Accounting and Finance for Engineers Prepared by Teh Thian Sung

Accounting and Finance for Engineers

Prepared by Teh Thian Sung

INTRODUCTIONTYPES OF BUSINESS ORGANISATIONS IN MALAYSIA

Sole Trader - sole proprietorship

- registered with Suruhanjaya Syarikat Malaysia (SSM) Partnerships - registered with Suruhanjaya Syarikat Malaysia (SSM) - governed by the Partnership Act 1961 - Advisable to have a partnership agreement - If no agreement - then the Act will take effect - All partners to contribute equal capital - Partners not entitle to salaries - Interest on capital and drawings are not allowed - Partners are to share profit and loss equally - An interest of 8% is to be paid on any loans from the partners

TYPES OF BUSINESS ORGANISATIONS IN MALAYSIA

Societies , Clubs and Association - registered under the Companies Act 1965 or under Societies Act

Co-operatives - registered under Co-operative Societies Act


Companies - Private - Sdn Bhd

- Public - Bhd. - registered under the Companies Act 1965

Private Companies - Sendirian Berhad - minimum two shareholders , maximum fifty. - usually privately owned, cannot invite public to subscribe for its shares.

Private Companies - Sendirian Berhad (Exempt) - membership limited to twenty, another company cannot hold its shares, - need not file it account with the Registrar of Companies provided that it files a certificate signed by a director, a company secretary and an auditor stating that the company can meet its liabilities a and when they fall due.


Public Companies - Berhad - Minimum two shareholders , no maximum. - Can invite public to subscribe for its shares. - No restriction on the transfer of shares.

Public Listed CompaniesMAIN BOARD

- To qualify for listing - should have traded successfully 3-5 years, have a pre-tax profit of

RM 2 million per annum and a paid-up capital of at least RM 60 million with at least 25% in

the hands of the public. Only companies incorporated in Malaysia can be listed on the main board.

SECOND BOARD

- To qualify for listing - should have traded successfully for 3 years, have a pre-tax profit of

RM 1 million per annum and a minimum paid-up capital of at least RM 40 million and a maximum of

less than RM60 million with 25% but no more than 50% in of the issued and paid-up capital in the

hands of at least 500 shareholders holding not less than 10,000 shares each


Limited Companies1- Memorandum of Associations - Name of the company, Registered Office, Limited Liability status, - Amount of registered or authorised capital , par value of shares - Objectives of the company2- Articles of Associations - internal working rules of the company, rights of shareholders, - powers of management, borrowing powers of the company, - duties and powers of directors etc.


Other form of Companies1- Foreign company

- One that is incorporated outside Malaysia but establishes a place of business in Malaysia

2- Investment company

- A public company proclaimed as such by the Yang di-Pertuan Agong in the Gazette.

- Primary activity is to invest in marketable securities for profits and not for acquiring control

3- Holding Company

- One that is able to control another undertakings - either 50% of the voting power or control

at least 50% of the issued share capital

4- Subsidiary company

- one in which a holding company has control of at least 50% of its share capital.

5- Associate company

- one in which an investor hold at least 20% but not more than 50% of the shares.

6- Joint Venture

- a business entity that is jointly controlled by two or more venturers

FINANCIAL REPORTING IN MALAYSIA

Internal – Management AccountingThe process of identifying, measuring, reporting and analyzing financial as well as operating information for internal users regarding the economic condition of an organization

External – Financial AccountingThe process of recording and reporting financial information that has taken place following set rules for external users regarding the economic condition of an organization

Financial Accounting vs Management Accounting

- Required by law- The cost of record keeping is a necessity- Objectives and uses of financial accounts are vague and ill-defined- Mainly concerned with profits- Mainly historical records- Information should be computed prudently and in accordance with legal and accounting requirement

- Records are not mandatory- Cost of record keeping must be justified- Objectives and uses of management accounts can be laid down by management- Mainly concerned with cash flow, profits and business management generally- Regularly concerned with predictions for the future- Information should be computed as management requires, the key criterion being relevance

Petty Cash Book General Ledger Sales/Debtors/Accounts Receivables Ledger Purchases/Creditors/Accounts Payable Ledger Assets Ledger The Cash Book

Some Basic Books

The Bank Reconciliation Statement The Control Accounts The Trial Balance

Others Inventory Control Year-end adjustments –

Accruals and Prepayments

Some Basic Accounting Statements

Accounting Profit

Cash Flow

Accounting Profit and Cash a misconception

Accounting Profit

Sales RM 2,000

Less Cost RM 1,200

Gross Profit RM 800

Less Expenses RM 300 NET PROFIT RM 500

Cash Flow

CASH FLOW IN

Cash collected from sales RM 1,600CASH FLOW OUT

Less Cost paid ( RM 1,200 )Less Expenses paid ( RM 300 )CASH IN HAND RM 100


Financial statements do not disclose all the information about the company.

Under Malaysian Companies Act 1965 - companies must issue financial statements in compliance with the requirements of the financial reporting standards.

Financial Reporting Standards 101 - Presentation of Financial Statements list

- Income Statement

- Balance Sheet

- Cash Flow Statement

- Statement of changes in equity

- Notes to the Financial Statements

FINANCIAL REPORTING IN MALAYSIAIncome Statement for the year ended 31 December 20082007 2008RM,000 RM,000 ,000 Turnover ,000 ,000 Cost of Sales ,000 ,000 Gross Profit ,000 ,000 Other operating income ,000

,000 ,000 Distribution cost ,000 ,000 Administrative expenses ,000 ,000 Other operating expenses ,000 (,000) ,000 Operating Profit ,000 ,000 Interest Income ,000 ,000 Dividend Income ,000 ,000 ,000 ,000 Interest expense (,000 ) ,000 Profit before Tax ,000 ,000 Taxation (,000) ,000 Profit after taxation ,000RM 0.24 Earnings per share RM0.28RM 0.10 Dividends per share RM0.15

The Balance SheetShare Capital- Authorised Share Capital- Issued Share Capital- Reserves (Statutory and non-statutory)

- Retained Earnings - Share Premiums - Other Reserves

Liabilities Non Current and Current liabilities Current liabilities – usually payable within one year Non Current – usually not payable within the short term

CONTINGENT LIABILITIES


Balance Sheet as at 31 December 20082007 2008

Non-Current assets 0,000 Tangible Assets 0,0000,000 Intangible Assets 0,0000,000 Investments 0,0000,000 Current Assets 0,000 0,000 Inventories 0,000 0,000 Bills Receivable 0,0000,000 Loan to Directors 0,0000,000 Trade Receivables 0,0000,000 Short Term Investments 0,0000,000 Cash and Bank Balances 0,000 0,000 0,000 0,0000,000 Non-current assets held for sale 0,0000,000 0,000

Shareholders Equity0,000 Share Capital 0,000

Reserves0,000 Share Premium 0,0000,000 Revaluation Reserve 0,0000,000 General Reserve 0,0000,000 P & Loss 0,0000,000 Share Capital and Reserves 0,000



The Cash Flow StatementOnly applicable to Limited Companies- Sdn. Bhd. and Bhd companies

Simply a summary of cash receipts and payments of an enterprise

Only items that can be quantified in monetary terms are shown


Cash Flow Statement for the year ended 31 December 2008Cash Flow from operating activitiesOperating income before interest and taxation 000,000Adjustment for non-cash itemsDepreciation 00,000Gain on disposal of non-current assets (00,000)Changes in working capitalIncrease in trade receivables (00,000)Increase in inventories (00,000)Decrease in trade payables (00,000)Cash generated from operation 00,000Interest paid (0,000)Tax paid (0,000)Net Cash inflow from operating activities 0,000Cash Flow from investing activitiesPurchase of non-current assets (0,000)Sale of non-current assets 0,000Purchase of investments (0,000)Dividends received 0,000Interest Received (0,000)Net Cash out flow from investing activities (0,000)Cash flow from financing activities Proceeds from issue of shares 0,000Proceeds from long-term borrowings 0,000Repayments of long term borrowings (0,000)Payments of dividends (0,000)Net cash inflow from financing activities 0,000Net increase in cash and cash equivalents 0,000Cash and cash equivalents at beginning of the year 0,000Cash and cash equivalents at year end 0,000


Notes to the AccountsCompanies are required to disclose all necessary information spelt out by the ninth schedule of the Companies Act 1965 and also the disclosures requirement stipulated in the various accounting standards .

Companies are encouraged to disclose more than the minimum required but in real practice, most companies do not have much ‘voluntary’disclosures.

ACCOUNTING POLICIESAccounting policies are the methods, procedures or bases adopted by the company to record and present the transactions and events.

Most company accounts are prepared based on the Historical Cost Basis or historical basis modified by regular revaluation of land /property

OTHER POLICIESAre other policies or methods/bases/procedures etc. that a company chooses to use

Example Property, plant and equipmentInventory ValuationAccounting for GoodwillResearch and DevelopmentTaxationConsolidation policies Retirement benefits etc…….


Notes to Balance Sheet

- Share Capital - Reserves - Deferred Taxations - Long Term Liabilities - Expenses not written off - Assets Non-current Assets - Fixed Current - Investments - Inventories- Receivables- Short-term investments- Current Liabilities- Dividends- Turnover- Transfer to Reserve- Prior Year adjustments- Dividends paid and proposed- Earnings per share- Contingent liabilities- Segment reporting

RATIO ANALYSIS AND UNDERSTANDING FINANCIAL STATEMENTS

Helps management to evaluate the organization’s performance in

comparison with previous years and with other organization in

the same industry

Types of financial ratios

°Liquidity ratios°Profitability ratios°Use of Assets°Capital Structure°Return to investors

Liquidity ratios

Current Ratios –Current assets : current liabilitiesA company should have enough current assets that give a promise of cash to come to meet its future commitments to pay off its current liabilities

Acid Test RatiosCurrent assets (less stock) : current liabilities A company should have sufficient liquid resources at short call to be able to pay off its current liabilities

Profitability ratios

Gross Profit PercentageGross profit to Sales ratio

Net Profit PercentageNet Profit to Sales ratio

Use of Assets ratios

Sale to fixed assets ratiosStock Turnover ratioAverage debtor collection periodCreditor turnover period

Capital StructureGearing ratioDifference between debt funding and equity funding. Low equity to assets means high debt and therefore higher exposure to riskInterest coverEmphasizes the cover (or security) for the interest by relating profit before interest and tax to interest paid

Return to investorsReturn on capital employed

Profit before interest and taxation x 100 capital employed

Dividend cover

Profit after tax less preference share dividend Gross dividend on ordinary shares

Earnings per share (EPS)

Profit after tax less preference share dividend Number of ordinary shares issued

Price Earning ratio (P/E) Current share price Earnings per share

Dividend yield

Ordinary dividend per share x 100 Market price per share

Equity as a source of Finance

Internally generatedRetained earnings

Non distributed profitNew Issues

IPORights issue

Other sources of finance Long term

Debentures (Bonds)Preference shares

Medium TermLeasingHire Purchase

Short TermTrade credit

Special purposeGovernment grants

Choice of financeCostDuration

Long term,secure but expensive Short term, risky but cheap

Gearing Too much – cause financial distress Too much equity – dilute EPS and control

Company size Small firm – limited access to financial market

Project

Appraisals

Investment AppraisalsPayback methodAccounting Rate of ReturnDiscounted Cash Flow

Net Present valueInternal rate of returnProfitability Index

Pay Back methodProject A B C

Initial Investment (RM10,000) (RM10,000) (RM10,000)

Net Cash inflow Year 1 5,000 5,000 5,000

2 3,000 5,000 4,000

3 2,000 1,000 4,000

4 2,000 1,000 4,000

5 1,000 - 1,000

Payback period 3 years 2 years 2. 25 years

Ranking (choice) 3 1 2

Accounting Rate of ReturnProject A B CInitial Investment (RM 2,500) (RM 2,500) (RM 2,500)Net Profit after tax and depreciation

Year 1 250 500 100 2 250 450 100 3 250 100 100 4 250 100 450 5 250 100 500

1,250 1,250 1,250

Average Profit RM1,250 RM1,250 RM1,250 5 5 5

ARR = Average profit RM 250 RM 250 RM 250 Initial Investment RM2,500 RM2,500 RM2,500 ARR 20% 20% 20%

Discounted Cash Flow Consider the timing of fund flowing

in Consider the interest factor Two principle methods

Net present value (NPV) Internal rate of return (IRR)

Net Present Value methodProject A

Initial Investment (RM 2,000)

Net Cash inflow Year 1 RM 400

2 RM 600

3 RM 700

4 RM 600

5 RM 500

Discounting FactorTo invest RM1,000 in the bank at 10% interest rate, cash will

be accumulated as follows

Now – Year 0 RM1,000 Year 1 RM1,000 + RM100 = RM1,100

Year 2 RM1,100 + RM110 = RM1,210Year 3 RM1,210 + RM121 = RM1,331Year 4 RM1,331 + ……………………..Year 5 …………………………………..

If we were to receive RM1,000 sometime in the future,what is its value now if the current rate of interest is 10% ?

Net Present Value methodProject A Year Cash Flow Discount rate Present Value

Initial Investment 0 (RM 2,000) 1.000 (RM 2,000.00)

Net Cash inflow 1 RM 400 0.909 RM 363.60

2 RM 600 0.826 RM 495.60

3 RM 700 0.751 RM 525.70

4 RM 600 0.683 RM 409.80

5 RM 500 0.621 RM 310.50

TOTAL CASH INFLOW AT PRESENT VALUE ( NOW ) RM 2,105.20

LESS CASH OUTFLOW RM 2,000.00

NET CASH INFLOW AT PRESENT VALUE RM 105.20

Choice is made by selecting the one with the highest Net Present Value

Internal rate of return methodProject A

Year Cash Flow Discount Present Discount Present

rate 10% Value rate 15% Value

0 (RM 2,000) 1.000 (RM 2,000.00) 1.000 (RM2,000.00)

1 RM 400 0.909 RM 363.60 0.866 RM 346.40

2 RM 600 0.826 RM 495.60 0.756 RM 453.60

3 RM 700 0.751 RM 525.70 0.676 RM 473.20

4 RM 600 0.683 RM 409.80 0.752 RM 343.20

5 RM 500 0.621 RM 310.50 0.497 RM 248.50

Net Present Value RM 105.20 (RM 135.10)

Internal rate of return methodProject A at 10 % at 15 %Net Present Value RM 105.20 (RM 135.10)

The Internal rate of return is where the NPV is = 0

In the above example for NPV to be at RM 0 = rate of discount is between 10 % and 15 %

Therefore the IRR = 10 % + ( 105.20 x 5 ) ( 105.20 + 135.10 )= 10 % + 2.19= 12.19 %

COMPANY CARS

FOR CARS BOUGHT AFTER 28 OCTOBER 2000

( not exceeding RM150,000 on the road )

1st Year = RM 100,000 x 20 + 20% = RM 40,000

2nd Year = RM 100,000 x 20 % = RM 20,000

3rd Year = RM 100,000 x 20 % = RM 20,000

4th Year = RM 100,000 x 20 % = RM 20,000

Total claims RM 100,000

Company Tax at 28% = Total tax saving over 5 years is

= RM 100,000 x 28%

= RM 28,000

Capital Allowances

Case 1 ( Car bought after 28 Oct 2000 )

Cost of new car RM 140,000

Less claims over 4 years RM 100,000

Balance after 4 years RM 40,000

If the car is sold after 4 years at RM 90,000

Tax payable RM 100,000 x RM 90,000 = RM 64,285

RM 140,000

Taxable disposal profit RM 64,285

Case 2 ( Car bought after 28 Oct 2000 )

Cost of new car RM 140,000

Less claims over 4 years RM 100,000

Balance after 4 years RM 40,000

If the car is sold after 8 - 9 years at RM 30,000

Tax payable RM 100,000 x RM 30,000 = RM 21,428

RM 140,000

Taxable disposal profit RM 21,428

FOR ATTENDING

AND MY BEST WISHES

TO ALL OF YOU

THANK YOU

THANK YOU !

Documents

Accounting and Finance for Engineers Prepared by Teh Thian Sung