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
TYPES OF BUSINESS ORGANISATIONS IN MALAYSIA
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.
TYPES OF BUSINESS ORGANISATIONS IN MALAYSIA
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
TYPES OF BUSINESS ORGANISATIONS IN MALAYSIA
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.
TYPES OF BUSINESS ORGANISATIONS IN MALAYSIA
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 REPORTING IN MALAYSIA
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
FINANCIAL REPORTING IN MALAYSIA
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
FINANCIAL REPORTING IN MALAYSIA
FINANCIAL REPORTING IN MALAYSIA
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
FINANCIAL REPORTING IN MALAYSIA
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
FINANCIAL REPORTING IN MALAYSIA
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…….
FINANCIAL REPORTING IN MALAYSIA
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 !