Problem: The data on the balance sheet of Sao Do Co.

Ltd on Dec 31 st, N-1 are as follows: Owner’s

equity: 800m. Long-term loan: 200m. Short-term loan: 200m. Payable to suppliers: 120m. Fixed assets:
historical costs 800m, net fixed assets 700m. Inventories: 200m. Receivable from customers: 110m. Cash:
310m.
The data for the first quarter of the year N are as follows:
1. The total amount from sales of goods and service provisions including VAT is 880m, of which 330m is
the total amount from sales of goods subject to SST. 60% of the amount is paid in the quarter of the sale,
the remaining is paid in the next quarter.
2. The total amount payable to raw material purchases to domestic suppliers excluding VAT equals 60% of the
total amount from sales of goods and service provisions excluding VAT. 50% of the total amount payable
including VAT is paid during the quarter of the purchases, the remaining is paid after that.

3. Direct costs (excluding raw materials and depreciation of fixed assets): 45m. These costs are paid
during the quarter when incurred.

4. Indirect costs (excluding depreciation of fixed assets, outside purchasing services cost, and the other
tax): 21m. 60% of these costs are attributed to selling expenses, and the remaining to general &
administrative expenses. These costs are paid during the quarter when incurred.

5. Depreciation of fixed assets is 19 m, of which 12m is attributed to direct cost, and the remaining to
general & administrative expenses.

6. The total amount of outside purchasing services cost excluding VAT: 20m. It is attributed to selling
expenses. This cost is paid during the quarter when incurred.
7. Inventories at the end of the first quarter: 110m

8. Short-term loan interest rate: 1% per month. This interest is paid once per two months, the first
payment is due in February. Long-term loan interest rate: 15% per year. This interest is paid equally twice
per year, the first payment is due in March.
9. Disposal of a fixed asset (subject to VAT 10%) on March 31 st: 17m (excluding VAT). The historical
cost: 50m. Net book value: 18m. Other related costs are negligible. The payment is made immediately.
10. VAT: Sao Do is required to use the credit method (also called the deduction method). The VAT rate:
10% applied to purchases of goods and raw materials, sales, disposal of a fixed asset, and the outside
purchasing services cost. SST rate: 50%. The amount of SST calculated from raw material purchases is
120m of which a portion namely 80m is allocated to goods sold. VAT and SST are calculated and paid
during the quarter. CIT rate: 20%. CIT is paid in the next quarter. Another tax attributed to general &
administrative expenses is paid in Feb: 3m.
Required

1. What is Sao Do’s total amount of taxes?

2. Construct the income statement for the first quarter of the year N.

3. Prepare a table that shows the computation of cash flows for the first quarter.
4. Construct the balance sheet on Jan 1st, N and March 31st, N.

5. Comment on the profitability of Sao Do in the first quarter of year N.

6. Construct the cash flow statement using the direct method, assuming the direct costs (as indicated in
data point 3) and indirect costs (as indicated in data point 4) are payments to employees.
7. Construct the cash flows statement (indirect method)

8. Calculate financial ratios. For market ratios, assume that the company has 10,000 common shares and
no preferred share. The market price of one share is 80,000 dong.

SOLUTION
1. Calculate taxes
Sao Do is producing 2 groups of products: One is NOT subject to SST and another is subject to SST.
Price excluding SCT&VAT + SCT(50%) + VAT(10%)
500 + 0 + 50 = 550
200 + 100 + 30 = 330

Price excluding VAT +

You cannot Price excluding
calculate VAT*10%
Deductible = Price
Input SCT including
directly VAT
from The amount payable of raw materials
purchases because of two reasons:
Price excluding VAT*(1+10%) = Price including VAT
1. You do not know how much of 480 mil you used to produce the goods subject to SCT.
Price excluding VAT = Price including VAT/(1+10%)
2. The amount of deductible input SCT is the amount of SCT of the input which is used to produced the
goods sold.

a) Value-added tax
Output VAT = [880/(1+10%)]*10% + 17*10% = 81.7 (mil dong)
Input VAT = (60%*800)*10% + 20*10% = 50 (mil dong)
VAT payables = 81.7 – 50 = 31.7 (mil dong)
b) SCT or SST (Special consumption tax = Special sales tax)
Output SCT = {330/[(1+10%)*(1+50%)]}*50% = 100 (mil dong)
Deductible Input SCT = 80 (mil dong) (Data number 10)
 SCT payable =100 – 80 = 20 (mil dong)
c) Corporate income tax
Profit before tax = [880/(1+10%) – 100] – [(60%*800 -80)+45+21+19+20+(200-110) +1%*200*3
+15%*200*3/12 +3] + (17 – 18) = 87.5 (mil dong)
CIT = 87.5*20% = 17.5 (mil dong)

Why we add Changes in Inventory = (Beginning inventory – Ending inventory) when calculating
COGS? (It is 200 -110 in our problem 1)
(MATCHING PRINCIPLE) The above changes in inventory help to eliminate the current direct cost
attributable to the production but did not contribute to the creation of current revenue or include the
previous direct cost attributable to the production but contributed to the creation of current revenue.
For example: You are a shop who sells laptops.
Beginning inventory: 0
The shop had bought: 100 laptops at 15 mil dong per unit (excluding VAT)
After that, the shop sold 40 laptops at 20 mil dong per unit (excluding VAT)
Ending inventory: (100 – 40)*15 = 60*15
COGS = 100*15 +(0 – 60*15)
It is correct because it is the cost of 40 laptops which were sold.

Why we eliminate deductible input SCT which is 80 (NOT SCT amount on the invoice which is 120)
from The total amount payable of raw material purchases to domestic suppliers excluding VAT
which is 480 when calculating COGS?
Because the inventory is recorded by the price including SCT.
For example:
A producer imported 1000 liters of liquor and paying an excise tax (SCT: Special consumption tax)
amount of VND 40 thousand per liter upon importation (based on the receipt of excise tax payment at the
stage of importation). The price including SCT is VND 120 thousand per liter.
+ Beginning inventory: 0
+ Inventory (price including SCTG) increased to 1000*120 = VND 120,000 thousand
+ Exwarehousing 400 liters of liquor to produce 400 bottles of liquor.
+ Sold 400 bottles of liquor.
 Ending inventory (price including SCT):
120,000 thousand dong – 400*120 thousand dong = 72,000 thousand dong
+ SCT in the invoice = 40*1000 = 40,000 thousand dong
+ Deductible SCT = 40*400 = 16,000 thousand dong
Two approaches to calculate COGS (ignoring the direct labor cost and other related costs):
1 approach: COGS = [1000*120 - 16,000 + (0 -72,000)] = 32,000 thousand dong

2. INCOME STATEMENTS OF THE QUARTER 1

1. Sales
(Doanh thu) 700 = 880/(1+10%) - 100
2. Deductions
(Các khoản giảm trừ Doanh thu)
Sales discounts
(Chiết khấu thương mại)
Sales rebates
(Giảm giá hàng bán)
Sales Returns
(Hàng bán bị trả lại)
3. Net sales
(Doanh thu thuần) 700
[Link] of goods sold
(Giá vốn hàng bán) 547 = (60%*800-80) +45 +12+(200-110)
5. Gross profit/loss
(Lợi nhuận gộp) 153 = 700 - 547
[Link] income
(Doanh thu hoạt động tài chính) 0
7. Financial expenses
(Chi phí tài chính)
In which: Loan interest expenses
(Trong đó: Chi phí lãi vay) 13.5= 1%*200*3 + 15%*200/4
8. Selling expenses
(Chi phí bán hàng) 32.6 = 60%*21+20
9. General and administrative expenses
(Chi phí quản lý doanh nghiệp) 18.4 = 40%*21 + 7+3
[Link] operating profit/loss
(Lợi nhuận thuần từ hoạt động kinh doanh) 88.5 = 153 + 0 - 13.5 – 32.6-18.4
11. Other income
(Thu nhập khác) 17 (Disposal of fixed assets)
12. Other expenses
(Chi phí khác) 18 (Net book value of disposed assets)
13. Other profit/loss
(Lợi nhuận khác) -1 = 17 - 18
14. Profit/loss before tax
(Tổng lợi nhuận kế toán trước thuế) 87.5 = 88.5 -1
[Link] income tax
(Thuế thu nhập doanh nghiệp) 17.5
[Link]/loss after tax
(Lợi nhuận sau thuế) 70 = 87.5-17.5

3. CASH FLOWS OF THE FIRST QUARTER

Items In the quarter
[Link] inflows from: 546.7 = 528+18.7
352= 40%*880 (Receivables from
customers)
[Link] 528 = 60%*880 Khoản phải thu khách hàng
2. Disposal of fixed assets 18.7 = 17*(1+10%)
[Link] outflows from: 425.7
264 (Payables to suppliers)
1. Raw material purchases 264 =(60%*800*1.1)*50% Khoản phải trả người bán
[Link] costs 45
[Link] costs 21
[Link] purchasing services 22= 20*(1+10%)
2 (Accrued expenses)
[Link]-term loan interest 4 = 1%*200*2 Chi phí phải trả
7.5 (Prepaid expenses)
[Link]-term loan interest 15 =15%*200/2 Chi phí trả trước
7. Pay VAT 31.7
8. Pay SCT 20
17.5 (Payables to state budgets)
Thuế và các khoản phải nộp ngân
[Link] sách nhà nước
[Link] taxes 3
Increases/Decreases in cash 121 = 546.7-425.7
Beginning cash and cash equivalents 310
Ending cash and cash equivalents 431 =310 + 121

4. BALANCE SHEET
ASSETS Beginning Ending balance
A. SHORT-TERM ASSETS
I. Cash and cash equivalents 310 431
III. Accounts receivable
1. Receivable from customers 110 462=110+352
[Link] 200 110
V. Other current assets
1. Short-term prepaid expenses 7.5
[Link] TERM ASSETS
II. Fixed assets
1. Tangible fixed asset
Historical costs 800 750=800-50
Accumulated depreciation (100) (87) = -[100 +19 – (50-18)]
TOTAL ASSETS 1320 1673.5
LIABILITIES AND OWNERS' EQUITY
[Link]
I. Current liabilities
[Link]-term debts and loans 200 200
2. Payable to suppliers 120 384=120+264
4. Taxes and other obligations to the State Budget 17.5
6. Accrued expenses 2
II. Long-term liabilities
4. Long-term debts and loans 200 200
[Link]' EQUITY
[Link] owners' equity
[Link] 800 800
[Link] earnings 70 (Profit after tax)
TOTAL LIABILITIES AND OWNERS' EQUITY 1320 1673.5

CASH FLOWS STATEMENT (Direct method)

I. Cash flows from operating activities
1. Gains from sales of goods and service provisions and other gains 528 = 880*60%
2. Payments to suppliers -286 = - (264+22)
3. Payments to employees -66 = - (45+21)
4. Loan interests already paid -19 = - (4+15)
5. Payments for corporate income tax 0
6. Other gains
7. Other disbursements -54.7 =-(31.7+20+3)
Net cash flows from operating activities 102.3
II. Cash flows from investing activities
1. Purchases and construction of fixed assets and other long-term assets
2. Gains from disposal and liquidation of fixed assets and other long-term assets 18.7
3. Loan given and purchases of debt instruments of other entities
4. Recovery of loan given and disposals of debt instruments of other entities
5. Investments into other entities 0
6. Withdrawals of investments in other entities 0
7. Receipts of loan interests, dividend and profit shared
Net cash flows from investing activities 18.7
[Link] flows from financing activities
1. Gains from stock issuance and capital contributions from shareholders
2. Repayments for capital contributions and repurchases of stocks already issued
3. Short-term and long-term loan received
4. Loan principal amounts repaid 0
5. Payments for financial leasehold assets
6. Dividend and profit already paid to the owners
Net cash flows from financing activities 0
Net cash flows during the year 121
Cash and cash equivalent at the beginning of the period 310
Effects of fluctuations in foreign exchange rates
Cash and cash equivalent at the end of the period 431

CASH FLOWS STATEMENT (Indirect method)

I. Cash flows from operating activities
1. Profit/ (loss) before tax 87.5
2. Adjustments
Depreciation of fixed asset 19
Provisions
Gain/ (loss) from foreign exchange differences
Gain/ (loss) from investing activities 1
Loan interest expenses 13.5
3. Operating profit before changes of working capital 121
Increase/ (decrease) of accounts receivable -352
Increase/ (decrease) of inventories 90
Increase/ (decrease) of accounts payable (excluding loan interests and CIT) 264
Increase/ (decrease) of prepaid expenses
Loan interests already paid -19
Corporate income tax already paid 0
Other gains
Other disbursements -1.7
Net cash flows from operating activities 102.3
(Other parts are the same as those of the direct method)