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BQOEIII Fundamentals of Accounting & Finance

Oct 04, 2014

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BQOE III FUNDAMENTALS OF ACCOUNTING AND FINANCENoor Asma Jamaludin Nor Asma Lode Junaidah Hanim Ahmad Azlan Zainol Abidin Amin Ali Norazita Marina Abd. Aziz

Project Directors:

Prof. Dr. Mansor Fadzil Prof. Dr. Shaari Abd. Hamid Open University Malaysia Noor Asma Jamaludin Nor Asma Lode Junaidah Hanim Ahmad Azlan Zainol Abidin Amin Ali Norazita Marina Abd. Aziz Universiti Utara Malaysia Assoc Prof. Dr. Arfah Salleh Assoc. Prof. Hashanah Ismail Universiti Putra Malaysia Azlina Abdul Aziz Loo Sze Wei Rosila Abu Zarin Open University Malaysia

Module Writers:

Moderators:

Translated & Edited: Pearson (M) Sdn. Bhd. Compiled by: Desktop Publishing: Printed by: Lilian Kek Siew Yick Open University Malaysia Centre for Instructional Design and Technology Open University Malaysia Meteor Doc. Sdn. Bhd. Lot 47-48, Jalan SR 1/9, Seksyen 9, Jalan Serdang Raya, Taman Serdang Raya, 43300 Seri Kembangan, Selangor Darul Ehsan

First Printing, January 2009 Copyright @ Open University Malaysia (OUM), BQOE III All rights reserved. No part of this work may be reproduced in any form or by any means without the written permission of the President, Open University Malaysia (OUM). Version January 2009

Table of ContentsCourse Guide Topic 1 Accounting Environment 1.1 Introduction to Accounting 1.1.1 Definition of Accounting 1.1.2 Users of Accounting Information 1.1.3 Branches of Accounting 1.1.4 Professional Accounting Bodies in Malaysia 1.2 Fundamental Accounting Concepts 1.2.1 Qualitative Characteristics of Accounting Information 1.2.2 Accounting Assumptions 1.2.3 Basic Principles of Accounting 1.2.4 Accounting Constraints 1.3 Accounting Equation 1.3.1 Analysis of Transaction 1.3.2 Summary of Analysis 1.4 Types and Objectives of Financial Statements 1.4.1 Income Statement 1.4.2 Statement of Changes in Owner's Equity 1.4.3 Balance Sheet 1.4.4 Cash Flow Statement Summary ix-xi 1 2 2 2 3 4 6 6 10 13 16 17 17 22 24 25 25 26 27 33

Topic 2

Recording Process 2.1 Chart of Accounts 2.2 Format of Account 2.3 Rules of Debit and Credit 2.3.1 Normal Balance 2.4 Steps in Recording Process 2.4.1 Journal 2.4.2 Journalising and Posting of Entry 2.4.3 Example of Analysis and Summary Transactions 2.4.4 Trial Balance Summary Tutorial Question

34 35 37 38 39 41 41 42 49 73 77 78

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TABLE OF CONTENTS

Topic 3

Financial Statements 3.1 Annual Report and Users of Financial Statements 3.2 Income Statement 3.3 Balance Sheet 3.3.1 Assets 3.3.2 Liabilities 3.3.3 Owners Equity or Shareholders Equity 3.3.4 Summary of Basic Accounting 3.4 Statement of Retained Earnings 3.5 Cash Flow Statement 3.5.1 Preparing Cash Flow Statement 3.5.2 Differentiating Cash Resources and Usage Summary Financial Statement Analysis 4.1 Financial Ratio Analysis 4.1.1 Income Statement 4.1.2 Balance Sheet 4.2 Liquidity Ratio 4.2.1 Net Working Capital 4.2.2 Current Ratio 4.2.3 Quick Ratio 4.3 Asset Management Ratio 4.3.1 Account Receivable Turnover 4.3.2 Average Collection Period 4.3.3 Inventory Turnover 4.3.4 Average Inventory Sales Period 4.3.5 Fixed Asset Turnover 4.3.6 Total Asset Turnover 4.4 Leverage Ratio 4.4.1 Debt Ratio 4.4.2 Debt-Equity Ratio 4.4.3 Equity Multiplier 4.4.4 Interest Coverage Ratio 4.5 Profitability Ratio 4.5.1 Gross Profit Margin 4.5.2 Net Profit Margin 4.5.3 Operating Profit Margin 4.5.4 Return on Asset 4.5.5 Return on Equity 4.5.6 Earnings Per Share

79 80 82 85 87 88 89 90 94 94 95 98 104 105 106 108 108 110 110 111 112 113 114 115 116 117 118 118 120 121 121 122 123 124 125 126 126 127 127 128

Topic 4

TABLE OF CONTENTS

v

Market Value Ratio 4.6.1 Price Earnings Ratio 4.6.2 Dividend Yield Ratio 4.7 Conducting A Complete Ratio Analysis 4.7.1 DuPont Analysis 4.7.2 Summarising All Financial Ratios 4.8 Weakness in Financial Ratio Summary Tutorial Question

4.6

128 129 130 132 132 134 136 141 142

Topic 5

Time Value of Money 5.1 Concept of Compounding and Future Value 5.1.1 Time Line 5.1.2 Compounding Interest 5.1.3 Calculation of Future Value Using Schedule 5.1.4 Graphical Illustration of Future Value 5.2 Concept of Discounting and Present Value 5.2.1 Calculation of Present Value 5.2.2 Calculation of Present Value (Principal) Using Schedule 5.2.3 Graphical Illustration of Present Value 5.3 Single Cash Flow Money Value 5.4 Series Cash Flow Money Value 5.4.1 Annuity 5.4.2 Derivation Cash Flow 5.4.3 Perpetuity 5.5 Compounding and Discounting More Than Once a Year 5.6 Continuous Compounding and Discounting Summary Tutorial Question

144 145 145 146 148 149 151 152 154 156 157 158 158 166 170 172 173 176 176 178

Answers

COURSE GUIDE

INTRODUCTIONFundamentals of Accounting and Finance is a preparatory course for open entry learners who intend to pursue postgraduate programmes in Masters in Management (MM) and Masters of Business Administration (MBA). This course provides learners with fundamental knowledge in the area of accounting and finance.

COURSE OBJECTIVESThis course integrates the fundamental concepts of Financial Accounting and Financial Management. The first section of this course handles the introduction to the fundamental accounting concepts. This section will also elaborate on the process of preparing accounting information starting from the journal entries to the preparation of financial statement or report. Students will then be taught on how to evaluate, use and apply the financial information provided. At the end of this course, you should be able to: 1. 2. 3. 4. 5. 6. understand the fundamental concepts of accounting; describe the meaning of accounting information, its role as well as its importance; elaborate the process of preparing accounting information from beginning until the completion of the accounting cycle; discuss the functions and information contained in financial statements; analyse the financial performance of a company using financial ratio analysis; and apply the concept of the time value of money in computing cash flows.

COURSE SYNOPSISTopic 1 discusses the Accounting Environment. It introduces you to accounting fundamentals, involving the definition of accounting, users of accounting information, branches of accounting, professional accounting bodies in Malaysia as well as the fundamental concepts found in accounting. Also discussed are the accounting assumptions and the four main types of financial statements in financial reporting, namely Income Statement, Statement of Changes in Equity, Balance Sheet and Cash Flow Statement.

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COURSE GUIDE

Topic 2 discusses the Recording Process. It revolves around the usage of accounts as well as the rules of debit and credit for each type of accounts (asset, liability and owner equity accounts). The rule of debit and credit will also include the normal balance for each type of accounts. This topic also tracks the steps taken in the recording process, which include the journal entry, transfer of entries to ledger and consequently the preparation of balance sheet. A complete example of the whole process is included to provide better understanding. Topic 3 discusses on the different types of financial statements used in business such as the income statement, balance sheet, statement of retained earnings and cash flow statement. You will get to understand the functions well as the information contained in the financial statements. Topic 4 discusses the usage of financial ratio analysis such as the liquidity ratio, asset management, leverage, profitability, and market value ratio. Besides that, this topic also discuss on the DuPont analysis and the overall financial analysis. Topic 5 exposes students to the basic concept for time value of money, which is the concept of present value and future value. You will learn the application and formula for the time value of money for single cash flow and net cash flow, annuity, perpetuity and derivation cash flow. The discussion will also include compounding and discounting methods that occurs more than once a year and compounding and discounting that occurs continuously.

REFERENCESEmery, D.R., et. al. (1997). Principles of Financial Management. (1st ed.). Prentice Hall. Gitman, L.J. (2005). Principles of Managerial Finance, (11th ed.). Addison Wesley. Horngren C. T., Harrison W. T. Jr. and Bamber L. S. (2002), Accounting (5th ed.), Prentice Hall, New Jersey. Larson Kermit D., Wild John J., Chiappetta Barbara, (2004) Fundamentals Accounting Principles, (17th ed.), McGraw Hill. Lasher, W.R. (2005). Practical Financial Management, (4th ed.). South-Western Thomson Learning. Roger, H.H et al. (1997), Accounting: A Business Perspective, (7th ed.), Irwin US.

COURSE GUIDE

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Scott, D.F. Jr., et. al. (1998). Basic Financial Management (8th ed.). Prentice Hall. Warren C.S., Reeve J. M. and Fess P. E. (2004), Accounting (21st ed.), International Thompson Publishing, Ohio, USA. Warren et. Al (2001), Accounting: Customized by School Of Accountancy UUM for Business Accounting Students, Thompson Learning. Weygandt Jerry J., Keiso Donald E., Kimmel Paul D., (2004) Accounting Principles, (7th ed.), John Wiley & Sons, Inc.

EVALUATIONRefer to the CAPL website at http://capl.oum.edu.my for the evaluation method for this course.

Topic1

Accounting Environment

LEARNING OUTCOMESAt the end of this topic, you should be able to: 1. explain the meaning, role and importance of accounting; 2. state the users and branches of accounting; 3. describe the main functions of professional accounting bodies in Malaysia; 4. describe the qualitative characteristics of financial information, assumptions, principles and constraints in accounting; 5. explain the accounting equation; 6. analyse transactions based on the accounting equation; and 7. list 4 main financial statements in financial