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7/28/2019 The Purpose of the Main Financial Statements
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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. The income statement represents the
performance of the company in a certain time.
Based on the income statement, the company can find out the areas are over
or under budget. It provides important insights into how effectively management is
controlling expenses, the amount of interest income and expense. 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.
Investors, creditors, etc are able to based on income statement to determine
the past performance in order to assess the current financial situation or company
the financial health of Kinh Do with others so that they could 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. The balance sheet reflects all the
assets, creditors and capital of the company in general.
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Firstly, the balance sheet is the important document to research and assess
all the assets of the organization by monetary unit such as USD, pound or Vietnam
Dong. Based on the balance sheet, user can evaluate the financial position at that
time and thus, 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.
For managers, it shows whether the company earned or loss money during
the period time. Thus, managers could analyze, evaluate in order to predict the future
opportunity for their business so that they could plan strategies to lead their business
to success.
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.Cash flow statement helps user could assess many information need. Firstly,
user could assess the ability to make money of Kinh Do through considering the
amount of money that Kinh Do had already earns. From that, user will know in
detailed that amount of money is much or not, from which activities and from that, he
or she can assess the profitability in the future.
Next, it assesses the ability to settle up of the organization. In business, there
are many transaction need to be settle up; and from that, it shows the ability to pay of
the company such as the ability to pay back on time, factor of safety of the company
or even the ability to pay dividend by money, etc. Moreover, it assesses the
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effectiveness of the company throughout the way they invest; buy share, bond or
loan, etc.
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.
In conclusion, cash flow satatement is a useful tool for any users. The first
purpose of it is to provide information about the liquidity, ability to use money of the
managers. Secondly, users will know the change in assets, liability and equity. In
addition, it not only provides the current information but also indicate the amount,
timing and profitability of future cash flows.
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 owners 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
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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.
Employees: For employees, they need to know the financial information of
the company such as profit or loss in order to fulfill their responsibilities. The financial
situation of Kinh Do has a big impact on employees. When the company generates
much revenue, employees may receive bonus. On the other hand, if the company
loss, the salary of them will be affected. Furthermore, blue-collar needs are different
from white-collar needs. For blue-collar, what they order may just common financial
information from the financial statements such as revenue, net profit, etc. For white-
collar, they need more than that. They could order and analyze more detailed
information such as how much the company has spent for some activities. From that,
they may negotiate about working condition or complaint or suggest their ideas to
solve its business problem.
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 suchas 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
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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.
Suppliers: Suppliers are also business partner of Kinh Do. There are two
main reasons that they need to require the financial statements. Firstly, they need
the information in order to manage make the company must follow the contract.
Secondly, they need information to run their investments. Based on the information
of the financial statements, suppliers will analyze any ratios such as ROCE, liabilities
ratio, current ratio, etc to assess the safety of their investment as well as consider
the delayed time for Kinh Do to pay back. Through the financial statement, the
company can not also create good relationship but also make trust to supplier.Customers: A company cannot exist without customers. Therefore,
customers play an important role in the company. Normally, customers have many
choices. Therefore, they will compare products as well as any company with others
to choose the most suitable option. Customers need to know an overall view of the
business so that they can assess the performance of a company. Therefore,
revenue, cost of goods sold, tax, profit, etc are some information that they need to
know. For example, combine these information, customers could assess the price of
a product is suitable or not. They also assess the responsibility of the company with
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social by the tax fee that they pay. Through showing the information, the company
could create the belief of customers.