Accounting Booklet Analysis and Interpretation

ACCOUNTING ANALYSIS AND INTERPRETATION OF FINANCIAL INFORMATION GRADE 12 © basic education =" to Lead = Department: SN __= po D Basic Education p REPUBLIC OF SOUTH AFRICA ‘A Reading Nation is a Leading Nation

Foreword In order to improve learning outcomes the Department of Basic Education conducted research to determine the specific areas that learners struggle with in Grade 12 examinations. The research included a trend analysis by subject experts of learner performance over a period of five years as well as learner examination scripts in order to diagnose deficiencies or misconceptions in particular content areas. In addition, expert teachers were interviewed to determine the best practicesto ensure mastery of thetopic by learners and improve outcomes in terms of quality and quantity. The results of the research formed the foundation and guiding principles for the development of the booklets. In each identified subject, key content areas were identified for the development of material that will significantly improve learner's conceptual understanding whilst leading to improved performance in the subject. The booklets are developed as part of a series of booklets, with each bookletfocussing onlyon one specific challenging topic. The selected content is explained in detail and include relevant concepts from Grades 10 - 12 to ensure conceptual understanding. The main purpose of these booklets is to assist learners to master the content starting from a basic conceptual level of understanding to the more advanced level. The content in each booklets is presented in an easy to understand manner including the use of mind maps, summaries and exercises to support understanding and conceptual progression. These booklets should ideally be used as part of a focussed revision or enrichment program by learners after the topics have been taught in class. The booklets encourage learners to take ownership of their own learning and focus on developing and mastery critical content and skills such as reading and higher order thinking skills. Teachers are also encouraged to infuse the content into existing lesson preparation to ensure in- depth curriculum coverage of a particular topic. Due to the nature of the booklets covering only one topic, teachers are encouraged to ensure learners access to the booklets in either print or digital form if a particular topic is taught.

TABLE OF CONTENTS 1. How to use this booklet PF 8 BN Study and examination tips Overview of Analysis and Interpretation of financial information Steps followed in Analysis and Interpretation of financial information 5. Analysis and Interpretation of Financial Information 5.1 5.2 5.3 5.4 5.5 5.6 5.7 5.8 Concepts and related information 5 Profitability 7 Liquidity 10 Solvency 12 Return 13 Financial Risk 14 How to comment using financial indicators 16 Activities 17 6. Check your answers 7. Message to Grade 12 learners from the writers 8. Thank you 32 43 44

1. How to use this booklet The main intention of this study guide is to address challenges with specific areas of subject content that was poorly answered in past NSC papers. This is informed by the detailed analysis done on each question and the findings that were provided in the Diagnostic Report. The material presented in this booklet focuses on the progression and content overlapacross the FET phase, as illustrated in the table below. Field Grade 12 Grade 10 & 11 Financial Companies Bookkeeping (sole trader) « Concepts and bookkeeping « Adjustments « Financial Statements « Financial Statements . Cash Flow, Ratios « Ratios/ Interpretation (analysis and interpretation) « Reconciliations prepare + Reconciliations analysis + VAT concepts and calculations . Bank, Debtors and Creditors » VAT Managerial Manufacturing concerns Manufacturing + Production Cost Statement + Concepts and ledger accounts + Unit cost calculations and « Break-even analysis break-even analysis Budgeting (prepare) Budgeting (analysis) + Concepts and preparation « Projected Income Statement + Basic calculations + Cash Budget Managing Resources + Stock valuation + Stock (clubs) FIFO, weighted average and Perpetual and periodic specific identification . Fixed assets (prepare) . Fixed asset management Depreciation, disposal (analysis) . Auditing, internal controls and . Auditing, internal controls ethics and ethics It is important to first address prior knowledge (concepts, calculations), before moving to the more challenging mattersof analysing, interpreting and commenting. The next logical step is to tackle examination type questions with the knowledge that all questions will cater for the different cognitive levels. This study guide provides: - Notes on simple definitions, explanations, formulae and short-cuts (handy hints). - Focus-activities to test specific skills. + Application activities in the form of examination-type questions. . Adapted questions from past examination papers. Plan of action: - Master the basic skills by using this manual, together with all other resources, if more practice is needed. + Test your knowledge by attempting to do some examination questions. + Make a note of your shortcomings and start the process over again until you get the activity right.

STUDY AND EXAMINATION TIPS KNOW THE PAPER: GENERAL STRUCTURE AND LAYOUT. One 3-hour paper for 300 marks; The paper consists of 6 compulsory questions; the marks per question range from 30 to 80 marks. Each question will comprise a number of sub-questions that are set at different cognitive levels. The content covered must conform to the requirements of CAPS, as follows: Financial Accounting 50% - 60% | 150 - 180 marks Managerial Accounting 20% - 25% |60 - 75 marks Managing Resources 20% - 25% |60 - 75 marks PAST TREND e Question 1, 2 and 6 are generally shorter questions (30 - 45 marks). o Question 3 and 4 are generally longer questions, comprising Financial Statements and the Cash Flow Statement. e | The question paper comes with a specially prepared ANSWER BOOK, which means you can answer the questions in any order. STRATEGY: e Analysis and interpretation of financial information cuts across all three fields of Accounting and constitutes a sizable portion of the marks in the examination paper. e Past trends show that the topicis normally asked in all questions, but it is concentrated on more inquestions3to 6. The questions require calculations as well as analysis and interpretation. e Examiners always set this topic and you must be well prepared on all sections of the work. Detailed explanations on this topic are provided in Section 5 of this document. ° The calculations require strong mathematical ability, which is developed over a period of time, starting inGrade 7. o These skills must include calculating percentages, increases, decreases or specific amounts, using equations. e Interpretation and analysis requires good comprehension ability. Be mindful of the language of the paper, and practice using many past papers.

3. OVERVIEW OF ANALYSIS AND INTERPRETATION WHAT TO DO Identify the relevant financial indicators to comment on specific questions. Extract the appropriate information from the financial information given, to calculate _ financial indicators. Understand the requirements of the question, such as comment, give advice, provide the trend, justify his action, etc. Be knowledgeable, so that it is easy to work backwards using the given information. Don't rely on rote learning or mindless memorising without insight. Assess the length of the answer expected by the question.

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5. FINANCIAL ANALYSIS AND INTERPRETATION 5.1 CONCEPTS AND RELATED INFORMATION A:A process that extracts relevant information from a company’s Financial Statements, which are interpreted to meet a particular need at a particular point in time. A: Financial analysis and interpretation is done to provide information that is useful for the purpose of decision making. Users Reasons Shareholders Current and future profitability. Financial institutions Will business be able to pay its debt? (suppliers of short-term credit) Financial institutions Will business be able to pay a long-term loan and (suppliers of long-term credit) interest? South African Revenue Services To know whether the correct tax is paid. Management To evaluate their performance. Customers To establish the staying power of a business. Auditors Does the financial statements fairly present the results of the business? Employees or unions Long-term growth prospects to ensure continued employment. A:Use the information from the Financial Statementsto calculate the required ratio. After calculating, interpret the result by comparing it to: + Financial indicators of the same business in previous years (meaningful) + Competitors + Generally accepted norms and standards

Profitability How efficient is the company in its % gross profit on sales normal operating activities? % gross profit on cost of sales % net profit on sales % operating expenses on sales % operating profit on sales (mark-up) Liquidity The ability of a company to pay off Current ratio its immediate (short-term) debts. Acid test ratio Stock turnover rate Stock holding period Average debtors' collection period Average creditors' payment period Solvency The ability of a company to pay off Solvency ratio all its debts. Net assets Return Are the shareholders earning a fair % return on shareholders' equity amount on their investment? Earnings per share Dividends per share Net asset value Financial risk To what extent is the company Debt/equity ratio gearing financed by loans (borrowed money) % return on total capital employed compared to its own capital? Share price To determine whether the business is_ | Net asset value (NAV) and in a sound economic/financial Issue price market position and if it is viewed as an Share price prospects investment opportunity. Average share price Market price (Securities Exchange)

ZAMA LTD FOR THE FINANCIAL YEAR ENDED 28 FEBRUARY 2018. INFORMATION: A. Share Capital The business has an authorised share capital of 750 000 ordinary shares The total issued share capital on 28 February 2018 was 400 000 ordinary shares. 50 000 ordinary shares were issued on 2 March 2017 B. Extract from the Income Statement on 28 February 2018: Sales 5 152 000 | Cost of sales 3 220 000 Gross profit 1932 000 Operating income 257 600 Operating expenses 1 004 640 Operating profit 1184 960 Interest expense = 133 960 Net profit before income tax 1051 000 Income tax 315 300 Net profit after income tax 735 700 Cc. Information from the Balance Sheet on 28 February 28/02/2018 28/2/2017 Non-current assets 6 947 700 6 377 400 Fixed assets = 6 747 700 6 177 400 Financial assets 200 000 200 000 Current assets 973 200 1.058 700 Inventories . 418 000 321 700 Trade debtors 550 000 475 000 Cash and cash equivalents 5 200 262 000 Shareholders’ equity 6 224 000 5 058 300 Ordinary share capital 5 827 500 4960 000 Retained income 396 500 98 300 Non-current liabilities 1.000 000 1600 000 Current liabilities 696 900 777 800 Trade creditors 411 200 621 600 Shareholders for dividends 220 000 120 000 Bank overdraft 52 200 (e) D. An interim dividend of R180 000 was paid and a final dividend was declared E. Credit sales amount to 30% of total sales. Credit maou amounted to R2 415 000. 5.2.1. Gross profit on sales (gross margin)

(Gross Profit) | 100 _ Saes % 7 = % It indicates the percentage by which the total selling price is greater than the cost price. Decrease in this ratio indicates: . Pressure on Selling Price as a result of competition. . | Upward pressure on costs as a result of inflation or other cost factors. . | Reduced SP to sell products. 5.2.2 Gross profit on cost of sales (gross mark-up) Gross Profit 100 TostofSaies * 1 = % Mark-up on Cost Price should equal this %;if not, it could be the result of: . Shrinkage . Products not correctly marked «Theft . Discounts 5.2.3 Net profit on sales (net margin) Net Profit, ~ 100 _ % Sales 1 . — Ifthe ratio is 10%, this means that for every R1 of sales, 10 cents is profit. . The faster the turnover, the greater the accumulation of 10 cents and the larger the ultimate net profit. 5.2.4 Operating expenses on sales Operating Expenses x 100 _ 9% Sales 17 * « This indicates how much of the sales price is used to cover running expenses. + The trend is favourable if this is dropping or at least consistent. 5.2.5 Operating profit on sales Operating Profit 100 > Sales 1 = % + Indicates how much of the sales price ends up as profit. + The trend is favourable if profit is increasing or at least consistent.

Use the practice information on page 7 to calculate the following ratios. Round off your answers to one decimal point. Gross profit percentage on sales Operating expenses on sales Operating income on sales Net profit after tax on sales Gross profit percentage gaco7p a.| Gross profit percentage on sales 1932 000 5152 000 X 100 = 37.5% b.| Operating expenses on sales 1004 640 5152 000 X 100 = 19.5% c.| Operating income on sales 1004 640 5152 000 X 100 = 19.5% d.| Net profit after tax on sales 735 700 5152 000 X 100 = 143% e.| Gross profit percentage 1932 700 x 10 3220 000 0 = 14,3%

5.3.1 Current Ratio Current Assets: Current Liabilities . This indicates whether or not the business can meet its short-term obligations. . It should not be too high, as that means that funds are tied up, instead of being used more effectively. 5.3.2 Acid Test Ratio Current Assets - Inventory: Current Liabilities . If this is too low, the business will not be able to meet its short-term obligations. . It should not be too high, as that will mean that funds are tied up, instead of being used more effectively. 5.3.3. Stock turnover rate Cost of Sales ‘Average Inventories — ———_ limes per year . Stock is turned over a number of times per year. . This also depends on the type of goods being sold. . The business needs to look at ways to increase its sales, in order to create a higher rate of stock turnover. 5.3.4 Stock holding period Average Inventories 365 Cost of Sales 1 °o— Gays . The faster the sales occur, the fewer number of days stock is kept. . This is also influenced by the type of goods being sold . 5.3.5 Average debtors’ collection period Debtors, 365 d Debtors woo lays Credit Sales 1 oy This indicates how long debtors will take to settle their accounts. It is informed _ by the credit terms of the business. A generally accepted period is 30 days. It is the final test of liquidity. 5.3.6 Average creditors’ payment period Creditors 365 Credit Purchases * ~4 “VS This indicates how long the business takes to pay its creditors. It is informed by the credit terms of the supplier. A generally accepted period is 90 days.

i. Current ratio ii. Acid test ratio iii. Stock turnover rate iv. Average stock holding period v. Average debtors’ collection period vi. Average creditors' payment period Current ratio 973 200 : 696 900 1,4:1 ii. Acid test ratio 555 200 555 200 (973 200 — 418 000) : 696 900 Or (550 000 + 5 200) : 696 900 =0,8:1 iii. Stock turnover rate 3 220 000 ¥(a21 700+ 418000) ~ 41-9 times iv. Average stock holding period ¥, (321 700 + 418 000) 3 220 000 X365=41,9times Or 365/8,7 < Average debtors’ collection period 512 500 Ya (475 000 + 550 000) 30% 5 15200 1 545 600 X 365 = 121 days vi. Average creditors’ payment period 516 400 Ya (621 600 + 411 200) 2415 000 X 365 = 78 days

5.4.1 Solvency ratio = Total Assets : Total Liabilities It indicates whether or not the business can meet (pay) its liabilities. A business is solvent if its assets exceed its liabilities. 5.4.2 Net Asset = Total Assets - Total Liabilities | = N Solvency ratio Solvency Solvency ratio 7 920 900 1696 900 (6 947 700 + 973 200) : (1 000 000 + 696 900) = 4,7 : 1 Solvency 7 920 900 - 1 696 900 = 6 224 000

5.5 RETURN 5.5.1 5.5.2 5.5.3 5.5.4 Return on Shareholders’ Equity Net Profit 100 Average Owner's Equity * ~4_ “——% . It indicates the return the owners' have received on their investment in the business. . Should the owners rather have invested elsewhere? . Compare it to returns achieved at financial institutions. Earnings per share Net Profit 400 Number of Shares issued % ~q ~—— cents . Establish if purchasing the shares was worthwhile and whether or not the company has long-term sustainability and growth potential. Dividends per share Ordinary Share Dividends 100 Number of Shares issued * —4 =——cents . Earnings are distributed to shareholders as dividends, but some earnings are retained to ensure future growth. Net Asset value per share Ordinary Shareholder's Equity 100 Number of Shares issued * ~q ~——cents This represents the intrinsic value of the share, i.e. a more realistic value, based on the performance of the undertaking over the years and the growth of the business, including acquisition of assets and additional shares being issued.

LET’S PRACTICE RETURN RATIOS Use the practice information on page 7 to calculate the following ratios. Round off your answers to one decimal point. Return on shareholders’ equity Earnings per share (EPS) Dividends per share (DPS) Net asset value per share (NAV) a2ooo a. Return on shareholders’ equity 735 700 Ya (6 224 000 + 5 058 300) 5 641 150 X 100 = 13% b. Earnings per share (EPS) 735 700 450 000 X 100 = 163,5 cents c. Dividends per share (DPS) 1 22 180 000 + 220 00° X 100 = 89 cents 450 000 d. Net asset value per share (NAV) 6224 000 450 000 X 100 = 1383 cents 5.6.1 Debt-equity ratio (gearing) Non-Current Liabilities: Shareholders’ Equity It provides insight into the capital structure of the business. Aratio of 0,52:1 indicates that for every R1 of capital invested by the shareholders, 52c was raised through long-term loans. It also indicates the ability of the business to raise additional capital throughlong-term loans. A lower ratio indicates that the business has a higher creditworthinessand that it should therefore be able to obtain additional financing easily. It is favourable for the business to make use of borrowed capital when interest ratesare lower than the return that can be earned by the businessin using those funds.

5.6.2 Return on total capital employed Net Profit Before Tax 100 Average Shareholders + Avarage Loans * ~4_ “—— Compare the figure to last year and indicate whether it has improved or deteriorated. Is it above or below the interest rate on loans? If itis above, it indicates positive gearing; therefore, it is favourable to use loans. If it is below, it indicates negative gearing; therefore, it is unfavourable to use loans and the business should consider paying loans off quickly. Debt/equity ratio ii. Return on average capital employed (ROTCE) Debt/equity ratio 1.000 000: 6 224000 = 0,2:1 (0,16: 1) ii. Return on average capital employed (ROTCE) 1 051 000 + 133 960 (6 224 000 + 1 000 000 + 5 058 300 + 1 600 000 X 100 = 17,1%

5.7 COMMENTING ON FINANCIAL INDICATORS Steps to follow when you are required to comment on financial indicators: o Consider what the question is asking you to analyse (e.g. liquidity). Decide on the relevant financial indicator(s). ° Name the financial indicator(s), giving figures or ratios or percentages. ° Compare the current year’s indicator(s) with that of the previous year. Say whether it has increased or decreased. o —- *If possible, provide a general comment. Hint: Use short sentences and point form when commenting. Financial indicator 2016 2017 Current ratio 1,6:1 2,311 Acid test ratio 0,7:1 1,5:1 ° Current ratio has improved from 1,6: 1 to 2,3 :1 ° Acid test ratio has improved from 0,7 :1to 1,5: 1 ° This company is in a good liquidity position and should be able to pay its short-term debt easily. EXAMPLE 2 Financial indicator 2016 2017 Earnings per share (EPS) 85c per share 55c per share Dividends per share (DPS) 75c per share 60c per share ° EPS has declined from 85c to 55c per share. ° DPS has declined from 75c to 60c per share. ° In 2016, the EPS was 85c, while the DPS was 75c per share. This means that the company retained 10c per share for future growth. ° In 2017, the company earned 55c per share, but gave the shareholders 60c per share; therefore none of this year’s profits were retained.

5.8 ACTIVITIES CONCEPTS Required: Complete the following sentences using the words in the list below. Write only the word next to the question number. (5) liquid; profitable; solvent; return; risk/gearing a) Acompany with total assets exceeding total liabilities is. b) Acompany thatrelies heavily on loans will have high... : c) Acompany thatcontrols its income and expenses properly will be... d) The percentage net income on equity indicates the ...... earned by shareholders. e) Acompany thatis able to settle its immediate debts is............... (Modified from Nov 2014 DBE QP) (32 Marks; 19 Minutes) REQUIRED SMITH TRADERS 2.1. Calculate the following financial indicators for the financial year ended 28 February 2014: 2.1.1Solvency ratio (4) 2.1.2Net asset value per share (3) 2.1.3Debt-equity ratio (3) 2.2 | Comment on the liquidity position of the company. Quote THREE relevant financial indicators (actual figures/ratios/percentages) and their trends. (9) 2.3. The directors decided to increase the loan during the current financial year. Quote TWO financial indicators (actual figures/ratios/percentages) that are relevant to their decision. Explain why this was a good decision, or not. (8)

24 The Bakker family owns 740 000 shares in this company. Explain the effect that the repurchase of shares on 31 December 2013 hadon their control of the company. Give a calculation to support your answer. (5)

INFORMATION: A. Extract from the Income Statement for the year ended 28 February 2014: Interest on loan (all capitalised) 88 500 Net profit before tax 1575 000 Income tax 441 000 Extract from the Balance Sheet as at: 28 Feb. 2014 | 28 Feb. 2013 Current assets 3 337 300 4641 000 Inventories 818 200 641 000 Trade debtors 2 377 600 1.512 000 SARS: Income tax 128 000 - Cash and cash equivalents 13 500 2 488 000 Shareholders’ equity 8 839 000 7 400 000 Ordinary share capital 8 700 000 6 600 000 Retained income 139 000 800 000 Mortgage loan: Excel Bank (interest rate: 12,5% p.a.) 208,000 208/000 Current liabilities 2 063 700 1 302 000 Trade creditors 678 700 700 000 Shareholders'for dividends 870 000 480 000 Bank overdraft 515 000 : SARS: Income tax = 122 000 Shareholders’ register: DATE DETAILS 4 March 2013 1.200 000 shares in issue. 31 March 2013 300 000 shares issued at R8 each. 31 December 2013 The company bought back 50000 shares from a dissatisfied shareholder, S Smit, at R9,50 each. The average price of all shares issued to date was R6 per share 28 February 2014 1.450 000 shares in issue. Dividends for the financial year ending 28 February 2014: Interim dividends paid on 31 August 2013 R750 000 Final dividends declared on 28 February 2014 R870 000 Financial indicators: 28 Feb. 2014 28 Feb. 2013 Debt-equity ratio 2 O74: 1 Net asset value per share (NAV) 7 617 cents Current ratio 1,671 36:1 Acid-test ratio 4,22 31:1 Stock turnover rate 6,8 times p.a. 5,1 times p.a. Debtors’ collection period 40 days 35 days % return on average capital employed 18,8% 16.4%

(Modified from Nov 2015 DBE QP) (38 Marks; 23Minutes) REQUIRED 3.1 CONCEPTS Give ONE term for each of thedescriptions below.Choose a term from the list below. Write only the term next to the question number. directors’ report; Balance Sheet; shareholder; director; internal auditor; Cash Flow Statement; independent auditor 3.1.1. Aperson employed by a company to check and advise management on the financial control systems. (1) 3.1.2 Aperson appointed by the shareholders who expresses an unbiased opinion on the financial statements of a company. (1) 3.1.3. Aperson appointed to manage a company and make decisions to ensure it runs smoothly. (1) 3.1.4. The financial statement that shows the financial position of a business on a certain date. (1) 3.2. CEBOLTD The information below relates to CEBO Ltd. REQUIRED: 3.2.1 Calculate the following for the financial year ended 28 February 2015. Acid-test ratio (4) Return on shareholders’ equity (ROSHE) (Use average equity in your calculation.) (5) Net asset value (NAV) per share. (3)

INFORMATION: A. Figures from the Balance Sheet and notes: 28 FEBRUARY| 28 FEBRUARY 2015 2014 Fixed assets (carrying value) R4 137 700 R2 598 300 Financial assets (fixed deposit) 350 000 600 000 Current assets 662 300 575 500 Inventory 322 000 345 000 Trade and other receivables 245 000 228 000 SARS: Income tax 6 400 > Cash and cash equivalents 88 900 2 500 Shareholders’ equity 3 439 500 2718 000 Ordinary share capital 2 967 000 2 520 000 Retained income 472 500 198 000 Non-current liabilities 1 200 000 500 000 Current liabilities 510 500 555 800 Trade and other payables 323 000 285 000 Shareholders’ dividend 187 500 108 000 SARS: Income tax = 9 800 Bank overdraft - 153 000 Extract from the Income Statement for the year ended 28 February 2015: Gross profit R2 040 000 Depreciation 215 100 Operating profit 1 300 000 Interest expense 132 000 Net profit before tax 1 175 000 Net profit after tax 846 000 Share capital: Authorised share capital consists of 800 000 ordinary shares. 150 000 new ordinary shares were issued on 1 October 2014. 60 000 ordinary shares were repurchased on 1 January 2015 at 90 cents above the average issue price of R4,30. On 28 February 2015, the share register reflected that a total of 690 000 shares had been issued to date. Fixed assets: Additional property was purchased for R2 100 000. No other fixed assets were purchased. Equipment was sold at carrying value.

3.3 DON LTD AND LAKALTD You have R50 000 to invest in a listed company. You choose to focus on two companies in the same industry. NOTE: When answering the questions below, compare the information given and quote the relevant financial indicators of both companies (percentages, ratios and/or amounts). REQUIRED: 3.3.1. Comment on the value of the shares of the two companies listed on the Johannesburg Securities Exchange (JSE). Explain how this will influence 3.3.2 3.3.3 3.3.4 your choice of company. Compare and comment on the dividend pay-out policies of the two companies. Comment on the degree of risk and gearing. Explain how this will influence your choice of company. Apart from the points mentioned above, what other factors would you consider before deciding in which company you are going to invest? Explain TWO points. (6) (6) (6) (4) INFORMATION: DON LTD LAKA LTD Current ratio A BiG A634 Acid-test ratio Aor 0,8:1 Stock turnover rate 4 times 6 times Stock-holding period 90 days 62 days Average debtors’ collection period 54 days 26 days Average creditors' payment period 59 days 62 days Debt-equity ratio O34 1:6: 4 Return on total capital employed (ROTCE) 15.6% 10,2% Return on shareholders’ equity (ROSHE) 17,2% 9.1% Earnings per share (EPS) 420 cents 980 cents Dividend per share (DPS) 360 cents 490 cents Net asset value per share (NAV) 310 cents 750 cents Market price of shares on JSE 400 cents 645 cents Interest rate on loans 11,5% 11,5%

(Modified from Feb 2016 DBE QP) (28 Marks; 17Minutes) PILLAY LTD You are provided with information for the financial year ended 28 February 2016, taken from the books of Pillay Ltd. It is a listed public company. 41 4.1.1 4.1.2 4.1.3 4.2 4.2.1 4.2.2 4.2.3 Calculate the following financial indicators for the financial year ended 28 February 2016. (Round off your calculation to ONE decimal point or the nearest cent, where applicable.) Net asset value per share (3) Return on average shareholders’ equity (5) Debt-equity ratio (3) Refer to Information E. The directors are not satisfied with the liquidity position. Quote and explain THREE relevant financial indicators (with figures) to support this statement. (6) The directors decided to increase the loan during the current financial year. Explain why this was a good decision. Quote and explain TWO financial indicators (with figures) in your answer. (8) The directors were pleased with the price that the company paid to buy back the 40 000 shares. Give a suitable reason why the directors felt that way. Quote relevant financial indicators (with figures) to support your answer. (3)

INFORMATION: A. Extract from the Income Statement for 28 February 2016: the year ended Sales R2 800 000 Net profit before tax 1 240 000 Income tax 2 Net profit after tax 892 800 Extract from the Balance Sheet on 28 February 2016: 2016 2015 Fixed assets (carrying value) ‘2 ? Fixed deposit: FS Bank 1 450 000 1 200 000 Current assets 1 944 280 1010 000 Inventory 975 700 345 000 Debtors and other receivables 419 000 629 600 SARS (Income tax) 0 17 400 Cash and cash equivalents 549 580 18 000 Shareholders’ equity 5 950 800 4 345 000 Share capital 5 402 000 4 200 000 Retained income 548 800 145 000 Mortgage loan: TKO Bank 1 950 000 400 000 Current liabilities 587 200 555 000 Creditors and other payables 437 800 165 000 Accrued expenses 8 700 5 000 SARS (Income tax) 35 700 0 Shareholders’ dividend 105 000 275 000 Bank overdraft 0 110 000 Share Capital Authorised share capital is 3 000 000 ordinary shares. In 2012, 1 200 000 ordinary shares had been issued at R3,50 per share. On 1 November 2015, 300 000 ordinary shares were issued at R4,50 each. On 28 February 2016, 40 000 shares were repurchased at RO,60 more than the average price per share. Dividends The directors declared a final dividend of 7 cents per share. The shares bought back on 28 February 2016 also qualify for the final dividend.

Financial indicators on 28 February: 2016 2015 Net profit after tax on sales 31,9% 24,5% Current ratio Bost 185 4 Debtors’ collection period 36 days 28 days Creditors’ payment period 45 days 80 days Acid-test ratio 021 12s 4 Rate of stock turnover 3 times 5 times Return on shareholders' equity 2z 17,5% Return on total capital employed 24,2% 21,2% Debt-equity ratio 2 0,09 :1 Interest rate on loans 10,5% 10.5% Net asset value per share 2? 362 cents Market value per share 505 cents 480 cents (Modified Nov 2016 DBE QP)(49 Marks; 29 Minutes) REQUIRED 5.1 5.2 Choose a term from COLUMN B that matches the description in COLUMN A. Write only the letter (A—-D) next to the question number (5.1.1— 5.1.4). COLUMN A COLUMN B 5.1.1 Ability of the business to pay off all its debts. A. gearing 5.1.2 Ability of the business to pay off its short-term B return on equity debts. 5.1.3 The benefit that shareholders receive for C_ solvency investing in the company. 5.1.4 The extent to which a company is financed by D liquidity loans. (4x 1) REID LTD You are provided with information relating to Reid Ltd for the financial year ended 30 June 2016. Where financial indicators are required to support your answer, name the financial indicator, the actual figure/ratio/percentage and the trend.

REQUIRED: 5.2.1 5.2.2 5.2.3 5.2.4 Calculate the following financial indicators on 30 June 2016: Acid-test ratio Debt-equity ratio % return on average shareholder's equity (ROSHE) Net asset value per share (NAV) The liquidity of the company has improved. Quote THREE financial indicators to support this statement. Dividend policy: Provide calculations to show the change in the dividend pay-out policy. Explain why the directors decided to change the policy. State ONE point with figures. Mary is the CEO of the company. Her shareholding is as follows: NUMBER OF DATE % SHARES PURCHASED SHAREHOLDING 420 000 10 January 2015 46,7% Calculate Mary's % shareholding on 1 October 2015, after the repurchase of shares. Explain how Mary has benefitted from the decision to repurchase the shares. The independent auditor discovered that Mary had made the decision to repurchase the shares without informing the board of directors. Why should the independent auditor be concerned about this? (4) (3) (5) (3) (6) (4) (2) (4) (2) (2)

5.2.5 The Financial Statements reflected fixed assets purchased in the amount of R4,5 million. Name TWO major sources of funding for these fixed assets and provide thefigures (over R1 000 000 each). (4) State for EACH source whether it was a good or bad decision. Explain your choice. Quote relevant financial indicators/figures to support your opinion. (6) INFORMATION: A. Share capital and dividends: 900 000 shares were in issue on 1 July 2015. 75 000 ordinary shares were repurchased from the estate of a deceased shareholder at R10,70 per share on 1 October 2015. The company issued 125 000 ordinary shares at R10,80 per share on 1 April 2016. The 2016 Cash Flow Statement reflected dividends paid of R434 250.

Extract from Income Statement for the year ended 30 June 2016: R Sales 5 220 000 Cost of sales 3 600 000 Operating profit 1 295 000 Income tax 190 500 Net profit after tax 444 500 Extract from Balance Sheet on 30 June: 2016 2015 R R Fixed assets (carrying value) 17 420 950 14 683 300 Fixed deposit: Ken Bank 250 000 380 000 Current assets 1015 000 456 000 Inventories (only trading stock) 564 000 281 500 Trade and other receivables (debtors) 246 000 167 000 Cash and cash equivalents 205 000 7 500 Shareholders’ equity 10 050 750 9 540 000 Ordinary share capital ? 9 180 000 Retained income i? 360 000 Loan: Barbie Bank 8 000 000 4500 000 Current liabilities 635 200 1 479 300 Trade and other payables 420 000 683 400 Shareholders’ dividend 209 000 162 000 SARS: Income tax 6 200 23 400 Bank overdraft - 610 500 The following financial indicators were calculated on 30 June: 2016 2015 Current ratio 1,6:1 03:1 Acid-test ratio ? OM 4 Stock turnover rate 8,5 times 10 times Debtors’ collection period 36 days 43 days Creditors’ payment period 63 days 63 days Solvency ratio 22:4 2624 Debt-equity ratio ? O5=4 Return on total capital employed (ROTCE) 8.2% 9,5% Return on shareholders' equity (ROSHE) ? 6.2% Earnings per share (EPS) 51 cents 58 cents Dividends per share (DPS) 55 cents 35 cents Net asset value per share (NAV) ? 1 060 cents Market price 1000 cents 1 030 cents Interest rate on loans 12% 12%

(Modified Nov 2017 DBE QP) REQUIRED 6.1 6.1.1 6.1.2 6.1.3 6.1.4 6.2 Choose a term to complete each of the following statements. Write only the term next to the question number (6.1.1— 6.1.4). shareholder(s); external auditor(s); director(s); internal auditor(s) besos are appointed by the shareholders to manage the company. The ....... is employed by the company to set up functional internal control processes. Aue is a person who invests in a company by buying shares. seen are appointed by shareholders to give an unbiased opinion on the financial statements. (4x 1) FINE LTD The given information relates to Fine Ltd for the financial year ended 31 August 2017. REQUIRED: 6.2.1 6.2.2 Calculate the following financial indicators on 31 August 2017: Percentage operating profit on sales Debt-equity ratio Calculate the dividends per share (DPS) of a shareholder who owned the same number of shares for the entire financial period. INFORMATION: A. Information from the Income Statement for the financial year ended 31 August 2017: R Sales 8 652 000 Operating expenses 1 760 000 Depreciation 320 000 Interest expense 86 100 Operating profit 697 000 Income tax 187 770 Net profit after income tax 438 130 (50 Marks; 30Minutes) (4) (3) (4) (4)

c. 6.3 Information from the Balance Sheet on 31 August: 2017 2016 (R) (R) Fixed assets (carrying value) 6 177 000 4975 000 Fixed deposits 220 000 300 000 Loan: Dolphin Bank 985 000 450 000 Current assets 619 600 663 300 Current liabilities 490 000 614 300 Shareholders’ equity @ ? Ordinary share capital 5 292 000 @: Retained income 2 147 370 Cash and cash equivalents 23 400 2 500 Bank overdraft - 65 100 Shareholders’ dividend 168 000 120 000 SARS: Income tax 11 800 (Cr) 2400 (Dr) Share capital and dividends The authorised share capital comprises 1 200 000 ordinary shares. 900 000 ordinary shares were in issue on 1 September 2016. The company issued 150 000 ordinary shares at R6,30 per share on 1 May 2017. 70 000 ordinary shares were repurchased from shareholders on 30 August 2017. A cheque for R437 500 was issued for these shares. These shareholders qualify for a final dividend. An interim dividend of 12 cents per share was paid on 1 February 2017. A final dividend was declared on 30 August 2017. CASTRO LTD AND PETER LTD You are provided with information relating to two companies. BACKGROUND INFORMATION: Henry Harries owns 300 000 shares in each company. Castro Ltd issued 200 000 new shares to existing shareholders at the average issue price (R9,10). These funds were used to establish a new branch. No new loans were raised. Peter Ltd paid R4 800 000 to repurchase 320 000 shares.

REQUIRED: NOTE: Where comments or explanations are required, quote financial indicators and figures to support your answer. CASTRO LTD 6.3.1. Comment on the price of R9,10 charged by Castro Ltd for the new shares issued. (3) 6.3.2 Explain how the issue of new shares has affected the financial gearing and risk of Castro Ltd. Quote TWO financial indicators. (6) 6.3.3. Henry had the option to buy some of the new shares issued by Castro Ltd. He had saved sufficient funds (interest rate 5% p.a.) for this purpose. If Henry wanted to retain his 60% shareholding in the company, how many shares would he have had to buy and how much would he have had to pay? (5) Henry decided NOT to buy these shares. Apart from the % shareholding, explain TWO reasons why he has made a mistake by not taking up this option. (6) PETER LTD 6.3.4. Comment on the liquidity of Peter Ltd. Quote TWO financial indicators. (6) 6.3.5 Comment on the price paid by Peter Ltd for the repurchase (buy-back) of shares. (3) 6.3.6 Explain THREE ways in which Henry has benefited from the repurchase of shares by Peter Ltd. (6) ADDITIONAL INFORMATION: Financial indicators and additional information from annual reports: CASTRO LTD PETER LTD 2017 2016 2017 2016 Debt-equity ratio 05:1 08:1 Currentratio 19:1 35:1 Acid-test ratio 1331 AFT1 Stock-holding period 54days| 54 days Number of shares in issue 700000} 500000} 580000} 900000 Average share issue price R9,10 R10,20 Price paid for share repurchase R15,00 Price of share on JSE R12,00 R15,00 Net asset value per share R10,73} R11,38} R13,30] R13,22 % return on shareholders’ equity 23% 17% 16% 13% % return on total capital employed 20% 15% Earnings per share 140 cents | 196 cents | 266 cents | 171 cents Total dividends R357 000 | R325 000 | R928 000 | R928 000 Dividends per share 51cents]| 65cents | 160cents | 103 cents

6. CHECK YOUR ANSWERS (a) solvent ¥ (b) risk/gearing ¥ (c) profitabley (d) return v (e) liquid v (5) 2.1 2.1.1 | Calculate the solvency ratio for 2014. 2.2 2.3 8 839 000 + 908 000 + 2 063 700 : 908 000 + 2 063 700 11 810 700” v : 2971 700” 3.97 : 1 or 4 : 1 IBROBaReOneet 2.1.2 | Calculate the net asset value per share for 2014. 8 839 000 v x 100 1 450 000 v 1 = 610 cents or 609,6 cents or R6,10 2.1.3 | Calculate the debt-equity ratio for 2014. 908 000 v: 8 839 000 v = 0,1 : 1 ARRRIPRRIeBree museBe Re Comment on the liquidity position of the company. Quote THREE relevant financial indicators (actual figures/ratios/percentages) and their trends. Any THREE valid financial indicators: Name of financial indicator vv Figure and trend: ry ¢ Current ratio: 3,6: 1 > 1,6: 1/ decreased to 1,6 : 1 e Acid test ratio: 3,1: 1 1,2: 1/decreased to 1,2 : 1 e Stock turnover rate: 5,1 > 6,8 times p.a./ increased to 6,8 times e Debtors’ collection period: 35 > 40 days / increased to 40 days The directors decided to increase the loan during the current financial year. Quote TWO financial indicators (actual figures/ ratios/percentages) that are relevant to their decision. Explain why this was a good decision, or not. ROTCE v © This is 18,8% v DEBT/EQUITY RATIO v © This is 0,1: 1 Geemlaay™ Explanation: e Itis positively geared as ROTCE is higher than interest rate v v ¢ There is a low financial risk / It is not making much use of loans, as it relies more on funds from internal sources. vv

2.4 The Bakker family owns 740 000 shares in this company. Explain the effect that the repurchase of shares on 31 December 2013 had on their control of the company. Give a calculation to support your answer. Before the repurchase, the family's shareholding was: vo v 740000 x 100 =49,3% 1 500 000 1 After the repurchase, the family's shareholding is: v v 740000 x 100 =51,0% 1 450 000 1 The family is now the majority shareholder. Vv

3-1 13.4.4. | Internal Auditor 3.1.2 | Independent Auditor 3.1.3 | Director 3.1.4 | Balance Sheet §s & 3.2 Calculate the acid-test ratio for 2015. 340 300 (662 300 v — 322 000 v) : 510 500 v OR 245 000 + 6 400 + 88 900 marks = 0,7: 1 WAGRSPRRESHBEtININSIOMMEHOR 0,67:1 OR 0,66:1 NOT 0,6:1 Calculate the return on shareholders’ equity (ROSHE) for 2015. (Use average equity in your calculation.) 846 000 v x 100 % V(2 718 000 v + 3 439 500 v) 1 3.078 750 (BIRNEERS) = 27,5% Wphepaneoreel OR 27,47% OR 27, 48% Calculate the net asset value per share (NAV). 3 439 500 v + 690000 v x100 = 498.5 cents MOR R4,99 BRBIBAMESHee! OR 499 centsOR 498,47 cents OR 498,48 cents 3.3. DONLTD AND LAKAY LTD 3.3.1 | Comment on the value of the shares of the two companies on the Johannesburg Securities Exchange (JSE). Explain how this will influence your choice of company. | would invest in Don Ltd, as the shares Vv seem to be in good demand. Don | JSE price 400c > NAV | OR Ltd aa | would not invest in Don Ltd, as the shares might be over-priced. OR | would invest in Lakay Ltd, as the shares Lakay 0. seem to be under-valued. Ltd JSE price 645c < NAV | OR 750c | would not invest in Lakay Ltd, as the shares might be in low demand.

3.3.2 3.3.3 3.3.4 Compare and comment on the dividend pay-out policies of the two companies. DPS 360 cents v Don Ltd is distributing a higher percentage of Don EPS 420 cents v income earned.Lakay Ltd has decided to Ltd OR retain half of EPS. Distributes 86% of OR earnings Bmaes Don Ltd appears to keep shareholders DPS 490 cents v satisfied by giving them good ike EPS 980 cents v dividends.Lakay Ltd appears to have plans tg” JOR for growth (better long-term benefits) / Distributes 50% of equalisation of dividends over time. earning: Comment on the degree of risk and gearing. Explain how this will influence your choice of company. _Sipanatone aes ure a OF | choose Don Ltd, as the financial risk is lowand D/E ratio 0,3: 1 v | gearing is positive (ROTCE exceeds interest). OR ne ROTCE 15,6% v_| | choose Don Ltd for its positive gearing (ROTCE OR ROTCE exceeds interest) but they are not making >11,5% effective use of loans. OR | do not choose Lakay Ltd, as there is high : 5 financial risk and negative gearing / Too much DIE ratio 1,6: 1” | money was borrowed and it is not able to use the funds effectively. rat*Y | ROTCE 10.2%v | oR ee oR ROISE s I choose Lakay Ltd, as there is high use of loans ia and, if they can improve efficiency (ROTCE), profit would improve significantly. Apart from the points mentioned above, what other factors would you consider before deciding in which company you are going to invest? Explain TWO points. Sa GSE ~~ << « ROSHE: Don Ltd’s return (17,2%)is much higher than that of Lakay Ltd (9,1%). e Liquidity: Lakay Ltd has a better current ratio (1,5:1) / acid-test ratio (0,8:1). ¢ Stock turnover: Lakay Ltd is managing stock more efficiently (62 days). « Debtors’ collection: Lakay Ltd's collection period is good (26 days). * Corporate social responsibility: This indicates the good reputation of company (King Code). e Directors: Good professionalism will benefit the company and shareholders. « Audit report: It indicates whetherthe auditors have detected any problems or not.

4.11 4.1.2 4.1.3 4.2.1 4.2.2 Calculate the net asset value per share. 5 950 800¥ x 100 = 396,7 cents 1500000V 1 OR5 950 800 x 100 = 407,6 cents 1460000 1 Calculate the return on average shareholders’ equity. 892 800 v x 100 = 17,3%MQRepemeoneel % ¥(5 950 800V +4345000)v 4 5 147 SOOB/REERS Calculate the debt-equity ratio. 1 950 000 v: 5 950 800 v 0.31 ean The directors are not satisfied with the liquidity position. Quote and explain THREE relevant financial indicators (with figures) to support this statement. Ratio Vv v Trend and figures vv v e Current ratio increased from 1,8: 1 in 2015 to 3,3: 1 in 2016 ¢ Acid test ratio increased from 1,2 : 1 in 2015 to 1,6 : tin 2016. ¢ The stock turnover rate declined from 5 times in 2015 to3 times in 2016. Debtors’ Collection and Creditors' Payment Period not accepted. The directors decided to increase the loan during the current financial year. Explain why this was a good decision. Quote and explain TWO financial indicators (with figures) in your answer. Ratio vv Figures and trend vv Comment beyond trend vvvv ROTCE e This has increased from 21,2% to 24,2%. « Positively geared, as ROTCE is higher than the interest rate (10,5%). DEBT-EQUITY RATIO ¢ This has increased from 0,09 : 1 to 0,33: 1 see 5.5.3. ¢ There is low financial risk./ It is not making much use of loans. It relies more on own funds.

4.2.3 The directors were pleased with the price that the company paid to buy back the 40 000 shares. Give a suitable reason why the directors felt that way. Quote relevant financial indicators(with figures) to support your answer. Reason VY Relevant figure Vv The company paid R4,30 per share to buy back shares. This is lower than the market value per share (2015 — 480 cents; 2016 — 505 cents). (Not a big difference compared to the NAV — 362 cents and 408 cents.) Average issue price was R3,70. The shares were purchased at a lower price than the issue price of the additional shares, ie. (R4,50).

5.1 5.2.1 §.2.2 5.2.3 5.1.1 Cc Mi Solvency 5.1.2 DY Liquidity §.1.3 B Ve Return on equity 5.1.4 A ve Gearing Calculate the acid-test ratio on 30 June 2016. "0:5 000 SR 5000 TR 451 000 (246 000 v +205 000 v): 635 200 v = 0,7: 1 QRS RSRESRSERmRIESYS Calculate the debt-equity ratio on 30 June 2016. 8 000 000 v : 10050 750 v =0,8: 1 MGROPAMEOMBEEINUSEDENEL Accept 0,79 1 Calculate the % return on average shareholders’ equity (ROSHE) for the year ended 30 June 2016. 444 500v x100 ‘av (10 050 750” + 9 540 000v’) 1 9795 37 5threeiniaeks = 4,5% ‘lone part correct; % sign not essential; cannot be Rands, cents, units, et. Calculate the net asset value per share (NAV) on 30 June 2016. 10 050750 x 100 = 1058 cents MIGEBSMEOHBEIOR R10.58 OR 1057.9 cents 950 000 Mi5Sa2H The liquidity of the company has improved. Quote THREE financial indicators to support this statement. Provide figures and trends. THREE valid indicators ~ ~ v Figures and trends v vv Current ratio— 0,3: 1 to 1,6:1 Acid-test ratio — 0,1: 1 to 0,7 : 18502 Debtors’ collection period — 43 days to 36 days. Provide calculations to show the change in the dividend pay-out policy. Comparison of DPS to EPS for 2015 ~ Calculation / implied calculation “ Comparison of DPS to EPS for 2016 v Calculation / implied calculation v Possible calculations for two marks each: ¢ 2015: 35/58 = 60,3% OR 0,6:1 ORIt paid out most of its earnings/more than 50%. e 2016: 55/51 = 107,8% OR 1,1:1 ORIt paid out more than its earnings. Possible responses for one mark each: e 2015: It paid out 35c of 58c earnings. / It retained 23c of 58c earnings. e 2016: it paid out 55c of 51c earnings. / It paid out 4c from previous earnings

5.2.4 5.2.5 Explain why the directors decided to change the policy. State ONE point and include figures. Any ONE valid explanation v Relevant figures ¥ Responses for two marks: To satisfy shareholders, as: ¢ ROSHE decreased (from 6,2%) to 4,5% SemaM e Market price decreased (from 1030 cents) to 1000 cents. e EPS decreased (from 58 cents) to 51 cents. 2 (a) Calculate Mary's % shareholding on 1 October 2015 after the repurchase of the shares. 420 000V x 100 = 50,9% MGRSpaReeneel (900 000v — 75000”) 825 000 SWOITARKS 4 (b) Explain how Mary has benefitted from the decision to repurchase the shares. Explanation v~ Mary became the majority shareholder. 2 (c) The independent auditor discovered that Mary had made the decision to repurchase the shares without informing the board of directors. Why should the independent auditor be concerned about this? Responses for two marks: v BSR fSRURTS=ITCOREIETSTaFEWER ¢ This is not good corporate governance. / This is not in accordance with the King Code. ¢ The CEO cannot make these decisions without getting board approval. ¢ This is considered to be insider trading. / This is an abuse of position for personal benefit. e Unethical. / Not transparent. 2 The Cash Flow Statement reflected fixed assets chased in the amount of R45 millon Soure and decision mustmateh sure Explanation must be leant th source ‘i welee sources °f | Goou/Bad | Explanation with financial indicators/figure ( over R000 000 each) decision Explanation “ v Figures v v Source 1: Bad Vv The company is negatively geared. ROTCE ‘ (8,2%) is lower than the interest rate on loans Increase in loan 12% - R3 500 000 uae Source: higuresy Financial risk increased. The debt-equity ratio increased from 0,5 : 1 to 0,8 : 1, Source 2: Good v | Shares were sold for R10,80 per share, which jaglisofahares'= is greater than the market price of R10,30 (2015) or R10,00 (2016) or NAV of R10,60. R1 350 000 OR Y Fi v SourcenySEigures If this amount were borrowed, interest of 12% would be payable. / It has reduced the risk, as the D/E ratio would have been higher than 0,8:1. OR Mary is no longer the majority shareholder. She owns 44% of the shares. 10

6.1 6.2.1 6.2.2 6.3 6.3.1 6.3.2 6.1.1 | Directors 6.1.2 | Internal auditor 6.1.3. | Shareholder 6.1.4 | External auditors <1] S| 8 [Ss Calculate the percentage operating profit on sales. 697 000¥ x 100 = 8,1% MISRSRSRESEBE 8 652 000 v Calculate the debt-equity ratio. 5 542 000 OIMIaKSSESMIZ4 985 000 v : (5 292 000 v + 250 000 M) = 0,2: 1MGnelpameoneet Calculate the dividends per share (DPS) of a shareholder who owned the same number of shares for the entire financial period. 900 000 + 150 000 (168 000V/1 050 000 vx 100) +12 cents v = 28 cents WiGheipaneoneet 16 cents (ieimans CASTRO LTD Comment on the price of R9,10 charged by Castro Ltd for the new shares issued. Compare issue price to market price or NAVY ¥ Figures R12,00 or R10,73 ¥ Expected responses: « The shares were issued at the average share issue price. The existing shareholders are being rewarded, as the price is lower than the R12,00 charged on the JSE and the NAV of R10,73. « The shares could have been issued at the market price of R12,00 or the NAV of R10,73. (They have diluted the value of the shares.) Explain how the issue of new shares has affected the financial gearing and risk of Castro Ltd. Quote TWO financial indicators. Explanation v v Financial indicators v v Figures vv Spec ae! responses: . peatDg has improved — less risk (as there was an issue of new shares) Debt-equity ratio decreased from 0,8 : 1 to 0,5: 1 (by 0,3 : 1) ‘one markone mark e¢ ROTCE improved(due to increased efficiency / profits on new branch) from 15 % to 20 % (by 5% or 33,3%) May also compare ROTCE to their estimate of current interest rate.

6.3.3 6.3.4 If Henry wanted to retain his 60% shareholding in the company, how many shares would he have had to buy? vv (700 000 x 60%) — (500 000 x 60%) = 120 000 420 000 300 000 fe) (60%) 200 000 x 60% = 120 000 How much would he have had to pay? MAN Baslparteoreel 120 000 shares at R9,10 each = R1 092 000 Henry decided NOT to buy these shares. Apart from the % shareholding, explain TWO reasons why he has made a mistake by not taking up this option. Explanation v vv ¥ Figuresv v Expected responses: His dividends would have increased by R61 200 (51c x 120 000 shares). This is more than the interest he earned on the savings account, i.e. R54 600 (1 092 000 see above x 5%). He could have bought the shares for capital growth: he could have bought the shares for R9,10 and then sold them on the JSE for R12,00. / Total profit would have been R348 000. / It would have been a good buy, as R12,00 exceeds NAV R10,73. He would have earned more dividends on the bigger investment (51¢/910c = 5,6%). ROSHE would be 23% on a bigger investment. He would lose 120 000 votes at the AGM. PETER LTD Comment on the liquidity of Peter Ltd. Quote TWO financial indicators. Explanation: vv The liquidity situation has improved./ It is able to meet its current debts. / Liquidity ratios have decreased. / Liquidity ratios are more efficient. Financial indicators Saye” “Figures vv ° . Current ratio has improved/decreased (from 3,5 : 1) to 1,9: 1. The acid-test ratio has improved/decreased (from 1,7: 1) to 1,1: 1. The stock-holding period appears to be efficient at 54 days (less than 2 months).

6.3.5 6.3.6 Comment on the price paid by Peter Ltd for the repurchase (buy-back) of shares. Expected response: vv The company is paying a premium above the average share price in order to entice shareholders to give up their shares. / They wanted to increase returns by decreasing equity. / This is a fair value — it is the same as the price on the JSE. Compare price paid (R15,00) to “Any one figure” market value R15,00 net asset value R13,30 average issue price of shares R10,20 Explain THREE ways in which Henry has benefited from the repurchase of the shares by Peter Ltd. Explanation vvv Figures vvv Expected responses: Three different responses He has now become a majority shareholder. His 300 000 shares are 51,7% of the total shares (33,3% before the share buy-back). Due to the reduced number of shares, his return has improved, i.e. EPS has increased by 95c / from 171c to 266c / ROSHE increased from 13% to 16%.(NOTE: EPS and ROSHE reinforce the same point). The reduced number of shares could have contributed to an increase in the DPS by 57c/ by 55,3% / from 103c to 160c, (The directors may have maintained the dividend pay-out policy).

7. Message to Grade 12 learners from the writers “Begin with the end in mind.” Stephen Covey At the end of your journey in the GET phase, you were required to choose a subject set that willshape your career path. Hopefully, your choice was based on your aptitude, ambition and desire to become a successful individual, with a comfortable standard of living. Let’s be frank! Accounting is not for the faint-hearted. There are NO short-cuts. Success in Accounting demands hard work and dedication, but the rewards are satisfying. The questions and topics covered in the examination papers are very predictable. You need to just extract the NSC papers for the last three years from the internet and compare the questions. If you do this, you will become familiar with the commonly asked questions and the style and format of the paper. You will also gain insight into the different ways in which questions can be asked. Practice every day, do not be afraid to ask questions, engage in group studies and attend the many intervention programmes organized by your school and your Department of Education. Effective planning ensures that you: Know the rules of the game, and play it better than others. “IT ALWAYS SEEMS IMPOSSIBLE UNTIL IT’S DONE,” ~ Nelson Mandela

8. Thank you This Accounting module on the Analysis and Interpretation of financial information was developed by Mr P Govender, Mr A Leeuw, Mr M.P Shabalala, Mr Dorian Olifant and Ms ZJM Mampana (Subject Specialists, PED) A special mention must be made of Mr Mzikaise Masango, the DBE curriculum specialist who, in addition to his contribution to the development of the guide, also coordinated and finalised the process. These officials contributed their knowledge, experience and in some instances unpublished which they have gathered over the years to the development of this resource. The Department of Basic Education (DBE) gratefully acknowledges these officials for giving up their valuable time, families and expertise to develop this resource for the children of our country. Administrative and logistical support was provided by Mr Noko Malope and Ms Vhuhwavho Magelegeda. These officials were instrumental in the smooth and efficient management of the logistical processes involved in this project. Look out for more modules that deal with other topics of the Grade 12 syllabus.

ACCOUNTING ANALYSIS AND INTERPRETATION OF FINANCIAL INFORMATION GRADE 12 Department of Basic Education 222 Struben Street, Pretoria, 0001 Private Bag X895, Pretoria, 0001, South Africa Tel: (012) 357 3000 Fax: (012) 323 0601 Hotline: 0800 202 933 website facebook twitter www.education.gov.za www.facebook.com/BasicEd www.twitter.com/dbe_sa ISBN NO. 978-1-4315-3284-1