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COMPREHENSIVE CASE 1:
CONCEPTUAL FRAMEWORK FOR FINANCIAL REPORTING, RECORDING
PROCESS AND PRESENTATION OF FINANCIAL STATEMENTS
2) Please write the details of all group members - name, matric number, class group on
the front page, and page number on the bottom of your answer document.
3) Two groups will present each case (based on the lecturer’s allocation). The presentation
would be held after submission.
4) Your answer should be TYPED and submit in a PDF file. The scanned document must
be clear, easily readable, and complete. Photo is not allowed.
5) Submit your report via the Online Learning portal → within the
allotted time and period, before 12.00 midnight, 7 NOVEMBER 2021 (MYT). Only one
submission per group will be accepted.
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Pauh Melimpah Bhd (PAUH), previously known as Pauh Melimpah Sdn Bhd commenced
its operations as a textile store in Sintok, Kedah on 1 January 2019. PAUH manufactures
tailored garments for government and private institutions and for retail buyers. After two
years in operation, the business has thrived, and the owner has changed the status of the
company to public listed companies to get more capital to expand the business. As the
business has become more complex, many substantial changes have been made and proposed
as well as many issues have been raised, such as the recognition and measurement of
financial items in financial statement preparation. For that, PAUH has appointed an
experienced chartered accountant, En. Aiman to lead the accounting department that consists
of a few staff, namely En. Lee, En. Zubir, Puan Tania, and Cik Maira previously were held
responsible for handling the company’s account. They have little experience in preparing
financial statements in accordance with the conceptual framework and MFRS standards as
required by MASB.
To make his staff familiar with the need for a conceptual framework and related MFRS
standards, En. Aiman has arranged a weekly meeting with them to explain the importance of
the framework and standards. This meeting officially started on 1 January 2021, in
conjunction with the first day of the annual accounting term for PAUH. By organizing this
meeting, En. Aiman believes his staff will gradually understand and manage to prepare the
company’s financial statements properly at the end of the year 2021. In the early meeting, En.
Hasnan, one of the senior staff from the accounting department has some questions regarding
the theoretical framework. He was told that these theoretical frameworks have little value in
the practical sense (i.e., in the real world). En. Hasnan feels that some of his anxiety about the
accounting theory and accountings semantics could be alleviated by identifying the basic
concepts and definitions accepted by the profession and considering them considering his
current work.
In the meetings as well, En. Aiman and his staff discuss various aspects of the Conceptual
Framework. En. Aiman asserts that the Conceptual Framework examines the characteristics
of accounting information that make it useful for decision-making. He also points out that
there is a main constraint inherent in the measurement and reporting process that may
necessitate trade-offs or sacrifices among the characteristics of useful information. The
meeting sessions so far seem fruitful. Staffs are satisfied with the explanations given by En.
Aiman.
In July 2020, PAUH acquired a business in the publishing industry- Terbit Sdn Bhd. The
accountant in that subsidiary company has presented a report on the examination of the
financial statement to the board of directors of PAUH. In the meeting, one of the new
directors expresses surprise that the income statement assumes that an equal proportion of the
revenue is earned with the publication of every issue of the company’s magazine. She feels
that the revenue should be recognised when the customers made the payments. Customers are
required to make full payment for the year in January. The magazine will be delivered to the
customer at the end of each month. She says that she does not understand why most of the
revenue cannot be recognised at the payment date.
In the latest weekly meeting, Cik Maira expresses her concern regarding the stolen money
from the company’s night safe amount of RM2,500. Cik Maira, as the staff responsible for
handling the cash safe, atones to the negligence by reimbursing her own money to replace the
amount loss. She would like to know the right way to account for this event.
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After a few sessions of meetings, En. Aiman then tries to test his staff's understanding by
asking them to prepare a statement of profit or loss and other comprehensive income
(combined statement format) for anonymous company, XYZ Bhd for the year ended 31
December 2020, based on the information on hand. They are required to follow a format from
a recent statement of profit or loss and other comprehensive income of any Malaysian listed
company. En. Aiman provided them with the following information:
**XYZ Bhd
Trial balance
31 December 2020
Debit Credit
RM RM
Cash 189,700
Accounts receivable 105,000
Rent revenue 18,000
Retained earnings 160,000
Salaries and wages payable 18,000
Sales revenue 1,100,000
Notes receivable 110,000
Accounts payable 49,000
Accumulated depreciation-equipment 28,000
Sales discounts 14,500
Sales returns and allowances 17,500
Notes payable 60,000
Selling expenses 232,000
Administrative expenses 99,000
Share capital-ordinary 300,000
Income tax expense 53,900
Cash dividends 45,000
Allowances for doubtful accounts 5,000
Supplies 14,000
Cost of sales 645,000
Land 70,000
Equipment 140,000
Bonds payable 100,000
Gain on sale of land 20,000
Accumulated depreciation-buildings 18,600
Inventory 64,000
Buildings 98,000
Revaluation of land and buildings 21,000
Total 1,897,600 1,897,600
Additional Information:
i. Depreciation of building and equipment for the year are RM10,000 and RM9,000
respectively which are not yet considered in the current administration expense.
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ii. Accrued revenue earned but not recorded are RM12,000.
iii. The balance of salaries and wages payable total RM18,000 is for the remaining 3 days in
the month of December as the pay date for the company is on 27th of every month.
** The financial data provided in the above trial balance is not related to PAUH. En. Aiman
purposely provided this data to test his staff’s understanding to apply what they have learned
for the past few sessions regarding IFRS and conceptual framework.
END OF CASE
CASE INSTRUCTIONS:
(1) If you were En. Aiman, help En. Hasnan to explain the purpose of a conceptual framework.
The benefits that arise from a conceptual framework is that the framework can help
the users of financial reporting information such as managers and employees to better
understand the information and limitations of the framework. The resulting standards
can be easily understood as it provides a frame of reference that is very useful to
preparers and auditors who use those standards in their works and examine the
resulting reports.
Next, the credibility of financial reporting will increase when the objectives
and concepts are clear to provide direction and structure to financial accounting and
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reporting. It helps in the formation of standards that are not only internally consistent
but also externally consistent. As a result, financial statements that are based on a
body of accounting criteria that are more internally consistent help both preparers and
users of financial statements.
Furthermore, the framework will increase the confidence of users of the
reporting. This is because it provides guidance for unusual transactions, which may be
otherwise open to interpretation. Also, it creates a framework for evaluating the pros
and cons of potential solutions to complex financial accounting or reporting issues.
So, it will eliminate some information that is inconsistent with the framework. As a
result, it contributes to greater efficiency and consistency in the standard-setting
process.
(3) Briefly describe the following characteristics of useful accounting information. State whether
each of the characteristics is fundamental quality or ingredient to fundamental quality.
(a) Relevance
In accounting, Relevance means information must be capable of making a
difference in decision-making. Accounting information must be timely to stay
relevant. In addition, useful accounting information must include information
about previous occurrences as well as predictive power about potentially
future events. Financial statements presented three weeks after the end of the
accounting period, for example, will be more relevant than financial
statements given several months afterwards. This demonstrates that accuracy
and reliability may have to be sacrificed in order to maintain timeliness and
relevance. Relevance is the fundamental quality of qualitative characteristics
in accounting information.
(c) Understandability
Understandability refers to the idea that financial information should be
presented in such a way that different users can easily understand it. This
concept assumes the reader has a basic understanding of business, but it does
not need sophisticated business expertise to attain a significant level of
knowledge. If information is presented in such a way that a user with a
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business mind finds it difficult to grasp, we may claim that the financial
statements do not adhere to the Accounting Understandability idea. This
characteristic is an ingredient to a fundamental quality.
(d) Comparability
Comparability refers to the amount of standards of accounting information that
allows financial statements from different firms to be compared to one
another. This is a key requirement of financial reporting that readers of
financial statements expect. For example, if many fast-food companies, such
as KFC, McDonald's, and Marrybrown, use the same industry-specific
accounting rules to their financial statements on a regular basis, there should
be a high level of comparability within that sector. Furthermore, comparability
is significant since it would improve a firm's information environment by
making financial information easier to grasp for investors. This characteristic
is an ingredient to a fundamental quality.
(e) Neutrality
Neutrality in accounting means information contained in the financial
statements must be free from bias, and it is an ingredient to a fundamental
quality. There are many cases where a firm's management prepares financial
statements that are slightly biased since the management wants to see the
company develop. This means they are more likely to claim improved
performance but neglecting to acknowledge negative events. Here’s an
example of a situation in violation of neutrality characteristic, due to stiff
competition in business, the CFO of a company decided to manipulate its
accounting figures in the company’s financial statements to show the higher
amount of profit earned for the year.
(4) Identify the main constraint that limits the company to provide information with the
qualitative characteristic that makes it useful.
The main constraint that limits the company to provide information with the
qualitative characteristics that makes it useful is cost constraint. Companies must
consider an overriding factor that limits (constrains) the reporting. Companies also
must weigh the costs of providing the information against the benefits that can be
derived from using it. Rule-making bodies and governmental agencies use cost-
benefit analysis before making final their informational requirements. In order to
justify requiring a particular measurement or disclosure, the benefits perceived to be
derived from it must exceed the costs perceived to be associated with it.
The difficulty in cost-benefit analysis is that the costs and especially the
benefits are not always evident or measurable. The costs are of several kinds: costs of
collecting and processing, of disseminating, of auditing, of potential litigation, of
disclosure or competitors, and of analysis and interpretation. Benefits to preparers
may include greater management control and access to capital at a lower cost. Users
may receive better information for allocation of resources, tax assessment, and rate
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regulation. As noted earlier, benefits are generally more difficult to quantify than are
costs.
(5) Refer to the case of Terbit Sdn Bhd. Explain to the new director the timing of
recognition of Revenue for magazine subscription based on the Conceptual
Framework for Financial Reporting.
Referring to the case of Terbit Sdn Bhd, the timing of recognition of Revenue for
magazine subscription based on the Conceptual Framework for Financial Reporting
should be during the publication of the magazine for every issue, not when the
payment from the customer is received. It is stated that companies should prepare
financial statements using the accrual basis of accounting assumption in conceptual
framework. Accrual basis of accounting means that any business transactions should
be recorded during the period when a particular event occurs. In simpler words, it
records the revenue when earned and records expenses when incurred. This
assumption regarding the recognition of revenue for magazine subscription is further
described under revenue recognition principle. Revenue recognition principle states
that when a company agrees to perform a service or sell a product to a customer, it has
performance obligation. Only when it has performed the obligation, it can recognize
revenue. Hence, the action of recognizing revenue from the publication of every
magazine issue made by Terbit Sdn Bhd is indeed correct. Terbit Sdn Bhd cannot ask
their customers for payments first before delivering the magazine and record it as
revenue because it has violated revenue recognition principle. The action of
recognizing the revenue after payment collected from customers just like the new
director wanted is under cash basis method that records revenue when cash is
received. This method is not practiced because it does not adhere the conceptual
framework for financial reporting.
(6) You are required to help Cik Maira by: (CTPS question, refer rubric for marking)
(i) Identify the problem faced by Cik Maira for the stolen money.
(Problem identification)
Cik Maira did not know want to record in Journal and deal with the wrong action.
(ii) Analyse the problem by referring to the Conceptual Framework for Financial
Reporting
(Problem analysis)
Based on the expense recognition principle, which define that expenses are
recognised in the correct period as the revenue to which they relate. I think Cik
Maira did not record this episode owing to a lack of experience. As a result, she
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replaced it with her own money. She was also nervous under that condition
because she was concerned owing to a lack of training and did not know how to
explain it to the firm or her team and last she did wrong.
(iii) Help her to make a decision related to accounting for the stolen money.
(Generation of solution, evaluation and decision making)
(7) Assume that you are a part of the team. Journalise the adjusting entries and prepare a
statement of profit or loss and other comprehensive income (combined statement format) for
XYZ Bhd for the year ended 31 December 2020. You are suggested to follow a format from a
recent statement of profit or loss and other comprehensive income of any Malaysian listed
company.
Journal
Date Account Titles and Explanation Ref. Debit (RM) Credit (RM)
2020
Dec 31 Administrative expenses 19,000
Accumulated depreciation – Building 10,000
Accumulated depreciation - Equipment 9,000
(To record depreciation expenses)
XYZ Bhd
RM RM
Revenue:
Sales revenue (1,100,000 + 12,000) 1,112,000
(-) Sales returns and allowances (17,500)
(-) Sales discounts (14,500)
Net sales 1,080,000
(-) Cost of sales (645,000)
Gross profit 435,000
Rent revenue 18,000
Gain on sale of land 20,000
473,000
Expenses:
Selling expenses 232,000
Administrative expenses (99,000 + 19,000) 118,000
Income tax expenses 53,900
Interest expense 6,000
Total expenses 409,900
Net profit 63,100
XYZ Bhd
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XYZ Bhd
As at 31 December 2020
RM RM RM
Non-current assets
Land 70,000
Equipment 140,000
(-) Accumulated depreciation- 37,000 103,000
equipment
Buildings 98,000
Accumulated depreciation- 28,600 69,400
buildings
242,400
Current assets
Cash 189,700
Account receivable 117,000
(-) Allowances for doubtful 5,000 112,000
accounts
Notes receivable 110,000
Supplies 14,000
Cash dividends 45,000
Inventory 64,000
534,700
Total assets 777,100
Equity
Share capital-ordinary 300,000
Retained earnings 223,100
Revaluation of land and buildings 21,000 544,100
Non-current Liabilities
Notes payable 60,000
Current liabilities
Salaries and wages payable 18,000
Accounts payable 49,000
Bonds payable 100,000
Interest payable 6,000
173,000
777,100
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Critical Thinking and Problem Solving (C
TOTAL SCORE
Lecturer’s Name: ___________________________________________________ Date: ________________________
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