Question
Sumium Bhd, is a company that commenced its business on 1 January 2018 in Selangor, Malaysia. Sumium Bhd manufactures clothes for private institutions and government
Sumium Bhd, is a company that commenced its business on 1 January 2018 in Selangor, Malaysia. Sumium Bhd manufactures clothes for private institutions and government as well as for retail buyers. In 2020, the company became a listed public company (corporation) in order to easily get more capital to finance its expansion in business. However, the business became more complex, and new issues have been raised, including the recognition and measurement of financial items in financial statement preparation. Because of that, Sumium Bhd has appointed Mr. Zami as an expert charted accountant in order to lead the accounting department that consists of a few staff, namely Mr. Omar, Mr. Samsam, Mdm Mary, and Ms. Huda who previously were held responsible for handling the companys account, but they dont have that much experience in preparing financial statements in accordance with the conceptual framework and IFRS standards. On the 1 st of January 2020, Mr Zami has decided to arrange a weekly meeting with his staff in order to make them familiar with the need for a conceptual framework and related IFRS standards and their importance. The first meeting started on the first week of January 2020 in conjunction with the first week of the annual accounting term for Sumium Bhd. By organizing this meeting, Mr. Zami believes his staff will gradually comprehend and managed to prepare the companys financial statements properly by the end of the year 2020. At the beginning of the meeting, Mr. Omar, one of the senior staff from the accounting department has some questions regarding the theoretical framework; he believes that these theoretical frameworks have little value in the practical sense (i.e. in the real world). Mr Omar would like Mr Zami to explain more about the accounting theory and accounting principles to help him to identify the basic concepts and the definitions accepted by the profession and consider them in light of his current work. During his presentation, Mr. Zami asserts that the Conceptual Framework examines the characteristics of accounting information that make it useful for decision-making. He also points out that the main constraint inherent in the measurement and reporting process may necessitate trade-offs or sacrifices among the characteristics of useful information. 5 The meeting sessions so far seem fruitful. Staffs are satisfied with the explanations given by Mr. Zami. On July 2020, Sumium Bhd acquired another business that is in publishing industryTerbit Sdn Bhd. The chief accountant in that subsidiary company has presented a report on the examination of the financial statement to the board of directors of Sumium Bhd. 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 companys magazine. Based on her argument, the revenue should be recognized when the customers made the payments as 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. So why most of the revenue cannot be recognized in the beginning of each year (the payment date). In addition, during the latest weekly meeting, Ms. Huda also expresses her concern regarding the stolen money from companys night safe amount RM3,200. Ms. Huda, 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 this event. Mdm. Mary raise another issue of in Sumium Bhd when one customer sued the company for negligence. However, based on professional opinion, it is likely that Sumium Bhd will win the case since the customer has no strong justification to blame the company for his own careless not to read the terms and conditions carefully before sign the agreement. She also does not know how to record the events. Mr Zami, after a few sessions of meetings, tries to test his staffs understanding by asking them to prepare a statement of profit or loss and other comprehensive income (combined statement format) for anonymous company, Z Bhd for the year ended 31 December 2019, 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 6 company. Mr. Zami provided them with the following information: Accounts** RM Debtors 48,500 Creditors 27,200 Carriage Inwards 1,800 General Expenses 60,000 Salaries 102,000 Allowance for Doubtful Debts 1,200 Commission Received 4,900 Sales Return 4,100 Sales 492,000 Purchases 230,000 Inventory as at 1 April 2019 61,500 Capital 150,000 Drawings 10,100 Cash at Bank 8,800 Premises 120,000 Equipment 27,200 Provision for Depreciation of Equipment 15,100 Motor Vehicles 28,000 Provision for Depreciation of Motor Vehicles 11,600 The following information is also available: 1) The closing inventory as at 31 March 2020 was valued at RM58,000. 2) At 31 March 2020: Salaries owing amounted to RM2,200 General Expenses were prepaid by RM2,700 3) During the year, Medinna had withdrawn for her personal use, goods costing RM2,500. This had not been recorded in the accounts. 4) The allowance for doubtful debts is to be adjusted to 3% of the debtors. 7 5) Razeef, a debtor included in the debtors balance above has recently been declared bankrupt and will not be paying his overdue account of RM900. This amount is to be written off as bad debt in the accounts for the year ended 31 March 2020. 6) Depreciation is to be provided as follows: Motor Vehicles 20% by the reducing balance method Equipment 10% per annum on cost using the straight-line method The land is not depreciated. No fixed assets were purchased or sold during the year ended 31 March 2020. ** The financial data provided in the above accounts are not related to Sumium Bhd. Mr. Zami purposely provided this data in order to test his staff's understanding to apply what they have learned in the past few sessions regarding IFRS and conceptual framework. Mr Zami also provided the following training for his staff. As follows; Chekov Corporations statement of financial statement at the end of 2019 included the following items. Land $30,000 Bonds payable $100,000 Buildings 120,000 Current liabilities 150,000 Equipment 90,000 Share capital-ordinary 180,000 Accum depr-buildings (30,000) Retained earnings 44,000 Accum depr-equipment (11,000) Patents 40,000 Current assets 235,000 TOTAL 474,000 474,000 The following information is available for 2020. 1. Net income was $55,000. 2. Equipment (cost $20,000 and accumulated depreciation $8,000) was sold for $9,000. 12,000 9,000 = 3000 3. Depreciation expense was $4,000 on the building and $9,000 on equipment. 4. Patent amortization was $2,500. 5. Current assets other than cash increased by $25,000. Current liabilities increased by $13,000. 6. An addition to the building was completed at a cost of $27,000. 7. A long-term investment in debt securities was purchased for 16,000. 8. Bonds payable of $50,000 were issued. 9. Cash dividends of $25,000 were declared and paid. 10. Treasury shares were purchased at a cost of $11,000. 8 CASE INSTRUCTIONS: (1) If you were Mr. Zami, help Mr. Omar to explain the purpose of a conceptual framework. (2) Identify the benefits arise from a conceptual framework. (3) Explain in brief the following characteristics of useful accounting information. State whether each of the characteristics is fundamental quality or ingredient to fundamental quality. (a) Relevance (b) Faithful representation (c) Understandability (d) Comparability (e) Neutrality (4) Identify the main constraint that limits the company to provide information with the qualitative characteristic that makes it useful. (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. (6) You are required to help Ms. Huda by: (i) Identify the problem facing by Ms. Huda for the stolen money. (ii) Analyze the problem by referring to the Conceptual Framework for Financial Reporting (iii) Help her to make a decision related to accounting for the stolen money. (7) You are required to help Mdm Mary by: (i) Identify the problem facing by Mdm Mary related to the lawsuit made by the customer. (ii) Analyze the problem by referring to the Conceptual Framework for Financial Reporting (iii) Help her to make a decision related to accounting for the lawsuit. (8) Assume that you are a part of the team: (i) Show the necessary journal entries for items 1 - 6 above in the general 9 journal. (ii) Prepare a Statement of Comprehensive Income for the year ended 31 March 2020. (iii) Prepare a Statement of Financial Position as at 31 March 2020. Note. You are suggested to follow a format from a recent statement of profit or loss, other comprehensive income and statement of financial position of any Malaysian listed company. (9) Prepare a statement of cash flows for 2020.
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