QUESTION 1

Prepare a statement of profit of loss and other comprehensive for the year ended 31
December 2015.
Borneo Enterprise
Statement of Profit or Loss and Other Comprehensive for the Year Ended
31 December 2015
RM
Sales (1,454,600 1,250)
Less : Return inwards
Net sales
Less : Cost of Goods Sold
Opening inventory
Add : Purchases (635,300 500)
Import duty
Less : Return outwards
Less : Closing inventory
Cost of goods sold
Gross Profit
Add : Other Incomes
Discount received
Dividend received
Commission received (7,500 + 3,250)
Rent revenue

RM
1,453,350
(1,250)
1,452,100

36,700
634,800
3,420
674,920
(4,560)
670,360
(89,700)
(580,660)
871,440
4,600
63,000
10,750
1,250
79,600
951,040

Less : Expenses
Advertising expense
Insurance expense
Discount allowed
General expenses
Interest on loan
Doubtful debts
Bad debts expenses (4,500 + 750)
Telephone expenses (2,300 + 2,100)
Wages and salaries
Water and electricity expenses
Carriage outwards
Depreciation : Motor vehicles
[(150,000- 17,500) x 15%]
Office equipment
(98,000 x 25%)

3,500
6,000
2,500
5,546
6,000
3,950
5,250
4,400
124,326
15,800
2,400
19,875
24,500
(224,047)

Net Profit

726,993

QUESTION 2
Prepare a statement of financial position as at 31 December 2015.
Borneo Enterprise
Statement of Financial Position as at 31 December 2015
RM
Non-current Assets
Land and building
Motor vehicle
Less : Accumulated depreciation

RM

RM
865,000

150,000
(37,375)
112625

Office equipment
Less : Accumulated depreciation

98,000
(47,500)
50,500
1,028,125

Current Assets
Inventory
Account receivables (55,000 - 750)
Less : Allowance for doubtful debt
Cash at bank (21,400 2,400 1,000)
Accrued commission received

89,700
54,250
(6,510)
47,740
18,000
3,250
158,690
1,186,815

Owners Equity
Capital
Add : Net profit
Less : Drawings (500 + 1,000)

259,222
726,993
986,215
(1,500)
984,715

Non-current Liabilities
6% loan from NION Bank
Current Liabilities
Account payable
Accrued interest on loan
Accrued telephone expenses

100,000
97,000
3,000
2,100
102,100
1,186,815

QUESTION 3
Why do you need to do adjusting entries for bad debts and provision/allowance for
doubtful debts before you prepare the financial statements? Explain.
We need to do adjusting entries for bad debts because bad debts were actually
an account receivable at first. When debtor buys our goods by owing it, then it will
become our current asset which is an account receivable. Then, when debtor has
specific reasons such as bankrupt or cannot pay the debts, it will become a bad debt
which we have to adjust by separating it from an account receivable so that the real
amount of this current asset can be ensured.
We need to do adjusting entries of allowance for doubtful debts because there
is always a possibility that debtor cannot pay certain amount of debts. When debtors
are buying goods by owing it, they must realize to pay it back. However, certain
conditions such as loss of sales, inflation, and other economic matters will obstruct
them to pay on time. As a result, we as creditors must estimate the worst possibility in
the future by adding allowance for doubtful debts in order to avoid loss of sales and
put it into an expenses account.
QUESTION 4
Why do you need to include the telephone expense although it was not paid? Explain.
Telephone expense is one of the revenue expenditure. It means that whether it
still has accruals or not, it has to be closed to the income statement at the end of the
period. Therefore, in this matter, telephone expense is written in full amount because
at the end of accounting period all amount of expenses including accrual account and
prepayment account must be combined in the income statement.

QUESTION 5
Evaluate the financial position of Borneo Enterprise by analysing the profitability,
liquidity, efficiency and leverage ratio.
(a) Current ratio =

Current Assets
Current Liabilities

= 158,690
102,100
= 1.55 : 1
Current ratio at 2014 is better than 2015. This is because in 2014 current
liabilities are well covered by the current assets. Every RM 1 of current liability, there
are RM 2.40 current assets to pay off its short-term liabilities whereas, in 2015 every
RM 1 of current liability, there are only RM 1.55 current assets to pay off its shortterm liabilities. So, low ratio will indicates the business is in a weak position to meet
its debt whereas good balance will help to cover the current liabilities.
(b) Quick ratio = Current Assets Inventory
Current Liabilities
= 158,690 89,700
102,100
= 0.68 : 1
The inventory in 2015 is too high compare to 2014. Without selling
inventories, Borneo Enterprise did not have enough current assets to cover its current
liabilities but for 2014, Borneo Enterprise has enough current assets to cover its
current liabilities without selling inventories.
(c) Net profit margin = Net profit after tax

x 100%

Sales
= 726, 993

x 100%

1,452,100
= 50 %
The net profit margin of 2015 is higher than 2014. This mean that in 2015
50% (RM0.50) of sales revenue (RM1.00) was used to pay for the cost of goods sold
and operating expenses and the other 50% (RM0.50) is net profit of Borneo Enterprise
whereas in 2014, 56.3% (RM0.56) of sales revenue (RM1.00) was used to pay for the

cost of goods sold and operating expenses and the other 43.7% (RM0.44) is net profit
of Borneo Enterprise. This can see that profit that earn of 2015 is higher than 2014.
(d) Return of assets = Net profit after tax
Total assets
= 726,993

x 100%

x 100%

1,186,815
= 61.3 %
The business of Borneo Enterprise in 2015 is more effectively than 2014. This
is because the return of assets in 2015 is higher than 2014. Then Borneo Enterprise is
earning more money on less investment and better at converting its investment into
profit in 2015.
(e) Inventory turnover = Cost of goods sold
Average
=

580,660
(36,700 + 89,700) / 2

= 9.2 times
In 2014, stock is being replaced every 1.5 months whereas in 2015, stock is
being replaced every 1.3 months. This can be seen that the stock is 2015 is sold and
replaced faster than 2014. So that, stock sold in 2015 is more than 2014 and the
salaries of 2015 is higher than 2014.
(f) Average collection period = Accounts/Trade receivable
Annual credit sales
=

54,250
1,452,100

x 360 days

x 360 days

= 13 days
Average collection period is use to indicate the number of days taken by a firm
to collect its account receivable. In 2015, Borneo Enterprise use 13 days to collect its
account receivables whereas it use 12 days to collect its account receivables in 2014.
This seen that in 2014, the debtors are paying back faster and more efficient the
Borneo Enterprises collection policy.

(g) Total assets turnover =

Sales
Total assets

= 1,452,100
1,186,815
= 1.22 times
The total assets turnover in 2014 is better than 2015. This means that Borneo
Enterprise is performing better in 2014 than 2015. In 2014, Borneo Enterprise is
generating more revenue per ringgit of assets than in 2015.
(h) Debt ratio = Total debt
Total assets

x 100%

= 100,000 + 102,100

x 100%

1,186,815
= 17 %
The debt ratio in 2015 is lower than 2014. This means that in 2014, Borneo
Enterprise will face financial risk. It can seem that the debt in 2014 is higher than
2015.
(i) Time interest earned = Earnings before interest and tax
Interest expense
= 726,993 + 6,000
6,000
= 122.16 times
Time interest earned is used to measure the firms ability to cover its interest
charges out of its operating profits. The times interest earned in 2015 is higher than
2014. This means that in 2015, Borneo Enterprise has higher ability to fulfil interest
obligations.