FINANCIAL ACCOUNTING 1.0 1.0 INTRODUCTION (RUBRICS 1) Objective of the p pe! "# i"t!

o#$ctio" to the %e&ecte# co'p "( Accounting is an information system that selects data, processes that data and produces information about an economic entity (Kolitz, Quinn and McAllister, 2009, p. !". #he end result i.e. the accounting information is intended to be used by users $hich can be di%ided into internal and e&ternal users. #he definition of internal and e&ternal users $ill be elaborated further in this paper in the paragraph belo$. #he ob'ecti%e of this paper is to identify and analyse the characteristics or (ualities of accounting information for the internal and e&ternal users of a public listed company. )or this purpose, the paper has selected the financial information as found in the annual report of *estle (M" +hd, a company listed in the main board of +ursa Malaysia +erhad under the consumer products sector $ith ,-0- as its stoc. code identifier (+ursa Malaysia, 20/2". *estle (M" +hd (hereinafter *estle", is in%ol%ed in the manufacturing of consumer food products $hich is sold under se%eral household names e.g. Milo, *escafe, and Maggi. #his paper $ill analyse the latest a%ailable annual report of *estle (M" +hd i.e. for financial year 20// $hich can be do$nloaded from +ursa Malaysia $ebsite.

*estle0s history in Malaysia can be traced bac. to more than /00 years ago $ith the establishment of the Anglo12$iss 3ondensed Mil. 3ompany in 4enang $hich later mo%ed to Kuala 5umpur in /969 to accommodate the business gro$th and e&pansion. 2ince its first factory in 4etaling 7aya commenced operation in /9!2, *estle no$ has se%en factories and operates from its head office in Mutiara 8amansara. #he 3ompany $as publicly listed on the +ursa Malaysia +erhad (then .no$n as Kuala 5umpur 2toc. 9&change or K529" on /6 8ecember, /9 9. #oday, the 3ompany employs more than :000 people and manufactures as
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$ell as mar.ets more than 600 Halal products in Malaysia. ;ts brand name such has M;5<, *923A)=, MA>>;, *924?A@ and K;# KA# need no introduction to the household of Malaysia (*estle, 20/6".*estle0s mission is to be the A$orld0s leading *utrition, Bealth and Cellness 3ompanyD (*estle, 20/6b".

*estle has a set of corporate %alues $hich act as their corporate moral compass. #here four %alues $hich *estle focused on (*estle, 20/6b" namely E

#rust E #he company $ill earn trust from its sta.eholders (staff, consumers and business partners" $ith by being competence, honest and ha%ing integrity.

?espect E #he company respect and care for their multi1cultural, multi1religious and multi1traditions staff.

;n%ol%ement E #he company is proacti%ely in%ol%ed in proacti%e change to create sustainable and profitable gro$th

4ride E #he company feel proud in passionately building successful brands through their people and the (uality of all the company0s acti%ities and products.

A (uic. glance on the annual report 20// for *estle $ill sho$ a fe$ financial highlights $orth mentioning. )or )@20//, *estle together $ith its subsidiaries as a group reported a profit before ta& of ?M:: , 09,000, an increase of 20F from )@20/0 profit before ta& of ?M,!:,-,,,000. 4rofit after ta& and minority interest stands at ?M,:!,60/,000, up /!.!F

from ?M69/,69 ,000 in )@20/0 8i%idends paid and proposed for )@20// is ?M,22,/00,000 up 9./F from ?M6 !,92:,000 recorded in )@20/0 (*estle, 20/2, p. 6".

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T*+

,UALITATI-+

C*ARACT+RISTICS

OF

ACCOUNTING

INFOR.ATION (RUBRICS )/ 0 AND 1) ).1 Defi"itio" of i"te!" & "# e2te!" & $%e!% ;nformation produced by the accounting process is directed at se%eral types of users. +roadly spea.ing, these users can be categorized into t$o categories G the internal and the e&ternal users. #he different needs of these t$o categories of accounting information users are addressed by different types of accounting information generated by different accounting sub1disciplines. )inancial accounting is the area of accounting $hich is primarily concerned $ith the preparation of general use financial statements for creditors, in%estors and other users outside of the company G in other $ords, they are e&ternal users. #he other type of financial information is generated by managerial accounting discipline. Managerial accounting is primarily concerned $ith generating financial and non1financial information for use by the management of the company i.e. the company0s managers $ith decision ma.ing roles in the company. #hese decision ma.ing managers are .no$n as the internal users of accounting information (7ac.son, 2a$yer and 7en.ins, 2009, p.60". #he paragraph belo$ $ill e&plain in detail the definition of internal and e&ternal users.

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I"te!" & $%e!% ;nternal users of accounting information are those indi%iduals inside a company $ith

the role of planning, organizing and running the company. #he designations of the people in this categories %ary G they include mar.eting managers, production super%isors, finance directors, e&ecuti%es and the list is not e&hausti%e. ;n running the business, the internal users
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are faced $ith important and rele%ant (uestions $hich demand ans$ers and decisions. #o ans$er these (uestions, internal users needs detailed the right accounting information. Managerial accounting is the type of accounting that pro%ides the accounting information needed by these internal users $hich is needed for their decision ma.ing process. 9&ample of accounting information directed to$ards internal users are financial comparisons of operating alternati%es, pro'ections of income from ne$ sales campaign and forecasts of cashflo$ for the ne&t operating years (Ceygandt, Kimmel and Kieso, 2009, p.!".

#he information needed by these internal users often include non1financial data (direct labour hours, units to brea. e%en etc." and are often future oriented (e.g. cashflo$ pro'ection" rather than historical (e.g. report on e&penses" (7ac.son, 2a$yer and 7en.ins, 2009, p.6,".

).1.)

+2te!" & $%e!% 9&ternal users are those users not directly in%ol%ed in the operations of the company0s

business. #he types of information that they need are different from those needed by the internal users. )urther, since the ability of e&ternal users to obtain the information is limited (since they are AoutsidersD to the company", they mostly ha%e to rely on the information presented to them by the company management (4orter and *orton, 20/6, p. //". According to 7ac.son, 2a$yer and 7en.ins (2009, p.6,", e&ternal users of accounting information and the type of accounting information $hich they need can be summarised as belo$ E

2./.2./ 2hareholders and creditors of the company

#ype of information needed by this type of e&ternal users are sales, gross profit, net income, cash flo$, assets and liabilities, earnings per share etc. Although the information is primarily financial it may also include non1financial information and this information is often pro%ided in summary form summarizing the rele%ant state of affairs of the company as a $hole.

2./.2.2 >o%ernment agencies

#he accounting information needs of go%ernment agencies %ary according to agencies. )or e&ample the ;nland ?e%enue 2er%ice (;?2" needs information on ta&able profits $hereas the 2ecurities 3ommission may re(uire information on compliance.

2./.2.6 3ustomers and suppliers

3ustomers and suppliers need to .no$ information such as their order status, shipping dates, in%entory le%el and others.

2./.2., <ther users

Apart from the abo%e, there are other e&ternal users such as researchers, consumers, stoc. e&change, bro.ers, under$riters, economists, the press and the public at large. #hese Aother usersD ha%e di%erse interests $hich is different from one another but they share one thing in common i.e. they need accounting information for their o$n specific purpose (Ahmed, 200 , p.9".#he internal and e&ternal users obtained the accounting information $hich they needed through %arious sources such as the company annual report, ta& return,
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%arious reports by the company and other documents. #his paper0s ob'ecti%e ho$e%er $ill only identify and analyse the characteristics or (ualities of accounting information for the internal and e&ternal users of the company as obtained from the company0s annual report.

).)

Re&i bi&it( ch ! cte!i%tic of cco$"ti"3 i"fo!' tio" fo! i"te!" & $%e!%. ?eliability means the accounting information possesses the (uality that permits users

to depend on it $ith confidently. Chat this means is that the accounting information must be %erifiable, has faithful representation, and is reasonably free of bias (the neutrality (uality". Herifiability refers to the inherent (uality of the accounting information $hich enables multiple measurers (i.e. such as accountants and auditors" to reach the same conclusion that the accounting information represents $hat it purports to represent or that the chosen method of measurement has been used $ithout error or bias. ?epresentational faithfulness refers to correspondence or agreement bet$een a measure or description as pro%ided by the accounting information and the phenomenon that it purports to represent. (<baidat, 200-, p. 2 ". ?eliability also means that the accounting information being presented is neutral $ith regards to parties potentially affected. ;n that regard, neutrality is closely related to the establishment of accounting standards. 3hanges in accounting standards ad%ersely affect the economic condition of certain companies, their in%estors and creditors, and other interest groups. (2piceland, 2epe and #omassini, 200-". 9&ample of reliability characteristics in the 20// annual report of *estle are E /" Herifiability E supposed that some internal users in *estle e.g. the finance directors needs to .no$ the total liabilities of *estle for )@20// in order for them to chart the strategic direction of *estle for )@20/2, they can refer to the statements of financial positions as at 6/st 8ecember 20// (at page /0 of )inancial ?eport 20//". #he information that they need is contained in the reports on liabilities. )rom the financial
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report, $e .no$ that the total liabilities (current and non1current liabilities" of *estle for )@20// is ?M/,6!/,,!6,000 $hich comprised of loans and borro$ing, employees benefits,deferred ta& liabilities, trade and other payables and ta&ation. 2e%eral accountants and auditors can %erify these items ($hether the detailed brea.do$n of the amount is correct or not" by as.ing *estle to furnish all the rele%ant documents $hich recorded these transactions and these different accountants and auditors in all probabilities $ill come to the same conclusion that the amount is either correct or $rong.

2"

?epresentational faithfulness E the accounting information contained in *estle )@20// financial report is reliable from the aspect of faithfulness of representation since the notes to the financial report pro%ide an e&planation of $hat real $orld phenomenon that a particular measure or description in the financial report purports to represent. )or e&ample, the term in%entories $hich is understood by users to

represent items that are intended for sale in the ordinary course of business ((2piceland, 2epe and #omassini, 200-". Cithout notes number 9 to the financial statement at page 6, of the financial report. #he term in%entories as used in the financial report $ill be misleading i.e. lac. representational faithfulness, but since the term in%entories as used in the financial report has already been e&plained by notes number 9 to include items not ordinarily understood to be in%entories, then the accounting information $ith regard to in%entories does possess representational faithfulness.

6"

*eutrality E *estle )@20// financial report possesses the (uality of neutrality since the financial statements of *estle (as a >roup and as a company" ha%e been prepared
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in accordance $ith )inancial ?eporting 2tandards ()?2s", generally accepted accounting principles and the 3ompanies Act, /9!: in Malaysia (p. /!, basis of preparation, financial report 20//". #his means that the accounting information is not prepared arbitrarily but by a specific standards $hich enable the preparers to prepare the accounting information in an ob'ecti%e $ay.

As a conclusion for this part on reliability characteristics of the accounting information, it is clear that internal users such as the management at *estle can base their decision ma.ing on the accounting information contained in *estle )@20// financial report since the same possess reliability characteristics needed for the internal users to base their decisions.

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Re&ev "ce ch ! cte!i%tic of cco$"ti"3 i"fo!' tio" fo! e2te!" & $%e!%. ?ele%ance means that the accounting information presented possesses predicti%e

%alue andIor feedbac. %alue $hich ma.es the reliance on the accounting information to ma.e a difference in the decision ma.ing process (2piceland, 2epe and #omassini, 200-". 4redicti%e %alue means that the rele%ant accounting information presented can assists decision ma.ers in ma.ing predictions about the future $hereas feedbac. %alue means that the rele%ant accounting information helps the decision ma.ers confirm or correct prior e&pectations (<baidat, 200-, p. 2-". >enerally, information does both at once (i.e. assisting decision ma.ers to ma.e prediction and to confirm or correct prior e&pectation", since .no$ledge about the outcome of actions $hich ha%e already been ta.en $ill generally impro%e the decision ma.ers0 abilities to predict the results of similar future actions. 3on%ersely, lac. of .no$ledge about past e%ent $ill result in difficulty in ma.ing accurate prediction about the future (<baidat, 200-, p. 2-". #he other component (uality of the (uality
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of rele%ance is AtimelinessD. #his simply means that the information in (uestion must be a%ailable to a decision ma.er before it loses its capacity to influence decisions. ;nformation that is not a%ailable $hen it is needed or becomes a%ailable only long after it has %alue for future action has been diminished is useless (<baidat, 200-, p. 2-" . >eneral e&ample of rele%ance (uality of accounting information is the scenario that if net income and its components presented in the financial statement confirm in%estor e&pectations about future cash1generating ability, then net income has feedbac. %alue for in%estors. #his confirmation can also be useful in predicting future cash1generating ability as and $hen e&pectations are re%ised (2piceland, 2epe and #omassini, 200-". 9&ample of rele%ance characteristics in the 20// annual report of *estle are E

/" 4redicti%e and feedbac. %alue E An e&ample gi%en by 2piceland, 2epe and #omassini (200-" is that if net income and its components confirm in%estor e&pectations about future cash1generating ability, then net income has feedbac. %alue for in%estors. #his confirmation can also be useful in predicting future cash1generating ability as e&pectations are re%ised. )inding a parallel of this e&ample in *estle )@20// financial report, it is clear that the accounting information in *estle )@20// financial report has predicti%e %alue and feedbac. %alue. )or e&ample, at page //, the net profit of *estle is reported to be ?M,:!,60/,000. #his accounting information has both predicti%e and feedbac. %alue. ;t has predicti%e %alue since it can be compared $ith )@20/0 net profit of ?M69/,69 ,000 i.e. the net profit for )@20// rise /,.2F from the pre%ious year and it can safely be predicted that for )@20/2 the net profit may be around /0F1/:F more than net profit for )@20//. ;f during )@20/0, the management has predicted an increase in net profit, then this amount as reported in annual report )@20// confirm their prediction and therefore $e can say that it has feedbac. %alue.

2" #imeliness E Cith regards to timeliness, it is submitted that the accounting information as contained in the *estle0s financial report for )@20// is timely since the information contained in it is recent enough to be rele%ant to the e&ternal users $ho $ants to base their decision regarding further action to be ta.en. )or e&ample, the information on net profit for )@20// abo%e is recent enough to be rele%ant to those e&ternal users $ho $ants to chec. the )@20// performance of *estle before buying *estle0s stoc..

0.0

SU..AR4 AND CONCLUSION (RUBRIC 5)

As a summary and conclusion, to be useful to its intended users, accounting information must ha%e certain (ualitati%e characteristics, chief among them is the (uality of reliability and rele%ance. #he component (ualities of reliability are %erifiability, faithful representation and neutrality $hereas rele%ance must contain the (uality of predicti%e and feedbac. %alue as $ell as timeliness. As sho$n in the paragraphs abo%e, accounting information as found in *estle0s financial report for )@20// contains the (ualitati%e characteristics of reliability and rele%ance. As such the accounting information as found in *estle0s financial report is useful for both internal and e&ternal users as it can be used to base their decision.

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