Topic outcome

You should be able to:

• Able to distinguish different forms of business and
its reporting environments
• Able to identify the various users of financial
information and discuss the importance of
accounting information in their decision making
• Able to distinguish different reporting
requirements and components of financial
statements/accounts classification
• Able to identify the importance of financial
accounting knowledge related industries.
 Definitions of
Financial Accounting
• Accounting can be defined as the art of classifying,
recording and summarizing transactions and business
events in monetary terms and interpreting the results to
interested parties to enable them to make decision.
(Amla,A., Fatimah, A.R., and Radziah,M.)
• Accounting can be defined as ‘the process of identifying,
measuring and communicating economic information to
permit informed judgments and decisions by users of the
information’.
(Wood, F.)
 Financial Accounting

RECORDING INTERPRETING
• Asset • Trial Balance
• Liability • Financial Statements
• Journal • Financial condition
• Capital • SoFP
• Ledger • Profit/loss
• Revenue • SoPoL
• Financial ratio analysis
• Expenses
• Liquidity, leverage,
profitability etc
CLASSIFYING SUMMARIZING
 Functions/Objectives/Purposes/
Uses of Financial Statements
• To provide information about the financial
position, performance and changes in
financial position of a company.
• To evaluate financial performance of the
business in order to identify strength and
weakness for corrective action.
• For decision making purposes such as for
expansion, loan application and etc.
 Main user groups of financial statements
INTERNAL USERS
- Those who work in the organizations.
Owners
The owner interested in the profits
earned, financial stability and growth.
Managers
Management needs information as a
guidance in planning, organizing and
controlling the organization.
Employees
Employees are interested in the business
ability to progress and expand.
EXTERNAL USERS
- Those who are indirectly involved with
the organization.
Creditors/Suppliers/Bankers
They are interested to know the ability of
the business in repaying the amount
owing.
Current and potential investors
Investors require information regarding to
solvency and financial strength of the
business.
Government
The government is interested in the
financial statements and report of a
business for tax purposes.
 Past year questions

• Jun 2019

• June 2018 Q1

• Jan 2018 Q1
 Past year questions
• December 2016 Q1

• June 2016 Q1

• June 2015 Q1

• December 2014 Q1
 Types and various forms of
business

Sole trader Partnership Company

 Types and various forms of business
Characteristics Sole Proprietorship Partnership Limited Companies

Registration Registered with the business Registered with the business Registered with the Registrar of
registrar under the Business registrar under the Business Companies under the Companies Act
Registration Act Registration Act

Capital Contributed by the owner from Contributed by partners according Contributed by shareholders through
savings or other properties brought to the Partnership Agreement (profit buying of shares
in sharing ratio)

Ownership Own by one person Own by 2 - 20 partners A private company must have a
minimum of 2 and a maximum of 50
shareholders. A public company must
have a minimum of 2 shareholders and
the maximum amount will be as to the
authorised capital
Management Manage and control by the owner Manage and control by partners or Manage and control by a board of
and Control with the help from his family and by a board which consists of a few directors appointed by the shareholders
workers partners
Liability Unlimited liability Unlimited liability Limited liability
If the business fails and the assets If the business fails and the assets If the business fails and the company’s
are not enough to cover the debt, are not enough to cover the debt, assets are not enough to cover the debt,
the creditors have a right against the creditors have a right against the the creditors do not have a right against
the owner personal properties owner personal properties the shareholders personal properties

Profit or Loss Profit belong to the owner and any Profit or loss will be shared by Profit will be paid to the shareholders in
losses incurred will be bear by the partners according to their profit the form of dividend
owner sharing ratio as stated in the
Partnership Agreement

Books and No legal obligation to keep the No legal obligation to keep the Proper books of account must be kept and
Accounts books and prepare accounts books and prepare accounts annual accounts must be sent to the
registrar of company
 Strengths & weaknesses of each form of
businesses
Advantages/Strength
Sole trader over No conflict for decision making
Partnership Easy to manage
Cheaper cost to manage
Partnership over Sole Increase decision making
trader capabilities as more than one
person involved
Able to grow the business from
new capital injection by partner
Share responsibility/liability
Sole trader over No conflict for decision making
Company No requirement for proper
accounting record
Cheaper cost to manage
Disadvantages/Weakness
Limited capital contribute
by one owner
Owner bear
responsibility/liability
alone
Conflict for decision
making by partners may
arise
Higher cost to manage
Limited capital by one
owner
Owner bear
responsibility/liability
alone
 Strengths & weaknesses of each form of
businesses
Advantages/Strength Disadvantages/Weakness
Company over Sole trader Able to hire a competent Required to prepare
and experience manager to proper accounting record
run the business Conflict for decision
Able to raise greater making may arise between
capital injection board of director
Enjoy the benefit of Higher cost to manage
limited liability
Partnership over Company No obligation to prepare Unlimited liability may
proper accounting record exposed the risk on
partner’s personal asset
Company over Partnership Able to hire a competent Required to prepare
and experience manager to proper accounting record
run the business Higher cost to manage
Able to raise greater
capital injection
Enjoy the benefit of
limited liability
 Past year questions
• June 2019

• June 2018

• Jan 2018 Q1
 Past year questions
• July 2017 Q1

• December 2016 Q1
 Past year questions
• June 2016 Q1

• December 2015 Q1
 Past year questions
• June 2015 Q1
 Past year questions
• December 2014 Q1

• June 2014 Q1
Components of Financial
Statement

Statement Statement
of Financial of Profit or
Position Loss
(SoFP) (SoPoL)

Statement Statement
of Changes of Cash
in Equity Flows
(SoCiE) (SoCF)
Example: Financial Report
1.SoFP
2. SoPoL
3. SoCiE
4. SoCF
 FINANCIAL STATEMENTS
Financial
statement

Statement of Statement of
Statement of Statement of
Financial Changes in
Profit or loss Cash Flows
Position equity

Asset Owner equity Liability Revenue

Non current Non current

Capital Expenses
asset liability

Current asset *Net profit/loss Current liability

Drawing *Net profit = Revenue > Expenses

Net loss = Revenue < Expenses
 Statement of financial position
(SoFP)/ Balance sheet
Asset
• Non-Current Assets - assets
acquired/bought not for
resale. Use them in running
the business. It has a useful
life of more than one year.
Example: Tangible (land and
building, motor vehicle,
machinery) Intangible
(goodwill, pattern),
investment (Fixed deposit>1
year)
• Current Assets - constantly
changing their form during
an accounting period.
Example: Stock/inventory,
Debtors/Accounts
Receivables, Cash at bank,
Cash in hand. Prepaid
expenses, accrued revenue
Owner equity
• Financial obligations of the
business to the owner.
• Capital either in the form of
cash/other assets that
owner brought into the
business
• Profit is the excess of
revenue over expenses
• Losses is the excess of
expenses over revenues
• Drawing is an asset of a
business taken by its owner
for his personal use
• Capital + /(-) Profit
(Losses) - Drawings
Liability
• Financial obligations of the
business.
• Non current liabilities -
Amount owing by the
business that is not
expected to be repaid within
one year. Example; Long
Term Loan, Mortgage on
Premises, Debenture.
• Current liabilities - amount
owing by the business that is
expected to be repaid within
one year. Example; Short
Term Loan, Bank Overdraft,
Creditors/Accounts Payable,
accrued expenses, unearned
revenue.
Statement of profit or loss (SoPoL)/
Income statement
Revenue Expenses
• Revenue represent the gross increase in • Expenses are the cost of assets consumed
owner’s equity resulting from business or services used in the process of earning
activities entered into for the purpose of revenues.
earning income. • A business must incur expense items
• Trading business derive their main which are necessary for the continuing of
revenue from Sales of goods. For the business, but for which no long-term
example, main revenue for a computer benefit will be obtained.
shop is a sale of computer. • For example, purchase of goods, salary,
• Services business main revenue derive interest expense, rent expense etc.
from performance of services. For
example, main revenue for a law firm is a
legal fee.
• Other revenue such as rental income,
interest received, commission income,
dividend received etc.
 EXAMPLE- Book Store
Revenue:
Non-current assets: 1. Sales of book/ stationery
1. Book shelf Non-current liability:
2. Chair 1. Long term loan
3. Table
4. Cash register Current liability:
1. Account payables
Current assets: (book & stationery
1. Closing inventory suppliers)
(books & stationery)
2. Cash in hand
3. Cash at bank Capital/ owner equity:
Expenses: 1. Start up cash by
1. Utility bills owners
2. Rental of shop
3. Cashier/worker salary
 EXAMPLE- Bakery shop
Revenue:
Non-current assets: 1. Sales of bread/cake/coffee
1. Foods shelf Non-current liability:
2. Chair 1. Long term loan
3. Table
4. Cash register Current liability:
1. Account payables
Current assets: (Foods suppliers)
1. Closing inventory
(ingredients eg flour)
2. Cash in hand
3. Cash at bank Capital/ owner equity:
Expenses: 1. Start up cash by
1. Utility bills owners
2. Rental of shop
3. Cashier/baker salary
 Past year question
• June 2019
 Past year question
• Dec 2018 Q1
 Past year question
• June 2018 Q1

• Jan 2018 Q1
 Past year question
• July 2017 Q1

• December 2016 Q1
 Past year questions
• December 2016 Q1

• June 2015 Q1

• December 2014 Q1
Qualitative characteristics of
Financial Statement
 Relevance
• Relevance refers to how helpful the information is for financial
decision-making processes. For accounting information to be
relevant, it must possess:
• Confirmatory value – Provides information about past events
• Predictive value – Provides predictive power regarding
possible future events
• Therefore, accounting information is relevant if it can provide
helpful information about past events and help in predicting
future events or in taking action to deal with possible future
events. For example, a company experiencing a strong quarter
and presenting these improved results to creditors is relevant
to the creditors’ decision-making process to extend or enlarge
credit available to the company.
 Example - Relevance
• A default by a customer who owes RM1000 to
a company having net assets of worth RM10
million is not relevant to the decision making
needs of users of the financial statements.
• However, if the amount of default is, say, RM2
million, the information becomes relevant to
the users as it may affect their view regarding
the financial performance and position of the
company.
 Representational Faithfulness
• Representational faithfulness, also known as reliability, is the extent
to which information accurately reflects a company’s resources,
obligatory claims, transactions, etc. For accounting information to
possess representational faithfulness, it must be:
o Complete – Financial statements should not exclude any transaction.
o Neutral – The degree to which information is free from bias. Note that there
are subjectivity and estimation involved in financial statements, therefore
information cannot be truly “neutral.”
o Free from error – The degree to which information is free from errors.
• Faithfull representation requires that transactions and events should
be accounted for in a manner that represent their true economic
substance rather than the mere legal form. This concept is known as
Substance Over Form. Substance over form requires that if
substance of transaction differs from its legal form than such
transaction should be accounted for in accordance with its
substance and economic reality.
 Example – Faithful Representation
• A machine is leased to Company A for the entire duration of
its useful life.
• Although Company A is not the legal owner of the machine, it
may be recognized as an asset in its SoFP since the Company
has control over the economic benefits that would be derived
from the use of the asset.
• This is an application of the accountancy concept of substance
over legal form, where economic substance of a transaction
takes precedence over its legal aspects.
 Verifiability
• Verifiability is the extent to which information
is reproducible given the same data and
assumptions.
 Example - Verifiability
• A company owns equipment worth
RM100,000 and told an accountant the
purchase cost, salvage value, depreciation
method, and useful life.
• The accountant should be able to reproduce
the same result. If they cannot, the
information is considered not verifiable.
 Timeliness
• Timeliness is how quickly information is available to users of
accounting information.
• The less timely (thus resulting in older information), the less
useful information is for decision-making.
• Timeliness matters for accounting information because it
competes with other information.
 Example- Timeliness
• A company issues its financial statements a
year after its accounting period.
• Thus, users of financial statements would find
it difficult to determine how well the company
is doing in the present.
 Understandability
• Understandability is the degree to which information is easily
understood.
• In today’s society, corporate annual reports are in excess of
100 pages, with significant qualitative information.
• Information that is understandable to the average user of
financial statements is highly desirable. It is common for
poorly performing companies to use a lot of jargon and
difficult phrasing in its annual report in an attempt to disguise
the underperformance.
 Example - Understadibility
• One of the main problems with the financial statements of
ENRON was that it contained a very complicated structure of
special purpose entities that were presented in a manner that
concealed the financial risk exposure of the company.
• The accounting treatments of ENRON were not
comprehensible by the capital market participants who
consistently overvalued its worth until the inevitable collapse
of its share price in 2001 upon the news of its bankruptcy.
ENRON – Special Purpose Entity

Example of Enron’s complex SPE structures. (Redrawn

from Swartz and Watkins (2003)
 Comparability
• Comparability is the degree to which accounting standards
and policies are consistently applied from one period to
another.
• Financial statements that are comparable, with consistent
accounting standards and policies applied throughout each
accounting period, enable users to draw insightful conclusions
about the trends and performance of the company over time.
• In addition, comparability also refers to the ability to easily
compare a company’s financial statements with those of other
companies.
• The qualitative characteristics of accounting information are
important because they make it easier for both company
management and investors to utilize a company’s financial
statements to make well-informed decisions.
 Example - Comparability
• If a company that retails leather jackets valued
its inventory on the basis of FIFO method in
the past, it must continue to do so in the
future to preserve consistency in the reported
inventory balance.
• A switch from FIFO to LIFO basis of inventory
valuation may cause a shift in the value of
inventory between the accounting periods
largely due to seasonal fluctuations in price.
 Materiality
• Definition
o Information is material if its omission or misstatement could influence
the economic decisions of users taken on the basis of the financial
statements (IASB Framework)
• Materiality therefore relates to the significance of
transactions, balances and errors contained in the financial
statements.
• Materiality defines the threshold or cut-off point after which
financial information becomes relevant to the decision
making needs of the users.
• Information contained in the financial statements must
therefore be complete in all material respects in order for
them to present a true and fair view of the affairs of the
entity.
 Example - Materiality
• A default by a customer who owes only
RM1,000 to a company having net assets of
worth RM10 million is immaterial to the
financial statements of the company.
• However, if the amount of default was, say,
RM2 million, the information would have been
material to the financial statements omission
of which could cause users to make incorrect
business decisions.
 Significance of the
Relevant information
(materiality) &
timeliness Information should be
free from error,
Reliability biasness or
manipulation
Comparability
Compliance of the
FRS, consistent in
adoption of techniques Understandability
& measurement
Able to comprehend
the information

Qualitative
characteristics of
Financial Statement
 Past year questions

• Jan 2018