Preparing taxation computations guidance

Yong Siew Chuen is examiner for CAT Paper 9 (MYS)

This short article aims to provide a few general pointers for candidates sitting CAT Paper 9, Preparing Taxation Computations (MYS), in December 2007 and beyond.

YEAR OF ASSESSMENT

The latest year of assessment examined in each sitting is as follows:

Exam session	Latest year of assessment examined
December 2007	Year of assessment 2007
June 2008	Year of assessment 2007
December 2008	Year of assessment 2008
June 2009	Year of assessment 2008

In each instance, the laws relating to the latest year of assessment would have long been enacted and gazetted, as in Example 1

Example 1

In the December 2007 exam, to be held on 11 December 2007, questions set will relate to the year of assessment 2007 and to prior years of assessment. In accordance with the six-month rule, the laws examined will be those enacted as at 31 May 2007. The amendments to the laws relating to the year of assessment 2007 have already been enacted and gazetted in the form of the Finance Act 2006 on 31 December 2006.

Read the question

Reminding students to read questions carefully may sound obvious to some, but it is a fact that - in the exam - many candidates do not read the question. Instead, they see certain key words in the question and they immediately proceed to write down everything they can remember about the topic.

VALID APPEALS

Example 2

When answering the question ‘Explain what constitutes a valid appeal’, the answer should deal with the necessary ‘ingredients’ of such an appeal, stating that it should be:

• submitted within 30 days of the assessment or additional assessment
• submitted in writing
• sufficiently supported with grounds of appeal.

What often happens when candidates answer this question?

Instead of stating the above, many candidates launch into a description of the passage of an appeal through the court hierarchy in the Malaysian legal system, and explain in detail about the process of applying for an extension of time for the appeal. Take the time to read the question carefully; note the key words, determine what is required, and then proceed to answer the question.

START ON A NEW PAGE

Starting the answer to a new question on a new page helps the marker to accurately add up the marks for each question. Sometimes, candidates end the answer to a question and start the answer to the next question on the same page. This means that the total marks for the page of the exam script relate to two or more questions, thus impeding the marker when adding up individual question marks. Always start a new page for a new question - a simple thing to do, but nevertheless very important.

Incomplete records

Incomplete records – Examples

Example 1
Tony Cook is a self employed plumber. His financial details for the years ended 1999 and 2000 showed:

	1999	2000
Assets:
Motor Vehicle	6,500	5,500
Equipment	2,500	2,000
Stock	750	1,650
Cash at Bank	900	1,300
	10,650	10,450
Less Creditors	750	650
	£9,900	£9,800

Tony’s drawings for the year were £10,650. He had sold some shares for £1,050, the proceeds of which he had paid into his business bank account.

Thus, profit for the year can be calculated as:

	£
Capital at start of the period	9,900
Add capital introduced (sale of shares)	1,050
	10,950
Drawings for period	(10,650)
	(300)
Capital at the end of the period	9,800
Net profit	9,500
	£
so: Capital at start of year	9,900
Add capital introduced	1,050
	10,950
Add profit for year	9,500
	20,450
Less drawings	10,650
Capital at end of year	9,800

The balance sheet figures should be supported by reconciled bank statements, unpaid sales invoices totalling the sum included as debtors, unpaid purchase invoices totalling creditors, and receipts for payments for fixed assets along with depreciation calculations.

Example 2
A similar approach can be used to determine sales and purchases totals, when given a cash book showing receipts and payments, together with opening and closing debtors and creditors. The following illustrates the use of such techniques.

John Risdon is a self employed motor engineer. He maintains a cash book to record his business receipts and payments. The following is a summary of the cash book for year ended 31 December 2000:

Cash Book
£ Balance b/d 1,500 Cash received from work done 39,300 Sale of own car 4,000 £44,800	£ Drawings 14,100 Materials 17,300 Van running expenses 4,100 Wages, trainee 5,100 Admin 250 Tools and consumables 600 General expenses 350 Balance c/d 3,000 £44,800

Assets and liabilities at 31 December 1999 and 2000 were:

	1999 £	2000 £
Motor van	7,500	5,000
Stock materials	1,350	1,450
Debtors for work done	3,400	3,750
Creditors for supplies	1,250	1,450
Van insurance pre-paid	160	170

The motor vehicle had been purchased second hand on 1 January 1999 for £10,000 and is subject to depreciation at 25% per annum, straight line, (that is, it is being written off over four years, its expected useful economic life).

This information can be used to produce statements for the year ended 31 December 2000.
Opening capital can be arrived at by using the “accounting equation”.

£ Assets: Motor van 7,500 Stock 1,350 Debtors 3,400 Cash at bank 1,500 Pre-payments 160 13,910 Less creditors 1,250 Capital £12,660	(see cash book summary)
Work done during the year:
	£
Cash received during the year	39,300
Less owed at start of the year	3,400
	35,900
Add owed at end of the year	3,750
	£39,650

This can also be shown in the form of a control account:

Sales Ledger Control
2000 £ Balance b/d 3,400 2000 Work done 39,650 43,050 2001 Balance b/d 3,750	2000 £ Receipts from debtors (cash book) 39,300 Balance c/d 3,750 43,050

Likewise the purchases and motor van running costs (where, because opening and closing creditors and debtors, the insurance pre-payment; and the actual amounts paid are all known, the charge for the year can be calculated).

Purchase Ledger Control
£ 2000 Payments to creditors for materials 17,300 Balance c/d 1,450 18,750	£ 2000 Balance b/d 1,250 2000 Purchases 17,500 18,750 2001 Balance b/d 1,450
Motor Van Running Costs
£ 2000 Balance b/d (pre-payment) 160 2000 Payments 4,100 4,260 2001 Balance b/d 170	£ 2000 Charge for year 4,090 Balance c/d 170 4,260

Notes for Preparation of the Final Accounts
NB: The difference between the opening and closing motor van valuation (£7,500 – £5,000 = £2,500, is the depreciation charge for the year, ie: (£10,000 x 25% per annum).

The proceeds from the sale of the personal motor vehicle, which were paid into the business bank account, represent capital introduced. Other costs are shown in the summary cash book extract.

We can now draft the final accounts for the year ended 31 December 2000.

Trading and Profit and Loss Account of J Risdon for Year Ended 31 December 2000

		£
Work done		39,650
Opening stock of materials	1,350
Add purchases	17,500
	18,850
Less closing stock of materials	1,450
Cost of materials used		17,400
Gross Profit		22,250
Wages	5,100
Motor vehicle running costs	4,090
Administration	250
Tools and consumables	600
General expenses	350
Depreciation motor van	2,500
		12,890
Net profit for year		£9,360

Balance Sheet as at 31 December 2000

	Cost £	Depreciation £	Net Book £
Fixed assets:
Value
Motor van	10,000	5,000	5,000
Current assets:
Stock		1,450
Debtors		3,750
Cash at bank		3,000
Pre-payment		170
		8,370
Less:
Current liabilities:
Creditors		1,450
Net current assets			6,920
Total assets less current liabilities			11,920
Financed by:
Opening capital			12,660
Add capital introduced			4,000
			16,660
Add profit for year			9,360
			26,020
Less drawings			14,100
			11,920

Complete the Manufacturing Process, Sell the Product, Collect the Receivable

Complete the Manufacturing Process
At last, we have completed our manufacturing process. Now we can move the product from the work in process inventory to the finished goods inventory. This transaction particularly interests the sales staff, since it means that the product is now available for sale, and that's what generates their commissions. The entries into the accounting system that record this event go like this:

Reduce work in process inventory Increase finished goods inventory

We've now completed the sixth and seventh steps of the business cycle.

Sell the Product
At last we're ready to make a sale. If it's a credit sale, our accounting system must record these transactions:

Reduction in finished goods inventory Increase in accounts receivable Increase in sales revenue

If this was a cash sale, replace the increase in receivables with an increase in cash. We just finished the eighth step of the business cycle.

Collect the Receivable
The final stage of the business cycle is conversion of the receivable (which is an asset) into spendable cash. When the customer pays, the accounting system records a decrease in receivables and an increase in cash.

This ends the business cycle and the various accounting transactions involved. The accounting system we're setting up will cover every one of these transactions.

ACCOUNTING FOR THE BUSINESS CYCLE

ACCOUNTING FOR THE BUSINESS CYCLE
The business cycle is nothing more than the flow of transactions needed in your business to complete a sale and collect the proceeds. It's important to setting up your accounting system. We want to know what types of transactions are involved and the accounting entries to make along the way. Most companies business cycles progress something like this:

1.Purchase raw materials.
2.Enter goods into raw materials inventory.
3.Begin the manufacturing or assembly process.
4.Enter goods into work in process inventory.
5.Pay suppliers or pay employees (at service companies).
6.Complete the manufacturing or assembly process.
7.Enter goods into finished goods inventory.
8.Sell the inventory.
9.Collect payment for credit sales.

Briefly, here is the way your accounting system interacts at each stage of the business cycle.

Purchase Raw Materials
What happens when you buy the raw materials used to create your company's product? You receive the goods, and you either pay cash for the goods or obligate the company for future payment. Both transactions require these accounting entries:

Increase raw materials inventory Decrease cash (if you paid on the spot) Increase accounts payable (if you didn't)

At this point, we've covered the first two steps of the business cycle listed above.

Begin the Manufacturing Process
When we use raw materials to make our product, the accounting system transfers the inventory from raw materials to an intermediate stage called work in process (WIP for short). This transaction explains the third and fourth steps of the business cycle.

Pay Suppliers
Sometime during the production process we must pay our suppliers if we bought the raw materials on credit. The accounting entry for this transaction does two things:

Reduces accounts payable Reduces cash