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INSTRUCTOR’S MANUAL

CHAPTER
Financial
2 Environment

Learning Objectives
• Identify the basic forms of business in Malaysia and explain the respective strengths and
weaknesses
• Identify, describe and explain the various financial statements that businesses produce
• Prepare simple financial statements of a firm
• Show an appreciation of the makeup of financial markets in Malaysia
• Distinguish between primary and secondary markets

Key Teaching Points


FORMS OF BUSINESS
• Businesses come in various forms. The three basic forms are:
(a) Sole proprietorship
(b) Partnership
(c) Company (firm)
• Sole proprietorship is a business operation owned and managed by a single person. The owner
has complete control of the business and all gains and losses arising from the business shall be
attributable to the owner.
• Partnership is the coming together of two or more individuals for a common purpose to operate
a business together. There are two types of partnership, i.e. the general and limited liability
partnership.
• Under general partnership, each partner shall be liable, jointly and severally, for the gains and
losses incurred by the business.
• Under limited partnership, the liability of certain partners shall be limited to the amount put in by
the said partner as capital into the business.
• In the case of company (firm), it is a separate, distinct entity as defined by the Companies Act,
1965.
• Ownership is by way of shareholdings in the firm. Firms can have unlimited life and shareholders’
liability is limited.
• There are advantages and disadvantages when there is a situation of separation of ownership and
management.

FINANCIAL STATEMENT OF A COMPANY


• Financial statements of a firm comprise (at the minimum):
(a) Income Statement
Instructor’s Manual
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(b) Statement of Financial Position


(c) Statement of Cash Flows
• Income statement provides information on a firm’s operations’ profitability over a financial period.
The simple accounting definition is given by: Income = Revenue – Expenses
• Table 2.1 on page 25 provides an illustration of an Income Statement.
• Statement of Financial Position sheet reports the assets, liabilities and shareholders’ equity.
• Assets are the resources owned by the firm. Liabilities and shareholders’ equity are the funding
obtained by the firm to finance the assets.
• The main classifications are non-current assets, current assets, current liabilities, non-current
liabilities and equity
• Table 2.2 on page 26 provides an illustration of a Statement of Financial Position.
• Statement of Cash Flows provides information on the cash receipts, payments and the consequential
net change in cash balances in a firm for a specific period. It allows for the assessment of a firm in
terms of:
(a) Ability to generate future cash flows
(b) Ability to pay dividends and meet liabilities
(c) Cash investing and financing transactions during a financial period
• Cash flows are classified under the following headings:
(a) Operating activities
(b) Investing activities
(c) Financing activities
• Table 2.3 on page 29 provides an illustration of the Statement of Cash Flows.

FINANCIAL MARKETS
• Financial markets perform the essential economic function of channeling funds from the providers
of finance that have surplus funds, to those who have a shortage of funds and hence, require funds.
• Financial markets facilitate savings by individuals, provide a platform for users of finance to raise
funding, provide a channel for interaction between savers and users and finally, provide financial
services.
• Financial markets comprise of: a) Money markets – the markets for debt securities that will be
repaid in the short term (within one year) capital markets b) Capital markets – the markets for
long term debt (debt securities > 1 year) and equity
• Long-term debt includes bonds or loan stocks and bank term loans, leasing and hire purchase.
• Equity represents ownership in a firm. There are two types of equity: a) Ordinary shares b)
Preference shares
• Financial markets may be divided into:
(a) Primary market – used when firms (and the government as well) first issue securities for
funds. Firms engage into two types of primary market activities – public offerings and private
placements.
(b) Secondary market – the holder of a security sells the security concerned to another investor.
Secondary markets provide the means for transferring ownership of a security (debt/equity).
• ASEAN Exchanges is a collaboration of the seven exchanges from Indonesia, Malaysia, Philippines,
Singapore, Thailand and Vietnam (6 countries) to promote the growth of the ASEAN capital
market by bringing more ASEAN investment opportunities to more people.
• A derivative is a financial instrument that is derived from other financial securities or some other
underlying asset. Examples of derivatives are forwards, futures, options and swaps.
• Forwards and swaps are purchased in the market for ‘private’ placements, such as through the
banks.
• Futures and options are traded on Bursa Malaysia Derivatives Exchange.

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