Assignment 1 finãnce

Assignment 1
Contents

Introduce
In this assignment, i will have opportunities to learn more thing relate to finance, and get
more information about the impact of many different source. Not only that, i will explain
clearly the cost of many different source.

1.1 Source of finance in business
There is having 6 different source of finance in business:
•

•

•

•

Payables: Bookkeeping payable, it can be explain by “Payables” the amount of money
that the company have to pay for the short-term debt. To be able to manage the
financial performance of the company, companies often use payable.
Short-term debt: Is the total value of debts to be paid with payment term not
exceeding 12 months or under a production cycle of business as usual in payables to
suppliers, internal pay, the other long-term payable, borrowings and finance lease
liabilities at the time of reporting.
Long-term debt: Is the total value of long-term debt of the business including debt
having remaining maturity of 12 months or more, or on a production cycle, normal
business at the time of the report, such as: Receivables paid to suppliers, internal pay,
the other long-term payable, loans and long-term finance lease liabilities at the time of
reporting.
Equity: The value of a property is less than the value of the financial liability that

lemongrass. Can more easily understand the definition of equity through the following
formula:
Equity = Assets - Liabilities. In the balance, the capital that owners spent to open a

company is equity.
•

Retained earning
Retained earning allude to the rate of net income not paid out as profits, but rather
held by the organization to be reinvested in its center business, or to pay obligation. It
is recorded under shareholders' value on the monetary record.

Phạm Mềnh Ốn GM03904 -AS1

Page 1


Retained earning (RE) = Begin RE + Net income – Dividends
Dividends are considered as the obligation which firm needs to satisfy by spends the
rate of net benefit to pay for shareholders. That rate will be relied on upon the
approaches of organization and the prerequisites of shareholders.

1.2 Implication of different resources:
Advantage
Short-term debt

Long-term debt

Disadvantage



Source
liquidity

of

'quick' 



Help tide over short
term shocks



Relatively
negotiate



Free up funds for
investment opportunities
in the short term



Less
need
for

collaterals and pledges



Relatively low cost of
servicing



More stable
short term debt



Linked to growth of 
company's
operating
capacity



Less
need
maintenance
monitoring



Sources
such

as
leases offer flexibility 
compared to buying the
asset

easy

to



than 



Equity

Phạm Mềnh Ốn GM03904 -AS1

for
and

Time and resources
for
monitoring
and
maintaining
short-term
credit
Not useful for long

term capital needs

Costly
charges

interest

Need
to
prepare
information for financiers
Companies with no
track records, cash and
asset base will find it
more difficult to obtain
financing
Restrictive
and covenants

clauses

- The funding is - Raising equity finance is
committed to your business demanding, costly and time
and your intended projects. consuming, and may take
Page 2


Investors only realize their
investment if the business is
doing well, egg through stock

market flotation or a sale to
new investors.
- You will not have to
keep up with costs of
servicing bank loans or debt
finance, allowing you to use
the capital for business
activities.
Outside
investors
expect the business to deliver
value, helping you explore
and execute growth ideas.
- The right business
angels and venture capitalists
can bring valuable skills,
contacts and experience to
your business. They can also
assist with strategy and key
decision making.
- In common with
you, investors have a vested
interest in the business'
success, i.e. its growth,
profitability and increase in
value.
- Investors are often
prepared to provide followup funding as the business
grows.

2.1 The cost of different sources of finance
Opportunity cost:

Phạm Mềnh Ốn GM03904 -AS1

Page 3

management focus away
from the core business
activities.
- Potential investors
will seek comprehensive
background information on
you and your business. They
will look carefully at past
results and forecasts and will
probe the management team.
Many businesses find this
process useful, regardless of
whether
or
not
any
fundraising is successful.
- Depending on the investor,
you will lose a certain
amount of your power to
make management decisions.
- You will have to
invest management time to

provide regular information
for the investor to monitor.
- At first you will
have a smaller share in the
business both as a percentage
and in absolute monetary
terms.
However,
your
reduced share may become
worth a lot more in absolute
monetary terms if the
investment leads to your
business becoming more
successful.
There can be legal
and regulatory issues to
comply with when raising
finance, egg when promoting
investments.


An opportunity cost is the cost of an alternative that must be forgone in order to pursue a
certain action. Put another way, the benefits you could have received by taking an alternative
action.
Example: you are 18 year old, and you can go to university to study or you can get the job,
the time that you spend out, you can earn the money. But you don’t, you spend that time for
study, you are leave that you can earn money after you graduated and you can get the best job
with your diploma. An opportunity cost is when you 18 years old and you can the job.
Tangible costs:

A quantifiable cost related to an identifiable source or asset. Tangible costs represent
expenses arising from such things as purchasing materials, paying employees or renting
equipment.
Tax Shield:
A tax shield is a reduction in taxable income for an individual or corporation achieved
through claiming allowable deductions such as mortgage interest, medical expenses, and
charitable donations. These deductions reduce taxpayers' taxable income for a given year or
defer income taxes into future years.
ESOP:is an employee stock ownership plan (ESOP) is a qualified, defined contribution,
employee benefit (ERISA) plan designed to invest primarily in the stock of the sponsoring
employer. ESOPs are "qualified" in the sense that the ESOP's sponsoring company, the
selling shareholder and participants receive various tax benefits. ESOPs are often used as
a corporate finance strategy and are also used to align the interests of a company's employees
with those of the company's shareholders.
Example: We will analysis the fact story - “TheGioiDiDong has hundred billion tax
avoidance by employee rewards”. Namely, Thegioididong.com was "rewarded" nearly 7
million shares to 886 employees of the company. Those shares were issued on the basis of
criticized 70 billion from the profit after tax and undistributed. On average, each employee
received 79,000 shares, respectively 79 million par values. However, the current stock market
price MWG nearly VND 80,000/share, ie the actual value is entitled to more than 600
million. So instead of a cash bonus, TheGioiDiDong reward with shares, it may get benefit?
Assuming monthly salary of each employee is 15 million VND (180 million VND/ year), so
the tax is 35 million/year. But if the reward was 600 million VND + 180 million VND salary.
The tax will be 125 million VND. Therefore, if 600 million VND reward by shares, so the tax
just be 0,1% when the owner sold. It mean the employee just pay 600.000 VND for tax. So
with this way, TheGioiDiDong wont violates any provision of the the Law. At the same time,
TheGioiDiDong nor used to 500 billion in cash to distribute to employees. Shareholders can
instantly calculate the reduced 5% interest in the company, corresponding to the ratio of
Phạm Mềnh Ốn GM03904 -AS1

Page 4


shares to be issued not more to reward employees. However, the immediate benefits of this
loss will be compensated if the business results continued good growth.

2.2 The information needs of different decision maker.
Financial information:
Financial statements are records that outline the financial activities of a business, an
individual or any other entity. Financial statements are meant to present the financial
information of the entity in question as clearly and concisely as possible for both the entity
and for readers. Financial statements for businesses usually include: income
statements, sheet, statements and cash flows, as well as other possible statements.
•

Balance sheet: A balance sheet is a financial statement that summarizes a company's
assets, liabilities and shareholders' equity at a specific point in time. These three
balance sheet segments give investors an idea as to what the company owns and owes,
as well as the amount invested by shareholders.
The balance sheet adheres to the following formula:
Assets = Liabilities + Shareholders’ Equality.

Example: organizations are getting high benefit and can twofold the benefit in one year from
now. Notwithstanding, organizations' held acquiring is lower than profits. For this situation,
the troughs ought to attempt endeavors to persuade shareholders putting their cash back in
firms keeping in mind the end goal to accomplish the twofold benefit objective in one year
from now.
•

Income statement: An income statement is a financial statement that measures a

company's financial performance over a specific accounting period. Financial
performance is assessed by giving a summary of how the business incurs
its revenues and expenses through both operating and non-operating activities. It also
shows the net profit or loss incurred over a specific accounting period, typically over
a fiscal quarter or year.

Cash flow: Cash flow statement demonstrates individual’s salary and costs of firms keeping
in mind the end goal to oversee money effectively.
In this statement, taxes are likewise spoken to. On the off chance that the proprietor does not
concur with high costs for assessments, they will apply some legitimate systems so as to low
this expense. For example, rather than utilizing money as a part of their financial plan, they
likely acquire cash from banks to put resources into creation process. This expands the
Phạm Mềnh Ốn GM03904 -AS1

Page 5


interest cost, and afterward diminishes charge expenses. Not with standing, money that firm
needs to pay for premium is lower than expenses.
If firms working together in various financial fields, income proclamation will help the chiefs
assess them with a specific end goal to settle on contributing choice, in light of contributing
costs and income of every field.

Non-financial information:
In contrast with financial information, non-money related one is represented by news,
patterns thus on that individuals base on them with a specific end goal to settle on business
choices to pick up benefits. Non-money related data is found on daily papers, magazines and
social average.
Non-financial information is performing an increasingly important role in accounting. It has
the potential to add significant value, while simultaneously providing challenges. Challenges

associated with non-financial information include identifying what it is, why it might be used,
where it is appropriate to use, and how assurance activities might be conducted. Nonfinancial reporting is sometimes referred to as: meeting note, press release, letter from BOD,
management board, vision, and mission.

2.3 Evaluating the appropriate sources of finance for business project
The necessity of the use of cash related records must be established in the context of the
currency held around then. In case the organization has no money to run the business, we
must have a model to reach a record payable obligations ephemeral and long distance.
Directors thought carefully before deciding on the kind of obligations they will apply.
Moreover, the use of additional revenue records should be consider the fact that they can get
money back from borrowers as opposed to the conduct of banks should have higher
requirements to execute.
Based on actual indicators, we have rankings of 6 elements in order of cheapest:
1
2
3
4
5
6

Retained earning.
Account payable.
Short term debt.
Long term debt.
Bond.
Owner equity.

Phạm Mềnh Ốn GM03904 -AS1

Page 6

Retained earing Allowing access to significant capital source of cash, long-term, not only
for organizations is ready to put the resources to work more notable for longer than is
required and part-time measures about money, but also with technical profits tax shelters
previous investigation. Long-term costs are higher than short-term cost. Retained earning
cheapest because this is the revenue of the company, the owner can use it more comfortable
than the other and it would not affect to the business of the company.
Account payable:: an organization with shut production network can use this success to
develop the capital, because of the connection of the organization and the supplier is based on
the long-distance participation. Organizations only reimbursement for their partner
companies while without having to hold the scandalous interest and not to disrupt the
production network is good. Account payable cheaper than short term debt because it is non
– interest bearing and the short term debt has interest bearing, the accounts payable entry is
found on a balance sheet under the heading current liabilities.
Short-term debt: is cheaper than long term debt because the interest bearing is lower than
long term debt and the owner can receive the money immediately, relatively easy to negotiate
and free up funds for investment opportunities in the short term.
Long-term debt: usually has fixed interest rates that translate into consistent monthly
payments and high predictability . it cheaper than bond because the long term debt borrowing
the money from the bank and the bond borrowing money from the other companies and the
companies cannot take the collateral so there is more risk for company.
Owner Equity: because of its highest cost when using it as a money speculation, since it was
paid to non-deductible profit, the source of this fund likewise comes with a higher risk
because it's your money Shareholders. Cost highest value.

Conclusion
At the end, financial reports are created with one purpose is to provide and share information
about financial to customers. In order that they can make some financial decisions. Financial
information will receive more attention and watched by many large organizations and

professional accounting practice, some researchers and was done by several different
methods. And we have known more definition and know more thing about the sources of
finance. We could catch all the information of debt, interest rate, capital, equity and explain
of any company by follow all this definition above.

Reference:
CafeF. (n.d.). học cách tránh thuế hơn trăm tỷ này của Thế giới Di động. Retrieved 6 02,
2016, from học cách tránh thuế hơn trăm tỷ này của Thế giới Di động:
Phạm Mềnh Ốn GM03904 -AS1

Page 7


/>Deadflow. (n.d.). Financing for Smes debt. Retrieved 06 02, 2016, from Financing for Smes
debt:
/>Money, B. (n.d.). Def of Balancesheet. Retrieved 06 02, 2016, from Def of Balancesheet:
/>Money, B. (n.d.). Disadvantage and Advantage of Short-term debt. Retrieved 06 02, 2016,
from Disadvantage and Advantage of Short-term debt:
/>
Phạm Mềnh Ốn GM03904 -AS1

Page 8