* '+*

1sset turnover './ times '.2 '.0


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28** 28*8

9:888 9:888 9:888 9:888

>ales 4Credit5 &,/++ &+,/++

Cost of sales '8,+++ '6,+++

3ross profit 0,/++ 8,/++

@istriution costs &,+++ ',2++

1dministration costs ,+++ /,+++ &,8++ 6,/++

Aperating profit &,/++ &,+++

:nterest payale ++ ++

"rofit efore ta$ation &,&++ ',0++

Ta$ation ',&++ ',+&+

"rofit after ta$ation ',+++ 89+

@ividends paid and proposed /&/ &9+

=etained profit for the year % 60/ % 6++

- @iscuss( "rofit and #oss 1ccounts

- :ndicate the company operations are profitale

-


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The purpose of a alance sheet is to show the financial position of a usiness on a certain

date, usually the end of the month or year. tock /,'++ ,&++

@etors &,2++ ',2++

"repayments '++ '++

Cash at ank 8++ /2+

9,0++ /,02+

Creditors amounts falling due within one year

Trade creditors &,+&/ ','++

"roposed dividends &0/ &9+

Ta$ation ',++ ',+&+

,8++ &,6++

/,'++ ,2+

Total assets less current liailities '&,6'/ '',26+

Creditors amounts falling due after more than one year

'+* deenture stock ,+++ ,+++

NDT 1>>DT> 2,6'/ 9,26+

Capital and reserves

>hare capital ordinary shares of %' each ,+++ ,+++


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"rofit and loss account 8,6'/ /,26+

2,6'/ 9,26+

- @emonstrate the company e$pands the scale of production and usiness activities

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There are three kinds of financial statements( cash flow statements, alance sheet and income

statements.

Inome st+tements3 income statements states revenue first then e$penses. Ey

sutracting e$penses from revenue net income is calculated. :t is the most simplified

income statements and most service providers use this process. :ncome 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 y sutraction of cost of

manufactured or goods sold. This provides a gross income amount. The second

section is lists of all e$penses include administrative or general costs, selling and so

on. Aperation income is calculated y sutracting all e$penses from gross income.

The last section sutracts any other e$penses, ta$es, interest e$pense to arrive at the

net income of the usiness.

'+,+ne seet3 it shows the shareholders e!uity, liailities and assets of the usiness.

The total assets are e!ual to total shareholders e!uity and liailities. The first section

is lists of all assets include e!uipment, real estate, investments, cash and other

usiness holdings. The ne$t section is list of all liailities includes any loans or

account payale and last section is shareholders e!uity. This alance sheet is suitale

for small company ut for larger company, the usiness often reaks it down to

current and long term assets and liailities. C+s 0,ow st+tement3 it shows the actual flow of cash in and out of the usiness. :t

helps investors and others to determine if the usiness is having difficulty managing

its cash flow. :t starts with the cash flow from operations, followed y cash flow from

investing and cash flow from operations. Dach category shows incoming and

outgoing cash from the usiness. The ending cash flow should e e!ual to the amount

of cash the usiness has on hand.

$i00erenes 31lthough these type of usiness use income statement with different purpose.

6&2&*& S+mp,e orm+t o0 in+ni+, St+tements 0or So,e;"roprietorsip

Inome St+tement

Co

>T1TDDNT A< "=A>


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9:888 9:888 9:888


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Re/enue

>ales GGG

#ess >ales =eturns 4GG5

Net >ales GGG

!ess Cost o0 Goods So,d

Apening :nventory GG

"lus "urchases GG

#ess "urchase =eturns 4GG5 GG

"lus


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otor Vehicle G

#ess( 1ccumulated @epreciation G

GG

achinery G

#ess( 1ccumulated @epreciation G

GG

GGG


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Trade Creditors GGG

>hort-term loans GGG


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"artners current accounts

$+te $et+i,s "+rtners $+te $et+i,s "+rtners

1 E C 1 E C

';';G' Ealance ;d G ';';G' Ealance ;d G G

';'&;G' :nterest on deit al G ';'&;G' :nterest on credit al G G

';'&;G' :nterest on drawings G G G ';'&;G' :nterest on capital G G G

';'&;G' >hare of losses G G G ';'&;G' #oan interest G

';'&;G' @rawings G G G ';'&;G' >hares of profits G G G

Ealance c;d G G Ealance c;d G

G G G G G G

';';G& Ealance ;d G ';';G& Ealance ;d G G

Appropri+tion Aount 0or te -e+r ended * $eem.er 28


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'+,+ne o0 pro0it ales;1ssets *&@ times *& *&B

This company has achieved sales growth of '/* from &+,/++ to &,/++ etween

&+'+ and &+''. Bere, the company?s asset turnover is '.2 times and similar firms? is './

times in &+''. This will help the company to make higher return on capital employed

than similar firms.

#iaility and gearing ratios( :n the alance sheet of any company, long- term det

which consists of things such as usiness loans is an important element. The reason

for this is it refers to money the company owes which it does not e$pect to pay ne$t

year. The long-term det ratio of "ontoon in &+'' 4'.9*5 was smaller than &+'+

4.8*5. 1s a result, it reflects a great sign for the organization ecause det shrinks

and cash increase.


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Ge+ring r+tio (,ong;term ,o+n +pit+,Ds+reo,ders:

0unds) #ong-term loan capital;>hareholders funds

* 8& 8&

Pnlike li!uidity ratios, the capital gearing is concerned with the company?s long

term capital structure. :n comparing with similar firms, this gearing FAF 4year on year5

of the company is so small. :t?s considered to increase long term loans if the company

need to finance the purchase of new fi$ed assets.

The gearing ratio measures the proportion of firm det to e!uity and the

company?s usiness activities. :f the ratio is high, meaning the company must face with

financial risk. :n this case ecause the gearing ratio of "ontoon #td is very low 4+.5 as

compared to industry averages 4'5, meaning they will not meet any financial risk .

Interest o/er Net profit efore interest andta$ation;:nterest charges

times F B

The ratio indicated the company?s earnings can very well cover the interest payments

on its dets. The company has igger numer of interest cover 49 times5, meaning they

can easily meet its interest oligation from profits.

#i!uidity and working capital ratios

Current (working +pit+,) r+tio J Current assets;Current

liailities

2&23* 2&6 2&6

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 liailities. Bowever, the company should have over-investing in working capital

and so tying up more funds in the usiness than it needs to.

Current ratio reflects the company?s aility its short-term det oligation, such as

account payale, wages, or accrued ta$es. This ratio is evaluated through three

situations.


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uik (+id test) r+tio J 4Current assets - stocks5;Current

liailities

*&* *&8 *&*

The !uick ratio is in the trend of similar firms. :t?s supposed that the company can

continue in its usiness with the level of li!uidity.

E1tern+,

Net pro0it .e0ore t+1 +nd interest to s+,es J Net profit

efore ta$ and interest;sales

*8 ** *8

The profit margin 4Net profit efore ta$ and interest to sales5 has een improved

from &+'+ to &+''. :n &+'', the company earned net profit on sales higher than those of

similar firms.

A/er+ge +ge o0 de.tors 4@etors $ 8/5;>ales B d+-s 6@ 6

1lthough 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.

A/er+ge +ge o0 stok 4>tocks $ 8/5;Cost of sales 28 d+-s ** F

The stock days showed an indication of how soon stock is convertile into cash.


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Part D. Task 4 - Managing Finance - Assignment ii.doc

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