Question:Success Rainbow Pvt Limited (SRL) is engaged in the manufacturing and selling of roofing sheets to both local and export markets. SRL produces three main categories of roofing sheets, namely,

• Color up sheet
• Supreme sheet
• Normal sheet
• Out of the three categories of roofing sheets, Supreme has the highest demand due to its durability. The government has announced that from 2020 it is going to ban all manufacturing companies which use"sabbic"as a raw material, since processing of sabbic pollutes the environment. SRL uses sabbic to make Supreme, a durable sheet. Currently the company's research & development (R&D) department is researching on other raw materials that can give Supreme the same durability. During the year they have incurred significant costs in this regard. The R&D is funded by a related party loan.
• Steel sheets are the main raw material used in the manufacturing process. It is imported from China and one shipment takes 20 days to arrive in Malaysia. However when the goods are manufactured as per the production budget, the existing stocks may not be sufficient at times. In such instances, the purchasing clerk has to place orders from India at a higher price than from China. The orders placed from India are received within a week.
• The purchasing and inventory process of steel sheets is as follows:
• The marketing team prepares a monthly production budget and sends it to the production
• manager.
• When stock level falls below a certain level, the stores clerk prepares and sends purchase
• orders to the purchasing department.
• The purchasing clerk places orders with suppliers by faxing the purchase order.
• When goods are received by the stores, the stores clerk updates bin card and raises the
• goods received note (GRN) for the quantity of stocks received as per the supplier's delivery
• note.
• The stores clerk updates the stock module based on the supplier's delivery note.
• A copy of the GRN is sent to the accounts department.
• The accounts department staff updates the general ledger for stocks and payables based on
• the supplier invoices.
• In addition to the general ledger, the accounts department maintains a separate stock ledger,
• since the stock module maintained by the stores is not linked to the general ledger.

At the month end, the invoices are settled by bank draft.

The statutory audit of SRL is currently done by Billa & Co. Chartered Accountants, who have been reappointed for the year ended 31 March 2016. In addition, the board of directors has requested Billa & Co. to perform a detailed system study of sales, purchases and collection, and recommend improvements to the system of internal controls.

Income statement for the year ended 31 March 2016 2015 $'000 $'000 Revenue 164,739 125,976 Less: Cost of sales (92,659) (55,284) Gross profit 72,080 70,692 Other income 505 Administrative & establishment expenses (22,479) (13,876) Selling & distribution expenses (7,989) (6,785) Operating profit /(loss) 41,612 50,536 Finance cost (1,541) (1,389) Profit/(loss) before taxation 40,071 49,147 Tax expense (1,356) (987) Profit/(loss) for the year 38,715 48.160 Success Rainbow (Pvt) Limited Statement of financial position as at 31 March 2016 2015 $'000 $'000 ASSETS Non-current assets Property, plant & equipment 3,442 2,818 Capital work in progress 31,777 35,219 2,818Current assets Inventories 9,913 12,649 Trade debtors and other receivables 97,104 59,210 Short term investments 28,332 Amounts due from related parties 22,374 26,380 Cash at bank and in hand 125 1,723 129,516 128,294 Total assets 164.735 131.112 EQUITY & LIABILITIES Capital & reserves Stated capital 31,000 31,000 Retained earnings 105,441 87,997 136,441 118,997 Non-current liabilities Amounts due to related parties 8,841 3,644 Interest bearing liabilities 1,915 1,236 10,756 4,880 Current liabilities Bank overdraft 7,670 676 Creditors and accrued expenses 1,509 1,583 Interest bearing liabilities 8,359 4,976 17,538 7.235 Equity & Liabilities 164,735 131,112