PBCC Module 1

PLANNING, BUDGETING &
COST CONTROL
GOOD MORNING & A WARM

WELCOME TO ALL
PARTICIPANTS.
Presented by : GERALD PERIES

(JERRY)
Prepared by: Gerald Peries 1

MODULE 1
UNDERSTANDING THE
BIGGER PICTURE
WHERE ARE WE NOW?
UNDERSTANDING
FINANCIAL STATEMENTS

BASIC ACCOUNTING EQUATION
ASSETS = LIABILITIES +OWNER’S

EQUITY
(CAPITAL)
 ASSETS
 Resources owned/controlled by company
 Provide future benefit to company through
revenues & cash inflows
 Eg. company owns a hotel and receives
payment for room rentals, providing meals,
etc Prepared by: Gerald Peries 3
EXAMPLES OF ASSETS
Cash
Accounts Land
Receivable
Office Buildings
Supplies Equipment
Store
Inventories

LIABILITIES
 Opposite of Assets
 Claims by third parties against

assets owned by company

EXAMPLES OF
LIABILITIES
Accounts SST Bank
Payable Payable Loans
LIABILITIES

OWNER’S EQUITY
 Ownership claim on assets after deducting

liabilities
 OWNER’S EQUITY CAN INCREASE
BY:-
 Owners investing more funds
 Making Profits (Revenue > Expenses)

OWNER’S EQUITY CAN
DECREASE BY:-
 Drawings – withdrawal of funds for

personal use, only for sole trader &
partnership
 Incurring Losses (Expenses > Revenue)

EXAMPLES OF EQUITY
Owner’s Owner’s
Capital Drawings
Equity
Revenues Expenses

EXAMPLE OF RECORDING TRANSACTION
& PREPARING BASIC STATEMENTS
Mr Jerry Wong opened his stationery shop during the month of
September 2020 and provided you with the following data:-
1. Invested RM8,000 in his business.
2. Purchased RM5,000 of stationery on credit.
3. Purchased RM4,000 of office equipment on credit
4. Sold stationery RM4,000 for cash. The cost was $2,500
5. Paid salaries RM800 for September.
6. Paid rent for September RM400.
7. Paid RM1,000 owed to creditor for office equipment.
8. Paid RM200 for cleaning services.
9. Sold stationery RM 500 on credit. The cost was $300
REQUIRED:
Record the above transactions and prepare the financial statements.
ASSETS = LIABILITIES + OWNER’S
EQUITY
CASH + INVENTORY + A/R + O. EQUIP. = A/P + J.WONG

CAPITAL
1. +8,000 = +8,000
2. +5,000 = + 5,000
3. +4,000 = + 4,000
4. +4,000 = +4,000
-2,500 - 2,500
5. - 800 = - 800
6. - 400 = - 400
7. - 1,000 = - 1,000
8. - 200 = - 200
9. +500 = + 500
- 300 = - 300
RM9,600 + RM2,200 + RM500+ RM4,000 = RM8,000 + RM8,300

SUMMARY OF TRANSACTIONS
+ RM 8,000 (INVESTMENT)
+ RM 4,500 (SALES REVENUE)
- RM 2,800 (COST OF SALES)
- RM 800 (SALARY EXPENSE)
- RM 400 (RENT EXPENSE)
- RM 200 (CLEANING)
RM 8,300 (OWNER’S EQUITY)
========

PREPARING FINANCIAL
STATEMENTS
Statement of
Income Financial
Statement Position/Balance
Sheet
Statement of Statement of
Owner’s Equity Cash Flow
13
INCOME STATEMENT OR PROFIT & LOSS

STATEMENT
FOR THE MONTH ENDED SEPTEMBER 30, 2020
Sales Revenue RM4,500
Less Cost of sales RM2,800
Gross profit RM1,700
Less Expenses:
Salary Expense RM 800
Rent Expense RM 400
Cleaning RM 200
Total Expenses RM1,400
PROFIT RM 300
OWNER’S EQUITY STATEMENT
FOR THE MONTH ENDED SEPTEMBER 30, 2020
Jerry Wong , Capital, September 1 2018 RM 0
Add : Investment by owner RM 8,000
Profit RM 300
Jerry Wong, Capital, September 30 2018 RM 8,300

ACCOUNTING EQUATION
ASSETS = LIABILITIES + OWNER’S
EQUITY
CASH + INVEN. + A/R + O.EQUIP. = A/P + J .WONG,CAPITAL
RM9,600 + RM2,200 + RM500+ RM RM4,000 = RM8,000 + RM8,300

STATEMENT OF FINANCIAL POSITION/BALANCE
SHEET AS AT SEPTEMBER 30, 2020
ASSETS
CASH RM 9,600
ACCOUNTS RECEIVABLE RN 500
INVENTORY RM 2,200
OFFICE EQUIPMENT RM 4,000
TOTAL ASSETS RM16,300
=========
LIABILITIES AND OWNER’S EQUITY
LIABILITIES
ACCOUNTS PAYABLE RM 8,000
OWNER’S EQUITY
JERRY WONG, CAPITAL RM 8,300
TOTAL LIABILITIES AND
OWNER’S EQUITY RM16,300
=========

STATEMENT OF CASH FLOW
FOR THE MONTH ENDED 30TH SEPTEMBER 2020
Cash flows from Operating Activities

Collection from customers RM4,000
Payments for inventory & expenses (RM1,400)
Net Cash flow operating activities RM2,600
Cash flows from investing activities

Payment for equipment (RM1,000)
Net Cash flow investing activities (RM1,000)
Cash flows from financing activities

Investment RM8,000
Net Cash flow financing activities RM8,000
Net increase in cash RM9,600
Cash at the beginning of the period 0
Cash at the end of the period RM9,600
Prepared by: Gerald Peries =======18
IMPORTANT CONCEPTS
- ADJUSTMENTS
ACCRUED EXPENSES (Accruals)
 Expenses incurred but not yet paid.
EXAMPLE
 Rent incurred : RM1000 per year
 Rent paid as at 31st Dec.: RM 750
 Rent accrued/owing : RM 250

ACCRUALS (Continued)
 TREATMENT IN FINANCIAL STATEMENT
INCOME STATEMENT
RM
Gross Profit xxx
Less Expenses
Rent Paid 750
Add Accrual 250 1,000
BALANCE SHEET
CURRENT LIABILITIES
Accrual 250
PREPAID EXPENSES (Prepayments)
 Expenses not due yet but paid in advance

EXAMPLES
 Insurance paid during year RM1,050
 Insurance incurred for year RM 840
Insurance Prepaid : RM 210

PREPAYMENTS (Continued)
TREATMENT IN FINANCIAL STATEMENT
INCOME STATEMENT
RM
Gross Profit xxx
Less Expenses
Insurance Paid 1,050
Less Prepayment 210 840
BALANCE SHEET
CURRENT ASSETS
Prepayment 210
ACCOUNTING FOR FIXED
ASSETS
 FIXED ASSETS
 Have long life
 To be used in the firm
 Not bought for re-sale
 Examples include machinery, motor
vehicles, office equipment, etc.

DEPRECIATION OF FIXED
ASSETS
The charge in the Income Statement for the

expected usage of the fixed asset
Main Method of calculating Depreciation
 Straight Line Method

STRAIGHT LINE METHOD OF
CALCULATING DEPRECIATION
 Amount of Depreciation is the same every
year.
EXAMPLE
 An equipment was bought for RM22,000.
 Expected usage is 4 years
 Expected scrap or disposal value at the end
of 4 years is RM2,000.

STRAIGHT LINE METHOD OF
CALCULATING DEPRECIATION
(Continued)
DEPRECIATION
= Cost - Estimated Disposal Value
Number of Expected Years Of Use (4)
= RM22,000-RM2,000
4 Years
= RM20,000 = RM5,000 Depreciation each year
4 for 4 years.

TREATMENT OF DEPRECIATION
IN THE FINANCIAL STATEMENTS
 A firm financial year ends on 31st Dec.
 It bought a machine on 1 Jan. 2016 for
RM2,000.
 Depreciation is at the rate of 20% on a Straight
Line basis.
INCOME STATEMENT
Expenses RM
2016 Depreciation 400
TREATMENT OF DEPRECIATION
IN THE FINANCIAL STATEMENTS
(Continued)
BALANCE SHEET (EXTRACT)
Accumulated Book
Year Item Cost DepreciationValue
2016 Machinery 2000 400 1,600
2017 Machinery 2000 800 1,200
2018 Machinery 2000 1,200 800

THREE MAIN CHARACTERISTICS OF
A COMPANY
LIQUIDITY
 Can the co. pay its short-term obligations to banks
& suppliers?
PROFITABILITY & SOLVENCY
 Can company survive in the long run?
 Of interest to long-term lenders & shareholders
 Can company pay dividends?
 Is there growth potential for the shares?

TYPES OF FINANCIAL
COMPARISONS
INTRA-COMPANY BASIS
 Compare same co. this year with previous
years
INDUSTRY AVERAGES
 Compare this co. with the industry average
INTER-COMPANY BASIS
 Compare this company with a competitor
Eg. Telekoms & Maxis, Dutch Lady & Nestle

RATIO ANALYSIS
Compares the relationship among selected items in

the financial statement
FINANCIAL RATIO CLASSIFICATION
Profitability
Indicates success in creating wealth for owners
Efficiency
 Indicates efficiency in utilising resources
Liquidity
 Indicates short-term debt paying ability of
company
FINANCIAL RATIO CLASSIFICATION
(Continued)
Gearing
 Indicates the amount of funds provided by
owners & lenders
 Indication of risk
Investment
 Indicates the return & performance of the
shares of company
 Important to shareholders

ADDITIONAL INFORMATION
 All sales and purchases are on credit.

 Net Cash flow from operating activities was
RM231,000 and RM251,400 in 2016 and 2017
 respectively.

The following financial statements relate to Maju Carpets Bhd.,
which owns a small chain of wholesale/retail carpet stores.
Balance Sheets As At 31 March

or Statement of Financial
Position 2016 2016 2017 2017
RM000 RM000 RM000 RM000
NON-CURRENT ASSETS
Freehold land & buildings at cost 451.20 451.20
Less : Accumulated depreciation 70.00 381.20 75.00 376.20
Fixtures and fittings at cost 129.00 160.40

Less : Accumulated depreciation 64.40 64.60 97.20 63.20
TOTAL NON-CURRENT ASSETS 445.80 439.40
CURRENT ASSETS
Inventory 300.00 370.80
Trade receivables 240.80 210.20
Bank 3.40 3.00
TOTAL CURRENT ASSETS 544.20 584.00
TOTAL ASSETS 990.00 1,023.40
BALANCE SHEET (Continuation)
2016 2017
EQUITY & LIABILITIES RM000 RM000
RM0.50 ordinary shares/common stock 300.00 334.10
General reserve 26.50 40.00
Retained profit 171.80 262.50
TOTAL EQUITY 498.30 636.60
NON -CURRENT LIABILITIES

Loan 200.00 60.00
CURRENT LIABILITIES
Trade payables 221.40 228.80
Dividends proposed 40.20 60.00
Corporation tax due 30.10 38.00
TOTAL CURRENT LIABILITIES 291.70 326.80
TOTAL LIABILITIES 491.70 386.80
TOTAL LIABILITIES & EQUITY 990.00 1,023.40

INCOME STATEMENT
2016 2016 2017 2017
RM000 RM000 RM000 RM000
Sales Revenue 2,240.80 2,681.20
Less Cost of
sales/COGS
Opening inventory 241.00 300.00
Add purchases 1804.40 2,142.80
2045.40 2,442.80
Less closing inventory 300.00 370.80
Cost of sales 1,745.40 2072.00
Gross profit 495.40 609.20

INCOME STATEMENT (Continuation)
2016 2016 2017 2017
RM000 RM000 RM000 RM000
Gross profit 495.40 609.20
Less: expenses
Wages & salaries 137.80 195.00
Directors’ salaries 48.00 80.60
Rates 12.20 12.40
Electricity 8.40 13.60
Insurance 4.60 7.00
Postage & telephone 3.40 7.40
Audit fees 5.60 9.00
Depreciation-building 5.00 5.00
Depreciation-fixtures 27.00 32.80
Total expenses 252.00 362.80
Operating profit/EBIT 243.40 246.40
INCOME STATEMENT (Continuation)
2016 2017
RM000 RM000
Operating profit/EBIT 243.40 246.40
Less: Interest payable 24.00 6.20
Profit before tax 219.40 240.20
Less: Corporation tax 60.20 76.00
Profit for the year/Net Income 159.20 164.20
Add: Retained profit brought forward 52.80 171.80
212.00 336.00
Less: Transfer to general reserve - 13.50
Dividends proposed 40.20 60.00
Retained profit carried forward 171.80 262.50

EXAMPLE OF RATIO ANALYSIS
MAJU CARPETS
PROFITABILITY RATIOS
Return on Equity (ROE)
= Profit for the year x 100
Total Equity
 Indicates the return the ordinary
shareholders are earning from their
investment in the company

RETURN ON EQUITY(Continued)
Earnings per Ringgit of invested equity

capital.
2016 2017
159.2 x 100 164.2 x 100
498.3 636.6
= 32%% = 26%
The return has fallen in 2017
POSSIBLE REASONS FOR LOW
ROE RATIO
Low profit margin due to

inefficient pricing strategies or
poor control of costs
Inefficient utilisation of assets to

generate sales

TOTAL ASSET TURNOVER
= Sales
Total Assets
 This ratio indicates the efficiency in

the use of assets to generate sales

TOTAL ASSET TURNOVER (Continued)
2016 2017
2,240.80 2,681.20
990 1023.40
= 2.26 times = 2.62 times

NET OPERATING PROFIT
MARGIN
= Operating Profit x 100
Sales
Indicates the profit earned before interest, taxes &

other non-operating items for every ringgit of
revenue.
It ignores differences in financing
Considered the ideal measure of operational
performance.

NET OPERATING PROFIT
MARGIN (Continued)
2016 2017
243.4 x 100 246.4 x 100
2,240.8 2,681.2
= 10.86% = 9.19%
The net operating profit margin has reduced in
2017.
Possible Reasons For Low Ratio
 Poor control of cost of saleds and/or expenses
 Inefficient pricing strategies
 Inefficient use of assets to generate revenue

RETURN ON ASSETS (ROA)
= Operating Profit x 100

Total Assets
Indicates the profit earned before interest &

taxes for every dollar of asset employed.
Determined by profit margin & total asset
turnover.

RETURN ON ASSETS (ROA)
2016 2017
243.4 x 100 246.4 x 100
990 1023.40
= 24.59% 24.08%

RETURN ON ASSETS (ROA) (Continued)
= Profit Margin x Total Asset Turnover

= Operating Profit x Sales
Sales Total Asset
2016 2017
= 10.86% x 2.26 9.19% x 2.62
= 24.54% = 24.08%
A slight drop in 2017 due to lower profit margin

GROSS PROFIT MARGIN
= Gross Profit x 100
Sales
This ratio measures the profitability in buying
or producing goods & selling these goods before any
expenses are taken into account.
 Cost of sales represent a major cost for retailing,
wholesaling and manufacturing business & change
in this ratio can have a major impact on the bottom
line of the company (i.e. net profit)

GROSS PROFIT MARGIN (Continued)
2016 2017
495.4 x 100 609.2 x 100
2,240.8 2,681.2
= 22.11% = 22.72%
A slight increase is indicated in 2017.
Possible Reasons for Low Ratio
 Inefficient pricing strategy due to selling price too
low & volume not high enough
 Poor control of cost of sales due to high cost price
and/or inefficient use of materials.

COST RATIOS AFFECTING
PROFITS
= Cost of Sales x 100
Sales
2016 2017
1,745.40 x 100 2,072 x 100
2,240.80 2,681.20
= 77.89% = 77.28%
Slightly better control of cost of sales in 2017.

COST RATIOS AFFECTING
PROFITS (Continued)
= Operating Expenses x 100
Sales
2016 2017
= 252 x 100 362.8 x 100
2,240.8 2,681.20
= 11.25% = 13.53%
Poor control of expenses in 2017.
Therefore, this shows that the reason for the
lower profitability in 2017 was poor control of
expenses.

SUMMARY OF PROFITABILITY
OF MAJU CARPETS BHD
 Efficient utilisation of assets

 Good control of cost of sales &
good efficient pricing strategy
 Poor control of expenses

EFFICIENCY RATIOS
Indicates the efficiency in managing the
resources of the business.
Average Age of Inventory
= Average inventory x 365 days
Cost of sales
Measures the average number of days
stocks are being held.

AVERAGE AGE OF INVENTORY
(Continued)
2016 2017
(241+300)/2 x 365 (300+370.8)/2 x365
1,745.4 2,072
= 57 days = 59 days
Average stock held is older in 2017

More funds tied up in stock in 2017

(Continued)
Should also consider future demand,
possibility of future shortages, future
price increases, amount of storage space
available & the perishability of the
product.
The nature of the business & seasonal
factors also determine the amount of
stocks to be carried.

(Continued)
EXAMPLE AGE HIGH/LOW
Used car dealership

Hypermarkets
Food businesses
Manufacturing businesses

RECEIVABLE COLLECTION
PERIOD
= Trade Receivables x 365 days
Credit Sales
This ratio indicates how long it takes the credit
customers to pay the company. This can have a
significant impact on the cash flow of the company.
2016 2017
240.8 x 365days 210.2 x 365 days
2,240.8 2,681.2
= 39 days = 29 days
More efficient collection in 2017
RECEIVABLE COLLECTION
PERIOD (Continued)
Long settlement period indicates that the co. is
taking a long time to collect from its credit
customers
Would mean that funds are tied up for longer
period which cannot be used for profitable purposes.
Possible reasons for high ratio includes
Collection dept. not aggressive
Poor choice of customers
Economic downturn

SETTLEMENT PERIOD FOR
TRADE PAYABLES
= Trade payables x 365 days
Credit purchases
This ratio indicates how long on average it takes
the co. to pay its trade creditors.
2016 2017
221.4 x 365days 228.8 x 365 days
1,804.4 2,142.8
= 45 days = 39 days
Creditors are being paid earlier in 2017

SETTLEMENT PERIOD FOR TRADE
PAYABLES (Continued)
Trade Credit is a free source of finance for

businesses
Normal for some businesses to pay trade
creditors much later than the agreed terms.
However, such a practice when taken to
extreme can result in a loss of goodwill
with suppliers

SUMMARY OF EFFICIENCY
OF MAJU CARPETS
 Poor control of stock/inventory

 Good management of debtors
 Paying creditors earlier – good supplier
relationship

LIQUIDITY RATIOS
Indicates the ability of the co. to meet its
short-term liabilities from current assets
Current Ratio
= Current assets
Current liabilities
This ratio compares the liquid assets of a
business with the current liabilities

CURRENT RATIO (Continued)
2016 2017
544.20 584
291.7 326.8

CURRENT RATIO (Continued)
A hypermarket would have a low current

ratio as it will hold only fast-moving stocks of
finished goods and will sell mostly for cash.
A high current ratio indicates liquidity & is
thus preferred.
However, if very high could mean that co.
has over –invested in current assets
For Maju Carpet Bhd, the liquidity position
has slightly deteriorated in 2017.
ACID TEST RATIO
A more stringent test of liquidity.
For many businesses the inventory takes the
longest time to be converted to cash
Some companies may include old inventory
items in their books, giving suppliers a false
sense of safety
= Current assets – closing inventory
Current liabilities

ACID TEST RATIO (Continued)
2016 2017
544.20 – 300 584 – 370.8
291.7 326.8

CASH FLOW RATIO
= Net Cash Flow from Operating Activities

Current liabilities
This indicates the ability of the co. to meet its current
obligations from its operating cash flows.
2016 2017
231 251.4
291.7 326.8

OPERATING CASH FLOWS TO MATURING
OBLIGATIONS(Continued)
The higher the ratio the better the liquidity

of the business.
Advantage because the operating cash flows

are a more reliable guide to the liquidity
For Maju Carpets Bhd, it has slightly deteriorated

in 2017.

SUMMARY OF LIQUIDITY
OF MAJU CARPETS BHD
 All ratios getting worse in 2017

– becoming more risky

GEARING RATIOS
Indicates the level of financing provided by outside
parties like debenture holders, banks, etc.
The higher the financing from outside parties, the
higher the gearing of the co.
This will result in higher commitment to pay
interest charges & principle on maturity.
This burden can significantly increase the risk of
the co. becoming bankrupt. Why then would a
business want to borrow?

GEARING RATIOS(Continued)
The reasons for borrowings include:-
 Owners have insufficient funds
 Interest expenses are an allowable expense
against tax which can reduce the financing
cost
 As a means of increasing returns to owners
 Nature of industry & cash flows.

DEBT RATIO
= Total liabilities
Total assets
2016 2017
491.70 386.80
990 1023.40
A low ratio indicates low gearing and vice-versa

DEBT TO EQUITY RATIO
 Total debt
 Total equity
2016 2017
200 60
498.30 636.60
0.40 times 0.09 times
DEBT COVERAGE RATIO
 Time taken to pay non-current liabilities
from net cash flow from operating activities
Non-Current liabilities
 Net Cash Flow From Operating activities
 2016 2017
200 60
231 251.4
= 0.87 years = 0.24 years

INTEREST COVER RATIO
Indicates the amount of profit available to
cover interest expense.
= Profit before interest and tax
Net Interest or Finance Cost
2016 2017
243.4 246.4
24 6.2
= 10 times = 40 times

INTEREST COVER RATIO(Continued)
Low ratio indicates a low safety level to lenders &

therefore high risk & a high ratio indicates good
safety to lenders & therefore low risk.
The safety level to lenders has increased

tremendously in 2017 due to a substantial
repayment of loans, thus resulting in lower interest
payments.

SUMMARY OF GEARING
OF MAJU CARPETS BHD
 Very low gearing losing out on tax

incentives
 Should consider increasing gearing &
improving liquidity but keeping an eye on
risk.

END OF MODULE 1

PBCC Module 1

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PLANNING, BUDGETING &

GOOD MORNING & A WARM

Presented by : GERALD PERIES

Prepared by: Gerald Peries 1

Prepared by: Gerald Peries 2

ASSETS = LIABILITIES +OWNER’S

Prepared by: Gerald Peries 4

 Claims by third parties against

Prepared by: Gerald Peries 5

Prepared by: Gerald Peries 6

 Ownership claim on assets after deducting

Prepared by: Gerald Peries 7

 Drawings – withdrawal of funds for

Prepared by: Gerald Peries 8

Prepared by: Gerald Peries 9

2. Purchased RM5,000 of stationery on credit.

3. Purchased RM4,000 of office equipment on credit

4. Sold stationery RM4,000 for cash. The cost was $2,500

5. Paid salaries RM800 for September.

6. Paid rent for September RM400.

7. Paid RM1,000 owed to creditor for office equipment.

8. Paid RM200 for cleaning services.

9. Sold stationery RM 500 on credit. The cost was $300

CASH + INVENTORY + A/R + O. EQUIP. = A/P + J.WONG

Prepared by: Gerald Peries 11

Prepared by: Gerald Peries 12

INCOME STATEMENT OR PROFIT & LOSS

Prepared by: Gerald Peries 15

Prepared by: Gerald Peries 16

Prepared by: Gerald Peries 17

Cash flows from Operating Activities

Net Cash flow operating activities RM2,600

Cash flows from investing activities

Net Cash flow investing activities (RM1,000)

Cash flows from financing activities

Prepared by: Gerald Peries 19

 Expenses not due yet but paid in advance

Prepared by: Gerald Peries 21

Prepared by: Gerald Peries 23

The charge in the Income Statement for the

Prepared by: Gerald Peries 24

Prepared by: Gerald Peries 25

Prepared by: Gerald Peries 26

2017 Machinery 2000 800 1,200

2018 Machinery 2000 1,200 800

Prepared by: Gerald Peries 28

Prepared by: Gerald Peries 29

Prepared by: Gerald Peries 30

Compares the relationship among selected items in

Prepared by: Gerald Peries 32

 All sales and purchases are on credit.

Prepared by: Gerald Peries 33

Balance Sheets As At 31 March

Fixtures and fittings at cost 129.00 160.40

NON -CURRENT LIABILITIES

TOTAL LIABILITIES & EQUITY 990.00 1,023.40

Prepared by: Gerald Peries 36

Operating profit/EBIT 243.40 246.40

Less: Interest payable 24.00 6.20

Profit before tax 219.40 240.20

Less: Corporation tax 60.20 76.00

Profit for the year/Net Income 159.20 164.20