Arab Open University

B291: TMA – Fall Semester 2022-2023

About TMA:
The TMA covers the financial accounting concepts and practices in the businesses. It is
marked out of 100 and is worth 20% of the overall assessment component. It is intended to assess
students’ understanding of some of the learning points within Books 1 to 5. This TMA requires you
to apply the course concepts.

The TMA is intended to:

 Increase the students’ knowledge about the reality of the accounting as a profession.
 Assess students’ understanding of key learning points within Books 1 to 5.
 Develop the ability to understand and interact with the nature of the financial statements in
reality.
 Develop students’ communication skills, such as memo writing, essay writing, analysis and
presentation of material.
 Develop basic ICT skills such as using the internet.

The TMA:
The TMA requires you to:
1- Review various study Books (from 1 to 5) of ‘Financial Accounting’ within it.
2- Conduct a simple information search using the internet.
3- Present your findings in not more than 1,600 words. The word count excludes
headings, references, title page, and diagrams.
4- You should use a Microsoft Office Word and Times New Roman Font of 14 points.
5- You should read and follow the instructions below carefully. Each part of the process will
carry marks for the assignment.
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Criteria for Grade Distribution:

Content
Financial Reporting on Using E-library & Structure and
Criteria Total marks
the Internet Referencing Presentation of ideas

Marks 100 (5) (5) 100

The TMA Questions

Financial Reporting on the Internet

The internet is a good place to get information that is useful to you in your study of accounting.
For example, you can find information about current events, professional accounting
organizations, and specific companies that may support your study.
MEPCO is considered to be one of the largest producers of paperboard in the Middle East, with
a production capacity of half a million metric tons. The company produces a diverse range of
CONTAINERBOARD grades (High Performance Fluting, Test Liner, Semi-Chemical Fluting,
Kraft Liner Board, Dual Use & White Top Test Liner) along with other grades of
INDUSTRIAL PAPER (Core board, Plasterboard Liner, & Absorbent Kraft) on three paper
machines.
MEPCO’s strategic location and proximity to Jeddah sea port provides the company with the
ability to deliver its products to a wide array of markets within a very short lead time. The
company is present mainly in the Middle East, North & East Africa along with the Indian
Subcontinent and a few European Markets.
MEPCO is intensely investing in research and development, to provide a wide range of prime
quality and innovative products to its loyal partners and customers. MEPCO core values are to
provide high-quality products for its clients, and to contribute environmental preservation and
to meet the market needs. Since the beginning MEPCO has been conscious of preserving our
environment. Recycling waste paper and transforming it into its various state of the art
products. Concern for the environment is extend to all aspects related to the production
process, starting from water treatment, utilizing renewable chemical additives, and ending with
an endless effort to keep our world green. (extracted from MEPCO website)
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You can access on Middle East Paper Company - Annual Reports (mepco.biz) click on
2020 annual report. (Download annual report and board of directors’ report) (2 reports)

Download 2020 Annual report in PDF format.

Instructions
Use the 2020 Annual report of MEPCO to answer the following questions:

1- A stakeholder is a party that has an interest in a company and can either affect or be
affected by the business. Discuss at least two types of stakeholders and give examples
from the MEPCO annual report 2020 to justify your answer.
[Marks (Words): 10(300)]

2- PEST analysis (political, economic, socio-cultural and technological) describes a

framework of macro-environmental factors used in the environmental scanning
component of strategic management. Give examples from the MEPCO annual report
2020 and discuss the impact of each of the elements in the PEST analysis on MEPCO.
[Marks (Words): 10(300)]
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.

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
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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. than. This comparison between these completed scans can
provide a very solid basis for making an informed decision.

3- IAS 16 Property, Plant and Equipment sets out the requirements for the recognition of
the assets, the determination of their carrying amounts, and the depreciation charges
and impairment losses in relation to them. Discuss the importance of two models under
IAS 16 PPE and Identify the depreciation methods used by MEPCO.
[Marks (Words): 10(100)]
Objectives of IAS 16
The objective of IAS 16 is to prescribe the accounting treatment of property, plant and
equipment. The main challenges are in recognizing assets, determining their book
value, as well as the depreciation and impairment charges recorded in connection with
them.
This recognition principle applies to all tangible fixed assets at the time they arise.
These costs include the costs incurred initially to acquire or construct a tangible
capital asset and the costs incurred thereafter to supplement, partially replace, or
maintain the asset.

IAS 16 does not prescribe a unit of measurement for recognition – the unit that
constitutes an asset, plant and equipment. [IAS 16.9] Note, however, that if the cost
model is used (see below), each part of an item of property, plant, and equipment has
 -5-

a substantial cost relative to the total cost. the cost of that item must be amortized
separately. [IAS 16.43]

IAS 16 acknowledges that parts of certain property, plant, and equipment may require
periodic replacement. The carrying amount of a property, plant, and equipment will
include the cost of replacing that part when it is incurred if the recognition criteria
(future benefit and reliability of measurement) ) be met. The carrying amount of the
replaced parts is derecognized in accordance with the derecognition provisions of IAS
16.67-72. [IAS 16.13]

In addition, the continuing operation of an item of property, plant, and equipment (e.g.
aircraft) may require regular inspection for defects, whether or not part of the item is
to be replaced. As each major inspection is performed, its cost is recognized in the
carrying amount of the replacement property, plant, and equipment if the recognition
criteria are met. If necessary, the estimated cost of a similar inspection in the future
can be used as an indication of the cost of the present inspection unit when the item is
purchased or manufactured. [IAS 16.14]
Depreciation (cost model and revaluation)
For all depreciable assets:

Amount to be depreciated (costs minus residual value) must be systematically

allocated over the useful life of the asset [IAS 16.50].

The carrying amount and useful life of assets must be reviewed at least at the end of
each fiscal year and, if expectations differ from prior estimates, any changes are
accounted for in the future. future is the estimated change in accordance with IAS 8
[IAS 16.51]

The depreciation method used should reflect the rate at which the entity utilizes the
economic benefits of the asset [IAS 16.60]; a method of depreciation based on the
revenue generated by an activity that includes the use of an asset is not appropriate.
[IAS 16.62A]
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The amortization method must be reviewed at least annually, and if the benefit
consumption pattern has changed, the amortization method must be changed in the
future as a change in estimates under IAS 8. [IAS 16.61] Expected future sales
declines may indicate a higher proportion of future consumption of economic benefits
embodied in an asset. [IAS 16.56]

Depreciation should be included in profit or loss unless it is included in the carrying

amount of another asset [IAS 16.48].

Depreciation begins when the asset is ready for use and continues until the asset is
unrecognized, even if the asset is dormant. [IAS 16.55]
In ZAMIL Depreciation is recognized in profit or loss on a straight-line basis
over the estimated useful lives of each segment of a tangible asset. Land and
fixed assets under construction are not depreciated.

4- Management makes many judgements and estimates in preparing accounts, some of

which will have a significant effect on the reported results and financial position. Give
examples of MEPCO estimates and assumptions reported in consolidated financial
statements.
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 MEPCO estimates and assumptions reported in consolidated
financial statements are: Dividends are recognized in the consolidated financial
statements for the period approved by
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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”)
[Marks (Words): 10(100)]

5- Transaction takes place when one party exchanges or promise to exchange good or
service with another party for money. Identify the difference between revenue expenditure
and capital expenditure and provide the example from Annual report of MEPCO 2020.
[Marks (Words): 10(100)]
Capital expenditure represents the large capital investments that a company makes to
maintain or more often to grow its business and generate additional profits. A capital
expenditure is the purchase of long-lived assets, meaning assets that last longer than a
year but typically have a useful life of several years.

Capital expenditures are typically used to purchase fixed assets, which are physical
assets such as equipment. Thus, capital expenditures typically represent larger
amounts than revenue expenditures.
Expense of revenue is a short-term expense used in the current period or typically
within a year. The cost of revenue includes the expenses necessary to meet the
ongoing operating costs of running a business and is therefore essentially the same as
operating expenses (OPEX).

Cost of revenue also includes normal repair and maintenance costs necessary to keep
the asset functioning properly without significantly improving or extending the useful
life of the asset. Existing product costs include regular repairs and maintenance as
well as paint and renewal costs. Revenue expenditure can be thought of as a recurring
expenditure unlike the one-time nature of most capital expenditures.
The capital expenditure contracted by the Group but not incurred till 31 December
2020 was approximately Saudi Riyals 55.1 million (2019: Saudi Riyals 33.8 million).
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The cost of revenue can be shown in sale and delivery of goods, Selling and
distribution expenses, transportation expenses, advertising expenses and packaging
expenses.

6- Going concern is a basic underlying assumption in accounting. Explain why the going
concern basis is important in understanding MEPCO financial statement; Support your
answer with evidence from MEPCO annual report 2020.
[Marks (Words): 10(100)]
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.
From MEPCO 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.

7- There are different basis approaches to valuing inventory that are allowed by GAAP,
explain the principal’s methods of valuation required by IAS2 inventories, provide some
evidence from annual report of MEPCO 2020.
[Marks (Words): 10(100)]
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IAS 2 is an international financial reporting standard developed and published by the

International Accounting Standards Board (IASB) to provide guidance on the
measurement and classification of inventories.

What is inventory?
Inventories under IAS 2 are assets that:
 held for sale in the ordinary course of business
 being manufactured for sale as such, or
 in the form of materials or supplies that are consumed in the production or
provision of a service.
 Importance of inventory management

Inventory management is important because:

 It helps businesses prevent out of stock

 It manages multiple locations
 It ensures accurate recording
 Inventory planning improves service levels
 Inventory planning and management reduces storage costs
 Effective inventory control improves market share
 Inventory control improves product quality
 Effective inventory control offers potential savings
 Inventory control avoids costly downtime
 Inventory control strategies facilitate purchase savings
 Inventory control paves the way for competitiveness
MEPCO tested inventory reserve calculations against Company policy regarding
obsolete and slow-moving inventory.
They are taking inventory at the end of the year to observe and understand the
Company's procedures for determining obsolete inventory and we have observed
such inventory in count.

8- The receivables allowance reduces the reported trade receivables balance to reflect
uncertainties over collectability. Explain the concept of allowances for irrecoverable
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receivable and analyze the MEPCO allowances for receivables information given in
annual report.
[Marks (Words): 10(100)]
Provision for bad debts:

There is always an element of risk that some credit customers default on their debt.
The concept of prudence states that corporate accounts should always anticipate
possible losses. Provision for bad debts is the estimated amount of debt that will arise
from receivables that have been issued but not yet collected. Provision for bad debts
can be calculated as follows:
 A fixed percentage of trade receivables.
 Analyze sales registers and identify potential bad debts. Debt age analysis.
 Provisions for doubtful debts include two types:
 special allowance
 general allowance
MEPCO The Board of Directors continuously monitors credit risk to customers
and makes provisions for creditable balances that are considered questionable
using the expected credit loss model. To minimize risk, the Group has developed
a credit line allocation system for its customers based on evaluation based on
customer profile and payment history. Outstanding balance of regular customers
monitored. Most customers are secured, to the extent possible, by domestic
letters of credit, cash collateral deposits, bank guarantees and insurance
guarantees.
9- Revenue recognition is a generally accepted accounting principle (GAAP) that
determines the specific conditions in which revenue is recognized or accounted for.
Classify the revenue recognition method(s) used by MEPCO as discussed in annual report.
Explain the rationale underlying the appropriateness of methods used by MEPCO.
[Marks (Words): 10(100)]
Provision for bad debts:

There is always an element of risk that some credit customers default on their debt.
The concept of prudence states that corporate accounts should always anticipate
possible losses. Provision for bad debts is the estimated amount of debt that will arise
 -11-

from receivables that have been issued but not yet collected. Provision for bad debts
can be calculated as follows:

 A fixed percentage of trade receivables.

 Analyze sales registers and identify potential bad debts.
 Debt age analysis.
 Provisions for doubtful debts include two types:
 special allowance
 general allowance
 A fixed percentage of trade receivables. Analyze sales registers and identify
potential bad debts.
 Debt age analysis.
Provisions for doubtful debts include two types:
 special allowance
 general allowance
MEPCO uses a contingency matrix in calculating ECLs on financial assets to
estimate their useful lives expected credit losses, by applying a certain provision
rate to the respective outstanding contract term payments. The contingency
matrix has been developed considering default probability and inferred default
loss is based on the Group's historical data and adjusted to reflect expected future
results.
10- Write a summary on MEPCO financial condition, including information/data taken from
financial statements and overall business condition. Your discussion should cover the
basic elements of these statements.
The Group's activities have many potential financial risks:
market risk (including currency risk, fair value and interest rate, cash flow risk and price
risk), credit risk and liquidity risk. Overall risk management of the Group the program
focuses on the unpredictability of financial markets and seeks to minimize potential
negative effects on the financial position of the Group. The Group also uses financial
derivatives to hedge risks for some risk exposure.
interest rates on the Group's financial position and cash flow. The Group manages interest
rate risk by regularly monitor interest rate records of interest-bearing financial instruments
as they arise interest rate swap.
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As of December 31, 2020, if interest rates are 1% higher/lower all other variables
constant, then interest on outstanding loans (excluding loans secured by interest rate
swaps) will be increase/decrease in Saudi Riyals 5,385,098 (2019: Saudi Riyal 4,236,083).
[Marks (Words): 10(100)]
[Total Marks = 100]

In your answer, you should explain each point or inquire separately. Use the following
headings (below) to make up the different sections of your work:

Cover The PT3 form (available on LMS)

Contents Title and contents page
TMA Financial Reporting on the Internet
References Recorded according to the Harvard style - Available on LMS