BBF 105 / ACCT 1001

BASIC ACCOUNTING AND FINANCE

Module

Faculty of Business and Accounting

NAME:
MATRIC NO.:
PROGRAM: BACHELOR OF CIVIL ENGINEERING (HONS)
LECTURER: NUR FATIN BINTI KASBUN

For Internal Circulation Only

Copyright Jubaidah Mashod & Nur Fatin Kasbun (2017)

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 MODULE CONTENTS
BBF 105/ACCT1001 BASIC ACCOUNTING AND FINANCE

CHAPTER TITLE
1 Introduction to Accounting and Finance
Page 3 - Accounting & finance definitions
- Accounting activities
- Accounting users
- Financial statements
- Accounting concepts
- Types & characteristics of businesses
2 The Accounting Cycle
Page 7 - The accounting equation
- Financial transactions and accounting equation
- Double-entry accounting system (Debit and credits)
- Recording process
- Journal entry
- Ledgers
- Trial balance
3 The Accounting Cycle (Adjustments and Final
Page 21 Accounts)
- Adjusting entries (for accruals and prepaid)
- Depreciation and bad debts entries
- Financial Statements; SOPL and SOFP
4 Financial Statement Analysis
Page 33 - Ratio/Analysis
- Financial Statements horizontal and vertical analysis
5 Working Capital Management
Page 43 - Objectives of working capital management
6 Financial Planning
Page 46 - Financial budgets
- Short-term sources of financing
- Capital budgeting
7 Cost Volume Profit (CVP)
Page 49 - Cost behavior analysis
- Variable costs & fixed costs
- Cost volume profit analysis
- Contribution Margin
- Break-even Analysis
8 Time Value of Money (TVM)
Page 53 - Future value and compound interest
- Present value
- Annuities

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 CHAPTER 1
INTRODUCTION TO ACCOUNTING AND FINANCE

1. INTRODUCTION

What is Accounting?
The purpose of accounting is to identify, record, and communicate the economic
events of an organization to interested users.

What is Finance?
Financial management is about planning income and expenditure, and making
decisions that will enable you to survive financially.

Three Activities of Accounting:

1) Identification: select economics events (transactions)

2) Recording: record, classify, and summarize
3) Communication: prepare accounting records

These three activities are to provide information to the users. The users will analyze and
interpret the financial information and make decision.

1.1 Regulatory and Conceptual Framework

a) Various users need financial information

b) The financial information includes financial statements (statement of profit or loss,

statement of financial position, statement of owners equity, statement of cash flows,
and notes disclosure)

c) The financial statements are prepared according to Generally Accepted Accounting

Principles (GAAP). The accounting profession has attempted to develop a set of
standards that are generally accepted and universally practiced. Malaysian
Accounting Standard Board (MASB) is responsibility to set up and monitor the
accounting regulation in Malaysia.

1.2 Accounting Data Users

There are two broad groups of users of financial information: internal users and external
users:

INTERNAL USERS include management (do the firm need to make loan in near
future?), human resources (can we raise pay?), finance (Is cash sufficient to pay
dividends to shareholders?), marketing (what price will maximize net income?) and
etc.

EXTERNAL USERS include investors (can they receive high returns?),

creditors/supplier (can the firm pay their debt on time?), governmental agencies
(for tax purposes), public (is the company doing well?) and etc.
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1.3 The Accounting Process

1.4 The Financial Statements

Four financial statements are prepared from the summarized accounting data:

a) An income statement/ statement of profit or loss (SOPL) presents the revenues

and expenses and resulting net income (or net loss) of a company for a specific
period of time.

b) A balance sheet / statement of financial position (SOFP) reports the assets,

liabilities, and shareholders equity/owners equity of a business enterprise at a specific
date.

c) A statement of cash flows summarizes information concerning the cash inflows

(receipts) and outflows (payments) for a specific period of time.

2. ACCOUNTING CONCEPTS

Time period concept the financial statements are prepared for a certain period of
time

Monetary measurement concept include in the accounting records only

transaction data that can be expressed in terms of money.

Going concern concept the financial statement of an enterprise is prepared on

the assumption that the business is a continuing business

Objectivity concept/Cost Principle (Historical) items in the financial

statements are recorded using the costs and prices at the time of the transactions

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 Business Entity Assumption requires that activities of the entity be kept separate
and distinct from the activities of its owner and all other economic entities.

Accruals concept states that revenues and expenses are reported in any
accounting period when they are earned or incurred

Prudence concept there is many uncertainties in business activities. This concept

states that the assets and income should not be overstated and liabilities and
expenses should not be understated.

Materiality concept financial statements are prepared to provide useful

accounting information to several user groups. The enterprise reports information
considered as significant to the users

Consistency concept states that an enterprise should use just one accounting
policy in preparing and reporting its financial statements.

Matching concept states that costs (expenses) incurred during the accounting
period can be identified with its corresponding revenues.

3. TYPES OF BUSINESSES
a) Sole Proprietorship
b) Partnership
c) Corporation

3.1 Characteristics of the business

Criteria Sole Proprietorship Partnership Corporation

Ownership Generally owned by one Owned by two or Ownership divided
person more persons. into shares
Nature of Often small service-type Often retail and A corporation,
business businesses service-type group companies
businesses
Owner receives any Partnership Shareholders
Profit/ profits, suffers any losses agreement receive dividend
Loss and is personally liable for when the
Returns all debts corporation earns
profit
Liability of Unlimited Generally Limited
the unlimited personal
business liability
Example Acacia Enterprise Ally and Abby Protasco Berhad
Associates (private limited)

4. THE IMPORTANCE OF ACCOUNTING KNOWLEDGE

a) To be able to identify the financial position of an organization, whether it makes

profit or a loss, to make decisions for the businesss future and as future reference.
b) To ensure that transactions are recorded appropriately.

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TUTORIAL CHAPTER 1

1. Identify the appropriate accounting concepts to be applied in each of the following

situations:

a) Orange Enterprise accounting period ends on 30 June every year.

b) Orange Enterprise recorded RM12,000 of computer as the date of purchased.

c) It is Orange Enterprises policy to provide for depreciation of all motor vehicles

owned by the business using the reducing balance method.

d) At the end of the financial year, Saga Bhd. recognized stationery consumed but not
yet invoiced as expenses.

e) During the accounting period, Saga Bhd. acquired a new machine. The machine will
be used by the manufacturing department for eight years. Depreciation will be
provided on a straight line basis so as to be similar to the other machines owned by
the enterprise.

f) As at year end, Saga Bhd. discovered the debtors figure includes several debts
which have been outstanding for some time. Those amounts will be provided in the
financial statements.

g) The owner of Saga Bhd. takes goods from inventory for his personal use. This event
is not recorded in the financial statements of Saga Bhd.

h) Saga Bhd.s accounting period ends on 31 March every year.

i) Saga Bhd. recognized the building acquired two years ago at RM1.2 million, which is
the value at the acquisition date. The current market price of the building is RM1.5
million

j) Saga Bhd. acquired inventory as at 5 January 2014 was valued at RM10,000. As at 31

December 2014, Saga Bhd. sold this inventory at RM15,000. However, the profit of
RM5,000 was not recorded in the income statement.

k) As at year end, Saga Bhd. discovered that 10% of its inventory is obsolete. The
amount of the obsolete inventory will be recognized in the financial statements.

2. Identify what kind of accounting information required by the following users

a) Shareholders
b) Creditors
c) Government
d) Employees
e) Public

3. Draw up the complete accounting process.

4. List down THREE (3) importance of accounting knowledge for engineers.

5. What are the THREE (3) types of businesses?

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 CHAPTER 2
ACCOUNTING CYCLES

1. THE BASIC ACCOUNTING EQUATION

The following is the underlying framework for recording and summarizing economic
events.

Assets = Liabilities + Owners Equity

A. Assets
Resources a business owns.
Provide future services or benefits.
The business uses its assets in carrying out such activities as production and sales.
Cash, Accounts receivable (debtors), Supplies, Equipment, etc.

B. Liabilities
Debts and obligations that are owed by a business to external parties
Accounts payable, Creditor, etc

C. Owners equity
The amount of money the business owes its owner
Ownership claim on total assets.
Referred to as residual equity

Capital is investments by owner in which the assets the owner puts into the business.

Revenues result from business activities entered into for the purpose of earning income.

Drawings are the owner withdraws cash or other assets for personal use.

Expenses are the cost of assets consumed or services used in the process of earning
revenue.

2. USING THE BASIC ACCOUNTING EQUATION

Transactions are a businesss economic events recorded by accountants.

May be external or internal.
Not all activities represent transactions.
Each transaction has a dual effect on the accounting equation.

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Illustration 2.1:

Transaction (1): Investment by owner.

Ahmad decides to open a computer programming service which he names Advance

Computer Enterprise. On 1 January 2016, he invests RM15,000 cash in the business. The
effect of this transaction on the basic equation is:

Assets = Liabilities + Owners equity

Cash Capital
+RM15,000 +RM15,000

Transaction (2): Purchase of equipment by cash.

On 3 January 2016, Advance Computer Enterprise purchases computer equipment by

RM7,000 cash.

Assets = Liabilities + Owners equity

Equipment
+RM7,000
Cash
-RM7,000

Transaction (3): Purchase of supplies on credit.

On 5 January 2016, Advance Computer Enterprise purchases computer paper and other
supplies for RM1,600 from Acme Supply Company on accounts.

Assets = Liabilities + Owners equity

Supplies Accounts payable (Acme
Supply Company)
+RM1,600 +RM1,600

Transaction (4): Services provided for cash.

On 10 January 2016, Advance Computer Enterprise receives RM1,200 cash from customers
for programming services it has provided.

Assets = Liabilities + Owners equity +Revenue

Cash Revenue
+RM1,200 +RM1,200

Transaction (5): Paid of advertising on credit.

On 12 January 2016, Advance Computer Enterprise receives a bill for RM250 from the NSTP
News for advertising but postpones payment until a later date.

Assets = Liabilities + Owners equity -Expenses

Accounts payable Expenses
(NSTP) (advertising)
+RM250 +RM250
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Transaction (6): Services provided for cash and credit.

Advance Computer Enterprise provides RM3,500 of programming services for a customer,

Ali on 18 January 2016. The company receives cash of RM1,500 from customer, and it bills
the balance of RM2,000 on account.

Assets = Liabilities + Owners equity +Revenue

Cash Revenues
+RM1,500 +RM3,500
Accounts receivable-
Ali
+RM2,000

Transaction (7): Payment of Expenses.

Advance Computer Enterprise pays the following expenses in cash for January on 21
January 2016: store rent RM600, salaries of employees RM900, and utilities RM200.

Assets = Liabilities + Owners equity -Expenses

Cash Expense (rent)
-RM1,700 +RM600
Expense (salaries)
+RM900
Expense (utilities)
+RM200

Transaction (8): Payment of accounts payable.

On 22 January 2016, Advance Computer Enterprise pays its RM250 NSTP News bill in cash.

Assets = Liabilities + Owners equity

Cash Accounts payable (NSTP)
-RM250 -RM250

Transaction (9): Receipt of cash on account.

On 25 January 2016, Advance Computer Enterprise receives RM600 in cash from customer
Ali who had been billed for services [in Transaction (6)].

Assets = Liabilities + Owners equity

Cash
+RM600
Accounts receivable
-RM600

Transaction (10): Withdrawal of cash by owner.

On 30 January 2016, Ahmad withdraws RM1,300 in cash from the business for personal use.

Assets = Liabilities + Owners equity -Drawings

Cash Drawing
-RM1,300 RM1,300
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 Summary of Transactions:

Assets = Liabilities + Owners + Revenue - Expenses - Drawings

equity
Cash
+RM15,000
Cash
-RM7,000 Expenses
Equipment Accounts Capital Revenues -RM250 Drawings
+RM7,000 payable +RM15,000 +RM1,200 Expenses -RM1,300
Supplies +RM1,600 Revenues -RM600
+RM1,600 Accounts +RM3,500 -RM900
Cash payable -RM200
+RM1,200 +RM250
Cash Accounts
+RM1,500 payable
Accounts receivable -RM250
+RM2,000
Cash
-RM1,700
Cash
-RM250
Cash
+RM600
Accounts receivable
-RM600
Cash
-RM1,300

TOTAL = RM18,050 RM18,050

3. DEBITS AND CREDITS

Double-entry accounting system

Each transaction must affect two or more accounts to keep the basic accounting
equation in balance.
Recording done by debiting at least one account and crediting another.
DEBITS must equal CREDITS

ASSETS= LIABILITIES +OWNERS EQUITY +REVENUE -EXPENSES -DRAWINGS

DEBIT

CREDIT

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4. STEPS IN THE RECORDING PROCESS

STEP 1: analyze each transaction

STEP 2: prepare JOURNAL

STEP 3: post to LEDGER

STEP 4: prepare TRIAL BALANCE

STEP 5: do adjustments

STEP 6: prepare ADJUSTED TRIAL BALANCE

STEP 7: prepare FINANCIAL STATEMENTS

4.1 Analyse each transaction

Analyze each transaction using business documents, such as a sales slip, a check, a bill, or a
cash register tape, provide evidence of the transaction.

4.2 Prepare journal

Book of original entry.

Transactions recorded in chronological order (based on date).
Contributions to the recording process:
a. Discloses the complete effects of a transaction.
b. Provides a chronological record of transactions.
c. Helps to prevent or locate errors because the debit and credit amounts can
be easily compared

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From Illustration 2.1: prepare journal entries for the transactions

JOURNAL ENTRY

Date Transactions/ details Debit (RM) Credit (RM)

1 January 2016 Cash 15,000
Capital 15,000
(owners contributed cash)
3 January 2016 Equipment 7,000
Cash 7,000
(purchased equipment by cash)
5 January 2016 Supplies 1,600
Accounts payable- Acme 1,600
Supply
(purchased supplies on credit)
10 January 2016 Cash 1,200
Revenue 1,200
(received cash from customer)
12 January 2016 Advertising 250
Accounts payable-NSTP 250
(incurred advertising on credit)
18 January 2016 Cash 1,500
Accounts receivable-Ali 2,000
Revenue 3,500
(customer paid cash and credit)
21 January 2016 Rent 600
Salaries 900
Utilities 200
Cash 1,700
(paid expenses by cash)
22 January 2016 Accounts payable-NSTP 250
Cash 250
(paid NSTP cash)
25 January 2016 Cash 600
Accounts receivable-Ali 600
(accounts receivable paid the
debts cash)
30 January 2016 Drawing 1,300
Cash 1,300
(owners withdrew cash for
personal use)

4.3 Post to Ledgers

A General Ledger contains the entire group of accounts maintained by a company.

The General Ledger includes all the asset, liability, owners equity, revenue and
expense accounts.
Posting the process of transferring amounts from the journal to the ledger
accounts

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From Illustration 2.1: post the transactions to ledger

Cash
1-Jan capital 15,000 3-Jan equipment 7,000
10-Jan revenue 1,200 21-Jan rent 600
18-Jan revenue 1,500 salary 900
25-Jan accounts receivable 600 utilities 200
- Ali 22-Jan accounts payable 250
NSTP
30-Jan drawing 1,300
31-Jan bal c/d 8,050
18,300 18,300

Capital
31-Jan bal c/d 15,000 1-Jan cash 15,000
15,000 15,000

Equipment
3-Jan cash 7,000 31-Jan bal c/d 7,000
7,000 7,000

Supplies
5-Jan accounts payable 1,600 31-Jan bal c/d 1,600
- acme supply
1,600 1,600

Accounts payable Acme Supply

31-Jan bal c/d 1,600 5-Jan supplies 1,600
1,600 1,600

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 Revenue
31-Jan bal c/d 4,700 10-Jan cash 1,200
18-Jan cash 1,500
accounts receivable
- Ali 2,000
4,700 4,700

Advertising
12-Jan accounts payable 250 31-Jan bal c/d 250
- NSTP
250 250

Accounts payable - NSTP

22-Jan cash 250 12-Jan advertising 250
250 250

Accounts receivable - Ali

18-Jan revenue 2,000 25-Jan cash 600
31-Jan bal c/d 1,400
2,000 2,000

Rent
21-Jan cash 600 31-Jan bal c/d 600
600 600

Salary
21-Jan cash 900 31-Jan bal c/d 900
900 900

Utilities
21-Jan cash 200 31-Jan bal c/d 200
200 200

Drawing
30-Jan cash 1,300 31-Jan bal c/d 1,300
1,300 1,300

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4.4 Prepare trial balance

A trial balance is a list of accounts and their balances at a given time.

Balances for debit and credit side in trial balance based on balance b/d in ledgers.
Its primary purpose is to prove (check) that the debits equal the credits after
posting.
It can be used by the company to uncover errors in journalizing and posting.
It is useful in preparing financial statements.

From Illustration 2.1: prepare trial balance

Advance Computer Enterprise

Trial balance as at 31 January 2016
Debit (RM) Credit (RM)
Equipment 7,000
Supplies 1,600
Cash 8,050
Accounts receivable-Ali 1,400
Accounts payable-Acme Supply 1,600
Capital 15,000
Revenue 4,700
Advertising 250
Rent 600
Salary 900
Utilities 200
Drawing 1,300
21,300 21,300

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TUTORIAL CHAPTER 2

Part A
Required: State whether the followings are non-current assets, current assets, owners equity,
non-current liabilities, current liabilities, revenues or expenses.

A. Premises
B. Long-term loans
C. Insurance
D. Bank
E. Dividend received
F. Interest
G. Inventories
H. Bank overdrafts
I. Cash in hand
J. Motor vehicles
K. Utilities
L. Trade receivables
M. Capital
N. Retained earnings
O. Salaries
P. Service revenue
Q. Rental
R. Machineries
S. Notes Payable
T. Van
U. Salaries Payable
V. Drawings
W. Buildings

Part B: Multiple choice questions

1. Accounting can be defined as;

A. The process to prepare business financial statements in order to evaluate the
performance of the business.
B. The process of classifying, recording and summarizing business transactions.
C. All business transactions are recorded in chronological order.
D. The process of identifying, recording, and communicating business transactions
in monetary units and interpreting the financial data of a business in order to
assist stakeholders in making decisions.

2. The left side of an account is

A. Blank
B. A description of the account.
C. The debit side
D. The balance of the account.

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3. Accounting is concerned only with the facts which can be measured in monetary
terms. Based on the statement, which of the following concept applies?
A. Prudence concept
B. Historical cost concept
C. Monetary measurement concept
D. Materiality concept

4. The followings are the external users of financial statements, EXCEPT?

A. Human resources department
B. Investors
C. Customers
D. Securities and exchange commission

5. Which of the following statements is INCORRECT?

A. Assets Capital = Liabilities
B. Liabilities + Capital = Assets
C. Liabilities + Assets = Capital
D. Assets Liabilities = Capital

6. Which one from the following is an asset?

A. Long-term loans
B. Fixtures & Fittings
C. Bank overdraft
D. Bad Debts

7. Azim paid a creditor by cheque. Based on the transaction, which of the following is
CORRECT?
A. There is no effect on assets.
B. There is a decrease in assets and an increase in liabilities.
C. There is an increase in both assets and liabilities.
D. There is a decrease in both assets and liabilities.

8. The followings are the three (3) types of businesses, EXCEPT?

A. Sole proprietorship
B. Entrepreneurship
C. Partnership
D. Corporation

9. As of December 31, 2015, Shakir Company has assets of RM3,500 and owners
equity of RM2,000. What are the liabilities for Shakir Company as of December
2015?
A. RM1,500
B. RM1,000
C. RM5,500
D. RM2,500

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 10. The followings are financial statements, EXCEPT?
A. Statement of Financial Position
B. Statement of Manufacturing
C. Statement of Profit or Loss
D. Statement of Owners Equity

Part C: Questions

1. For each of the following transactions, you are required to:

(i) Show the effect of the transactions on assets, owner's equity, liabilities, revenues
and expenses and (ii) state the journal entries using the format given below.

Example:

Transaction Effect Journal entry

Purchased a motor vehicle Increase Asset Dr Motor vehicle
and paid by cheque Decrease Asset Cr Bank

Transaction Effect Journal entry

Started a business with cash
at bank.
Bought furniture on credit
from Jaya Bhd.
Received service revenue
by cheque.
Motor van repairs being paid
by cash.
Owner took cash for personal
use
Pay staff salaries by cheque

Bought equipment from AA

sdn bhd on account

2. Selected transactions for Bersatu Sdn Bhd are listed below for January 2016:

Jan 1 Made cash investment to start business RM10,000

5 Paid monthly rent RM2,000 cash
7 Purchased equipment on account RM15,000
10 Billed customers for services performed RM 1,500
18 Withdrew cash of RM5,000 for owners personal use
22 Received cash from customers billed in 10th January
24 Incurred advertising expense on account RM3,000
26 Purchased additional equipment for cash of RM3,500
31 Received cash of RM4,000 from customers when service was performed

List the numbers of the above transactions and describe the effect of each transaction on
assets, liabilities and owners equity.

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 3. Vivian, opened a hair salon, VV Hairven which started the operation on 1st January
2016. VV Hairven operated in Subang Jaya. On 1st January 2016, Vivian introduced
cash of RM15,000, an equipment that cost RM7,000. On the same day, MicroFinance
Bank released RM10,000 cash as loan to VV Hairven. During January 2016, VV
Hairven earned revenue RM15,078 and had the following expenses:

RM
Salaries 5,000
Rent 3,200
Utilities 3,000

On 27th January 2016, Vivian withdrew RM1,000 for personal use.

Required:

a) What was the owners equity amount as at 1st January 2016?

b) Calculate the net income (or net loss) for the month of January 2016.
c) Determine whether the treatment for Vivians withdrawal is appropriate or not? Explain
the correct accounting treatment.

4. Maryam, an owner of a laundry shop started a business on 1 January 2016. The following
financial transactions occurred during the month of January 2016.

January Transactions

1 Started business with cheque deposited at City Bank worth

RM58,000.
3 Bought supplies on credit from Ah-Ling worth RM7,000.
4 Provide services to a client and cheque was received for RM11,800.
6 Purchased office furniture from Macy Sdn Bhd for RM5,400 on
credit.
10 Bought supplies on credit from Umar worth RM2,550.
16 Settled amount due to Umar by cheque.
19 Paid salary by cheque amounting to RM6,600.
24 Paid rental for two months by cheque. Rental per month is RM1,200.
25 Withdraw RM1000 from City Bank for personal use.
26 Provided cleaning service to IOI Resort on credit worth RM 12,000.

Required:

1. List the numbers of the above transactions and describe the effect of each
transaction on assets, liabilities and owners equity.

2. Record the above transactions in:

(a) The journal entries
(b) The Ledger accounts; and
(c) Prepare the Trial Balance as at 31 January 2016.

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5. On 1 February 2016, the account balances for February were as follows.
Cash 1,000
Bank 2,500
Accounts Receivable 3,500
Accounts Payable 2,000
Capital 5,000

Below are the transactions for Jaya Services during February 2016:

Feb 1 Jaya, the owner, invested RM20,000 cash as an additional capital. He

also brought his own van costing RM65,000 into business.
5 Bought office equipment on account for RM7,500
7 Provide service to a client and received RM17,520 cash
15 Paid creditors RM3,000 cash
20 Performed services to a customer of RM6,000, but he only paid half
of the amount by cheque
25 Received cheque of RM4,750 and cash of RM2,000 for the services
provided
27 Paid the following expenses with cash:
Utility RM270
Salary RM3,600
Rent RM600
28 Debtor paid RM1,200 from the amount due by cheque and cash
RM600
29 Hired 2 new staffs and paid them RM3,800 cash.

Required:
a) Describe the effect of each transaction on assets, liabilities and owners equity
b) Journalize the above transaction into general journal.
c) Post it to ledger
d) Prepare trial balance as at 29 February 2016.

6. Presented below is information related to Basir Real Estate Agency.

October 2016
1 Basir begins business a real estate agent with cash investment of RM60,000
in exchange for capital.
2 Pays RM1,900 for office rental, cash
3 Purchases furniture for RM3,800 from World Furniture, on account.
10 Provide realty services for Billy Lim, RM4,400 on account.
16 Pays RM2,500 to World Furniture (balance related to transaction 3 October)
20 Provide realty service to Pierre Andrew, RM3,200 and receives cash
25 Pays utilities for RM300, cash
30 Pays salary to administrative assistant RM1,500, cash

Required:
a) Journalize the above transactions
b) Post to the ledgers
c) Prepare trial balance as at 30th October 2016

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 CHAPTER 3
ADJUSTMENTS AND FINAL ACCOUNTS

1. INTRODUCTION

Adjustments for accounting are needed due to:

i. Time-Period Assumption

The time period (or periodicity) assumption assumes that the economic life of a
business can be divided into artificial time periods.

Accounting time periods are generally a month, a quarter, or a year. The accounting
time period of one year in length is usually known as a fiscal year. Example:
Calendar year: 1 January to 31 December every year.

ii. Accrual Basis Concept

The revenue recognition and matching principles are used under the accrual basis of
accounting. Under cash basis accounting, revenue is recorded only when cash is
received and expenses are recorded only when paid.

Generally accepted accounting principles require accrual basis accounting rather

than cash basis accounting because the cash basis of accounting often leads to
misleading financial statements.

iii. Revenue Recognition Principle

The revenue recognition principle states that revenue should be recognized in the
accounting period in which it is earned. Example: when services are
rendered/performed, when the seller has deliver the goods, when the seller has
earned the right to collect payment from customers.

iv. The Matching Principle

The matching principle dictates that expenses incurred should be matched with
revenues earned.

2. THE BASICS OF ADJUSTING ENTRIES

Adjusting entries make it possible to report correct amounts on the statement of

financial position and on the statement of profit or loss.
A company must make adjusting entries every time it prepares financial statements.
Revenues - recorded in the period in which they are earned and received.
Expenses - recognized in the period in which they are incurred and paid.

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 Prepaid
Prepaid Expenses (current asset) :
Expenses paid in advance.
Entry: Dr Expense
Cr Prepaid expense
Unearned/Prepaid Revenues
liability) :
Revenues received in advance.
Accruals
Accrued Revenues (current asset) :
Revenues earned but not yet received in
cash or recorded.
Entry: Dr Accrued revenue
Cr Revenue
(current Accrued Expenses (current liability) :
Expenses incurred but not yet paid in cash
or recorded.

Entry: Dr Prepaid/Unearned Revenue Entry: Dr Expense

Cr Revenue Cr Accrued expense

3. ADJUSTING ENTRIES FOR ACCRUALS

Made to record:
Revenues earned
AND/OR
Expenses incurred

In the current accounting period that has not been recognized through daily entries.

3.1 Accrued Expenses (current liabilities)

Expenses incurred but not yet paid in cash or recorded.

At the end of the accounting period, an adjusting entry should be made to recognize
those expenses, which have accrued but have not yet been recorded.

Example 3.1:

On 1 December 2015, AB Enterprise hired Mr. David as a part-time salesman. The

agreed salary is RM1,200. The companys year-end is as at 31 December 2015. The
salary payment for the 1st month to Mr. David was made on 5 January 2016.

Adjustment (recognize expense on 31/12/2015 and at last day of accounting

period)
Dec 31 Dr Salaries 1,200 (expense)
Cr Accrued Salaries 1,200 (current liability)
(Adjustment of accrued salaries at the end of the year)

3.2 Accrued Revenues (current assets)

Revenues earned but not yet received in cash or recorded prior to the closing
date (Company already performed the job but still not receive payment from
customer)

At the end of the accounting period, an adjusting entry is required to record the
revenue which has been earned during the period.

22
 Example 3.2:

On 31 December 2015, AB Enterprise performed repairing services to Alam Enterprise

which amounts to RM8,000. Alam Enterprise will make payment on 5 January 2016.
The companys year end is as at 31 December 2015.

Adjustment (to recognize revenue earned and record at the last day of accounting
period)
Dec 31 Dr Accrued revenue 8,000 (current asset)
Cr Service Revenue 8,000 (revenue)
(Adjustment on accrued revenue at the end of the year)

4. ADJUSTING ENTRIES FOR PREPAID

Prepaid are either:

Prepaid expenses OR Prepaid/Unearned revenues.

4.1 Prepaid Expenses (current assets)

Expenses paid in advance; payments are made to cover future periods as well.
Reason: such expenses are paid during the current accounting period but will not
be incurred until the next accounting period.
The portion that is used up in the current period will be treated as an expense of
that period

Example 4.1:

AB Enterprise pays a year insurance premium of RM4,800 beginning on 1 April 2015. The
companys year-end is as at 31 December 2015.

When paid insurance in advance

April 1 Dr Prepaid Insurance 4,800 (current asset)
Cr Cash 4,800 (current asset)

Adjustment (When the insurance expired)

Dec 31 Dr Insurance 3,600 (expense)
Cr Prepaid Insurance 3,600 (current asset)
(1/4/2015 until 31/12/2015; 9/12 x RM4,800 = RM3,600)

OR

Adjustment (entry at the last day of accounting period)

Dec 31 Dr Insurance 4,800 (expense)
Cr Prepaid Insurance 4,800 (current asset)
(Adjustment on prepaid insurance at the end of the year)

23
 4.2 Unearned Revenues/Prepaid Revenues (current liabilities)

Revenues received in advance.

For accounting purposes, amounts collected in advance do not represent revenue
because these amounts have not been earned and they are not realized yet in the
current accounting period.

Example 4.2:

On 1 November 2015, AB Enterprise agreed to act as consultant to Ryu Co. and received 6
months consultancy fee of RM6,000 in advance. The companys year-end is as at 31
December 2015.

When received payment in advance

Nov 1 Dr Cash 6,000 (asset)
Cr Prepaid consultancy revenue 6,000 (current liability)

Adjustment (when perform the task)

Dec 31 Dr Prepaid consultancy revenue 2,000 (current liability)
Cr Consultancy revenue 2,000 (revenue)
(RM6,000/6 x 2 months = RM2,000)

OR

Adjustment (entry at the last day of accounting period)

Dec 31 Dr Prepaid consultancy revenue 6,000 (current liability)
Cr Consultancy revenue 6,000 (revenue)
Adjustment on prepaid revenue at the end of the year)

5. DEPRECIATION

Depreciation is defines as the allocation of the depreciable amount of an asset over

its estimated useful life or economic life.
Factors of depreciation:
o Expected usage of asset by the entity
o Obsolescence
Accumulated depreciation is the accumulative sum of all depreciation expenses
recorded for an asset. Usually presented in statement of financial position deducted
from an asset.
Entry: Dr Depreciation (SOPL)
Cr Accumulated Depreciation (SOFP)

5.1 Depreciation Methods

a) Straight Line Method

Cost
Estimated useful life: the length of service

24
 Estimated residual value/scrap value: expected cash value of an asset at the end of
its useful life
Formula = (Cost residual value or disposal value) / useful life

Example 5.1 a:

On 1 January 2015, AB Enterprise purchased a machine at the cost of RM41,000. The

company estimated to use this machine for 5 years at the disposal value of RM11,000.

Depreciation/year = (41,000 11,000)/5

= RM6,000

Entry:
Dec 31 Dr Depreciation machine 6,000 (expense)
Cr Accumulated depreciation machine 6,000
(Depreciation expense of machine for year end 31 December 2015)

i. Reducing Balance Method

Example 5.1 b:

On 1 January 2015, AB Enterprise purchased a machine at the cost of RM41,000. The

company estimated the rate of depreciation was 40%.

Year Depreciation Accumulated Net book value

depreciation
2015 0.4x41,000= 16,400 41,000-16,400= 24,600
16,400
2016 0.4x24,600= 16,400+9,840= 24,600-9,840=
9,840 26,240 14,760
2017 0.4x14,760= 26,240 - 5,904= 14,760-5,904=
5,904 32,144 8,856

Entry:
2015
Dec 31 Dr Depreciation machine 24,600 (expense)
Cr Accumulated depreciation machine 24,600
(Depreciation expense of machine for the year end 31 December 2015)

6. BAD DEBTS
Bad debts are amounts of debts, which are considered uncollectable after all efforts
have been made to collect them.
Reasons:
a. Debtors experience financial difficulties, and leading to bankruptcy
b. Debtors cannot be traced
c. Debtors pass away
Entry: Dr Bad debts expense (expense)
Cr Accounts receivable (asset)

25
7. PREPARING FINANCIAL STATEMENTS

Financial Statements are prepared directly from the Adjusted

Trial Balance

Statement of Profit or Statement of Financial

Loss (Income Statement) Position (Balance Sheet)

7.1 Tips in preparing adjusted trial balance using worksheet

Accounts Trial Balance Adjustments Adjusted Trial Balance

Dr + Dr = Dr
Cr + Cr = Cr
Dr - Cr = Dr
Cr - Dr = Cr

7.2 Extracts of Financial Statements (Servicing Companies)

a) Example of Statement of Profit or Loss

Shakir Corporation
Statement of Profit or Loss
for the year ended 31 December 2016
RM RM
Revenues:
Service Revenue XX

Expenses:
Rental XX
Depreciation Motor vehicle XX
Salaries XX (XX)
Net Profit / Net Loss XX / (XX)

Statement of Profit or Loss is a financial statement that summarizes the revenues

and expenses incurred during a specific period of time, usually a fiscal quarter or
year.
These records provide information about a company's ability or lack thereof to
generate profit by increasing revenue, reducing costs, or both.

26
 Some referred statement of profit and loss as the profit or loss statement, income
statement, statement of operations, statement of financial results and income and
expense statement.

b) Example of Statement of Financial Position

Shakir Corporation
Statement of Financial Position
As at 31 December 2016
Assets: RM RM
Non-current assets:
Land XX
Machine XX
Less: Accumulated depreciation - machine (XX) XX

Current assets:
Accrued revenue XX
Prepaid insurance XX
Cash XX XX
Total assets XX

Liabilities:
Non-current liabilities:
Long-term loans XX
Current liabilities:
Accrued salaries XX
Unearned/prepaid revenue XX XX

Owners Equity:
Capital XX
Add/Less: Net Profit / Net loss XX
Less: Drawings (XX) XX
Total liabilities and owners equity XX

Statement of Financial Position, also known as the Balance Sheet, presents the
financial position of an entity at a given date. It is comprised of three main
components: Assets, liabilities and equity.
Statement of Financial Position helps users of financial statements to assess the
financial soundness of an entity in terms of liquidity risk, financial risk, credit risk
and business risk.

27
TUTORIAL CHAPTER 3

QUESTION 1

The following is the trial balance as at 31 December 2016 for Sonata Enterprise (servicing company);

Sonata Enterprise
Trial Balance as at 31 December 2016

Debit (RM) Credit (RM)

Revenue 205,800
Salaries 30,000
Utilities 6,000
Telephone bill 1,200
Fixtures & Fittings 90,000
Van 180,000
Accumulated depreciation van 12,000
Debtors 9,800
Creditors 19,200
Capital 150,000
Bank 55,000
Drawings 15,000
387,000 387,000

Additional information:

a) Unpaid salaries of RM3,000 for December 2016.

b) Utilities of RM500 for January 2017 had been paid in December 2016.
c) Telephone bill account outstanding RM150.
d) Revenue received in advance RM5,000 for the task which will be performed next year.
e) Depreciation fixtures and fittings RM2,000 and van RM3,500.

Required:

i) Journalize the transaction of adjustments.

ii) Prepare an adjusted trial balance using worksheet.
iii) Prepare:
Statement of Profit or Loss for the year ended 31 December 2016.
Statement of Financial Position as at 31 December 2016.

28
QUESTION 2

The Exora Printing trial balance for the month of December 2015 shown below:

Exora Printing
Trial Balance as at 31st December 2015

Debit Credit
RM RM
Cash 18,600
Accounts Receivable 4,500
Supplies 2,400
Building 30,000
Prepaid Insurance 2,000
Notes Payable 10,000
Accounts Payable 6,300
Salary Payable 1,900
Unearned Revenue 2,100
Capital 26,200
Service Revenue 15,500
Insurance Expenses 1,000
Salary Expenses 1,800
Utilities Expenses 500
Drawings 1,200
62,000 62,000

Additional information:

i. Supplies as at 31st December 2015 are RM400.

ii. Depreciation for building for year assessment 2015 is RM1,500.
iii. RM200 from prepaid insurance is expired.
iv. RM600 from the unearned revenue has been earned.
v. Interest of RM300 on notes payable has accrued during December.

Required: Prepare the followings;

a) Journalize the transactions of adjustments.

b) An adjusted trial balance as at 31st December 2015.
c) The statement of profit and loss for the year ended 31st December 2015.
d) The statement of financial position as at 31st December 2015.

29
QUESTION 3

At the end of first month operations, Best Tele-Marketing Service has the following
unadjusted trial balance;

Best Tele-Marketing Services

Unadjusted Trial Balance
As at 31st August 2016

Account Name Debit (RM) Credit (RM)

Cash 4,400
Accounts Receivable 2,300
Prepaid Insurance 2,400
Supplies 2,300
Equipment 60,000
Notes Payable 40,000
Accounts Payable 2,400
Service Revenue 5,100
Capital 25,000
Unearned Revenue 5,000
Drawings 1,000
Salaries Expense 2,400
Utilities Expense 800
Advertising Expense 400
Rent Expense 1,500
77,500 77,500

Additional information:

i. Insurance expires at the rate of RM200 per month.

ii. RM1,000 of supplies are on hand at 31st August 2016.
iii. Yearly depreciation on the equipment is RM12,000.
iv. RM1,500 from the unearned revenue has been earned.

Required:

a) Journalize the adjusting entries at 31st August 2016.

b) Prepare an adjusted trial balance as at 31st August 2016.
c) Prepare the followings:
i) Statement of profit and loss for the month ended 31st August 2016.
ii) Statement of financial position as at 31st August 2016.

30
QUESTION 4

The Happy Virus Co. trial balance for the financial year ends on 30th June 2015 shown
below:

Happy Virus Co.

Trial Balance as at 30th June 2015

Debit Credit
Accounts RM RM
Cash 14,600
Accounts Receivable 4,500
Supplies 1,400
Building 30,000
Prepaid Insurance 2,000
Accounts Payable 13,300
Salary Payable 1,900
Unearned Revenue 2,100
Capital 20,000
Service Revenue 18,500
Insurance Expenses 1,000
Salary Expenses 1,800
Utilities Expenses 500

55,800 55,800

Additional information:

i. Supplies as at 30th June 2015 were RM400.

ii. Depreciation for building was RM1,500.
iii. RM200 from prepaid insurance is expired.
iv. RM600 from the unearned revenue has been earned.
v. Happy Virus Co. paid RM500 by cash for salary payable.

Required:

Prepare:
a) Journalize the transactions of adjustment.
b) An adjusted trial balance as at 30th June 2015.
c) Statement of profit or loss.
d) Statement of financial position.

31
QUESTION 5

Intellect Optical Sdn Bhd is a company engaged in providing optical services and products
located in Bandar Baru Bangi. The adjusted trial balance of Intellect Optical Sdn Bhd as at
30th September 2016, the end of the companys fiscal year is as follows;

Intellect Optical Sdn Bhd

Trial Balance as at 30th September 2016

Accounts Title Debit (RM) Credit (RM)

Cash 21,370
Account Receivable 3,740
Cost of Goods Sold 3,690
Prepaid insurance 2,290
Inventory 20,000
Equipment 63,930
Accumulated depreciation- equipment 28,430
Furniture and fittings 54,330
Accumulated depreciation- building 18,260
Accounts payable 19,550
Interest payable 2,280
Salary payable 830
Prepaid revenue/ Unearned revenue 3,660
Notes payable, short term 69,900
Capital 49,200
Repair expense 47,500
Sales revenue 101,310
Salary expense 29,800
Insurance expense 5,370
Interest expense 8,170
Rent expense 10,770
Utilities expense 4,970
Supplies expense 6,880
Total 293,420 293,420

Additional information:
a) Prepaid revenue earned during the year, RM2,600.
b) Prepaid insurance expired during the year, RM5,050.
c) Accrued interest expense, RM1,280.
d) Services provided but unbilled at 30 September amounted to RM2,200.
e) Depreciation for the year: equipment, RM6,900; building: RM3,710.
f) Employees salaries of RM2,500 not yet paid.

Required:

(i) Journalize the adjusting entries.

(ii) Prepare the adjusted trial balance.
(iii) Prepare:
a. Statement of profit and loss for the month ended 30th September 2016.
b. Statement of financial position as at 30th September 2016.

32
 CHAPTER 4
FINANCIAL STATEMENTS ANALYSIS

INTRODUCTION:

Purpose of financial statement analysis:

a. Enables the financial statement users to make better decisions about a company.
b. To identify the weakness as well as strengths of a business.
c. To enable the business to improve its overall financial situations in the future.

When analyzing financial statements, three major characteristics of a company are

generally evaluated: (a) liquidity, (b) profitability, and (c) solvency.

Comparative analysis may be made on 3 different bases:

a. Within the Companies (intracompany)Compares an item or financial

relationship within a company in the current year with the same item or
relationship in one or more prior years.
b. Between Companies (intercompany)Compares an item or financial
relationship of one company with the same item or relationship in one or more
competing companies.
c. Industry AveragesCompares an item or financial relationship of a company
with industry averages.

1. BASICS OF FINANCIAL STATEMENT ANALYSIS

Analyzing financial statements involves:

Comparison Tools of
Bases Analysis

d. Intracompany a. Percentage
e. Industry averages b. Ratio
f. Intercompany

2. TOOLS TO ANALYZE FINANCIAL STATEMENT

i. Horizontal analysis @ trend analysis

ii. Vertical analysis @ common-size analysis
iii. Financial ratios analysis

33
 A. Horizontal Analysis

Horizontal analysis, also called trend analysis, is a technique for evaluating a series
of financial statement data over a period of time.
Its purpose is to determine the increase or decrease that has taken place, expressed
as either an amount or a percentage. In horizontal analysis, a base year is selected
and changes are expressed as percentages of the base year amount.
Horizontal analysis is commonly applied to the balance sheet, income statement,
and statement of retained earnings.

Illustration 4.1:

Compute horizontal analysis (2013 as a base)

BEYOND ENTERPRISE
Condensed Statement of Financial Position as at 31 Dec 2014

Increase or (Decrease)
during 2014
2014 2013

Amounts Percentage

ASSETS:
Non-current assets 815,000 650,000 165,000 25.4
Current assets 1,020,000 945,000 75,000 7.9
Total assets 1,835,000 1,595,000 240,000 15.0
LIABILITIES:
Current liabilities 344,500 303,000 41,500 13.7
Long-term liabilities 487,500 497,000 (9,500) (1.9)
Total liabilities 832,000 800,000 32,000 4.0
OWNERS EQUITY:
Capital 275,400 270,000 5,400 2.0
Retained earnings 727,600 525,000 202,600 38.6
Total equity 1,003,000 795,000 208,000 26.2
Total liabilities and
equity 1,835,000 1,595,000 240,000 15.0

34
 BEYOND ENTERPRISE
Condensed Statement of Profit or Loss for the year ended 31 Dec 2014
Increase or (Decrease)
2014 2013 during 2014

Amounts Percentage
Sales 2,195,000 1,960,000 235,000 12.0
Sales return and allowances 98,000 123,000 (25,000) (20.3)
Net sales 2,097,000 1,837,000 260,000 14.2
Cost of goods sold 1,281,000 1,140,000 141,000 12.4
Gross profit 816,000 697,000 119,000 17.1

Selling expenses 253,000 211,500 41,500 19.6

Administrative expenses 104,000 108,500 (4,500) (4.1)
Total operating expenses 357,000 320,000 37,000 11.6
Income from operations 459,000 377,000 82,000 21.8
Other income 45,000 51,500 (6,500) (12.6)
Profit before income taxes 504,000 428,500 75,500 17.6
Income tax expenses 168,200 139,000 29,200 21.0
Net profit 335,800 289,500 46,300 16.0

B. Vertical Analysis

Vertical analysis, also called common-size analysis, is a technique that expresses

each financial statement item as a percent of a base amount.
Vertical analysis is commonly applied to the balance sheet and the income
statement.
Vertical analysis, also called common size analysis, expresses each item within a
financial statement as a percent of a base amount. Generally, the base amount is
total assets for the balance sheet, and net sales for the income statement. For
example, it may be determined that current assets are 22% of total assets, and
selling expenses are 15% of net sales.

35
 Illustration 4.2:
Compute vertical analysis (total assets and total liabilities and equity as a base)
BEYOND ENTERPRISE
Condensed Statement of Financial Position as at 31 Dec 2014
2014 2013
Amount Percent Amount Percent
ASSETS:
Non-current assets 815,000 44.4 650,000 40.8
Current assets 1,020,000 55.6 945,000 59.2
Total assets 1,835,000 100.0 1,595,000 100.0
LIABILITIES:
Current liabilities 344,500 18.8 303,000 19.0
Long-term liabilities 487,500 26.6 497,000 31.2
Total liabilities 832,000 45.3 800,000 50.2
OWNERS EQUITY:
Capital 275,400 15.0 270,000 16.9
Retained earnings 727,600 39.7 525,000 32.9
Total equity 1,003,000 54.7 795,000 49.8
Total liabilities and equity 1,835,000 100.0 1,595,000 100.0

Compute vertical analysis (net sales as a base)

BEYOND ENTERPRISE
Condensed Statement of Profit or Loss for the year ended 31 Dec 2014
2014 2013
Percen
Amounts Percent Amounts t
Sales 2,195,000 104.7 1,960,000 106.7
Sales return and allowances 98,000 4.7 123,000 6.7
Net sales 2,097,000 100.0 1,837,000 100.0
Cost of goods sold 1,281,000 61.1 1,140,000 62.1
Gross profit 816,000 38.9 697,000 37.9

Selling expenses 253,000 12.1 211,500 11.5

Administrative expenses 104,000 5.0 108,500 5.9
Total operating expenses 357,000 17.0 320,000 17.4
Income from operations 459,000 21.9 377,000 20.5
Other income 45,000 2.1 51,500 2.8
Profit before income taxes 504,000 24.0 428,500 23.3
Income tax expenses 168,200 8.0 139,000 7.6
Net profit 335,800 16.0 289,500 15.8

36
C. RATIOS
Ratio analysis expresses the relationship among selected items of financial
statement data.
A single ratio by itself is not very meaningful.
The discussion of ratios will include the following types of comparisons.
A ratio expresses the mathematical relationship between one quantity and another
as either a percentage, rate, or proportion

Financial Ratio Classifications

A) Liquidity Ratios
Measure the short-term ability of the company to pay its maturing obligations and to meet
unexpected needs for cash.

i. The current ratio expresses the relationship of current assets to current liabilities. It
is a widely used measure for evaluating a companys liquidity and short-term debt
paying ability. The formula for this ratio is: (answer in no. of times OR ratio 1:1)

Current assets
Current ratio =
Current liabilities

ii. The acid-test or quick ratio relates cash, short-term investments, and net receivables
to current liabilities. This ratio indicates a companys immediate liquidity. It is an
important complement to the current ratio. The formula for the acid-test ratio is:
(answer in no. of times OR ratio 1:1) *inventory in financial position
Current asset - inventory - prepayment
Acid-test ratio = Current liabilities

37
B) Efficiency Ratios
Efficiency ratios measure the level of efficiency and capability of the management to operate
its business, especially in the use of assets to generate sales.

iii. The receivables turnover ratio is used to assess the liquidity of the receivables. This
ratio measures the number of times, on average, receivables are collected during the
period. The formula for the ratio is: (answer in no of times receivables turnover)

Net sales
Receivables turnover =
Average net receivables

Average net receivables can be computed from the beginning and ending balances of
the net receivables. A popular variant of the receivables turnover ratio is to convert it
into an average collection period in terms of days. This is done by dividing the
turnover ratio into 365 days.

iv. Inventory turnover measures the number of times, on average, the inventory is sold
during the period. It indicates the liquidity of the inventory. The formula for the ratio
is: (answer in no of times inventories turnover)

Cost of goods sold

Inventory turnover =
Average inventory

Average inventory can be computed from the beginning and ending inventory
balances. A variant of the inventory turnover ratio is to compute the average days to
sell the inventory. This is done by dividing the inventory turnover ratio into 365
days.

v. Asset turnover measures how efficiently a company uses its assets to generate sales.
The formula for this ratio is: (answer in no. of times assets turnover)

Net sales
Asset turnover =
Average assets

38
C) Profitability Ratio
Profitability ratios measure the ability of a business to generate profit within a specific
period. It is used as an indicator to analyze the efficiency and effectiveness of a business in
achieving its profit.

vi. The gross profit ratio is a measure of the percentage of each sales dollar that results
in net income. The formula is: (answer in %)

Gross Profit
Gross profit ratio =
Net sales

vii. Return on Assets (ROA) is an overall measure of profitability. It measures the rate of
return on each dollar invested in assets. The formula is: (answer in %)

Net income
Return on assets =
Average assets

viii. Return on Investment (ROI) measures profitability from the shareholders viewpoint.
(answer in %)

Return on Net income

=
Investment Total assets Current liabilities

ix. Return on Equity (ROE) measures how many dollars of net income the company
earned for each dollar invested by the owners. (answer in %)

Net income
Return on Equity =
Average equity

x. Net Profit Margin Ratio reveals how far costs are covered by revenue and what is
available to the owner of the business after considering all expenses incurred for a
particular accounting period. (answer in %)

Net income
Net profit ratio =
Sales

39
EXERCISES:

1. The followings are the summarized Statement of Profit or Loss for the year ended 31
December 2016 and the Statement of Financial Position as at 31 December 2016 for United
Sdn. Bhd.

United Sdn Bhd

Statement of Profit or Loss for the year ended 31 December 2016
2016 2015
RM RM RM RM
Sales 110,000 125,000
Less: Cost of goods sold
Opening Stock 50,000 80,000
Add: Purchases 15,000 16,200
Less: Purchase return (5,000) (6,400)
60,000 89,800
Less: Closing Stock (20,000) (40,000) (50,000) (39,800)
Gross Profit 70,000 85,200
Less: Operating expenses (30,000) (41,000)
Net Profit 40,000 44,200

United Sdn Bhd

Statement of Financial Position as at 31 December 2016
2016 2015
RM RM RM RM
Non-current assets 110,000 111,200
Current assets:
Bank 25,000 20,000
Inventory 20,000 15,000
Account receivables 15,000 60,000 10,000 45,000
170,000 156,200
Current liabilities:
Account payables 17,000 10,000
Bank loan 18,000 35,000 12,000 22,000

Owners Equity:
Capital 95,000 90,000
Add: Net Profit 40,000 135,000 44,200 134,200
170,000 156,200

Compute and explain the meaning of the following ratios:

i. Current ratio
ii. Acid test ratio
iii. Gross profit ratio
iv. Net profit ratio
v. Inventory turnover ratio

40
2. The following is the financial statements of Franco Enterprise for year 2016. The
companys financial year ends on 30 June 2016.

Franco Enterprise
Statement of Profit or Loss for the year ended 30 June 2016
2016 2015
RM RM RM RM
Sales 120,000 125,000
Less: Cost of Goods Sold
Opening Inventory 20,000 15,000
Purchases 100,000 64,000
120,000 79,000
Less: Closing Inventory (60,000) (60,000) (20,000) (59,000)
Gross Profit 60,000 66,000
Less: Expenses (40,000) (35,000)
Net Profit 20,000 31,000

Franco Enterprise
Statement of Financial Position as at 30 June 2016
2016 2015
RM RM RM RM
Non-Current Asset:
Equipment 85,000 80,000
Current Asset:
Inventory 78,000 68,000
Accounts Receivables 81,000 80,000
Bank 69,000 228,000 47,000 195,000
Total Assets 313,000 275,000

Owners Equity:
Capital 76,000 60,000
Add: Net profit 20,000 96,000 31,000 91,000

Non-current Liabilities 200,000 164,000

Current Liabilities 17,000 20,000
Total Liabilities & Owners Equity 313,000 275.000

REQUIRED:
Calculate and explain following ratios for Franco Enterprise:
a) Net profit margin
b) Current ratio
c) Acid test ratio
d) Inventory turnover ratio
e) Return on capital employed / Return on investment

41
3. The followings are the summarized Statement of Profit or Loss for the year ended 31
December 2015 and 2016 and the Statement of Financial Position as at 31 December 2015
and 2016 for GenCorp.

GenCorp.
Statement of Profit or Loss for the year ended 31 December 2016
2016 (RM) 2015(RM)
Sales 255,600 240,000
Less: Cost of goods sold (120,300) (113,400)
Gross Profit 135,300 126,600
Less: Operating expenses (47,600) (35,400)
Net Profit/Loss 87,700 91,200

GenCorp.
Statement of Financial Position as at 31 December 2016
2016(RM) 2015(RM)
Non-current assets 230,000 170,000
Current assets 67,800 98,000
Total assets 297,800 268,000

Non-Current liabilities 30,400 20,500

Current liabilities 17,000 16,500
Total liabilities 47,400 37,000

Owners Equity:
Capital 162,700 139,800
Add: Net Profit 87,700 91,200
297,800 268,000

Compute and explain the meaning of the following ratios:

i. Current ratio
ii. Gross profit ratio
iii. Net profit ratio
iv. Return on assets (ROA)
v. Return on Investment (ROI)
vi. Return on Equity (ROE)

42
 CHAPTER 5
THE MANAGEMENT WORKING CAPITAL

1. BASICS WORKING CAPITAL

Working Capital
Assets and liabilities required to operate a business on a day-to-day basis
a. Assets: Cash, Accounts Receivable and Inventory
b. Liabilities: Accounts Payable and Accruals

Working Capital Requires Funds

a. Maintaining a working capital balance requires a permanent commitment of
funds.
b. Cash, inventory and receivables turn over regularly, but minimum levels always
exist

Net Working Capital: the difference between gross working capital (current assets)
and spontaneous financing (current liabilities).
a. It reflects the net amount of funds required to support routine operations.
b. Generally:
Net working capital = current assets current liabilities

2. OBJECTIVES OF WORKING CAPITAL MANAGEMENT

Working capital management concerned with managing the firms liquidity.
To run the firm with as little money tied up in the current accounts as possible
Working capital elements:
a. Inventory
b. Receivables
c. Cash
d. Payables and accruals

43
2.1 Managing Accounts Receivable
A business should have a reasonable average collection time for receivables to
ensure that cash is not tied up. This to ensure cash is sufficient and to avoid
potential of having bad debts.
Objectives and Policy:
a. Higher receivables mean selling to financially weaker customers and not
pressuring them to pay promptly.
b. Increases sales and improves customer relations.
Receivables Policy involves:
a. Credit Policy:
How financially strong must a customer be to receive credit?
b. Terms of Sale (credit terms and cash discounts)
Prompt payment discount
Net time to pay

44
 c. Collections Policy:
How aggressively are slow paying customers handled

2.2 Managing and Control Inventory

Inventory Management - overall way a firm controls inventory and its cost.
Define an acceptable level of operating efficiency with regard to inventory.
Minimize inventory level, yet keep it adequate to meet the demands of customers.
Benefits and Costs of Carrying Adequate Inventory:
a. Benefits
i. Reduces stock outs and backorders
ii. Makes operations run more smoothly
iii. Improves customer relations
iv. Increases sales
b. Costs
i. Interest on funds used to acquire inventory
ii. Storage and security
iii. Insurance
iv. Taxes
v. Shrinkage - theft
vi. Spoilage
vii. Breakage
viii. Obsolescence

2.3 Managing cash

Motivation for holding cash:
a. Transactions demand - cash to pay bills.
b. Precautionary demand emergencies.
c. Speculative demand - take advantage of unexpected opportunities.
d. Compensating balances.
Objectives of Cash Management
a. To ensure that there is no over surplus or shortage of cash in business.
b. Expensive to maintain significant amounts.
c. But its clearly easier and more efficient to run a company with lots of liquid cash.

45
 CHAPTER 6
FINANCIAL PLANNING

1. PREPARING THE FINANCIAL BUDGETS

Shows anticipated cash flows.
Often considered to be the most important output in preparing financial budgets.
Contains three sections:
- Cash Receipts
- Cash Disbursements
- Financing
Shows beginning and ending cash balances.

Cash Receipts Section

- Expected receipts from the principal sources of revenue.
- Expected interest and dividends receipts, proceeds from planned sales of
investments, plant assets, and capital stock.
Cash Disbursements Section
- Expected cash payments for direct materials and labor, taxes, dividends,
plant assets, etc.
Financing Section
- Expected borrowings and repayments of borrowed funds plus interest.
To prepare cash budget:
- Must prepare in sequence.
- Ending cash balance of one period is the beginning cash balance for the next.
- Data obtained from other budgets and from management.
- Often prepared for the year on a monthly basis.
Advantages of cash budgets
- Contributes to more effective cash management.
- Shows managers the need for additional financing before actual need arises.
- Indicates when excess cash will be available.
46
Illustration 6.1:

1.1 Short-term sources of financing

Include all forms of financing that have maturities of 1 year or less - current
liabilities
Two issues:
- How much short-term financing should the firm use?
- What specific sources of short-term financing should the firm select?
Advantages of Short-term Debts
- Flexibility
Used to match the timing of a firms needs for short-term financing
- Interest Cost
Interest rates on short-term debt are lower than on long-term debt
Disadvantages of Short-term Debts
- Risk of illiquidity:
Short-term debt must be repaid or rolled over more often
Uncertainty of interest costs from year to year

2. CAPITAL BUDGETING
Capital Budgeting is the process of making capital expenditure decisions in business.
(Investment decision involving non-current assets).
Amount of possible capital expenditures usually exceeds the funds available for such
expenditures.
47
 Involves choosing among various capital projects to find the one(s) that will
maximize a companys return on investment.
Providing management with relevant data for capital budgeting decisions requires
familiarity with quantitative techniques.
Most common techniques are:
- Payback period: Defined as the number of years required to recover the
initial investment.
- Discounted payback period: Defined as the number of years required to
recover the initial cash outlay from the discounted net cash flows.
- Internal Rate of Return: defined the discount rate that equates the present
value of the inflows with the present value of the outflows

EXERCISES:

First Energy Consulting Engineers involves in Procurement, Construction and Civil

Engineering business. The followings are the details of cash receipts, disbursements and
financing of the company based on quarters for year 2016.
Quarters Beginning Cash Receipts Cash Disbursements
cash
(Year Cash Accounts Sales of Direct Direct General Purchase
balances
2016) sales Receivable assets Materials Labor expense of asset
Collected
1st Quarter 45,600 50,600 120,100 - 21,400 50,000 2,300 -
January
March
2nd - 50,100 124,000 135,600 19,400 40,500 1,400 -
Quarter
April
June
3rd Quarter - 70,500 117,800 - 24,000 45,300 3,500 45,600
July
September
4th Quarter - 30,350 109,500 - 19,300 40,000 2,700 -
October -
December

The company has to pay income tax expense for RM5,500 for every quarter of the year
2016. Borrowings of RM2,500 incurred in the 3rd quarter of the year.

Required:
Find the ending cash balances for each quarter of the year 2016 by preparing a
cash/financial budget statement for First Energy Consulting Engineers based on the details
given.

48
 CHAPTER 7
COST VOLUME PROFIT

1. INTRODUCTION

To manage any business, you must understand:

- How costs respond to changes in sales volume and the effect of costs and
revenues on profit

To understand cost-volume-profit (CVP), you must know how costs behave:

- Cost behavior includes Variable costs, Fixed costs and Mixed costs
- Cost-Volume-Profit Analysis includes Basic components, CVP income statement
and Break-even analysis

2. COST BEHAVIOR ANALYSIS

Cost Behavior Analysis is the study of how specific costs respond to changes in
the level of business activity.

Helps management plan operations and decide between alternative courses of

action.

Applies to all types of businesses and entities.

Starting point is measuring key business activities.

Activity levels may be expressed in terms of:

Examples: Sales in RM (in a retail company)

Miles driven (in a trucking company)
Room occupancy (in a hotel)
Dance classes taught (by a dance studio)

Many companies use more than one measurement base.

For an activity level to be useful:

- Changes in the level or volume of activity should be correlated with changes in costs.

The activity level selected is called the activity or volume index.

The activity index:

- Identifies the activity that causes changes in the behavior of costs
- Allows costs to be classified according to their response to changes in activity as
Variable Costs, Fixed Costs and Mixed Costs.

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2.1 Variable costs
Costs that vary in total directly and proportionately with changes in the activity
level.

Example: If the activity level increases 10 percent, total variable costs increase 10
percent.

Example: If the activity level decreases by 25 percent, total variable costs decrease
by 25 percent.

Variable costs remain constant per unit at every level of activity.

Illustration 7.1:

Damon Company publishes text books. It needs paper to produce their product.

Activity index is the number of books produced.

For each book produced, the total cost of the paper increases by RM10:

If 2,000 books are made, the total cost of paper are RM20,000 (2,000 X RM10)
If 10,000 books are made, the total cost of paper are RM100,000 (10,000 X RM10)

2.2 Fixed costs

Costs that remain the same in total regardless of changes in the activity level.
Per unit cost varies inversely with activity:
As volume increases, unit cost declines, and vice versa
Examples include: Property taxes, insurance, rent, depreciation on buildings and
equipment.

50
 Illustration 7.2:

Damon Company leases its productive facilities for RM10,000 per month.

Total fixed costs of the facilities remain constant at all levels of activity - RM10,000
per month.

On a per unit basis, the cost of rent decreases as activity increases and vice versa.

At 2,000 radios, the unit cost is RM5 (RM10,000 2,000 units)

At 10,000 radios, the unit cost is RM1(RM10,000 10,000 units)

2.3 Mixed Costs

Costs that have both a variable cost element and a fixed cost element.
Sometimes called semi variable cost.
Change in total but not proportionately with changes in activity level.

3. COST-VOLUME-PROFIT ANALYSIS

Study of the effects of changes of costs and volume on a companys profits.

A critical factor in management decisions.
Important in profit planning.
Assumptions Underlying CVP Analysis:

i. All costs can be classified as either variable or fixed with reasonable accuracy.
ii. Changes in activity are the only factors that affect costs.
iii. All units produced are sold.
iv. When more than one type of product is sold, the sales mix will remain constant.

51
3.1 CVP Income Statement (SOPL)

A statement for internal use (this statement is not going to be published).

Classifies costs and expenses as fixed or variable.
Reports contribution margin in the body of the statement.
Contribution margin amount of revenue remaining after deducting variable
costs.
Reports the same net income as a traditional income statement.

Illustration 7.3:

Video Tape Company produces DVD players.

Relevant data for June 2016:

Unit selling price of DVD player RM500
Unit variable costs RM300
Total monthly fixed costs RM200,000
Units sold 1,600 units

Video Tape Company

CVP Profit or Loss Statement
For the month ended 30 June 2016

Total (RM) Per unit (RM)

Sales (1,600 DVD) 800,000 500
Variable costs 480,000 300
Contribution margin 320,000 200
Fixed costs 200,000
Net profit 120,000

3.2 Contribution Margin Per Unit

Contribution margin is available to cover fixed costs and to contribute to income

The formula for contribution margin per unit and the computation for Video Tape
Company are:

Contribution margin per unit = selling price per unit variable costs per unit
RM200 = RM500 RM300

3.3 Contribution Margin Ratio

Shows the percentage of each sales dollar available to apply toward fixed costs and
profits
Ratio helps to determine the effect of changes in sales on net income
The formula for contribution margin ratio and the computation for Video Tape
Company are:

Contribution margin ratio = contribution margin per unit selling prices per unit
40% = RM200 RM500

52
4. BREAK-EVEN ANALYSIS

Process of finding the break-even point:

- level of activity at which total revenues equal total costs (both fixed and variable)

Can be computed or derived:

i. from a mathematical equation,
ii. by using contribution margin, or
iii. from a cost-volume profit (CVP) graph

Expressed either in sales units or in sales dollars

4.1 Mathematical Equation

Break-even occurs where total sales equal variable costs plus fixed costs; i.e., net
profit is zero.

Illustration 7.4:

The formula for the break-even point and the computation for Video Tape Company
are:

Sales = total variable costs + fixed costs + net profit

RM500Q = RM300Q + RM200,000 + 0

RM200Q = RM200,000
Q = 1,000 units

Therefore, break-even in term of units are 1,000 units

To find sales RM required to break-even:

1000 units X RM500 = RM500,000 (break-even RM)

4.2 Contribution Margin Technique

At the break-even point, contribution margin must equal total fixed costs
(CM = total revenues variable costs)

The break-even point can be computed using either contribution margin per
unit or contribution margin ratio.

53
 When the BEP in units is desired, contribution margin per unit is used in the
following formula which shows the computation for Video Tape Company:

Breakeven points (units) = Fixed costs contribution margin per unit

1,000 units = RM200,000 RM200

When the BEP in RM is desired, contribution margin ratio is used in the

following formula which shows the computation for Video Tape Company:

Breakeven points (RM) = Fixed costs contribution margin ratio

RM500,000 = RM200,000 40%

4.3 Graphic Presentation

A cost-volume profit (CVP) graph shows costs, volume and profits.
Used to visually find the break-even point
To construct a CVP graph:
i. Plot the total sales line starting at the zero activity level
ii. Plot the total fixed cost using a horizontal line
iii. Plot the total cost line (starts at the fixed-cost line at zero
activity
iv. Determine the break-even point from the intersection of the
total cost line and the total sales line.

54
EXERCISES:

1. Listed below are a number of costs typically found in organizations, identify type of cost
for the followings (variable or fixed costs);
1. Property insurance, factory
2. Boxes used for packaging detergent produced by the company
3. Salespersons commissions
4. Supervisors salary, factory
5. Depreciation
6. Wages of workers assembling computers
7. Electricity
8. Advertising costs
9. Microchips used in producing calculators
10. Ink used in textbook production

2. Solve the followings;

a. Sales are RM500,000 and variable costs are RM350,000. What is the contribution
margin ratio?

b. Fresher Sdn Bhd. has a product with a selling price per unit of RM200, the unit
variable cost is RM75, and the total monthly fixed costs are RM300,000. How much
is Freshers contribution margin ratio?

c. Global Sdn Bhd has a contribution margin of RM150,000 and a contribution margin
ratio of 30%. How much are total variable costs?

d. At the break-even point of 2,000 units, variable costs are RM55,000, and fixed costs
are RM32,000. How much is the selling price per unit?

e. Hess, Inc. sells a product with a contribution margin of RM12 per unit, fixed costs of
RM74,400, and sales for the current year of RM100,000. How much is Hesss break-
even point?

f. A company has total fixed costs of RM120,000 and a contribution margin ratio of
20%. The total sales necessary to break even are

3. Prepare a Profit Graph:

Acacia Enterprises distributes a single product whose selling price is RM16 and whose
variable expense is RM11 per unit. The companys monthly fixed expense is RM16,000.

Required:
i. Prepare a cost-volume-profit graph for the company up to a sales level of 4,000 units.
ii. Estimate the companys break-even point in unit sales using your profit graph.

55
4. Baker Sdn Bhd developed the following information for its product:
Per Unit (RM)
Sales price 90
Variable cost 63
Contribution margin 27

Total fixed costs 1,080,000

Required: Compute Baker Sdn. Bhd.s break even in units and determine the total sale that
must be generated if the company wants to earn a profit of RM60,000.

5. Blake Corporation prepared the following contribution format statement of profit or loss
based on a sales volume of 20,000 units for the year of 2016.

Total
Sales (20,000 units) RM 500,000
Variable expenses RM (220,000)
Contribution margin RM 280,000
Fixed expenses RM (140,000)
Net operating income RM 140,000

Required:
a) Compute the companys contribution margin ratio.
b) Compute the company's break-even in units.
c) Compute the companys break-even point in price per unit.
d) Construct a graph to visually show the break-even point.
e) Compute the new net operating income if the sales volume increased by 200 units.

6. The following is extracted contribution segment of income statement (SOPL) for Shakir
SB for October 2016:

Sales RM3,750,000
Variable expense RM2,150,000
Contribution margin RM1,600,000
Fixed expenses RM550,000
Net operating income RM1,050,000

The company has no opening and closing inventories. The company produced and sold
30,000 units during the month.

Required: Compute the followings;

a) Companys contribution margin ratio.
b) Companys break-even in units.
c) The new net operating income if the sales increase to 40,000 units.

56
7. Amazon buys hiking socks for RM6 a pair and sells for RM10. Management budgets
monthly fixed cost of RM12,000 for sales volumes between 0 and 12,000 pairs.

Requirement:

Consider each of the following questions separately by using the foregoing information
each time:
a) Calculate the breakeven point in units
b) Amazon reduces its selling price from RM10 to RM8 a pair. Calculate the new
BEP.
i. Amazon finds a new supplier for the socks. Variable cost will decrease by RM1
per pair. Calculate new BEP.
ii. Amazon plans to advertise in hiking magazine. The advertising campaigns will
increase the fixed costs by RM2,000. Calculate the new BEP.

8. Ahmad SB produces two sports equipment, basketball and footballs. The following is
the additional information of the products:

Basketballs Footballs
Units 6,000 4,500

RM RM
Sales 80,000 70,000
Variable costs 40,000 35,000
Fixed costs 10,000 10,000
Net profit 30,000 25,000
Profit per unit RM5.50 RM5.00

Required:
Referring to the above contribution margin format, determine which product should Ahmad
SB sells more? Explain your answer.

57
 CHAPTER 8
TIME VALUE OF MONEY (TVM)

1. INTRODUCTION

TVM, is a dollar today is worth more than a dollar received in the future.
Why?
- Because if the money invested today, you may earn extra income for the next
year.
- Invested money earns income over time = Time Value of Money
- TVM means that the timing of investment cash inflow is very important.
-
Factors affecting TVM:
a) the principal amount (p)
b) number of periods (n)
c) interest rate (i)

There are three main TVM which are:

i. Compound interest and future value

ii. Present value; and
iii. Annuity

Each item can be determined either using formula OR table

A. COMPOUND INTEREST AND FUTURE VALUE

Compound interest, occurs when interest paid on the investment during the first
period is added to the principal, then during the second period, interest is earned on
this new sum
Compounded interest means all interest earned will remain invested and earn
additional interest at the same interest rate.
Formula:

FV = PV(1+i)n
FV = the future value of the investments at the end of n year
PV = the present value, or original amount invested at the beginning of the
first year
i = the annual interest
n = the number of years during which the compounding occurs

Illustration 8.1 (a):

Suppose we place RM100 in a savings account that pays 6 percent interest

compounded annually:
FV1 = PV(1+i)1
= 100(1+0.06)
= 106

58
 Illustration 8.1 (b):
RM10,000 principal, invested for 6 years at 6% interest.

FV1 = PV(1+i)1
= 10,000 (1+0.06)6
=10,000(1.485)
= 14,185

Note : if compounded;

Annually Semi-annually Quarterly

Period: nx1 nx2 nx4
Interest: i/1 i/2 i/4

B. PRESENT VALUE

PV, refers to the current value of a future payment. Concerns about discount rate
(the rate of return available on an investment of equal risk to what is being
discounted) and PV of future cash flows
Formula:

PV =
PV= FV ( 1_
(1+i)n
)
Illustration 8.2:

What is the present value of RM500 to be received 10 years from today if discount
rate is 6 percent?
PV = 500 [1/(1+0.6)10]
= 500 [0.558]
= RM279

Table: Please refer to Appendix

C. ANNUITIES

Annuities, is a series of equal dollar payments for a specified number of years

There two types of annuities which are:
i. Compound annuities
ii. Present value of an annuity

59
 i. Compound annuities

Involves depositing or investing an equal sum of money at the end of each year for a
certain number of years and allowing it to grow.

Formula:

FVA = A( (1+i)i -1 )
n

FVn = the future value of the investments at the end of n year

A = payment
i = the annual interest
n = the number of years during which the compounding occurs

Illustration 8.3:

Deposit RM500 at the end of each year for the next 5 year in a bank where it will
earn 6 percent interest, how much will we have at the end of 5 years?

FV5 = 500[(1+0.06)5 1)/0.06]

= RM2,818.50

ii. PV of an annuity

Pension funds, insurance obligation and interest received from bonds all involve
annuities.

Formula:

PVA = A( 1- 1/(1+i)n
i
)
Illustration 8.4:

What is the present value of a 10-year RM1,000 annuity discounted back to the
present at 5 percent?

PV10 = 1,000[(1-(1/(1+0.05)10))/0.05
= RM7,722

60
EXERCISES:

1. Jeep costs RM20,000. In 10 years, Peter would like to have RM20,000 to buy a new
Jeep, but he only have RM11,167. At what rate must Peters RM11,167 be
compounded annually for it to grow to RM20,000?

2. Max has deposit RM2,800 in a saving account that pays 9% compounded

semiannually. How much will he has in his account after 10 years?

3. Edmund deposits RM4,000 per year at the end of the year for the next 5 years into
Invest smart investment account that currently pays 12% interest rate. How much
will Edmund have on deposit at the end of the 5 years?

4. Khairy purchased a motor vehicle for RM220,000. At the time he purchased, he

decides to make a down payment of RM20,000 on the new motor vehicle. What is
the amount of his semiannually payment on the remaining loan if he must pay 7%
annual interest for 6 years.

5. Aniq borrows RM3,000 to be repaid in equal annual end-of-year amounts of

RM644.14 for the next 8 years. What is the interest rate on this loan? Refer to PVIF.

6. Mukhtar made a borrowing of RM10,500. The borrowing is to be repaid in equal

annual end-of-year amounts of RM1,152.85 for the next 15 years. What is the
interest rate on this loan made by Mukhtar?

7. Suria would like to make two investments. The first investment yields RM120,000 to
be received in 5 years and the second investment yields RM200,000 to be received
in 7 years at the discount rate 5 percent. What is the present value of those
investments?

8. At what rate must RM400 be compounded annually for it to grow to RM716.40 in 10

years?

9. A friend plans to buy a big-screen TV/entertainment system and can afford to set
aside RM1,320 toward the purchase today. If your friend can earn 5.0%,
compounded yearly, how much can your friend spend in four years on the purchase?
Round off to the nearest RM1.

10. You just purchased a parcel of land for RM10,000. If you expect a 12% annual rate of
return on your investment, how much will you sell the land for in 10 years?

11. If you place RM50 in a savings account with an interest rate of 7% compounded
weekly, what will the investment be worth at the end of five years (round to the
nearest ringgit)?

12. If you put RM700 in a savings account with a 10% nominal rate of interest
compounded monthly, what will the investment be worth in 21 months (round to
the nearest ringgit)?

61
13. If you put RM600 in a savings account that yields an 8% rate of interest
compounded weekly, what will the investment be worth in 37 weeks (round to the
nearest ringgit)?

14. What is the value of RM750 invested at 7.5% compounded quarterly for 4.5 years
(round to the nearest RM1)?

15. Shorty Jones wants to buy a one-way bus ticket to Mule-Snort, Pennsylvania. The
ticket costs RM142, but Mr. Jones has only RM80. If Shorty puts the money in an
account that pays 9% interest compounded monthly, how many months must
Shorty wait until he has RM142 (round to the nearest month)?

16. If you want to have RM1,700 in seven years, how much money must you put in a
savings account today? Assume that the savings account pays 6% and it is
compounded quarterly (round to the nearest RM10).

17. If you want to have RM1,200 in 27 months, how much money must you put in a
savings account today? Assume that the savings account pays 14% and it is
compounded monthly (round to the nearest RM10).

18. A Max, Bhd deposited RM2,000 in a bank account that pays 12% interest annually.
What will the dollar amount be in four years, assuming that interest is paid
annually?

19. You wish to borrow RM2,000 to be repaid in 12 monthly installments of RM189.12.

The annual interest rate is

20. A commercial bank will loan you RM7,500 for two years to buy a car. The loan must
be repaid in 24 equal monthly payments. The annual interest rate on the loan is 12%
of the unpaid balance. What is the amount of the monthly payments?

21. Gina Dare, who wants to be a millionaire, plans to retire at the end of 40 years.
Gina's plan is to invest her money by depositing into an IRA Berhad at the end of
every year. What is the amount that she needs to deposit annually in order to
accumulate RM1,000,000? Assume that the account will earn an annual rate of
11.5%. Round off to the nearest RM1.

62