PREFACE 1. The urgency of the study In the current situation, our country is in the process of economic development and integration according to the development of the world and the trend of the times. Economic integration and development is an opportunity and also a great challenge for the countrys economy in general and in particular domestic enterprises in particular. This requires each enterprise to make efforts, maximize its advantages, as well as overcome the weaknesses that still exist in order to integrate with the world economy. In the era where science and technology are advancing and upgrading by hour, a single decision can decide the fate of an entire business entity. To be able to make a right decision, the leaders must have information about company’s current status presented clearly and faithfully, so that no items shall be mistaken. Having a good accounting information system also allows director to manage the company’s operation so that if any problem arises, they can interfere and solve the problem in no time. But the accounting information system is too complicated for users such as creditors, lendors, and employees… to understand, so a need for a compact but fully and clearly –presented occurred, and financial statements was made. Financial statements are written records that convey the business activities and the financial performance of a company. Financial statements are often audited by government agencies, accountants, firms, etc. to ensure accuracy and for tax, financing, or investing purposes. Investors and financial analysts rely on financial data to analyze the performance of a company and make predictions about its future direction of the companys stock price. Financial statements are the main source of financial information for most decision makers. On the base of practicing thesis and theories of preparing and analysing financial statements which had been studied at the academy and understanding practical situation at the company, under guidance and support of supervisor, MSc Nguyen Ba Linh and the company’s employees, I had achieved some success in researching company’s practical operation. This is also an opportunity given to us by the academy to strenghthen the knowledge, as well as develops suitable skills. Based on that, I decided to choose the topic of “The preparation and analysis of financial statements in DUYENHAI Trading and Manufacturer, Ltd” to make my graduation thesis.
General overview of financial statements and financial statements analysis in enterprises
The basics of financial statements
Accounting is the systematic process of identifying, measuring, and communicating financial information, enabling users to make informed judgments and decisions Defined by The American Accounting Association, this essential tool reflects the activities of both profit-seeking businesses and not-for-profit organizations By providing critical economic data, accounting facilitates effective decision-making for its users.
Accounting information is the information that arises from business transactions Once identified, the information is then classified and recorded, and it eventually finds its way into various reports.
The process of providing information
Identify stakeholders (users of accounting information): usually, the users of accounting
users of accounting information are divided into two factions:
Internal users: includes owners, managers, employees
External users: includes customers, creditors, government
Assess stakeholders’s informational needs: each kind of user has a different motives and objectives, therefore holds different needs of accounting information
Owners: need to assess how well their business is performing.They are also interested in knowing how risky their business is and can be
Managers: need accounting information to plan, monitor and make business decisions.
Employees: need accounting information to get a better understanding of the company’s business, so that they may have proper plans for future development.
Investors: need accounting information to know how well their investment is performing, therefore decide should they keep investing or stop.
Lendors: need accounting information to assess their credit worthiness, their ability to pay back loan.
Suppliers: need accounting information to assess the credit- worthiness of its customers before offering goods and services on credit.
Tax authorities require accounting information from suppliers and consumers to detect potential tax evasion To ensure compliance, they occasionally audit the tax returns submitted by businesses, cross-referencing the information with the supporting accounting records.
Design the accounting information system to meet stakeholders’s needs
An Accounting Information System (AIS) is a comprehensive framework utilized by businesses to efficiently collect, store, manage, process, retrieve, and report financial data This system serves various stakeholders, including accountants, consultants, business analysts, managers, chief financial officers (CFOs), auditors, regulators, and tax agencies, ensuring accurate financial reporting and analysis.
Prepare accounting report for stakeholders
Definition and objectives of financial reporting
Financial reporting involves the disclosure of an organization's financial results to its stakeholders and the public, serving as a crucial responsibility of the controller In publicly held companies, the investor relations officer may assist in this process Key documents and postings included in financial reporting typically encompass essential financial statements and disclosures.
Financial statements, which include the income statement, balance sheet, and statement of cash flows
Accompanying footnote disclosures, which include more detail on certain topics, as prescribed by the relevant accounting framework
Any financial information that the company chooses to post about itself on its website
Annual reports issued to shareholders
Any prospectus issued to potential investors concerning the issuance of securities by the organization
Financial statements are essential written records that reflect a company's business activities and financial performance These documents are frequently audited by government agencies, accountants, and firms to verify their accuracy, serving crucial purposes in taxation, financing, and investment decisions.
Financial reportings provide information about the reporting entity that is useful to existing and potential investors, lendors and other creditors in making decisions about providing resources to the entity.
The information provided about financial performance helps existing and potential investors, lenders and other creditors to understand the return the entity has produced on its economic resources.
Investor decisions regarding the buying, selling, or holding of equity and debt instruments are primarily influenced by the anticipated returns from these investments, such as dividends, principal and interest payments, or increases in market prices.
Decisions by ledors are about providing or selling loans and other forms of credit depend on the principal and interest payments of other returns that they expect.
The information must reflect the effect on performance of changes in market prices and/or interest rates.
Requirements of financial statements presentation
According to Article 101 of circular 200/2014/TT-BTC about
“Requirements for information presented in financial statements”, the following are requirements for information presented in financial statements:
Information presented in the financial statements must be recorded honestly and reasonably
of enterprises To ensure honesty, the information must be complete, objective, unmistaken.
Complete information is essential for users of financial statements to grasp the nature, forms, and risks associated with transactions and events Additionally, for certain items, a comprehensive presentation should include detailed insights into their quality and the factors or circumstances that may influence this quality and nature.
Objective presentation in financial reporting involves an unbiased selection and description of financial information It is essential to maintain neutrality, avoiding any focus or emphasis that could distort the impact of the data This ensures that the financial information remains accurate and reliable for users of financial statements, without being manipulated to appear either advantageous or disadvantageous.
Accurate reporting requires a comprehensive description of the phenomenon without omissions and a meticulous process in selecting and applying information However, the absence of errors does not guarantee complete accuracy, particularly when estimating unobservable costs and values, which can be challenging to assess An estimate is deemed honest when the estimated value is clearly articulated, the nature and limitations of the estimation process are thoroughly explained, and the appropriate figures are accurately chosen.
Financial information must be appropriate to help users of financial statements to predict,
statements to predict, analyze and make economic decisions.
Financial information must be presented fully in all important respects Information is
Financial information must be presented consistently and must be comparable among the
Types of financial statements
A balance sheet is a financial statement that outlines a business's assets, liabilities, and equity at a specific moment, reflecting the net worth of the organization It provides a comprehensive overview of the company’s financial position by detailing the balance between income and expenses over the previous period.
* Nature and purpose of balance sheet
The purpose of the balance is to set out the financial position of a business at a particular point in time.
It gives a snap shot of the assets, liabilities and equity position of the entity at a particular point in time.
It sets out the assets of the entity on the one hand, and the claims against it on the other.
The balance sheet can be presented in two formats: account format and report format In the account format, the balance sheet resembles a T account, with assets displayed on the left side and both liabilities and owners' equity on the right side It is essential that the total assets on the left side equal the combined total of liabilities and owners' equity on the right side, ensuring that all elements are accurately represented.
Picture 1: Example of account format
The vertical format is the most commonly used report style, where the balance sheet elements are arranged vertically In this layout, the assets section is positioned at the top, followed by the liabilities and owners' equity sections beneath it.
Picture 2: Example of vertical format
In vertical format, the balance sheet has 5 columns:
Columns 2: Code of items Column 2 is used to sumưup in preparation of combined financial statements r consolidated financial statements.
Columns 3: Notes of items represented in the notes to the financial statements
Columns 4: Ending balance Figures recorded in column 4 are based on related account closing balance in general ledger.
In column 5 of the financial statement, the beginning balance reflects the figures from column 4 of the same items in the previous year's financial statement.
Assets = Liabilities + Owner's (Stockholders') Equity
Assets are valuable resources owned by a company that hold future economic potential and can be quantified in monetary terms These include cash, investments, accounts receivable, inventory, supplies, land, buildings, equipment, and vehicles.
Liabilities: Obligations of a company or organization Amounts owed to lenders and suppliers Liabilities often have the word
"payable" in the account title Liabilities also include amounts received in advance for a future sale or for a future service to be performed.
Owner's equity reflects the owner's total investment in the business, adjusted for any withdrawals made and the net income or loss incurred since the business's inception.
A cash flow statement is a financial statement that provides aggregate data regarding all cash inflows a company receives from its ongoing operations and external investment sources.
* Nature and purpose of cash flow statement
A cash flow statement provides a detailed overview of the inflow and outflow of cash and cash equivalents within a company over a designated period It categorizes these cash movements into three primary sections: operating activities, investing activities, and financing activities, offering insights into the company's financial health and operational efficiency.
The Cash Flow statement is essential for evaluating a business's capacity to generate cash and cash equivalents, as well as understanding its requirements for utilizing these cash flows effectively.
Taking economic decisions requires an evaluation of the ability of an enterprise to generate cash and cash equivalents, which is provided by the cash flow statement
* Format of cash flow statement
There are two forms of cash flow statement: using direct method and using indirect method.
Picture 3: Example of cash flow statement using indirect method
Picture 4: Example of cash flow statement using direct method
* Components of cash flow statement
The cash flow statement has 3 parts: operating, investing, and financing activities There can also be a disclosure of non-cash activities.
+) Cash flow from financing activities
Definition: Financing activities are actions where money is flowing between the company and investors in the company, such as banks and shareholders
Cash flow from financing is a crucial component of the cash flow statement, encompassing activities related to borrowing, repaying, or raising capital This includes actions such as issuing shares, repurchasing shares, paying dividends, and obtaining loans Changes in non-current liabilities and equity, as reflected in the change-in-equity statement, highlight these financing activities.
+) Cash flow from operating activities
Operating cash flows in the cash flow statement represent the cash generated from a company's core business operations This figure reflects the net cash received from customers minus the cash paid to suppliers, excluding long-term capital investments and financing activities Essentially, it highlights the cash a business generates from its day-to-day activities, providing insight into its operational efficiency.
+) Cash flow from investing activities
Investing activity is an activity that causes changes in non-current assets or involves a return on investment.
Cash flow from investing is a key component of the cash flow statement, encompassing activities related to changes in non-current assets such as property, equipment, and investments in stocks, foreign currencies, or government bonds It also includes returns on investments, like dividends from other entities and gains from the sale of non-current assets, which are reflected in the investing income section of the income statement.
The income statement also called a profit and loss statement is a report made by company management that shows the revenue, expenses, and net income or loss for a period.
* Nature and purpose of income statement
Income statement provides valuable insights into a company’s operation, the efficiency of its management, under−performing sectors and its performance relative to industry peers.
Income statement gives an account of how the net revenue realized by the company gets transformed into net earnings (profit or loss).
The income statement consists of five columns:
Column 3: Note of items represented in the notes to the financial statement
Column 5: Figures of the prior year (for comparative information)
Picture 5: Example of income statement
Revenue, often referred to as sales, net sales, or sales revenue, represents the money an entity earns from selling goods or services Commonly known as the "top line," revenue is prominently displayed at the beginning of the income statement.
Cost of goods sold are the direct costs of producing the goods being offered by the entity This would include the materials, labor, and other resources required for production.
Gross profit is the difference between the revenue received for the product less the cost of goods sold.
Example of account format
Financial statement footnotes
Financial statement footnotes serve as explanatory and supplemental notes accompanying a company's financial statements Their specific content varies based on the accounting framework applied, such as GAAP or IFRS.
* Purpose of financial statement footnotes
Refer to additional information provided in a company’s financial statements.
Describe the items that are left out of the balance sheet and income statement.
Helps to clarify they would cloud the data reported in the financial statements.
May also include information regarding future activities that are anticipated to have a notable impact on the business or its activities.
* Format of financial statements footnotes
Notes to the financial statements of a company are shown in three groups:
The helping information of the accounting items presented in financial statements
Other matters such as contingent liabilities, detailed disclosure of financial and non-
financial and non- financial matters.
Preparation of adopted principles of accounting
The basis of preparation of financial statements
2 The accounting principles adopted in the preparation of financial statements Besides, for their easy understanding the information regarding who has used and analyzed the methods which have been adopted in measuring money with its historical cost, current cost, realization cost or present cost should be stated in detail.
Besides, methods adopted in case of;
depreciation or write off of assets
the lease is to be taken into consideration.
In preparation of financial statements the business organizations will also have to mention the following matters if not stated otherwise:
Size of company, legal entity, its structure, registration, address and any other place
and any other place where business is run or registered.
Business activities of the company and detailed, information regarding expansion of
regarding expansion of the business.
3 Source of the company, source of the entire group of companies, information regarding the company.
Some employees in a year or a particular period
1.1.3 The basics of financial statement analysis
* Definition of financial statements analysis:
Financial statement analysis is the systematic review and evaluation of a company's financial statements, including the income statement, balance sheet, statement of cash flows, and notes to accounts, aimed at enhancing economic decision-making for future income generation This analytical process employs specific techniques to assess an organization's risks, performance, financial health, and future prospects.
* Purpose of financial statements analysis:
In an open economy, businesses must enhance their financial capabilities and competitiveness to thrive Financial analysis, through the calculation of financial ratios, provides insights into a company's market position and overall business activities A clear understanding of an enterprise's financial status and growth potential is essential for identifying factors that influence its financial health This knowledge enables businesses to seize opportunities and make informed financial decisions to sustain and grow their operations Consequently, financial statement analysis is crucial for various stakeholders, including the Board of Directors, investors, shareholders, creditors, customers, managers, and employees, each utilizing the information for distinct decision-making purposes.
Financial statements analysis to business’s owner
To business’s owner, financial statements analysis has purposes as follow:
− Create regular cycles to evaluate management activities in the past period, the implementation of financial balance, profitability, solvency and financial risks during operation
− Guiding the decisions of the Board of Directors in the appropriate direction to the current situation of the company, such as decisions on investment, financing, profit distribution
− Financial statements analysis is the base for financial forecasting
− Financial statements analysis is a tool for company’s internal control, management.
* Financial statements analysis to investors
Financial statements analysis helps the investors evaluate the company’s operation through researching financial reports, profitability, risks…
Financial statements analysis to the company’s creditors
Analyzing financial statements is crucial for creditors to accurately assess the financial health of their customers, including asset values, debt levels, and repayment capabilities This analysis not only aids in understanding the current financial situation but also helps in forecasting future financial conditions and identifying potential risks that could impact customers' ability to meet their debt obligations.
Financial statements analysis to company’s employees
Financial analysis plays a crucial role in job stability for employees, enabling them to concentrate on their assigned tasks and enhance overall productivity within the company.
Financial statements to Government’s management agencies
Government management agencies analyze financial statements from enterprises to assess their financial health and monitor business operations This analysis enables the agencies to develop tailored policies, management mechanisms, and financial solutions that align with the specific circumstances of each business By creating a supportive legal environment, these efforts contribute to enhancing production efficiency for enterprises.
The above issues have shown that analyzing the financial situation of enterprises is very necessary, an indispensable tool for businesses in a market economy.
1.2.1 Statement of financial position (balance sheet) preparation
Guidance for financial position preparation is stated in article 112 of
1.2.1.1 Basis for preparation of the Balance Sheet
The information which is used in preparation of the balance sheet was based on:
− Detailed accounting books, cards on detailed summary sheet;
− The balance sheet of previous accounting year (to present the first column).
1.2.1.2 Content and methods of setting up items in balance sheet of enterprises to meet the assumption of continuous operation (Form B01-DN)
− “Opening Balance” column: Based on the closing balance column of the previous year balance sheet to fill in the items, the column does’s change during the period.
− “Closing Balance” column: Based on the closing balance of the detailed accounts at year end declaration The items will be recorded as follow:
Debit balance of account will be recorded in to corresponding assets section.
Credit balance of account will be recorded into corresponding equity section.
− In case of items which are related to many other accounts, the ending balancec of relevant accounts will be collected to record.
− Accounts such as 129, 139, 159, 214, 229, in which has ending balance, will be record in negative value with form (− value) in the corresponding items in assets section.
− Accounts such as 412, 413, 421, if ever record in equity section, the debit balance will still be recorded in the equity section, but in negative value with form (−value).
− Debit balance and credit balance in “Trade receivables””, as well as debit balance and credit balance in “Trade payables” can not offset each other.
1.2.2.1 Basis for preparation of the income statement
The preparation of cash flow statement is based on:
- Based on income statement of previous year.
- Based on general accounting books and detailed accounting books in period used for accounts from 5 to 9.
1.2.2.2 Contents and methods of preparation of item in income statement
Revenue from sales of goods and services (Code 01):
This item captures the total revenue generated from the sale of goods, finished products, investment properties, service provision, and other income for enterprises during the reporting year The figures reflect the accumulated total on the Credit Side of Account 511, which details "Revenue from Sales and Service Provisions" for the specified period.
When superior units make general reports with subordinate units without legal status, revenues from sales and service provisions arising from intra-group transactions are all excluded.
- This item does not include indirect taxes, such as VAT (including VAT paid under subtraction method), excise tax, export taxes, environmental protection taxes and other indirect taxes and fees.
This item reflects the total revenue decrease for the year, encompassing trade discounts, sales allowances, and sales returns within the reporting period The figures represent the accumulated amounts on the Debit side of Account 511 "Revenue from Sales and Service Provisions," corresponding to the Credit side of Account 521 "Revenue Deductions" during the same period.
This item excludes indirect taxes and fees that businesses cannot benefit from, which are payable to the state budget These amounts, recorded as a decrease in accounting under account 511, are essential state collections and do not form part of the revenue structure or qualify as revenue deductions.
Net revenue from sales of goods and services (Code 10):
This item captures the total revenues generated from the sale of goods, finished products, investment properties, and service provisions, while accounting for deductions such as trade discounts, sales allowances, and returns during the reporting period This information serves as the foundation for calculating the operational income of enterprises The formula is represented as Code 10 = Code 01 - Code 02.
Costs of goods sold (Code 11):
This item captures the total costs associated with goods, investments in real estate, production expenses for finished goods sold, and direct costs linked to completed services during the reporting period It also encompasses any additional costs or reductions in the cost of goods sold recorded in that timeframe The figures reflect the accumulated amounts on the credit side of Account 632 "Cost of Goods Sold," corresponding to the debit side of Account 911.
When superior units make general reports with subordinate units without legal status, revenues costs of goods sold arising from intra-group transactions are all excluded.
Gross profit from sales of goods and services (Code 20):
This indicator measures the net revenue generated from the sales of goods, finished products, investment real property, and services, subtracting the cost of goods sold during the reporting period It is calculated using the formula: Code 20 = Code 10 - Code 11.
This item captures the net financial income generated by enterprises during the reporting period It reflects the total accumulated amounts from the Debit side of Account 515, "Financial Income," which corresponds to the Credit side of Account 911, "Income Summary," for the same period.
When superior units make general reports with subordinate units without legal status, financial income arising from intra-group transactions are all excluded.
This item captures the total financial income of enterprises for the reporting period, encompassing loan interest payable, copyright expenditures, and joint-venture expenditures The recorded figures represent the accumulated amounts on the Credit side of Account 635 "Financial Expense," which align with the Debit side of Account 911 "Income Summary" during the same period.
When superior units make general reports with subordinate units without legal status, financial expenses arising from intra-group transactions are all excluded.
This item records the cost of accrued interest included in financial expenses during the reporting period Figures recorded in this item are based on detailed accounting books of Account 635.
This item captures the total selling expenses associated with goods and finished services sold during the period The figures reflected here represent the cumulative amounts recorded on the credit side of Account 641.
"Selling expense" corresponding to the Debit side of Account 911 "Income summary".
This entry captures the total administrative expenses incurred by the enterprise during the reporting period It reflects the total amounts recorded on the credit side of Account 642, "Enterprise Administrative Expense," which corresponds to the debit side of Account 911, "Income Summary," for that same period.