Arab Open University

Tutor Marked Assignment (TMA) – PT3 Form

Academic Year 2023 - 2024 Semester: Fall 2023

Branch: Program: Business Studies

Course Title: Financial Accounting Course Code: B291

Student Name: Student ID:

Section Number: Tutor Name:

Total Mark: Awarded Mark:

Mark details
Questions Total
Allocated Weight 25 25 25 25 100
Marks
Marks

Criteria Presentation Referencing Total

Marks deduction Up to (5) (5) (10)
Marks

100 Student’s Total Mark /100

Notes on plagiarism:
A. According to the Arab Open University By-laws, the following acts represent cases of
cheating and plagiarism:
 Verbatim copying of printed material and submitting them as part of TMAs without
proper academic acknowledgement and documentation.
 Verbatim copying of material from the Internet, including tables and graphics.
 Copying other students’ notes or reports.
 Using paid or unpaid material prepared for the student by individuals or firms.

B. Penalties for plagiarism ranges from failure in the TMA to expulsion from the university.

Declaration: I hereby declare that the submitted TMA is my own work and I have not copied
any other person’s work or plagiarized in any other form as specified above.

Student Signature

…………………….

Tutor’s Feedback
Answer for Question 1:

A stakeholder is a person or group with an interest in an enterprise. A stakeholder is a party

with an interest in an enterprise and can influence or be affected by that activity. The main
stakeholders of a typical business are investors, employees, customers, and suppliers.

However, with increasing interest in corporate social responsibility, the concept has been
expanded to include communities, governments and business associations.

Stakeholders can be internal or external to the organization. Internal stakeholders are people
interested in a business that stem from a direct relationship, such as employment, ownership,
or investment.

External stakeholders are those who do not work directly with the business but are
influenced in some way by the actions and results of the business. Suppliers, creditors and
public groups are all considered external stakeholders.

Example of an internal stakeholder:

An investor is an internal stakeholder who is significantly affected by the related interest and
its activities. For example, if a venture capitalist decides to invest $5 million in a technology
startup in exchange for 10% equity and significant influence, that company becomes a related
party. insider in the startup company.

Return on investment of venture capital business depends on the success or failure of the
startup which means the business has a vested interest.

Example of external stakeholders:

External stakeholders, unlike internal stakeholders, do not have a direct relationship with the
company. Instead, an external stakeholder is usually a person or organization that is affected
by the business. For example, when a company exceeds an acceptable limit for carbon
emissions, the city where the company is located is considered an external stakeholder
because it is affected by the increase in pollution.

In contrast, external stakeholders can sometimes also have direct influence over a company
without having an obvious connection to it. For example, the government is an external actor.
As the government begins to change its policy on carbon emissions, the decision will affect
the business of any entity with increased carbon levels.
Shareholders/Investors: These are individuals or entities that own shares in the company
and have a financial interest in its performance.

Employees: The employees of a company are important stakeholders as they contribute to

the organization's success and are directly affected by its operations.

Customers: Customers are essential stakeholders as they purchase the company's products or
services and contribute to its revenue.

Suppliers: Suppliers provide the necessary resources, materials, or services to the company,
and their relationship is crucial for the organization's operations.

Government and Regulatory Bodies: Government entities and regulatory bodies play a role
in overseeing and regulating the company's activities, ensuring compliance with laws and
regulations.

Local Communities: Companies often have an impact on the communities in which they
operate, and stakeholders from these communities may have an interest in the company's
activities and their potential social and environmental impact.

Creditors: Creditors are individuals or institutions that have provided loans or credit to the
company and have a financial interest in its ability to repay its debts.

Non-Governmental Organizations (NGOs): NGOs may have an interest in the company's

activities, particularly if they relate to social or environmental issues.

ALZAMEL annual report 2022

External stakeholders:

Saudi Industrial Development Fund (SIDF)- Islamic banking facilities (Tawarruq) - the
KSA Government

Internal stakeholders:

Employees – management – Internal auditors

Answer for Question 2:

PEST (political, economic, social and technological) analysis is a management method by

which an organization can assess the main external factors affecting its performance in order
to become more competitive in the world. market. As described by the acronym, these four
areas are at the heart of this model.

PEST analysis is a strategic planning tool used by companies to evaluate and understand
external factors that could impact their business. PEST stands for political, economic, social
and technological factors. By analyzing these factors, companies can identify potential threats
and opportunities in their business environment. Elements of PEST analysis:

Political factors:

 work regulations

 Government policy

 Protection of Intellectual Property

 Stability of the political context

 Tariffs and Trade

 Restrictions financial policy

 Government sanctions

Economic factors:

 Access to credit levels of business investment

 Maintenance costs

 Economic rise or decline exchange rates and interest rates

 Globalization inflation

 Labor costs and skill levels of the work force

 Market Conditions

 Spending Habits tax levels

Social factors:

 Attitude towards work and productivity trends, tastes and consumption patterns
  Diversity, Inclusion and Equity

 Division of Assets

 Education level employment trends and labor market trends

 Changing Generational Attitudes

 Population Health

 Population Demographics and Growth

 Rate Social mobility

 Unionization

Technological factors:

 Artificial Intelligence (AI)

 Automation and robotics

 IT security and data protection

 Digitalization and connectivity new technologies

 The influence of technology on business processes and products

By conducting a PEST analysis, companies can gain insight into external factors that can
impact their profitability, market position, and overall success. This analysis helps companies
anticipate and adapt to changes in the political, economic, social and technological landscape
so they can make informed strategic decisions.

A popular variation of the PEST analysis format, especially in the UK, is the PESTLE
strategic planning approach, which includes additional legal and environmental aspects.

PEST analysis is said to have been first introduced as ETPS by Harvard professor Francis J.
Aguilar. In the 1967 publication "Scanning the Business Environment", Aguilar presented the
economic, technical, political and social factors that have a great influence on the business
environment. The letters were then rearranged to create a real and original acronym used
today.
PEST analysis can help an organization recognize and thereby capitalize on the opportunities
presented by conditions. existing conditions in the business environment bring.

It can also be used to identify current or possible future challenges, allowing for effective
planning on how best to manage these challenges.

PEST analysis can also be applied to assess an organization's internal structure to identify
strengths and weaknesses of internal politics, economic prospects, social environment, and
technological base of that organization. The results of this analysis may facilitate changes or
improvements in areas identified as below average.

PEST analysis can be used in conjunction with other forms of strategic business analysis,
such as the SWOT (strengths, weaknesses, opportunities, and threats) model, for
comprehensive results. This comparison between these completed scans can provide a very
solid basis for making an informed decision.

Copied from ALZAMIL annual report:

Political factors: the company’s operations were conducted according to the best corporate
governance methods beside adhering to the governance principles and following the
governmental standards.

Economic factors: pay detailed attention to the recommendations of the Ministry of

Commerce and Saudi Exchange (Tadawul) in the pursuit of a sound investment environment
for shareholders.

Social factors: The Board of Directors has elected to seek social achievements and prioritize
social responsibility. Although the company has been offering solar and green building

solutions since 2012, as green building projects, particularly those using solar

technology, are on the rise.

Technological factors: Using the latest technology in this field.

Answer for Question 3:

Management plays a crucial role in preparing financial accounts by making various

judgments and estimates. These judgments and estimates have a significant impact on the
reported results and financial position of a company. Here are some key points highlighting
the importance of judgments and estimates in financial accounting:

Disclosure and Transparency: Judgments, assumptions, and estimates are required to be

disclosed in financial statements to provide transparency and enable investors to understand
how accounting policies are applied. This disclosure helps users of financial statements to
compare companies and make informed decisions.

Significant Effect on Financial Statements: Certain judgments and estimates have a material
impact on the financial performance and position reported to investors. For example,
determining the fair value of assets or assessing impairment requires management to make
informed decisions based on available information and assumptions.

Assumptions and Estimates: Financial estimates often involve assumptions about the future,
such as future selling prices, cash flow forecasts, growth rates, and discount rates. These
assumptions can significantly affect the carrying amounts of assets and liabilities within the
next financial year.

Complexity and Uncertainty: In a complex organization, accountants are inevitably required

to make numerous judgments and estimates when preparing financial statements.
Determining the fair value of assets or assessing control over another company involves
assessing facts, circumstances, and using observable and unobservable information.

Regulatory Scrutiny: Regulators closely monitor the quality of disclosures made by

companies regarding judgments and estimates. They expect companies to provide entity-
specific insights into the judgments and estimates made by management, including sensitivity
analysis and the impact on balances and earnings.

Investor Expectations: Investors also expect detailed and specific information about
judgments and estimates made by management. They want to understand the basis on which
these decisions are made and the potential impact on financial performance and position.

Accounting estimates in historical financial statements measure the impact of past business
transactions or events or the current condition of an asset or liability. Examples of accounting
estimates include net realizable value of inventories and accounts receivable, provision for
loss of property insurance and casualty, and contract revenue as a percentage. of the method
of completion, and the cost of pensions and warranties.

Management is responsible for making the accounting estimates in the financial statements.
Estimates are based on both subjective and objective factors and judgment is therefore
required to estimate an amount at the date of the financial statements. Management's
judgment is often based on their knowledge and experience of past and present events as well
as on their assumptions about the conditions under which they are expected to exist. and the
actions they intend to take.

Examples of ZAMEL estimates and assumptions reported in consolidated financial

statements are: Dividends are recognized in the consolidated financial statements for the
period approved by

 shareholders of the Company.

 fair presentation, in all

 in all material respects, the financial position of the Group as at 31 December 2020 and

 financial performance and cash flows for the year then ended in accordance with

 International Financial Reporting Standards (“IFRS”)

Answer for Question 4:

Going Concern

This assumption is based on the principle that in preparing the financial statements of an
entity, we assume that the entity has no intention of liquidating in the near future. Therefore,
the assumption is that the company will continue to exist indefinitely (in the distant future),
i.e. it will continue to exist.

This assumption is important because it allows the correct accounting of fixed assets and
depreciation. Since we traditionally follow the historical cost method to value assets, we must
assume that the business is not at risk of future closure. If so, these assets should be valued at
their market value. But in case of continuous operation, the increase/decrease in asset price is
not considered.

Another case is an expense that is amortized over a number of years, such as deferred
advertising costs. The benefits of such spending are assessed over a number of years. So
instead of billing the cost for a year, we amortize it. This can also happen due to the
assumption of continuous operation.

The going concern principle is important to understanding accounting because it provides

fundamental assumptions about a company's financial stability and future prospects. It is
assumed that the company will continue to operate for the foreseeable future and that there is
neither the intention nor the need to liquidate or cease trading. This concept is fundamental to
various stakeholders, including investors, creditors and management, as it influences
financial reporting, decision making and risk assessment.

Here are some reasons why the going concern principle is important for understanding
accounting:

Financial Reporting: The going concern concept forms the basis for recording a company's
profits and losses for a specific fiscal year. It allows accountants to properly record and
allocate the company's assets and liabilities at their own expense, ensuring the company's
security and continued, long-term growth and expansion. This foundation helps produce
accurate and reliable financial reports that reflect the company's true financial position and
performance.

Decision Making: The going concern assumption is essential to making informed decisions
regarding investments, credit, and business operations. Investors and creditors assume that
the company will continue to operate and generate profits in the future. It helps them evaluate
the profitability and sustainability of their business and influences their decisions about
investing or granting a loan [2]. Without this assumption, stakeholders would be confronted
with greater uncertainty and risks in their decision-making processes.

Risk Assessment: Business continuity is critical to assessing a company's financial health

and risk profile.

It allows auditors and analysts to assess a company's ability to meet its obligations and
continue operations for the foreseeable future. Should the company fail to continue
operations, this could indicate financial difficulties or even possible bankruptcy. This
information is necessary so that interested parties can assess the level of risk associated with
their investments or loans.

Valuation: The assumption of business continuity influences the valuation of the company.
A going concern is generally valued at a higher value than its post-dissolution value because
it has the potential to continue generating profits and cash flow.

This assessment influences various aspects such as mergers and acquisitions, financial
reporting and investment decisions. Without the going concern assumption, the company
valuation would be significantly different, which could lead to incorrect assessments of the
value.

From ZAMEL annual report: The Group's ability to continue as a going concern so that it can
continue to provide returns for shareholders and benefits for other stakeholders; and to
maintain a strong capital base to support the sustained development of its businesses.

References:

- Alzamel industrial annual report for the year 2022

- Rashain Perera, 2017: The Pestle Analysis

- Marshall A. Geiger, Anna Gold, Philip Wallage, 2021: Auditor Going Concern
Reporting: A Review of Global Research