Accounting and Finance
for Engineers
Prepared by Teh Thian Sung
INTRODUCTION
TYPES OF BUSINESS ORGANISATIONS IN MALAYSIA
Sole Trader - sole proprietorship
- registered with Suruhanjaya Syarikat Malaysia (SSM)
Partnerships
- registered with Suruhanjaya Syarikat Malaysia (SSM)
- governed by the Partnership Act 1961
- Advisable to have a partnership agreement
- If no agreement - then the Act will take effect
- All partners to contribute equal capital
- Partners not entitle to salaries
- Interest on capital and drawings are not allowed
- Partners are to share profit and loss equally
- An interest of 8% is to be paid on any loans from the partners
TYPES OF BUSINESS ORGANISATIONS IN MALAYSIA
Societies , Clubs and Association
- registered under the Companies Act 1965 or under Societies Act
Co-operatives
- registered under Co-operative Societies Act
TYPES OF BUSINESS ORGANISATIONS IN MALAYSIA
Companies - Private - Sdn Bhd
- Public - Bhd.
- registered under the Companies Act 1965
Private Companies - Sendirian Berhad
- minimum two shareholders , maximum fifty.
- usually privately owned, cannot invite public to subscribe for its shares.
Private Companies - Sendirian Berhad (Exempt)
- membership limited to twenty, another company cannot hold its shares,
- need not file it account with the Registrar of Companies provided that it files a
certificate signed by a director, a company secretary and an auditor stating that the
company can meet its liabilities a and when they fall due.
TYPES OF BUSINESS ORGANISATIONS IN MALAYSIA
Public Companies - Berhad
- Minimum two shareholders , no maximum.
- Can invite public to subscribe for its shares.
- No restriction on the transfer of shares.
Public Listed Companies
MAIN BOARD
- To qualify for listing - should have traded successfully 3-5 years, have a pre-tax profit of
RM 2 million per annum and a paid-up capital of at least RM 60 million with at least 25% in
the hands of the public. Only companies incorporated in Malaysia can be listed on the main board.
SECOND BOARD
- To qualify for listing - should have traded successfully for 3 years, have a pre-tax profit of
RM 1 million per annum and a minimum paid-up capital of at least RM 40 million and a maximum of
less than RM60 million with 25% but no more than 50% in of the issued and paid-up capital in the
hands of at least 500 shareholders holding not less than 10,000 shares each
TYPES OF BUSINESS ORGANISATIONS IN MALAYSIA
Limited Companies
1- Memorandum of Associations
- Name of the company, Registered Office, Limited Liability status,
- Amount of registered or authorised capital , par value of shares
- Objectives of the company
2- Articles of Associations
- internal working rules of the company, rights of shareholders,
- powers of management, borrowing powers of the company,
- duties and powers of directors etc.
TYPES OF BUSINESS ORGANISATIONS IN MALAYSIA
Other form of Companies
1- Foreign company
- One that is incorporated outside Malaysia but establishes a place of business in Malaysia
2- Investment company
- A public company proclaimed as such by the Yang di-Pertuan Agong in the Gazette.
- Primary activity is to invest in marketable securities for profits and not for acquiring control
3- Holding Company
- One that is able to control another undertakings - either 50% of the voting power or control
at least 50% of the issued share capital
4- Subsidiary company
- one in which a holding company has control of at least 50% of its share capital.
5- Associate company
- one in which an investor hold at least 20% but not more than 50% of the shares.
6- Joint Venture
- a business entity that is jointly controlled by two or more venturers
FINANCIAL REPORTING IN MALAYSIA
Internal – Management Accounting
The process of identifying, measuring, reporting and
analyzing financial as well as operating information for
internal users regarding the economic condition of an
organization
External – Financial Accounting
The process of recording and reporting financial
information that has taken place following set rules for
external users regarding the economic condition of an
organization
Financial Accounting
vs
- Required by law
- The cost of record keeping is a
necessity
- Objectives and uses of financial
accounts are vague and ill-defined
- Mainly concerned with profits
- Mainly historical records
- Information should be computed
prudently and in accordance with
legal and accounting requirement
Management Accounting
- Records are not mandatory
- Cost of record keeping must be justified
- Objectives and uses of management
accounts can be laid down by
management
- Mainly concerned with cash flow, profits
and business management generally
- Regularly concerned with predictions for
the future
- Information should be computed as
management requires, the key criterion
being relevance
Some Basic Books






Petty Cash Book
General Ledger
Sales/Debtors/Accounts Receivables Ledger
Purchases/Creditors/Accounts Payable Ledger
Assets Ledger
The Cash Book
Some Basic Accounting Statements
 The Bank Reconciliation Statement
 The Control Accounts
 The Trial Balance
Others
 Inventory Control
 Year-end adjustments –
Accruals and Prepayments
Accounting Profit
Cash Flow
Accounting Profit and Cash
a misconception
 Cash Flow
CASH FLOW IN
Cash collected from sales RM 1,600
CASH FLOW OUT
Less Cost paid
( RM 1,200 )
Less Expenses paid
( RM 300 )
CASH IN HAND
RM 100
 Accounting Profit
Sales
Less Cost
Gross Profit
Less Expenses
NET PROFIT
RM
RM
RM
RM
RM
2,000
1,200
800
300
500
FINANCIAL REPORTING IN MALAYSIA
Financial statements do not disclose all the information about the company.
Under Malaysian Companies Act 1965 - companies must issue financial statements
in compliance with the requirements of the financial reporting standards.
Financial Reporting Standards 101 - Presentation of Financial Statements list
- Income Statement
- Balance Sheet
- Cash Flow Statement
- Statement of changes in equity
- Notes to the Financial Statements
FINANCIAL REPORTING IN MALAYSIA
Income Statement for the year ended 31 December 2008
2007
RM,000
,000
,000
,000
,000
,000
,000
,000
,000
,000
,000
,000
,000
,000
,000
,000
RM 0.24
RM 0.10
2008
RM,000
,000
,000
,000
,000
,000
Turnover
Cost of Sales
Gross Profit
Other operating income
Distribution cost
Administrative expenses
Other operating expenses
Operating Profit
Interest Income
Dividend Income
Interest expense
Profit before Tax
Taxation
Profit after taxation
Earnings per share
Dividends per share
,000
,000
,000
(,000)
,000
,000
,000
,000
(,000 )
,000
(,000)
,000
RM0.28
RM0.15
FINANCIAL REPORTING IN MALAYSIA
The Balance Sheet
Share Capital
- Authorised Share Capital
- Issued Share Capital
- Reserves (Statutory and non-statutory)
- Retained Earnings
- Share Premiums
- Other Reserves
Liabilities
Non Current and Current liabilities
Current liabilities – usually payable within one year
Non Current – usually not payable within the short term
CONTINGENT LIABILITIES
FINANCIAL REPORTING IN MALAYSIA
Balance Sheet as at 31 December 2008
2007
0,000
0,000
0,000
0,000
0,000
0,000
0,000
0,000
0,000
0,000
0,000
0,000
0,000
0,000
0,000
0,000
0,000
0,000
0,000
Non-Current assets
Tangible Assets
Intangible Assets
Investments
Current Assets
Inventories
Bills Receivable
Loan to Directors
Trade Receivables
Short Term Investments
Cash and Bank Balances
0,000
0,000
0,000
0,000
0,000
0,000
Non-current assets held for sale
Shareholders Equity
Share Capital
Reserves
Share Premium
Revaluation Reserve
General Reserve
P & Loss
Share Capital and Reserves
2008
0,000
0,000
0,000
0,000
0,000
0,000
0,000
0,000
0,000
0,000
0,000
0,000
0,000
0,000
FINANCIAL REPORTING IN MALAYSIA
The Cash Flow Statement
Only applicable to Limited Companies
- Sdn. Bhd. and Bhd companies
Simply a summary of cash receipts and payments of an
enterprise
Only items that can be quantified in monetary terms are
shown
FINANCIAL REPORTING IN MALAYSIA
Cash Flow Statement for the year ended 31 December 2008
Cash Flow from operating activities
Operating income before interest and taxation
Adjustment for non-cash items
Depreciation
Gain on disposal of non-current assets
Changes in working capital
Increase in trade receivables
Increase in inventories
Decrease in trade payables
Cash generated from operation
Interest paid
Tax paid
Net Cash inflow from operating activities
Cash Flow from investing activities
Purchase of non-current assets
Sale of non-current assets
Purchase of investments
Dividends received
Interest Received
Net Cash out flow from investing activities
Cash flow from financing activities
Proceeds from issue of shares
Proceeds from long-term borrowings
Repayments of long term borrowings
Payments of dividends
Net cash inflow from financing activities
Net increase in cash and cash equivalents
Cash and cash equivalents at beginning of the year
Cash and cash equivalents at year end
000,000
00,000
(00,000)
(00,000)
(00,000)
(00,000)
00,000
(0,000)
(0,000)
0,000
(0,000)
0,000
(0,000)
0,000
(0,000)
0,000
0,000
(0,000)
(0,000)
(0,000)
0,000
0,000
0,000
0,000
FINANCIAL REPORTING IN MALAYSIA
Notes to the Accounts
Companies are required to disclose all necessary information spelt out by the ninth schedule of the
Companies Act 1965 and also the disclosures requirement stipulated in the various accounting standards .
Companies are encouraged to disclose more than the minimum required but in real practice, most companies
do not have much ‘voluntary’disclosures.
ACCOUNTING POLICIES
Accounting policies are the methods, procedures or bases adopted by the company to record and present the
transactions and events.
Most company accounts are prepared based on the Historical Cost Basis or historical basis modified by
regular revaluation of land /property
OTHER POLICIES
Are other policies or methods/bases/procedures etc. that a company chooses to use
Example
Property, plant and equipment
Inventory Valuation
Accounting for Goodwill
Research and Development
Taxation
Consolidation policies
Retirement benefits etc…….
FINANCIAL REPORTING IN MALAYSIA
Notes to Balance Sheet
-
Share Capital
Reserves
Deferred Taxations
Long Term Liabilities
Expenses not written off
Assets
Non-current Assets - Fixed
Current
Investments
Inventories
Receivables
Short-term investments
Current Liabilities
Dividends
Turnover
Transfer to Reserve
Prior Year adjustments
Dividends paid and proposed
Earnings per share
Contingent liabilities
Segment reporting
RATIO ANALYSIS AND UNDERSTANDING
FINANCIAL STATEMENTS
Helps management to evaluate
the organization’s performance in
comparison with previous
years and with other organization in
the same industry
Types of financial ratios
°Liquidity ratios
°Profitability ratios
°Use of Assets
°Capital Structure
°Return to investors
Liquidity ratios
Current Ratios –
Current assets : current liabilities
A company should have enough current assets that give
a promise of cash to come to meet its future
commitments to pay off its current liabilities
Acid Test Ratios
Current assets (less stock) : current liabilities
A company should have sufficient liquid resources at
short call to be able to pay off its current liabilities
Profitability ratios
Gross Profit Percentage
Gross profit to Sales ratio
Net Profit Percentage
Net Profit to Sales ratio
Use of Assets ratios
Sale to fixed assets ratios
Stock Turnover ratio
Average debtor collection period
Creditor turnover period
Capital Structure
Gearing ratio
Difference between debt funding and equity funding.
Low equity to assets means high debt and therefore
higher exposure to risk
Interest cover
Emphasizes the cover (or security) for the interest by
relating profit before interest and tax to interest paid
Return to investors
Return on capital employed
Profit before interest and taxation
capital employed
Dividend cover
x 100
Profit after tax less preference share dividend
Gross dividend on ordinary shares
Earnings per share (EPS)
Profit after tax less preference share dividend
Number of ordinary shares issued
Price Earning ratio (P/E)
Current share price
Earnings per share
Dividend yield
Ordinary dividend per share x 100
Market price per share
Equity as a source of Finance
Internally generated
Retained earnings
Non distributed profit
New Issues
IPO
Rights issue
Other sources of finance
 Long term
 Debentures (Bonds)
 Preference shares
 Medium Term
 Leasing
 Hire Purchase
 Short Term
 Trade credit
 Special purpose
 Government grants
Choice of finance
 Cost
 Duration
 Long term,secure but expensive
 Short term, risky but cheap
 Gearing
 Too much – cause financial distress
 Too much equity – dilute EPS and control
 Company size
 Small firm – limited access to financial market
Project
Appraisals
Investment Appraisals
 Payback method
 Accounting Rate of Return
 Discounted Cash Flow
Net Present value
Internal rate of return
Profitability Index
Pay Back method
Project
Initial Investment
Net Cash inflow Year 1
2
3
4
5
Payback period
Ranking (choice)
A
(RM10,000)
5,000
3,000
2,000
2,000
1,000
3 years
3
B
(RM10,000)
5,000
5,000
1,000
1,000
2 years
1
C
(RM10,000)
5,000
4,000
4,000
4,000
1,000
2. 25 years
2
Accounting Rate of Return
Project
A
Initial Investment
(RM 2,500)
Net Profit after tax and depreciation
Year 1
250
2
250
3
250
4
250
5
250
1,250
Average Profit
ARR = Average profit
Initial Investment
ARR
RM1,250
5
B
(RM 2,500)
500
450
100
100
100
1,250
RM1,250
5
C
(RM 2,500)
100
100
100
450
500
1,250
RM1,250
5
RM 250
RM2,500
RM 250
RM2,500
RM 250
RM2,500
20%
20%
20%
Discounted Cash Flow
 Consider the timing of fund flowing
in
 Consider the interest factor
 Two principle methods
 Net present value (NPV)
 Internal rate of return (IRR)
Net Present Value method
Project
Initial Investment
Net Cash inflow Year
1
2
3
4
5
A
(RM 2,000)
RM 400
RM 600
RM 700
RM 600
RM 500
Discounting Factor
To invest RM1,000 in the bank at 10% interest rate, cash will
be accumulated as follows
Now –
Year
Year
Year
Year
Year
Year
0
1
2
3
4
5
RM1,000
RM1,000 + RM100 = RM1,100
RM1,100 + RM110 = RM1,210
RM1,210 + RM121 = RM1,331
RM1,331 + ……………………..
…………………………………..
If we were to receive RM1,000 sometime in the future,what
is its value now if the current rate of
interest is 10% ?
Net Present Value method
Project A
Initial Investment
Net Cash inflow
Year
0
Cash Flow
(RM 2,000)
Discount rate
1.000
Present Value
(RM 2,000.00)
1
RM 400
0.909
RM 363.60
2
RM 600
0.826
RM 495.60
3
RM 700
0.751
RM 525.70
4
RM 600
0.683
RM 409.80
5
RM 500
0.621
RM 310.50
TOTAL CASH INFLOW
AT PRESENT VALUE ( NOW ) RM 2,105.20
LESS CASH OUTFLOW
RM 2,000.00
NET CASH INFLOW AT PRESENT VALUE
RM 105.20
Choice is made by selecting the one with the highest Net Present Value
Internal rate of return method
Project A
Year Cash Flow
Discount
Present
Discount Present
rate 10%
Value
rate 15% Value
0 (RM 2,000) 1.000 (RM 2,000.00) 1.000
(RM2,000.00)
1 RM 400 0.909 RM 363.60
0.866
RM 346.40
2 RM 600 0.826 RM 495.60
0.756
RM 453.60
3 RM 700 0.751 RM 525.70
0.676
RM 473.20
4 RM 600 0.683 RM 409.80
0.752
RM 343.20
5 RM 500 0.621 RM 310.50
0.497
RM 248.50
Net Present Value
RM 105.20
(RM 135.10)
Internal rate of return method
Project A
Net Present Value
at 10 %
RM 105.20
at 15 %
(RM 135.10)
The Internal rate of return is where the NPV is = 0
In the above example for NPV to be at RM 0 = rate of discount is between
10 % and 15 %
Therefore the IRR
= 10 % + (
105.20
( 105.20 + 135.10
= 10 % + 2.19
= 12.19 %
x5 )
)
COMPANY CARS
Capital Allowances
FOR CARS BOUGHT AFTER 28 OCTOBER 2000
( not exceeding RM150,000 on the road )
1st Year
= RM 100,000 x 20 + 20%
= RM 40,000
2nd Year
= RM 100,000 x 20 %
= RM 20,000
3rd Year
= RM 100,000 x 20 %
= RM 20,000
4th Year
= RM 100,000 x 20 %
= RM 20,000
Total claims
RM 100,000
Company Tax at 28% = Total tax saving over 5 years is
= RM 100,000 x 28%
= RM 28,000
Case 1 ( Car bought after 28 Oct 2000 )
Cost of new car
Less claims over 4 years
Balance after 4 years
RM 140,000
RM 100,000
RM 40,000
If the car is sold after 4 years at
RM 90,000
Tax payable RM 100,000 x RM 90,000
RM 140,000
Taxable disposal profit
RM 64,285
= RM 64,285
Case 2 ( Car bought after 28 Oct 2000 )
Cost of new car
Less claims over 4 years
Balance after 4 years
RM 140,000
RM 100,000
RM 40,000
If the car is sold after 8 - 9 years at RM 30,000
Tax payable RM 100,000 x RM 30,000
RM 140,000
Taxable disposal profit
RM 21,428
= RM 21,428
THANK YOU
FOR ATTENDING
AND MY BEST WISHES
TO ALL OF YOU
THANK YOU !