CONFIDENTIAL 2 AC/OCT 2009/FAR360

PART A

Answer ALL questions.

1. Accounting can be defined as the art of classifying, recording and summarising of

transactions and business events in monetary terms and interpreting the results to
interested parties to enable them to make decisions. Describe the complete accounting
process.
(12 marks)

2. Users of accounting information could be either those of internal or external to an

organisation. Briefly explain two (2) internal users AND two (2) external users of
accounting information and how the information is being used by each of them.
(4 marks)

3. State four (4) circumstances under which a particular expense is not qualified for
deduction (non-allowable expenses) against the business income under the Income Tax
Act 1967.
(4 marks)

4. The auditors should obtain sufficient appropriate audit evidence to be able to draw
reasonable conclusions on which to base the audit opinion. Can ratio analysis technique
be applied by the auditor to obtain the sufficient appropriate evidence? State your
answer by giving reasons.
(5 marks)

5. The company always aims for the optimum capital structure i.e. the best combination
between debt and equity. Why is it necessary to raise capital through a mixture of equity
and debt rather than just equity or debt? Explain with reasons.
(10 marks)

6. The third type of financial information after income statement and balance sheet which
users find necessary for making decision about the entity is the entity’s cash flows.
Briefly discuss the information that can be obtained from the cash flow statement of a
company.
(5 marks)

7. Business risk, which is part of the unsystematic risk, is described as the variability in a
firm’s expected earnings before interest and tax. Its concern is mainly about the
uncertainty associated with an investment’s earnings and the investment’s ability to pay
interest, principal, dividends and any other return owed to investors. Briefly explain any
three (3) factors influencing the business risk.
(6 marks)

8. A company is required to comply with Section 169 of the Companies Act 1965 which
requires that audited financial statements to be prepared and filed with the registrar
office of the Companies Commission of Malaysia (CCM) not later than 6 months after the
accounting year end. Briefly explain two (2) situations where a company will find it useful
to have the audited financial statements.
(4 marks)
(Total: 50 marks)
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CONFIDENTIAL 3 AC/OCT 2009/FAR360

PART B

Answer ALL questions.

QUESTION 1

Light N Bright Sdn Bhd is a manufacturer of electrical appliances located in Penang. When
the company was first formed forty years ago by Dato' Amir Rizal, it only had a workforce of
10 people to take advantage of the booming demand of electrical appliances throughout
Peninsular Malaysia. Its product range was fairly limited but the company had an excellent
reputation for quality to ward off similar cheaper imported products.

Currently, Light N Bright Sdn Bhd manufactures an extensive range of high quality electrical
appliances and exports some of its products overseas. The company is now steered by
Dato' Amir’s only daughter, Nur Aisyah, who heads a small management team and employs
250 employees. It has an annual sales averaging approximately RM10 million.

Although it has been consistently profitable, Light N Bright Sdn Bhd is experiencing
increased competition from new industrialised nations such as China and Vietnam.
Incredibly, products from these competing nations are improving in terms of quality while
maintaining their cost advantages. Light N Bright Sdn Bhd uses a cost-plus approach to
pricing but it is under pressure to reduce its mark-up constantly in order to maintain market
share.

Both Dato' Amir and his daughter are qualified as electrical engineers. Nevertheless, they
have been very conservative in carrying their business and have never seen the need to
employ an accountant. Instead, a bookkeeper calculates monthly and yearly profits as sales
revenue minus expenses. Prices are based on rough estimates of cost of direct materials
and direct labour plus a 50 per cent mark-up.

With the changing environment leading to profit decline and constant pressure to keep
prices down, Nur Aisyah began to have second thoughts about the way costs and profits
were calculated.

The results for the year ended 30 June 2009 were as follows:
RM RM

Sales 9,800,000
Other incomes 52,000
9,852,000
Less Expenses:
Materials purchased 3,000,000
Factory wages – production line 2,500,000
Approved training expenses for employees 20,000
Production supervisors’ salary 350,000
Rental expenses 800,000
City Hall rates (assessment tax etc) 50,000
Salesmen salaries 1,100,000
Insurance expenses 10,000
Advertising 180,000
Entertaining customers 5,000
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CONFIDENTIAL 4 AC/OCT 2009/FAR360

Equipment depreciation 250,000

Old office computer written off 500
Electricity 120,000
Managers’ salaries 800,000
Truck lease 100,000
Total expenses 9,285,500

Net Profit 566,500

Additional information in respect of the financial statements for the year ended 30 June 2009
are as follows.

1. Other incomes comprise of:

a) Interest income of RM10,000.

b) Dividend income of RM15,000.
c) Profit on disposal of unused machinery of RM20,000.
d) Insurance compensation received in respect of faulty machine of RM7,000.

2. There was virtually no beginning inventory of raw material, work-in-progress and

finished goods.

3. At the end of the year, 10% of the materials purchased remained in hand, work-in-
progress amounted to 20% of the manufacturing costs incurred during the year, and
none of the finished goods inventories were in hand.

4. Out of the total space of the premise, factory occupies 80% of the area, sales
department occupies 15% and the rest is being occupied by the administration
department.

5. The insurance expenses were paid to a local insurance company for the purpose of
distribution of finished goods to the final customers.

6. The total cost of the company’s equipment is RM2,500,000 depreciated over 10

years based on straight-line method. Most of the equipments are used for manufacturing,
with only 5% being used for sales functions and another 5% on administrative functions.

The rates of initial and annual allowances are 20% and 14% respectively. All of these
equipment were acquired in the previous years and still entitled to claim capital
allowance. None of these equipments were purchased within the current year.

7. Almost all of the electricity is consumed within the factory.

8. The trucks are used to deliver finished goods to customers. The trucks are
commercial leased vehicles. The lease started five years ago and the lease amount paid
to date is RM500,000.

9. Managers spend about half of their time on managing factory operations, about 30%
in handling the sales function and the rest on administrative issues.

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CONFIDENTIAL 5 AC/OCT 2009/FAR360

Required:

a) Nur Aisyah asks you to review the results for the year and evaluate the company’s
approach to estimating product costs. In doing so, you should :

1. Criticize the income and cost classifications used in Light N Bright Sdn Bhd’s income
statement.
(4 marks)
2. Estimate the cost of goods manufactured and sold.
(12 marks)
3. Prepare a revised income statement for the year.
(14 marks)

4. Explain the differences between your income statement and the one above.
(3 marks)

5. Evaluate the usefulness of product costing and pricing based on direct materials and
direct labour.
(3 marks)

6. Suggest a method of product costing that is more acceptable compared to the one
practised by the company.
(3 marks)

b) Based on the net accounting profit, calculate the tax adjusted income according to the
Income Tax Act 1967.
(8 marks)

c) Based on the tax adjusted income, calculate the statutory tax income according to the
Income Tax Act 1967. Show capital allowance computation.
(3 marks)
(Total: 50 marks)

END OF QUESTION PAPER

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