ABFA 1023 FUNDAMENTALS OF ACCOUNTING DIPLOMA IN BUSINESS STUDIES (ACCOUNTING) YEAR 1 – SEMESTER 2 (2011/2012) COURSEWORK 1

NAME

: FOONG YEW JOE GAN KEAN HOE MAVERICK NG SHUNG SERN HUAN CHAN YANG SEBASTIAN GOH SZE PAN

TUTORIAL GROUP DAY TIME DATE OF SUBMISSION

: 2 DAC27 : : :

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TABLE OF CONTENT
No. 1 2 3 4 5 6 Title Plagiarism Statement Declaration Form Marking Schemes Safe Assign Plagiarism Report Summary Introduction Content: 6.1 Types of Inventories 6.2 Manufacturing Process 6.3 Valuation of Inventories Used by Company 6.4 Amount of Closing Inventories 6.5 Definitions of Relevant Information Relating to Inventories   7 8 9 Consignment Types of tax charged on inventories 12 12-13 13 14-19 20-21 9-10 10-11 11 11-12 Page 3 4-6 7 8 8

Conclusion Appendix Reference

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1. Plagiarism Statement Declaration Form Semester: ________________ Course Code &Title: _____________________________ Declaration We confirm that we have read and shall comply with all the terms and condition of TAR College’s plagiarism policy. We declare that this assignment is free from all forms of plagiarism and for all intents and purposes is my/our own properly derived work. We further confirm that the same work, where appropriate, has been verified by anti-plagiarism software ________________________ (please insert).

Name FOONG YEW JOE GAN KEAN HOE MAVERICK NG SHUNG SERN HUAN CHAN YANG SEBASTIAN GOH SZE PAN

Student ID 11WBD04648 11WBD01689 11WBD05440 11WBD04991 11WBD00163

Signature

Date: ___________________

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3. Safe Assign Plagiarism Report

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4. Summary
What are inventories? Inventories are the goods that are available at a point of time. It consists of goods for resale, work-in-progress and raw materials which belong to a business (Frank Wood et al., 2008). Besides, it is a type of assets which will be recorded in the financial statements. We usually value the inventories by using LCM (Lower of Cost and Market value) rule. Inventories should be valued at the lower cost or net realisable value to prevent profit and assets from being overstated. The cost of inventories in a business can be determined and recorded in various types of method such as FIFO (First-in-First-out), LIFO (Last-in-First-Out) and WAC (Weighted Average Cost). Recording of Inventories is very important for a business, especially the manufacturing and trading enterprises because the amount of inventories left will influence the production lines and trading activities (R. Anthony Inman, 2011). Thus, it is important for us to know how to record the cost of inventories.

5. Introduction
As we know, inventories are the important asset of a manufacturing enterprise such as Fraser & Neave Holdings Berhad (F&N). F&N Holdings Berhad major in manufacturing and distributing consumer products such as soft drinks. F&N Beverages Marketing Sendirian Berhad is a subsidiary company of the F&N Group (F&N, 2011). F&N Beverages Marketing Sendirian Berhad is the largest soft drink manufacturer in Malaysia. (F&N, 2011) The company has four operating production plants in Malaysia with well-equipped facilities, including its headquarter in Shah Alam, Malaysia. It produces various brands of soft drinks such as 100 Plus, F&N Fun Flavours, SEASONS and Red Bull. It also manufactures and distributes Red Bull products in Malaysia. Due to these factors, F&N appears to be the market leader in Malaysia’s soft drink industry. As a result, the company was awarded the Reader’s Digest Trusted Brand in a sequence from the year 2006 to 2008. Besides, the company was also awarded the Superbrands Asia in 2006 (F&N, 2011).

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6. Content
6.1 Types of Inventories
Inventories are the asset needed by the company in running the producing, distributing and trading activities. There are many types of inventories owned by F&N Group such as raw materials, work-in-progress (WIP) and finished goods (R. Anthony Inman, 2011)  Raw Materials The items that are needed by the company to produce finished goods are considered as raw materials. Without raw materials, a company is unable to produce any goods. Thus, the amount of raw materials left in a manufacturing company should be monitored and maintained in large quantity to prevent the production lines break down. For F&N Beverages Marketing Sdn. Bhd, the raw materials needed to produce soft drinks are carbonated water, sugar, additives (citric acids and emulsions), preservatives and flavourings.  Work-In-Progress (WIP) Work-In-Progress refers to the goods that are being processed and not completed yet in the end of an accounting period (Andrew Thomas, 2006). During production, some of the goods has been processed but have not passed the inspection to be finished goods are also considered as work-in-progress. The examples of Work-In-Progress are uncapped soft drinks, soft drinks being processed and unlabelled soft drinks.  Finished Goods Finished goods are the goods that are completely produced and ready for sale. They are the goods that passed all the processes from raw materials into finished goods. For the manufacturing enterprises such as F&N, the finished goods will be sold either directly or indirectly to the customers, retailers and wholesalers to make profits. Soft drinks are the main product manufactured by F&N Group in Malaysia. F&N Beverages Marketing Sdn. Bhd is the largest soft drink distributors in Malaysia as there are many brands of soft drinks produced by the company. F&N Flavours, 100 PLUS, Fruit Tree, SEASONS and Red Bull are the famous brands of product manufactured by F&N in Malaysia (refer to Appendix 9

8.2). They are produced and bottled in different sizes such as cans (325ml), regular bottle (500ml) and large bottle (1.5l). Once they are produced, these products will be sold to retailers, wholesaler or directly to the consumers. The remaining products will be stored in the factory, waiting for customers’ orders.

6.2 Manufacturing Process of Soft Drinks
Every product manufactured has its own production process. The manufacturing process of soft drink is stated as below:

F&N Beverages Marketing Sdn. Bhd has four soft drinks production plants, including its headquarter in Shah Alam, Malaysia refer to (Appendix 8.6). The raw materials needed for production are carbonated water, sugar, additives (citric acids and emulsions), preservatives and flavourings. To produce soft drinks, water has to be clarified first to remove impurities in water and adjust the pH value. Without clarification, some impurities in the water such as bacteria and other organic matter will affect the taste and colour. During the process, a certain amount of lime water will be added to obtain the preferred pH value (Audra Avizienis, 2011). Then, the water will be filtered by sand filter to remove some small particles of impurities. It will be sterilized and added with some chlorine to kill bacteria. It then will be dechlorinated by using carbon filter to remove any unwanted substances such as sand before it is pumped into a dosing station (refer to appendix 8.3). Next, a certain quantity of dissolved sugar and flavourings will be added into the dosing station. They will be mixed with the water in a batch tank. In the tank, the syrup (mixture of sugar and flavourings) will be sterilised by using ultraviolet radiation or any other methods. The water and syrup are mixed carefully by the sophisticated machines (proportioners). Then, the beverages will be carbonated by adding a right amount of carbon dioxides. The amount of carbon dioxides added depends on types of beverages. Usually fruit drinks have lesser carbon dioxides than isotonic drinks. After that, the completed products will be filled into the bottles or cans with a high flow rate. The bottles and

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cans will then be sealed quickly to prevent any unwanted substances from entering the containers (Audra Avizienis, 2011). Later, the products will be labelled with the soft drinks brand and other information. Finally, the beverages will be packed into cartons before they are distributed to the wholesalers and other retailers.

6.3 Valuation of Inventories Used by Company
There are many valuation methods being used to calculate the cost and the value of inventories of a company such as FIFO (First in, First out) method, LIFO (Last in, First out) method and WAC (Weighted Average Cost) Method. Basically, most of the companies including F&N Holdings Berhad value the inventories based on LCM (Lower of Cost and Market value) rule. LCM rule states that every type of inventories should be recorded and valued at net realisable value or lower of cost according to the prudence concept. Thus, closing inventories should not be overstated; otherwise profit and assets of a business will be overstated in Statement of Financial Statement. In F&N Holdings Berhad, cost of inventories is calculated by using WAC (Weighted Average Cost) method (refer to appendix 8.5). In WAC method, the average unit cost will be calculated by totalling the cost of old inventories and the cost of new purchased inventories by the total units of inventories hold after the purchases (Frank Wood et al, 2008). It gives out a lower of cost of inventories, thus the net profit calculated will be lower than the result of using other method such as FIFO method. Thus, the profit earned and the assets will not be overstated. Raw materials (including packaging materials), work-in-progress and finished goods are included in the cost of inventories. Referring to Statement of Financial Statement as at 30 September 2010, the amount of closing inventories is RM343,717 (‘000).

6.4 Amount of Closing Inventories
Closing inventories are the goods that left in a business at the end of an accounting period. They include raw materials, packaging materials, work-in-progress, and finished goods. For F&N Holdings Berhad, the amount of closing inventories at the end of financial year 2010 is RM 343,717 (‘000) as be shown in diagram below. It is

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valued at the lower of cost and net realisable value (estimated selling price - cost of completion - selling expenses). Cost of the inventories are calculated based on WAC (Weighted Average Cost) basis (refer to Appendix 8.5).

Source: F&N Holdings Berhad Annual Report 2010 (Refer to Appendix 8.4)

6.5 Definition of Relevant Information Relating to Inventories
 Consignment: As Frank Word (1996) said, when a seller or supplier sells his goods directly to customers or consumers, it is called ordinary sale. By the way, they can also sell goods to customers through an agent or intermediary. For example, F&N soft drinks manufacturer sells his drinks to customers through his agents such as Supermarket operators (Carrefour, Tesco and Jusco) and small retailers. These goods are said to be on consignment. Under consignment, a supplier (consignor) will send the goods to an agent (consignee). The agent will keep the goods in his store, shop or warehouse until they are sold. Some expenses will incur in selling the goods to customers but it will be paid by the supplier later. After the end of a period (week, month, year, quarter), the agent will receive commission from the supplier for his work in selling the goods. By the way, the agent will give the supplier the money he gets from selling the goods. This is known as account sales. A consignor or a consignee account will be opened to record the transactions. In this case, the inventories stored in the agent’s (consignee) place belongs to the supplier (consignor), not the agent. The agent is the person who in charge of selling the goods for the supplier. Therefore, the inventories left in the agent’s place are part of the closing inventories at the end of an accounting period.  Types of Tax Charged on Inventories

Tax is a fee charged by the government on goods and services, income, activity, or property. There are two types of tax imposed in Malaysia: direct tax and indirect tax. If

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the tax or duty is charged directly on the consumers are called direct tax. Indirect tax refers to the tax or duty collected indirectly from consumers. There are many taxes charged on inventories such as export duty, import duty, and sales tax. Firstly, export duty is charged on a particular type of goods to be exported. However, the rate of export duty charged depends on the types of goods. It is referred to Column 5 of the "First Schedule to the Customs Duties Order of 1988". (ASEAN, 2011) Besides, import duty is charged on a particular type of imported goods such as vehicles and electronic products under Custom Duties Order 1996. The rates of import duty charged vary from 2% to 300% based on the types of goods being charged. Over the last few years, raw materials, components and machinery are exempted from import duty charges. Sales tax is an ad valorem single stage tax charged on local products or imported goods. Manufacturers are required to be licensed under Sales Tax Act 1972. The general rate charged on all goods are 10% while some particular types of goods such as cigarette and alcoholic drinks are charged on 15%. Books, sports equipment, newspaper and tourist products are exempted from sales tax. (E-directory, 2011) 7. Conclusion By completing this coursework, we have learned a lot of knowledge and information about Accounting for Inventories and F&N Group. By referring to the annual reports, we learned how to search for its closing inventories, valuation of inventories and also the history of a company. From this research, we know what kind of products that are manufactured by F&N Group and their manufacturing process. We also learned about how the manufacturing companies such as F&N Group record and value their inventories. This improves our understanding about the company and how to work as an excellent accountant. Besides, it gives us a preview that as an accountant in public listed company, we have to be prudent and more careful in recording every business transaction. Perhaps in future, we will be working as an accountant in public listed company. Through this coursework, we understand the importance of teamwork in order to complete a task. We also learned how to complete a task within tight deadlines and avoid procrastination. It is important and useful for our future. In short, we enjoy doing the coursework as its benefits are aplenty.

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8. APPENDIX Appendix 8.1: F&N Holdings Berhad Logo & Group Structures

F&N Logo

F&N Holdings Berhad Group Structure Source: http://www.fn.com.my/groupstructure.aspx

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Appendix 8.2: Products Manufactured by F&N Holdings Berhad

100 Plus

F&N Flavours

Fruit Tree

SEASONS Source: http://www.fn.com.my/food.aspx

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Appendix 8.3: Part of Soft Drinks Manufacturing Process

Filtration, Sterilization and Dechlorination of Water

Mixing and Filling Process of carbonated water Source: http://www.madehow.com/Volume-2/Soft-Drink.html

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Appendix 8.4: Fraser & Neave Holdings Berhad (F&N) Statement of Financial Position 2010

Part 1 of Balance Sheet

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Appendix 8.4: Fraser & Neave Holdings Berhad (F&N) Statement of Financial Position 2010 (cont’d)

Part 2 of Balance Sheet Source: 1. http://klse.com.my 2. http://announcements.bursamalaysia.com/EDMS/subweb.nsf/7f04516f80986803482 56c6f0017a6bf/88aa879bcd0b8e4848257803003cdb88/$FILE/F&NPage%2043%20to%20ProxyForm%20(3MB).pdf

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Appendix 8.5: Valuation of Inventories used by F&N Holdings Berhad as stated in Accounting Policies

Source: F&N Holdings Berhad Annual Report 2010

Appendix 8.6: F&N Holdings Berhad Factory in Shah Alam, Malaysia

Soft Drink Production Plant Source: http://www.panoramio.com/photo/16900924

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9. Reference
1. Frank Wood and Alan Sangster. 2010. Business Accounting 1 11th Edition. Harlow: Pearson Education Limited. 2. Andrew Thomas, 2005. Introduction to Financial Accounting, 5th Edition. United Kingdom: McGraw-Hill Education (UK) Limited. 3. Curtis L. Norton and Gary A. Porter, 2009. Introduction to Financial Accounting, 7th Edition. United States: South-Western, Cengage Learning. 4. Andrew Leong Fook Chee and Wong Sei Yan. 2010. Business Accounting, 3rd Edition. Malaysia: Pearson/Prentice Hall. 5. Jerry J. Weygandt, Donald E. Kieso and Paul D. Kimmel. 2008. United Kingdom: John Wiley & Sons Inc. 6. Betsy Li, Tan Sai Kim, and Goh, Ling Chin. 2006. Principle of Accounting, 22nd Edition. Canada: Thomson South Western. 7. Monger, Rod F. 2010. Financial Accounting: A Global Approach. United Kingdom: John Wiley & Sons Limited. 8. Clave Finch, 2007. A Student’s Guide to International Financial Reporting Standards. Great Britain: Kaplan Publishing UK. 9. R. Anthony Inman, 2011. Inventory Types. Viewed on 1 October 2011. Available from: < http://www.enotes.com/management-encyclopedia/inventory-types> 10. F&N, 2011. About Us. Viewed on 1 October 2011. Available from: < http://www.fn.com.my/aboutusoverview.aspx > 11. F&N, 2011. Business & Brands: Soft Drinks. Viewed on 1 October 2011. Available from: < http://www.fn.com.my/food.aspx> 12. F&N, 2011. Annual Report 2010. Viewed on 28 September 2011. Available from: <http://announcements.bursamalaysia.com/EDMS%5Csubweb.nsf/LsvAllByID/8 8AA879BCD0B8E4848257803003CDB88?OpenDocument) 13. F&N, 2011. Awards. Viewed on 28 September 2011. Available from: < http://www.fn.com.my/awards.aspx> 14. Audra Avizienis, 2011. Soft Drink. Viewed on 28 September 2011. Available from: < http://www.madehow.com/Volume-2/Soft-Drink.html>

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15. Larry Walther, 2011. Chapter 8: Inventory. Viewed on 28 September 2011. Available from: < http://www.principlesofaccounting.com/chapter%208.htm> 16. William H. Coyle, 2011. Inventory Accounting. Viewed on 29 September 2011. Available from: < http://www.referenceforbusiness.com/encyclopedia/IntJun/Inventory-Accounting.html> 17. Wikipedia, 2011. Inventory. Viewed on 3 October 2011. Available from: < http://en.wikipedia.org/wiki/Inventory> 18. ASEAN, 2011. Malaysia: Tariff and Duty Rates. Viewed on 3 October 2011. Available from: <http://www.asean.org/14296.htm> 19. E-directory, 2011. Taxation. Viewed on 3 October 2011. Available from: <http://e-directory.com.my/doc/taxation.htm>

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