FINANCIAL ACCOUNTING FAR 360 INTEGRATED ACCOUNTING STUDY | solution Semester April 2009 Answer 1

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There are many differences between a partnership and a limited liability company. The following are 10 main differences. No 1 2. Legal Status Formation Partnership Firm No legal status By written or oral agreement. Registration with CCM (Form A) Min 2 , max 20 (Exception to max of 20) Company Limited By Shares An artificial legal entity Incorporation under CA 1965 by lodging the various prescribed statutory forms and memorandum of association (MMA) Private company: Min 2, Max 50 (excluding staff turn member) Public company: Min 2 and no Max By allotting shares to shareholders (owner of the company) Limited to the amount of shares subscribed by the shareholders Owned by the company. The company is the rightful owner of the companys properties, not the shareholders Managed by BOD which may or may not be shareholders of the company. At least one CO SEC and must not be vacant for more than one at any time. Required to lodge with CCM returns on prescribed return forms and annual returns and audited accounts annually.

3.

Owner (s)

4.

Capital

Contributed by partner

5.

Liabilities of owners Ownership of properties

Unlimited liability

6.

Jointly owned by the partners

7.

Management

Every partner is entitled to participate in the management of the firm

8.

Reporting and return

Not required to submit any report to the CCM

FINANCIAL ACCOUNTING No 9. Partnership Firm The firm is not subject to income tax. The profits generated are added to the partners personal income and the partners are liable for thus profit under personal income tax. By filling of form C with the CCM.

TUTORIAL 1 Company Limited By Shares The company is subject to income tax at the rate applicable to companies.

Taxation

10. Termination

By undergoing legal winding up procedures as laid down by the CA 1965 and Companies (Winding Up) rules 1972. Costly professional charges will be incurred.

Answer 2 The main difference between a trading enterprise income statement and the manufacturers income statement lies in the cost of goods sold calculation. The table below illustrates the difference. Trading Firm Income Statement (partial) for the year ended xx/xx/xx RM Opening stock of goods xxx Add: Cost of goods purchased xxx Cost of goods available for sale Less: Closing stock of goods Cost of goods sold xxx (xxx) xxx Manufacturing Firm Income Statement (partial) for the year ended xx/xx/xx RM Opening stock of finished goods xxx Add: Cost of goods manufactured (see xxx schedule below) Cost of goods available for sale Less: Closing stock of finished goods Cost of goods sold xxx (xxx) xxx

It can be seen from above that instead of dealing with the cost of goods purchased (as in trading firm), the manufacturing firm needs to report on the cost of goods manufactured. The following illustrates a cost of goods manufactured schedule applicable only for manufacturing firms.

FINANCIAL ACCOUNTING Manufacturing Firm Income Statement (partial) for the year ended xx/xx/xx RM Opening work in progress Direct materials Opening stock of raw materials Add: Purchases of raw materials Raw materials available for use Less: Closing stock of raw materials Direct materials used Direct labour Manufacturing overheads Indirect materials Indirect labour Indirect expense Total manufacturing overhead Total manufacturing costs Total cost of work in progress Less: Closing work in progress Cost of goods manufactured Answer 3 xxx xxx xxx (xxx)

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RM

RM xxx

xxx xxx xxx xxx xxx xxx xxx xxx (xxx) xxx

The following table summarizes the principal differences between financial accounting and managerial accounting. The need for various types of economic data is responsible for many of the differences. No. 1. 2. Primary Users of Reports Types and Frequency of Reports Purpose of Reports Content of Reports Financial Accounting External users: shareholders, creditors and regulators Financial statements. Quarterly and annually General purpose Pertains to business as a whole. Highly aggregated (condensed). Limited to double-entry accounting and cost data. Generally accepted accounting principles, such as the Financial Reporting Standards. Audited by external Managerial Accounting Internal users: officers and managers Internal reports. As frequently as needed. Special purpose for specific decisions. Pertains to subunits of the business. Very detailed. Extends beyond double-entry accounting to any relevant data. Standard is relevant to decisions. No independent

3. 4.

5.

Verification Process

FINANCIAL ACCOUNTING auditors FAR 360 INTEGRATED ACCOUNTING STUDY Semester October 2009 Answer 4 audits.

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Journalising of Closing Entries Recording Adjusting Journal Entries

Source Document s Journalising

JOURNALS

Extraction of Balances of Accounts Preparation of Pre-Adjusted Trial Balance Extraction of the Balances of Accounts

LEDGERS Preparation of Post-Adjusted Trial Balance

Preparation of Financial Statements

The accounting process starts with the recording of business transactions that are taken from the source documents. The source documents are of different types depending on the type of transactions (for example: invoices, bills, receipts, debit notes, credit notes, vouchers, etc.). The transactions are then classified and recorded in the appropriate journals or books of prime entry. Journals can be classified into General Journal, Purchases Journal, Sales

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Journal, Return Inwards Journal, Return Outwards Journal and Cash Payments and Receipts Journal. The process of recording transactions in the journals is known as journalising. After the transactions are recorded in the journals, the total will be posted to the appropriate accounts in the ledgers. This process is known as posting. Ledgers can be classified into General Ledger, Sales/Debtors Ledger and Purchase/Creditors Ledger. At the end of the month or at the end of the accounting period, a trial balance is prepared. The purpose is to check whether or not transactions have been recorded correctly in the books of accounts. Adjustments have to be made if there are errors. Adjustments are also made at the end of the accounting period for accruals and prepayments of revenue and expenses, doubtful debt and depreciation. Finally, the financial statements can be extracted from the list of balances in the trial balance. Financial statements are then prepared including the Income Statements and Balance Sheet. (12 marks) Answer 5
Users of Accounting Information Internal Users External Users Owners As the owners of the Creditors / Creditors are interested to business, they are lenders know the ability of the interested in the profits business in repaying the earned from their amount owing to them investment in the business and the financial stability and growth of the business Managers Management needs Investors Investors require information information to guide them in regarding the solvency and planning, organising and financial strength of the controlling the organisation business, its present and and analysing the future earning capacity and operations of the business the ability of the management Employees Employees are interested in Government The government is the business ability to interested in the financial progress and expand. They statements and reports of a look for steady business for tax purposes employment, earning Consumers Consumers are interested in capacity and other the establishment of good monetary benefits that are accounting controls as a to be gained from a means of reducing cost of financially stable business production, selling and distribution and hence the reduction of the prices of the goods they purchase

(4 marks)

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FAR 360 INTEGRATED ACCOUNTING STUDY Answer 6 Disclosure items under FRS 116 Classes of property, plant and equipment assets Basic of measurement Gross carrying amount, accumulated depreciation at the beginning and end of the period Depreciation methods Useful lives and depreciation rates Addition, disposals and other movements Impairment losses recognized or reversed in profit and loss Revaluation-basis, date and name valuer Construction or acquisition commitments (Any 4 points for 4 marks) Answer 7 Cost includes all costs incurred in the normal course of business to bring inventory to its present location and condition. Net realizable value is the expected selling price less any costs which will be incurred in order to complete the sale. (4 marks) Answer 8 Materiality concept Financial statements are prepared to provide useful accounting information to several user groups. Enterprise report information considered as significant to the users. The information will be used by the users to make economic decisions. The reporting of significant accounting information is known as the application of the materiality concept. The distinction between significant and insignificant information depends on the size of the enterprise. The preparer of the financial statements need to make certain judgment in determining the significance of information to be reported. These include the nature of the information, amount of an item and effects on the results which will be reported. For instance, for a multinational enterprise, sale revenue of RM500 has been recorded in error as RM50. This error may be considered as insignificant. However, for an enterprise with total sales revenue of RM15,000, this error may be significant and the error needs to be corrected so that the information in the income statement is not misleading. Prudence concept

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There are many uncertainties in business activities. Under the uncertain circumstances, the prudence concept states that the assets and income should not be overstated and liabilities and expenses should not be overstated. For instance, when an enterprise sells goods to its customers on credit, there is an uncertainty that the customer will not pay in full. Therefore, the enterprise will deduct a certain amount of doubtful debts from the debtors balance. This will ensure that the debtors balance is not being overstated. (6 marks) Answer 9 Capital expenditures are expected to increase the future earning capability of companies. For example, the purchase of a new machine ABC costing RM100,000 to be used to manufacture Product XYZ for Company RST is considered to be a capital expenditure as the company will receive revenues from the sales of the product. Revenue expenditures are associated with the expenses incurred to maintain the present earning capability of the company. For example, Company RST owns another old machine DEF. Previously, the machine is able to produce 1,000 units of product daily but since last month, the machine has had a continuous series of breakdowns. Company RST paid RM5,000 on machine DEF to repair so that it could produce 1,000 units of product again. Thus, this expenditure is considered as revenue expenditure as it merely maintained the earning capability of the company. (6 marks) Answer 10 Alir Deras Bhd. Cash flow statement for the year ended 30 June 2009 RM000 Cash flows from operating activities Cash received from customers 12,203 Cash paid to suppliers (4,802) Cash paid for expenses (887) Cash generated from operation 6,514 Tax paid (1,411) Interest paid (277.5) Net cash flow from operating activities Cash flows from investing activities Proceeds from disposal of PPE Payment for intangible assets Purchase of long term investment Proceeds from disposal of non-current investment Interest income Net cash flow from investing activities Cash flows from financing activities Issue of ordinary shares at premium Payment to finance lease creditor 315 (340) (170) 740 354

RM000

4,825.5

899

1,200 (325)

FINANCIAL ACCOUNTING Redemption of 12% Debentures at premium Repayment of bank loan Dividend paid Net cash flow from financing activities Net Increase in cash and cash equivalent Cash and cash equivalent at beginning Cash and cash equivalent at end (120) (60) (4776)

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(4,081) 1,643.5 110.5 1,754

Statement of Cash & Cash Equivalent Beginning Ending RM000 RM000 Cash 58 1,589 Bank Overdraft (79.5) (60) Short term investment 132 225 110.5 1,754

Difference RM000 1,531 19.5 93 1,643.5

Reconciliation of cash generated from operations with net profit before tax RM000 RM000 Profit before tax 6,356 +/- Adjustments: Gain on disposal of PPE (115) Gain on disposal of LT Investments (320) Interest income (347) Depreciation of PPE 250 Amortisation of intangible assets 200 Finance cost 270 Premium on redemption of debentures 20 +/- Changes in working capital: Increase in inventories (40) Decrease in trade receivables 203 Increase in trade payables 38 Decrease in accruals (1) 158 Cash generated from operations 6,514 OR: Working: All figures in RM000 Bal b/d Sales Trade receivable 923 Cash 12,000 Bal c/d Trade payable 4,802 Bal b/d 475 Purchases 12,203 720

Cash Bal c/d

437 4,840

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Bal b/d Purchases

Cost of sales 180 Income statement 4,840 Bal c/d

4,800 220

Administrative and S&D expenses Depreciation 250 Income statement -admin Amortization of 200 Income statement S&D development cost Premium on debenture redn 20 Accrued exp b/d Accrued c/d 12.5 Cash 887 Tax 12 Income statement 140 Def tax b/d 1,411 13 Interest Expenses 277.5 Bal b/d 7.5 Income statement Property, Plant & Equipment 13,500 Disposal 400 Depreciation 50 Bal c/d Long Term Investment 1,250 Disposal 170 Bal c/d Interest Income 15 Cash 347 Bal c/d Finance Lease Creditor 325 Bal b/d (NCL) 720 Bal b/d (CL) 125 PPE

936 420 13.5

Tax recoverable b/d Def tax c/d Cash Tax pay c/d

1,456 120

Cash Bal c/d

15 270

Bal b/d Finance lease creditor ARR Bal b/d Cash Bal b/d Income statement

200 250 13,500 420 1,000 354 8

Cash Bal c/d (NCL) Bal c/d (CL)

695 75 400

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