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CASE 1

1.0 An accountant prepared a balance sheet for a business. In the balance sheet, the equity of the
owner was shown next to the liabilities. This confused the owner, who argued: My equity is my
major asset and so should be shown as an asset on the balance sheet. How would you explain this
misunderstanding to the owner?

2.0 The accountant goes on to explain that the the balance sheet shows how much a business is worth.
Do you agree with this statement? Discuss.

CASE 2
3.0 Valuing Brands as part of intangible product in the Balance Sheet.

Millward Brown Optimor, part of WPP marketing services group, recently produced
a report which ranked and valued the top ten world ranking brands for 2007 as
follows:

Ranking Brand Value ($M)


1 Google 66,434
2 GE (General Electric) 61,880
3 Microsoft 54,951
4 Coca-cola 44,134
5 China Mobile 41,214
6 Marlboro 39,166
7 Wal-Mart 36,880
8 Citi 33,706
9 IBM 33,572
10 Toyota 33,427

We can see that the valuations placed on the brands are remarkable; they show how
much of a companys value can b tied up in brand equity.

Discuss your observation here.


Clue An intangible assets that lack clarity in identity and cost of acquisition and
the issue of measurability.

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CASE 3
4.0 COMPREHENSIVE CASE STUDY .

Betty set up the printing shop business on 02 January 2011. She is new to running a business and so has
only been able to maintain some basic records, including those of her cash transactions. Betty has hired
you for an agreed fees of RM1,000 to prepare her end of year financial accounts and to explain some
accounting principles which are puzzling her. The agreed fees will be paid after you have completed the
accountancy work. She has provided you with the following letter which contains information about her
business activities during the year.

Dear sir,

Thank you for agreeing to act as my accounts preparer and also for agreeing to deal with some rather
puzzling points which, I have to confess, have been making my brain hurt. I started the printing shop
business with just RM2,000 in cash, which I deposited in the business bank account on 2 January of this
year. All cash transaction have gone through the business bank account. I was fortunate in obtaining loan
of RM28,000 from the CIMB Bank on 2 January. I immediately used the loan to purchase some essential
desktop printing equipment for RM20,000 in cash. I used the remainder of the loan to purchase a van, to
be used to delivering printing orders to clients, for RM8,000 in cash. I also purchased on 2 January a
stock of paper on credit for RM30,000. An experienced businesswoman friend of mine has explained that
I need to depreciate both my printing equipment and a van. I do not understand this point at all, as I paid
for both items in cash surely that is the only cost that matters, as I have paid for both the assets in full?
Anyway, my friend tells me that it is the standard practice in my line of business to depreciate the printing
equipment evenly over its six-year life, and to depreciate the van at 25 % on the reducing balance method.
I am told that the printing equipment has a scrap value of RM2,000. I am not clear as to what all of this
advice on depreciation means, but I am sure that you will be able to explain it and work it all out for me.

During the year, I have paid an assistant salary of RM10,000 but I still owe her RM1,000 for the overtime
which she kindly agreed to work for me in December 2011. I have also drawn RM25,000 in cash for
myself out of the business bank account over the year. I obtained premises to rent at the start of the year,
and paid rent of RM12,000 in advance in cash on 2 January to cover me up to the end of June 2012.

There have been several van expenses which have arisen during the year and have been paid in cash.
Petrol expenses amounted to RM1,500. Also, there were van repairs which totaled RM500 and additional
payments for tax and insurance which came to RM1,000.

Electricity expenses paid in cash during the year amounted to RM 1000. The figure for electricity
included the last bill for RM300 for three months: it covered months of November and December 2011 as
well as the month of January 2012.

Business rates of RM9,600 were paid in advance on 01 April 2011, and covered the 12 months up to 31
March 2012. The municipal council has agreed not to charge me the rates for the first three month of
2011.

At the end of the year, I was advised by friends to carry out a comprehensive stock take for the business.
This revealed that I had a stock of paper worth RM40,000. I also found that I had spent RM60,000 in cash

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on purchase of paper during the year, and also owed creditors RM50,000 for purchases of paper during
the year. I have received cash from sales of printing work of RM120,000 during 2011. I also discovered
that I had debtors who owed me RM40,000 for printing work, which I have carried out for them during
the year.

I also appear to have a problem debtor. The bank has informed me that a cheque from one debtor, Shark
Enterprise, which owes me RM4,000, has bounced many times and so unfortunately I am not likely to
obtain any money from that firm now or in the future. The bank manager has also suggested that I should
make a provision of 10 % of the remaining debtors in order to allow for possible problems with people
who do not settle their debts in future. I am not clear as to how this might be done, but hope that this
suggestion make sense to you when you put all this business information together.

During the year, as you may want to know, I took a modest amount of paper for my own use out of the
business. This paper was worth RM1,000. Also, I was able to pay the total interest of RM3,000 which
was due on the loan in cash, and was able to repay RM2,000 of the loan to the CIMB bank.

I hope that you can make sense of all the information that I have provided for you above. I understand
that you can prepare some accounts for me, although I am not really sure if it is necessary to do this. If I
can aim just to end up with a cash surplus at the end of the year, then is that not sufficient to show
everyone that the business is doing well?

Best wishes

Yours sincerely

Betty.

REQUIRED.

1. Show Miss Betty whether the firm is making profit or loss. (To support this outcome, you are
required to assist to prepare an Income Statement)
2. Show Miss Betty the net worth of her assets by representing them through the balance sheet
preparation.
3. Explain to Miss Betty the importance of depreciating the fixed assets.
4. Explain to Miss Betty the purpose and importance of making provision for doubtful debts.

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