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is education DEPARTMENT: EDUCATION MPUMALANGA PROVINCE ACCOUNTING SUPPORT GUIDE FOR GRADE 12 LEARNERS 2017

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ACTIVITY 8 CASH FLOW STATEMENT You are provided with information relating to Zippo Limited, a public company. The financial year ends on 28 February 2014. REQUIRED: 4 Prepare the Retained Income note to the Balance Sheet on 28 February 2014. 2 Complete the note for the reconciliation between net profit before tax and cash generated from operations for the year ended 28 February 2014. 3 Complete the Cash Flow Statement for the year ended 28 February 2014. Some of the figures have been entered in the answer sheet. INFORMATION: 1. Figures from the Balance Sheet and Notes on 28 February 2014 2014 2013 Ordinary shareholders’ equity ? 2 572 500 Ordinary share capital 3113 400 2 149 500 Retained income ? 423 000 Fixed/Tangible assets 2 790 000 3 824 500 Loan 500 000 850 000 Inventories 381 000 408 000 Cash and cash equivalents 1 155 000 3.000 Trade and other receivables 1 640 000 1 198 500 Trade debtors 1 640 000 4 150 000 SARS (Income tax) - 48 500 Trade and other payables 1 803 355 2.011 500 Trade creditors 1 534 355 1 030 000 Accrued expenses (Telephone) 8 000 8 700 SARS (Income tax) 69 000 : Shareholders for dividends 192 000 57 700 Bank overdraft - 915 100 2. Extract from the financial statements for the year ended 28 February 2014 Depreciation R203 000 Interest on loan 86 400 Net profit before tax 1020 350 Income tax 306 105 Net profit after tax 2222? Interim dividends paid on 30 September 2013 396 000 Final dividends declared on 28 February 2014 192 000 31 (8) (11) (23)

3. Dividends « Aninterim dividend of R396 000 was paid on 30 September 2013. * The directors recommended a final dividend of R192 000 on 28 February 2014. 4. Fixed assets * Land and buildings were sold for R1 250 000. « Equipment was purchased for cash. * No other tangible/fixed assets were bought or sold. 5 Ordinary share capital e 429900 shares were in issue on 1 March 2013 e 394 990 shares were issued at R5 each during the year. e 202210 shares were repurchased from dissatisfied shareholders at average price during the year. ACTIVITY 8 ANSWER SHEET RETAINED INCOME NOTE } NOTE 1 Reconcitiation between profit before taxation and cash generated_from operations Profit before taxation 1 020 350 | Changes in working capital Change in inventories 27 000 Cash generated from operations CASH FLOW STATEMENT Notes R Cash flows from operating activities

Cash flows from investing activities. Cash flows from financing activities | Net change in cash and cash equivalents 2 2 Balance end of the year 2 1 155 000 RATIO ANALYSIS WHAT IS IMPORTANT TO KNOW ABOUT RATIOS? 1. Different categories e Profitability and efficiency ratios e Liquidity e Solvency « Risk and return 2. Which financial indicator falls under which category 3. What is the purpose of each indicator 4. What is the formulae for the calculation of each indicator 5. How is each indicator expressed 6. Which indicators are compared to one another 7. Comment by starting with the trends and the general view of the situation at hand. TABLE SHOWING THE VARIOUS INDICATORS a 4 Return on average Net profit x 100 Shows what % shareholders are shareholder equity (ROE) Average shareholder equity getting from their investment. } Should be compared with returns | from other investments Return on capital ‘Net profit + interest expense _x100 | Shows the return on all capital imployed (ROCE) Average capital employed use.(equity + long term loan) ls used to determine if the co. can borrow money. Must be compared with interest on loan. If ROCE > interest it is ok to borrow this is called Positive gearing. Solvency ratio Total assets: Total liability Indicates the ability of the If it is1 of greater the business Is solvent business to pay its accounts when their due tet current assets (Net Current assets - crrent liabilities How much money is available to vorking capital) tun the day to day activities of the business. Surrent ratio Current assets : current liabilities Shows the ability of the business to pay its short term debts. The norm 2: 1 if its too high it means it is bad because some cash | 33

could tied up in stock for instance | \cid test ratio Current assets — inventory : current liabilities Shows the ability of the business | to meet its short term obligations even | fit cannot sell its stock stock turnover rate —Castof sales — Average stock Shows how many times (fast) the business sells out and replaces its stock in a year. | If it is too high the business will run out of stock If it is too low the goods can become obsolete. eriod of stock or stock Average stock x 365 Shows how many days the tolding period Cost of sales business keeps its stock before selling or replacing it Lower numbers means the business is selling more stock Jebt equity ratio ( gearing Non-current liability: equity Shows how the business is atio) financed. ( Is it using own capital or borrowed capital). A high ratio means the business is financed by borrowed capital: 441 zarnings per share (EPS) Net profit after tax x 100 No.of shares in issue Shows what each share earned during the year Shareholders will be satisfied if it increases from year to year Compare it to dividends dividends per share (DPS) Dividends paid & declared x100 | Shows how much dividends each No. os shares in issue shareholder will receive per share. Jet asset value (NAV) _ Shareholders equity x 100 Indicates the true value of the There is a relationship r»etween EPS and DPS: If No. of share in issue share. Must be compared to market price arge dividends were paid If NAV is lower than market price he NAV will be low. the share is overvalued. ACTIVITY 9 INFORMATION You are provided with the following extract from the balance sheet of Woodhill Ltd: 2015 2014 R R Current Assets 315 600 192 000 Inventories 242 400 134 400 Trade and other receivables 52 800) 43 200 Cash and cash equivalents 20 400) 14 400) Current Liabilities 132 000 126 000 Trade and other payables 93 600) 75 600} SARS - Income tax 9 600) 24 000) Shareholders for dividends 28 800) 26 400) You are provided with the following extract from the Income Statement: 2015 2014 Sales 2 292 000 1920 000 Cost of sales 4 524 000) 1 320 000) 34

ADDITIONAL INFORMATION: 4. Ali the inventories comprise trading stock. 2. One-tenth of the sales is on credit. 3. One-third of the purchases is on credit. REQUIRED: (a) Calculate the following for both years: 1. Current ratio 2. Acid-test ratio (b) Calculate the following for 2015 1. Rate of stock turnover 2. Period for which enough stock is on hand 3. Debtor's average collection period in months 4. Creditor’s average payment period in months (c) Comment on the results and offer suggestions to the board of directors ACTIVITY 9 ANSWER SHEET (a) Current ratio 2015 2014 Acid-test ratio (b) Rate of stock turnover 35

(c) Period for which enough stock is on hand (d) Debtors collection period (e) ‘Creditors payment period COMMENT: Current ratio: COMMENT Acid test ratio: 36

| COMMENT Stock turnover rate: COMMENT Period for which enough stock is on hand: COMMENT Debtors collection period and creditors payments period: Question 4 ACTIVITY 10 1.1 Complete the following sentences by using filling in the words from the list provided. Profitability; solvent; liquid; return; Risk /Gearing | 4 1.1.2 1.1.3 1.1.4 1.4.5 1.2 A company with total assets exceeding the total liability is The percentage net income on equity indicates the ..............+. earned by shareholders Accompany which is able to settle its immediate debts is ............ You are provided with the following financial indicators for the past two years. Calculate the missing indicators denoted by (a) to (e). 37

Financial indicators 20.3 ] 20.2 | Current ratio 1.9:1 141 | Acid test ratio {a) 02:1 | Stock turnover rate 6 times 4times Debt/equity ratio (b) 0.4:4 Net asset ratio per share (c) 1312cents Earnings per share (d) 310 cents | Dividends per share 560 cents 315 cents | Return on shareholders’ equity (e) 32.1% Return on total capital employed 59.0% 40.3% Interest on loans | 11% | 11% 4.3 Comment on the following, quoting the financial indicators to support your answer: e Gearing e Return, earning and dividends earned by the shareholders Information Black Label Limited Balance sheet on 30 June 20.3 20.3 20.2 Assets Non- current assets 3.996 800 4 180 000 Fixed assets 3.716 800 2 400 000 Investments 280 000 1 780 000 Current assets 2 789 000 2104000 | Inventories 2.020 000 1608 000 Trade and other receivables 456 000 488 000 Cash and cash equivalents 313 000 8 000 Total assets 6 785 800 6 284 000 | Equity and Liabilities | Shareholders’ equity 4313 800 3148000 | Ordinary share capital 2.997 000 2 544 000 Retained Income 1316 800 604 000 Non-current liabilities 984 000 1 148 000 Mortgage loan 984 000 1 148 000 Current liabilities 1 488 000 1 988 000 Trade and other payable (Including SARS and 1 488 000 1616 000 shareholders for dividends) Bank overdraft 372 000 Total equity and liabilities 6 785 800 6 284 000 Additional information: 1. Number of shares: Authorised: 400 000 In issue on 30 June20.2 240 000 New shares issued on 1 July 20.2@1260 cents 80000 Repurchased on 30 June20.3 50 000 The repurchase price was 120 cents higher than the average price 2. The income statement for 20.3 reflects the following: Net profit before tax R 2 864 000 Income tax, R859 200 Interest expense, R145 200 (all interest due was paid) Depreciation, R124 000 38

3. Unused fixed assets were sold at book value during the year for R224 000 4, Amounts owed to SARS at the end of the year are included in the trade & other payables Owed to SARS on 30 June 20.2, R38 400 Owed to SARS on 30 June 20.3, R48 000 5. As the new shares were repurchased on the last day of the year they did not qualify for all the dividends. Dividends were as follows: Final dividend for 20.2 paid on 5 August 20.2 total R312 000 Interim dividends for 20.3 paid on 31 December 20.2, 180 cents per share Final dividend for 20.3 declared on 30 June 20.3, 205 cents per share ACTIVITY 10 Answer Sheet 1.1Complete the following sentences by using filling in the words from the list | provided. jaja} o)o wfofojoju ail &loo/h|a 1.2Calculate the missing indicators denoted by (a) to (e) (a) (b) (c) i (d) 39

(e) 1.3 « Comment on the gearing ratio General comments: e Comment on return ; earnings and dividends General comments: RECONCILIATIONS 4. Reconciliation of debtors control accounts with the list ¢ Animportant managerial part of the business is to keep track of its debtors. ¢ Debtors contro! account is a T account in which we keep record of the total debtors of the business. e Each debtor has its own account that is kept in the Debtors ledger. « Atthe end of each month we need to reconcile the debtors list with the debtors control account. (Internal reconciliation) This is the summary of the possible differences between the 2 documents and how to correct them. difference Where we should fix it \ transaction was not recorded at ail. E.g. An voice was omitted. In both the debtors control account and the list \ transaction was recorded with an incorrect imount In both the control account and the list \ total of a journal was added up or (cast) correctly. In the debtors control account only \ transaction was posted incorrectly to the adividual account of the debtor In the debtors list only 40

\ transaction was posted to the wrong side of he individual accounts account of the debtor Double the amount and post it on the correct side debtors list \ transaction was posted to the wrong side of he general ledger Double the amount and post it on the correct side of the debtors control \ debtor with a credit balance on his account int to be transferred to the creditors ledger Dr the debtors control and the individual debtors account in the list Cr Creditors control and the individual creditors account in the list 3. BANK RECONCILIATION STATEMENT Summary of the differences when reconciling the Cash journals (CRJ and CPJ) and the bank statement. Items appearing in the credit column of the bank statement but not in the CRJ What should you do? Interest on current account Interest on fixed deposit Direct deposits from tenants for rent income Direct deposits from debtors Enter in the CRJ Items appearing in the debit column of the bank statement but not in the CPJ What should you do? Interest on overdraft Interest on foan Bank charges Debit orders Stop orders | Enter in the CPJ Dishonoured cheque (R/D) Items appearing in the CRJ but notin the credit column of the bank statement What should you do? Outstanding deposit Enter as outstanding deposit in the credit column of BRS Items appearing in the CPJ but not in the debit column _ of the bank statement What should you do? Cheques not yet presented to the bank for payment Enter as outstanding cheques in the debit column of BRS Additional items What should you do? Errors made in the CRJ or CPJ where the correct amount appears on the bank statement If too little entered, then enter the difference in the same journal If too much entered , then enter the difference in the opposite journal Errors on the bank statement If our account was incorrectly debited, then credit the BRS with the incorrect cheque. If our account was incorrectly credited, then debit the BRS with the incorrect deposit. Stale cheques (older than 6 months), lost | cheque, or where cheque was issued but the | service was not provided or a mistake made on the cheque. Then the cheque must be cancelled. We cancel these cheques in the CRJ. If anew cheque was issued in its place, an entry must be made in the CPJ and entered into the BRS as outstanding cheque until it is presented for payment 4l

Enter these cheques inthe BRSas _—si outstanding cheques. No entry | Post-dated cheques issued ( cheques that are already recorded in the CPJ) Post-dated cheques received (cheques are not entered in the CRJ but will be placed in the post-dated cheques register until the date appearing on the cheque. Creditors’ reconciliation Documents: Creditors’ ledger and the statement sent by creditors e The business uses the creditors ledger to keep a strict record of its transactions with its creditors e Once amonth the creditors send a statement of account to the business, which is a record of all its transactions between the creditor and business as per its own financial books. e Transactions between the creditors ledger of the business and the creditors statement mirror each other because the business is seen as a debtor in the books of the creditor Reasons why the Creditors ledger must be reconciled with the creditors statement of accounts e Identify errors that could have taken place when updating the creditors ledger account Identify errors that the creditor could have made on the statement Account for omissions on the creditors ledger account Account for omissions on the statement received from the creditor The table below explains the procedure: Type of transaction between How it is recorded in How itis recordedinthe | the business and the creditor the books of the books of the creditor business 41. Bought goods on credit Document - invoice Document - invoice from the creditor Journal - CJ Journal - DJ Amount will be credited in | Amount will be debited on the creditors ledger the statement 2. Paid creditor in settlement | Document — cheque Document — receipt of account and received a _| counterfoil discount for early payment Journal - CPJ Journal - CRJ Amount will be debited in | Amount will be credited on the creditors ledger the statement 3. Returned goods to the Document — debit note Document - credit note creditor Journal - CAJ Journal - DAJ } Amount will be debited in | Amount will be credited on | the creditors ledger the statement 4. Creditor charged interest Document — journal Document — journal voucher on overdue account voucher Journal - GJ Journal - GJ Amount will be credited in | Amount will be debited on the creditors ledger the statement 42

AGE ANALYSIS e ls the categorisation of amounts of debtors on the basis of how old the balances are? The purpose is to enable the attention to focus on the collection of overdue e Any business must keep a careful control of all the accounts in the Debtors by ensuring on the following: 4. Monitor a debtor's credit rating before extending any credit to the debtor. 2. No debtors exceed their credit limit 3. Payments are regularly received according to their agreement ACTIVITY 11 Question 1 24 Marks 20 Minutes DEBTORS AND CREDITORS RECONCILIATION The information below relates to Highty Tight who runs a general dealer store in a residential area. He buys most of his stock on credit from two suppliers with whom he has an arrangement whereby he settles with them within 30 days. He also sells on credit to a selected number of regular customers. He allows them 60 days’ credit. Required: 1.1 Record the errors and omissions directly in the Debtors and Creditors {14] List. Show working in brackets. 1.2 State your observations on the credit terms allowed to debtors and [4] allowed by creditors. Give your recommendations in this regard ? 4.3. Refer to item (iii) above. What internal control measures can be (2] implemented to prevent this in the future? 1.4 Briefly explain why the Debtors and Creditors contra! account balances [4] should always be equal to the totals of the Debtors and Creditors Lists. Information At the end of March 2010 his part-time bookkeeper compiled the Debtors and Creditors control accounts. The final balances on 31 March 2010 are: Debtors control R5 790 Creditors control R 7 300 These balances were arrived at after taking all the errors and omissions listed below, into account. The bookkeeper, however, did not update the Debtors and Creditors Ledger with these errors and omissions as he had fallen ill. Your help is needed. The Debtors and Creditors Lists on 31 March 2010 are given below: { Debtors List on 31 March 2010 LG. Gents 2 400 B. Patient 3 120 LR. Smilo 980 | R6 500 Creditors List on 31 March 2010 | | Camby Wholesalers 5 430 | Tel Stores 3500 [RB 930 43

Errors and omissions that were not considered in the Debtors and Creditors Ledgers (i) Stock sold on credit to G. Gents for R300 was incorrectly charged to the account of R. Smilo. (ii) | Damaged merchandise was returned to Camby Wholesalers R890. (ii) —_B. Patient returned stock which she had not ordered R760. (iv) An invoice for items purchased on credit from Tel Stores for R1 310 was not entered in their account. (vy) Accheque received from B. Late for R410 had been incorrectly recorded in the account of B. Patient. The account of B. Late had been previously written off. (vi) | A payment of R2 000 was made to Tel Stores. A discount of R50 was received (vii) Merchandise returned by R. Smilo, R180, was treated as a credit sale. ACTIVITY 11 ANSWER SHEET DEBTORS AND CREDITORS RECONCILIATION 1.1 Record the errors and omissions directly in the Debtors and Creditors List. Show working in brackets. [14] Debtors List on 31 March 2010 | G. Gents B. Patient R. Smilo Creditors List on 31 March 2010 Camby Wholesalers Tel Stores 12 State your observations on the credit terms allowed to debtors | [4] | and allowed by creditors. Give your recommendations in this regard? | Refer to item {iii) above. What internal control measures can be | [2] implemented to prevent this in the future? 44

1.4 Briefly explain why the Debtors and Creditors control account [4] | balances should always be equal to the totals of the Debtors and Creditors Lists. ACTIVITY 12 QUESTION 2 DEBTORS AGE ANALYSIS 15MARKS 10MIN The information relates to Orange Stores REQUIRED: 2.1 Identify one debtor who could have his credit limit increased and (2) support your answer 2.2 Explain Three different problems reflected by the Debtors’ Age Analysis. (9) Give evidence. 2.3 If G. Grape settled her account after receiving her statement, and within (4) the credit terms, how much would she be required to pay. Information Debt collection policy e Debtors who settle within 30 days qualify for 5% discount e Interest is charged as follows: e o 3% on accounts overdue for 31 — 60 days o 5% on accounts overdue for 61 — 90 days e Accounts overdue for more than 90 days 10% interest is charged and are handed over to the attorneys for collection Orange Stores Debtors age analysis on 31 March 2016 Debtor Credit Current | 31-60 61-90 >90 Amount Limit Owing A Apple R_5 800 R1 900 R2 400 R1 200 R 500 R6 000 B. Banana R15 000 R1 400 R3 200 R4 600 G. Grape R10 500 R3 000 R4 500 R7 500 P. Peach R 2100 R2 000 R2 000 R33 400 R8 300 R5 600 R1200 R5000| R20 100 41% 28% 6% 25% 100% 45

ACTIVITY 12 ANSWER SHEET Question 2 2.1 Identify one debtor who could have his credit limit increased and Support your answer, (2) 2.2. Explain Three different problems reflected by the Debtors’ Age Analysis. Give evidence. (9) Explain of problem with evidence Problem 1 Problem 2 Problem 3 | 2.3 | If G. Grape settled her account after receiving her statement, and (4) within the credit terms, how much will she be required to pay? 46

ACTIVITY 13 Question 3 Bank Reconciliation and internal control The information below relates to base Traders REQUIRED: ; 3.1.1. Calculate the correct bank balance on 31 May 2016 | (13) 3.1.2. Prepare the Bank Reconciliation Statement on 31 May 2016 | (8) 3.1.3. Refer to information 5 ; ; | Identify TWO different problems with evidence. Give advice for ach (6) problem. INFORMATION: 4. The following Bank Reconciliation Statement was prepared on 30 April 2016: Balance as per Bank Statement (unfavourable) R13 000 Outstanding deposit R30 000 Outstanding cheques: No. 123 (dated 20 November 2015) 10 500 No. 158 (dated 2 Aprit 2016) 7900 No.162 (dated 30 June 2015) 4500 Correction of error 3 600 | Balance asper bank account (unfavourable) 2.300 NOTE: The deposit of R30 000 appeared on the Bank Statement on 14 May 2016. - The Bank corrected the error of R3 600 on 10 May 2016. - Cheque No. 158, issued in April 2015, was reflected on the Bank Statement for May 2016, was reflected on the Bank Statement for May 2016 as R9 700. The Bank Statement is correct. The other outstanding cheques have not been presented for payment. 2. Provisional totals on 31 May 2016: CRU: R87 220; CPJ: R74 860 3 The Bank Statement for May 2016 revealed the following: e Direct deposit for rent income from the tenant, R21 000 e Stop order for insurance, R6 500 e R/D cheque originally received from G Gums for R2 250 in settlement of her account of R2 200 e Bank charges, R210 e Balance as per Bank Statement, ? a: The following cheques appeared in the Cash Payments Journal and not on the Bank Statement for May 2016: e No. 178 for R2 200 e No. 182 for R1 400 (dated 28 June 2016) 4. The Bookkeeper recorded the following entry in the May 2016 CRJ: Doc. Date Details Analysis Bank Sales CS173-181 | 30 Cash 18 500 18 500 18 500 ' The Bank recorded this on 15 June 2016. The internal auditor has noticed that cash slips, CS173 — 181, actually total R25 500. 47

ANSWER SHEET ACTIVITY 13 Question 3 Bank Reconciliation and internal control "Cash Receipts Journal (Figures only) 87 200 Bank balance on 31 May 2016 3.1.1 Calculate the correct bank balance on 31 May 2016 Cash Payment Journal {Figures only) 74 860 3.1.2.Bank Reconciliation Statement on 31 May 2016 advice for ach problem. 3.1.3. Refer to information 5. Identify TWO different problems with evidence. Give PROBLEM WITH EVIDENCE ADVICE 48

Eve 24, education x DEPARTMENT: EDUCATION MPUMALANGA PROVINCE ACCOUNTING SUPPORT GUIDE FOR GRADE 12 LEARNERS 2017 SOLUTION BOOK

ANALYSIS AND INTERPRETATION OF FINANCIAL STATEMENTS In analysing financial statements, we would like to arrive at answers to the following main questions: e PROFITABILITY How profitable is the business and how well does it control its expenses? « LIQUIDITY Can the business pay off its immediate debts without any problem in the short term and has the business handled its working capital effectively? e RETURN Is the owner earning a good return on the capital he invested in the business? e SOLVENCY Can the business pay off all its debts? RATIOS _ PURPOSE A PROFITABILITY e Determine the level of profitability and operating efficiency of the business. 1. GP on Cost of sales [How profitable is the business] 2. GP on Turnover e Verify the mark-up. 3. Total Expenses on Turnover [Business policy on Gross Profit on Sales] 4. Operating profit on tumover e Check on control over expenses. 5. Net Profit after Tax on Turnover ¢ Check on controt over stack / inventory. [Applicable to Periodic Inventory system] Profltability Ratios/Percentages Ratio Comments 1. Gross Profit on Cost of Periodic Inventory System Sales e Verify mark-up. e Compare with the previous year and | Gross profit X 100 |

Cost of Sales 4 Answer = 2 % determine the extent of the drop in percentage. If the business uses the Periodic Inventory up can be attributed to the following: e Stock was discounted during a stock clearance sale. | e Errors in calculating mark-up. Theft of stock. decline in the mark-up. Continuous Inventory System [Perpetual] e Verify mark-up. ¢ Compare with the previous year and determine the extent of the drop in percentage. can be attributed to the following: Stock was discounted during a stock clearance sale. Errors in calculating mark-up. System and a Fixed Mark-up and the % mark-up is lower than as per policy, then the drop in mark- | e Trade discounts were offered to bulk buyers. If the business used a variable mark-up, the result would be an average mark-up on cost. This could be compared with the average mark-up of the previous of the year to see if there is an improvement or If the business uses the Perpetual / Continuous Inventory System and a Fixed Mark-up, and the % mark-up is lower than as per policy, then the drop in mark-up cannot be attributed to theft of stock. It Trade discounts were offered to bulk buyers. Theft of stock is not applicable.{Explain] Profitability Ratios/Percentages Ratio Comments 2. Gross Profit on Turnover e Check on GP policy on Turnover to see if it is maintained. e For every Ri of sale, 4 # was the gross profit. Gross profit X 100 * Compare with the previous year. Turnover 1 e A drop in % could be attributed to the same reasons as in the case of a drop in Gross Profit on Cost of Sales. Answer = 7 % The Effect of Trading Stock on Gross Profit Note: The business uses a fixed mark-up of 100% on cost. Trading Statement Example 1 Example 2

Opening stock 100 000 100 000 Purchases 450 000 450 000 Carriage on purchases 25 000 25 000 Customs duties 15 000 15 000 Import duties 10 000 10 000 Total Value of Goods Available for Sale 600 000 600 000 Less: Closing stock 150 000 90 000 Cost of sales 450 000 510 000 Gross profit 450 000 390 000 Sales 900 000 900 000 Gross Profit on Cost of Sales 100% 76,5% STOCK CONTROL Periodic Inventory System Continuous Inventory System Fixed Mark-Up Fixed mark-up will assist in monitoring stock Calculation of GP on COS must indicate must indicate whether the mark-up is maintained. if the mark-up is lower it indicates that there are stock shortages. Variable Mark-Up Stock shortages would be by comparing the average mark-up with the previous year. Other reasons for a drop in mark-up: Goods were discounted during a period of sale. Goods were discounted to promote bulk Take physical stock and compare it with the balance on the Trading Stock Account to establish stock shortages. sales. 3. Total Expenses on Turnover Total Expenses X 100 Turnover 1 This shows what portion of the GP on Turnover is used for Operating Expenses. Compare result with the previous year to see if the %is a lower [improvement in control over expenses] or if the % is higher [poor control over expenses}. Identify specific expenses that need to be curbed. Guard against decreasing salaries and wages to improve control over expenses. [Note that macro-economics is not only about making a profit but it is also a social responsibility insofar as creating jobs is concerned. Advertising expenditure seen in relation to sales. 4. Net Income after Tax on Turnover Net Income after Tax X 100 if the drop in % from GP on turnover to Net Profit after Tax on turnover is very high, then the focus must be on curbing expenses including interest expense since the cost of financing will have an effect on this ratio. [See ratio 3 above]

Turnover 1 e Compare result with the previous year to assess whether there is an improvement or deterioration in the control over _ expenses. RATIOS PURPOSE B Liquidity Ratios To assess whether the business can pay off its immediate debts / its short-term obligations. 1. Current Ratio. 2. Acid Test Ratio. Make comparisons with the results of the previous year 3. Rate of Stock Turnover. and comment on: 4. Period for which enough Stock is on Hand. e The cause and level of improvement OR 5. Debtors’ Average Collection deterioration. Period. 6. Creditors’ Average Payment | Points to consider when calculating liquidity ratios: Period. e When calculating a ratio, the left hand side of the ratio must be divided by the right hand side of the ratio. Therefore, the right hand side of the ratio will always be equated to 1 i.e. the result would read x D4 e e When calculating the Rate of Stock Turnover, the result would read‘ x times per year’. e (Refer to 4, 5 and 6 below] It is highly recommended that a ‘period’ is calculated in days and not in months. It is easier to comment on the exact number of days than on a fraction of a month. Therefore, in the calculation multiply by 365 days to arrive at an answer in days. Liquidity Ratios Ratio Comments 41. Current Ratio e How much of current assets does the business have for every R1 of current liability. Current Assets : Current Liabilities e ts the business liquid? * Inventories + Payables e How does the result compare with the » Receivables * Bank Overdraft} previous year? - Cash e Will the business be able to pay its short-term debts? e Whatcan a higher ratio be attributed to? * High stock levels. * Obsolete stock. * Inventory is valued at prices higher than the realistic value.

[= Increase in debtors through credit sales. | » Increase in cash through loans. e What can a lower ratio be attributed to: « Decrease in any of the current assets or * increase in any of the current liabilities. 2. Acid Test Ratio Current Assets — inventories ; Current liabilities [ Receivables [Payables Cash] Bank Overdraft] The Acid Test Ratio is calculated to: e Assess the ability of the business to pay off its short-term debts without having to sell its stock [inventory]. * How much of current assets excluding stock | does the business have for every R1 of current liability? » Why is stock excluded? * Obsolete stock cannot be converted to cash quickly. * Stock may be over priced and cannot be sold quickly. « Generally stock cannot be converted to cash quickly. « Todetermine the extent to which the business has invested in stock. How will this be determined? By examining the drop between the Current Ratio and the Acid Test Ratio. Other factors that can affect the ratio: * Cash invested in Fixed Deposits. « Debtors are taking too long to pay. « Creditors are being paid too soon. How does the result compare with the previous year? Will the business be able to pay its short-term debts? 3. Rate of Stock Turnover , Cost of sales | Average Stock Answer = 1 times fer year The Rate of Stock Turnover is calculated to check the liquidity and operating efficiency of the business by determining the number of times stock is replaced in a year. e Ahigh stock turnover rate is advantageous | and would result in: : Increased sales [Turnover] « Increased cash sales would improve cash flow. [Money is available more quickly] + Increase in turnover would lead to profits being realized more quickly. e A lower stock turnover rate could be as a result of: * Stockpiling due to ageing, poor quality or changes in fashion. ° Wrong purchases

« Wrong purchase policy [When must stock be replaced] « Poor sales * Economic circumstances. Consequences of stock piling: e incur costs for storage [Rent etc]. Profits decrease. ° Cash is tied to stock that cannot be sold easily because it is outdated. Affects liquidity. How does this result compare with the previous year? 4. Period for which enough stock on hand Average Stock X 365 Cost of sales 1 Answer = 7% days The Period for which enough Stock is on Hand is calculated to help the business in planning and replenishing stock. This process involves: e Adhering to the purchasing policies. « Timeous placing of orders. e Checking up on availability of stock. If the period is long it indicates that more working capital is tied up in stock. [Working Capital = Current Assets - Current Liabilities] It must be noted that the type of business will also influence the period e.g. e Clothing may be replaced seasonally. Approximately four times a year. e Groceries and other food items may be replaced more rapidly, that is, daily or weekly. How does this result compare with the previous year? 5. Debtors’ average Collection period Average Debtors X 365 Credit Sales 4 Answer = 7 days The debtors’ collection period is calculated to determine whether debtors are complying with the credit terms policy. If the collection period exceeds the terms for collection in the policy it means that the credit terms policy is not efficient and the consequences are as follows: e The business would not have sufficient cash to meet its financial obligations for e.g. payment to creditors, paying salaries and other operating expenses. e The business would have to borrow money as a result cash flow constraints and would have to pay interest on overdraft. e Compare the result with the previous year and if the payment has worsened, it means that there is a regression in credit regulation.

If the collection period complies with the credit terms policy or it is shorter than the terms for collection it means that: e The credit terms policy is efficient. e The collection period has a positive effect on the liquidity position of the business because the debt is converted to cash more quickly. Ways of improving the Debtors’ Average Collection Period: e Offer settlement discounts e Charge interest on overdue accounts. e Regular communication with debtors to settle their accounts. Communicate by: * Sending out monthly statements. « Following-up telephonically or by SMS. * Escalating the account to senior the credit controller if payment is not forthcoming. N.B. The Debtors’ Collection Period must be shorter than the Creditors’ Payment Period. Important How does this result compare with the credit terms policy? How does this result compare with the previous year? 6. Creditors’ average Payment period Average Creditors X 365 | Credit Purchases 4 Answer = 7% dage The creditors’ payment period is calculated to determine the following: e Whether there is compliance with the credit terms facilities arranged with creditors. e Whether it is in keeping with the internal payment policy of the business so that: * Settlement discounts are received. * Interest is not charged on overdue accounts. « Supplies are not halted due to late payment. A longer period of payment is always better because: e It does not create financial constraints on the business. e Surplus cash could be invested and interest could be earned on it. [Money Market account, 32 day call account etc.] Important How does this result compare with the credit terms policy?

“How does this result compare with the previous | year? RATIO PURPOSE C Solvency [Refers to Shareholders’ Equity] Solvency can be calculated as a ratio or as an amount. “This ratio tests the credit worthiness of the business and indicates whether the business can meet all its commitments. Total Assets : Total Liabilities Ratio = TotalAssets : Total Liabilities Amount = Total Assets - Total Liabilities = Shareholders’ Equity Solvency Ratios Ratio Comment | Solvency Assets must always be greater than R11 in order for the business to be solvent. ' How does the Total Assets compare with the Total Liabilities? How does this result compare with the previous | year? ; RATIO PURPOSE D Gearing This ratio is calculated to assess the extent to which the business is financed through loans as against own capital raised through the sale of shares. Hence, it indicates the degree of financial tisk of the business. Note: e Loans are subject to a finance cost viz. interest on loan. [Risk] « Share capital is not subject to a cost. This shows the ratio between: Borrowed Capital and [Non-Current Liabilities} * Loans Own Capital {Shareholders’ Equity} « Share Capital * Share Premium * Retained Income Important: Use this ratio to comment on loans. | Gearing Ratios / Percentages Ratio Comment Debt to Equity Ratio This ratio tests the credit worthiness of the business and indicates the extent to which the

Borrowed Capital Own Capital [Non-Current Liabilities] (Shareholders’ Equity] « Loans « Share Capital * Share Premium « Retained Income Important: Use this ratio to comment on loans. business is geared [financed] by loans [borrowed capital]. Credit providers are the interested parties: « Banks ¢ Creditors High Gearing e High risk [Disadvantageous] e Loans are high * Costly - interest has to be paid. Low Gearing e Low risk [Advantageous] e Regarded as creditworthy by banks. Improvement in the ratio can be attributed to: e Increase in the number of shares issued. ¢ Decrease in loans through partial repayments How does the ratio compare with the previous year? RATIOS PURPOSE E Return 1. Return on average Shareholders’ Equity. [ROSHE] Return on Total on Capital Employed. [ROTCE] Earnings per Share. [EPS] Dividends per Share. [DPS] Net Asset value per Share. [NAV] one These ratios test the efficiency of the investment in the company. Comparisons against other forms of investments are crucial. The information derived from these percentages assist the directors and shareholders in decision making insofar as the investment in the company is concerned. Return Rati os / Percentages Ratios / Percentages Comment 1 Return on Shareholders’ Equity [ROSHE] Netincome afterTax X 100 Ave Shareholders equity 1 Answer = 1% This calculation is done to ascertain the Return on Shareholders’ Equity. [Investment in the Company] » Check the profit on investment. » Compare the result against the return on alternative investments. » Compare the result against the previous year. 2 Return on Total Capital Employed | [ROTCE] | | Net Profit before Tax + Interest X 100 This ratio indicates whether the business has a return on capital employed that is higher or lower than the percentage interest paid on loans.

Ave Capital Employed 1 Answer = 4% Capital employed = Shareholders’ Equity | + Non-Current Liabilities Important: Use this ratio to comment on loans. Consider the following: Positive Gearing: [Favourable] e Applies when funds are borrowed at a relatively low interest rate in order to earn relatively higher returns. Negative Gearing: [Unfavourable] e Applies when funds are borrowed at a relatively higher interest rate and the difference between return earned on Capital Employed by utilizing borrowed funds is relatively narrowed down. e Example Interest on loan = 15% compared against the ROTCE of 22%. e Applies when interest rates on loans are equal to or relatively higher than the return earned by the company on Capital Employed. How does the result compare with the previous ear? |3 Earnings per Share [EPS] | Netincome afterTax X 100 | No. of Shares issued 1 Answer = 1 cents per share Calculation as a percentage 100 1 EPS x Price Per Share Answer = 4% L This ratio refers to the return the company earned per share. More specifically it means that this is the amount that the company earned for every share invested in the company. This does not mean that the shareholders received this amount per share: e Because a portion of the earnings is Retained for further expansion or unforeseen circumstances. e Shareholders do not receive the immediate benefit, that is, the total benefit of the earning. e This calculation is used by shareholders to gauge the earning per share in relation to the market price of the share for investment purposes. How does the result compare with the previous year? 4 Dividends per Share [DPS] Total Dividends forthe year X 100 No. of Shares issued 1 Answer = 1% cents per shane Note: | Total Dividends = Dividends Paid [Interim] I + Recommended [Final] for This ratio indicates that portion of the total earnings of the company that the shareholders received. The shareholders must compare their earnings in the form of dividends with: e The results of the previous year. e Alternative investments [% earned] Note:

the year. Calculation as a percentage DPS x 100 Price Per Share 1 Answer = 4% The difference between Earnings per share and Dividends per share is Retained Income EPS - DPS = RETAINED INCOME How does the result compare with the previous year? ic Net Asset Value per Share [NAV] Ordinary Shareholders’ equity X 100 No. of shares issued 1 Answer = 2% cexts fer share Note: Assets = Shareholders’ Equity + Liability | Shareholders’ Equity = Assets - Liability | Shareholders’ Equity = Net Assets Hence, Net Assets = Shareholders’ Equity Current curriculum stipulate three values to shares: « Par value = Nominal value e Market value = The price at which the share is trading on the Securities Exchange e Net asset Value = This Ratio indicates the value of the share according to the accounts and financial statements of the company, that is, according to the books of the company. How does the result compare with the previous year? . How does the result compare with the other values? ;

22, education ss DEPARTMENT. EDUCATION 2 MPUMALANGA PROVINCE SOLUTIONS TO ACTIVITIES

MODULE 1: COMPANY LEDGER ACCOUNTS ACTIVITY 1 Solution1. 1.1 Ordinary share capital 2014 2013 Jan 16 | Bank CPJ 232 000 Mar. 1 Balance b/d 1625 000 Feb | 28 | Balance cid 2233 000}|Sep | 20 | Bank CRJ 840 000 2 465 000 2 465 000 2014 Mar. | 1 | balance bid 2 233 000 1.2 Retained Income 2014 2013 Jan 16 | Bank CPJ| 108000 Mar. 1 | Balance b/d 881 000 Feb |28 | Appropriation |Gu | 773 000|]27'4 | 28 | Appropriation GJ) 250000 Feb | 28 | Balance eld 250 000 4 131 000 1131 000 Mar. | 1 | Balance cld 250 000 1.3 SARS Income tax 2013 2013 Mar. 15 | Bank CPJ 55 000 Mar. 1 | Balance b/d 55 000 Aug. | 31 | Bank cps} 88 o00}]20' | 28 | income tax e)| 171.000 2014 Feb. 28 | Bank CPJ 95 000 Feb 28 | Balance c/d 12 000 238 000 238 000 2014 Mar. 1 ‘| Balance b/d 12 000 Ww

ACTIVITY 2 Solution 2 2.1 Ordinary share capital 2014 14 | Bank cps} 160 .000]|2°' | 4 | Batance bid | 4500000 May July June | 30 | Balance cid | 5600 000}|Nov | 1 | Bank CRJ | 1260000 5 760 000 § 760 000 Balance bid § 600 000 2.2 Retained income 2013 2013 May 4 Bank CPJ 70 000 Jul 1 | Balance b/d 650 000 2014 a 2014 a June 30 | Appropriation | GJ 580 000 June 30 | Appropriation GJ 1 157 500 June | 30 | Balance cid 1 157 500 1 807 500 1 807 500 July | 4 | Balance cold 4 157 500 2.3 SARS income tax 2073 | 4 | Balance bid 8 000 Income tax GJ | 405000 Aug | 31 | Bank 172 000 2014 | 58 | Bank cPJ| 180000 Feb June | 30 | Balance cld 45 000 405 000 405 000 Balance b/d 45 000 2.4 Dividends on ordinary shares oa | 4 | Bank cps] 210000 Appropriation | GJ 367 500 Shareholders for dividends os uerey 367 500 367 500

2.5 Appropriation account 2014 Dividends on 2014 June 30 ordinary shares GJ 367 500 June 30 | Profitand loss | GJ 1350 000 Retained dune | 30 | Income tax GJ 405 000]|June | 30 neon GJ 580 000 Retained June | 30 er GJ | 1157 500 1 930 000 1 930 000 MODULE 2: FIXED ASSETS ACTIVITY 3 Solution 3 3.4.1 Equipment account 2009/4 | Balance b/d 240 000||2099| 4 | Asset disposal | GJ g0 000 Jan Nov Creditors Jan | 1 control CJ 130 000 Dec 31 | Balance cid 290 000 370 000 370 000 2010/4 | Balance bid 290 000 Jan 3.1.2 Accumulated depreciation on equipment 2009 Asset 2009 Nov 1 disposal GJ 20 500 ‘jan 1 Balance b/d 72 000 Dec | 31] Balance eld 94 500}] Nov 4 Depreciation GJ 8 500 Depreciation Dec 31 | (19 500 + 15 000) GJ 34 500 115 000 115 000 2010 14 | Balance bid | 94500 Jan Calculation: New Equipment: R130 000 x 15/100 x 12/12 = R19500 Sold equipment: R 80 000 - 12 000 x 15/100 x 10/12 = R8500 Old equipment: (240 000 - 80 000) — (72 000 — 12 000) x 15/100 x 12/12 160 000 — 60 000 x 15/100 x 12/12 = R15 000 5

Asset disposal! Accumulated epee l4 | Equipment | GU | 80 000 hay [1 | depreciation on GJ 20 500 equipment Profit on sale Nov | 1 of asset GJ 14 500]|Nov [1 | Bank CRJ 74 000 94 500 94 500 Calculation: R12 000 + R8 500 = R20 500 3.2 NOTE 3 TO FINANCIAL STATEMENTS Land and A FIXED ASSETS building Equipment Carrying value — beginning of year 150 000 168 000 Cost price 150 000 ¥240 000 Accumulated depreciation 0 Y (72 000 ) Movements Additions ¥60 000 ¥130 000 Disposals (31 December 2011) 0 (59 500) Depreciation Q (43 000) Carrying value — end of year 210 000 195 500 Cost price ¥210 000 290 000 Accumulated depreciation 0 (94 500)

ACTIVITY 4 Solution 4 4.1 NOTES TO FINANCIAL STATEMENTS Foreign items -1 (max. -2) FIXED ASSETS Vehicles Equipment Carrying value — beginning of year M 312000} M4 245000 Check operation, ace dep must be deducted Cost price v¥ 780 000 ¥ 350000 Accumulated depreciation (468 000) (105 000) Movements Additions y¥ 32000 Disposals (31 December 2011) 4 (78 000) (180 000 ~ - 102 000 ~’) operation if one part correct Depreciation M (150 000) M (39 150) (30 000 + 120 000) (36 750 + 2 400) operation if one part correct Carrying value — end of year 4 84000) M 237850 Gheck operation Cost price y 600000; “ 382000 Accumulated depreciation ¥ (516000)) ~ (144150)

MODULE 3: FINANCIAL STATEMENTS ACTIVITY § Solution 5 5.1.1 SANDALS LIMITED INCOME STATEMENT FOR THE YEAR ENDED 28 FEBRUARY 2009 Sales (3 040 000 - 2 000 - 14 400) 3 023 600 Cost of sales (1 251 200 — 24 000) {1 246 400) Gross Profit 1.777 200 Other Operating Income 70 755 Rent income (73 150 —6 050) 67 100 Bad debt recovered 2 500 Provision for bad debts adjustment 1155 Gross Operating Income 1 847 955 Operating Expenses (663 079) Directors’ fees 30 000, Consumable stores ( 6 600 - 810) 5 790 Insurance (2 350 — 400) __1950 Audit fees 10 000 Salaries and wages (377 150 + 1 000) 378 150 Medical aid contribution ( 15 500 + 80) 15 580 UIF contribution (3 600 + 10) 3610 Discount allowed 11 750 Bad debts 1.170 Loss on sale of assets 19 500 Trading stock deficit_() 7 200 Repairs § 000 Sundry expenses (1129 300 +1 230) 130 530 Depreciation (5 500 + 2 350 +34 999) 42 849 Operating Profit 4 184 876 Interest Income 400 Profit before interest expense 1185 276 Interest expense (62 250 + 3 750) (66 000) Profit before tax 1119 276 Income tax | «380 000) Net Profit for the year 739 276 §.1.2 Notes to Balance sheet 3. Tangible / Fixed assets / Land and Vehicles Equip- Total buildings ment Carrying value beginning of year 2604 150 35 000 60000 2 699 150 Cost 2 604 150 375 000 240 000 3 462 110 Accumulated depreciation 0 (340 000) | (180.000) | (520 000) Movement Additions at cost 115 000 282 000 397 000 Disposals at carrying value (54 500) {54 500) Depreciation for the year (7 850) (42 849) Carrying value end of current year 2719 150 1 279650 | 2998 801 Cost 2719 150 375 000 282000 | 3376 150 Accumulated Depreciation 0 (374999) {2 350) (377 349)

4. Inventories Trading stack (316 200+4 800-4 800 -7 200 309 000 Consumables stores on hand 810 309 810 5. Trade and other receivables (debtors) Trade Debtors (191 900 - 3 900 - 14 400+ 335 + 2 500) 176 435 Provision for bad debts (15 400 — 1 155) (14 245) Net trade debtors 162 190 Prepaid expenses (38500 + 840) 400 Accrued income 400 162 990 6. Cash and cash equivalents Bank (60 250 + 2730 + 3 400) 66 380 Petty cash 750 Cash float ft) Fixed deposit maturing within next 12 months 0 67 130 7. Ordinary share capital Authorised Number of authorised shares 1 000 000 Issued 600 000 shares in issue at beginning of the year @ R2 1 200 000 450 000 shares issued during financial year @ R4.50 675 000 (0) shares repurchased during the financial year (0) 750 000 shares issued and outstanding at end of the year 1 875 000 8. Accumulated profits / Retained income Balance at beginning of the year 64 000 Net profit after tax for the year 739 276 Repurchase of shares above average issue price (0) Dividends on ordinary shares (600 000) Paid 225 000 Recommended 375 000 J Balance at end of the year 203 276 9. Trade and other payables (creditors) Trade creditors (241 500+282 000-35 000+120 000-4800+335+3 400) 607 435 Accrued expenses(3 750+30 000+10 000+1 230) 44 980 Income received in advance 6 050 Shareholders for dividends 375 000 Creditors for salaries 660 Medical aid fund (5 200+80+80) 5 360 UIF (10 +10) 20 SARS (Income tax) (297 700 — 38 000) 82 300 PAYE (28 400 +250) 28 650 1 150 455

STATEMENT OF FINANCIAL POSITION (BALANCE SHEET) ON 28 FEBRUARY 2015 Notes R ASSETS NON-CURRENT ASSETS 3 038 801 Tangible/ Fixed assets 3 2.998 801 Financial assets | Fixed deposit 40 000 CURRENT ASSETS 539 930 Inventories 4 309 810 } Trade and other debtors 5 162 290 Cash and cash equivalents 6 67 130 TOTAL ASSETS 3 578 731 | EQUITY AND LIABILITIES CAPITAL AND RESERVES / SHAREHOLDERS’ EQUITY 2 078 276 Ordinary share capital 7 1 875 000 Accumulated profit / Retained income 8 203 276 NON-CURRENT LIABILITIES 300 000 Mortgage loan (_ 350 000 - 50 000) 300 000 CURRENT LIABILITIES 1 200 455 Trade and other creditors 9 1.150 455 Bank overdraft ("] Current portion of long-term loan 50 000 TOTAL EQUITY _AND LIABILITIES 3 578 731

ACTIVITY 6 Solution & STATEMENT OF COMPREHENSIVE INCOME (INCOME STATEMENT) OF SILVERWOOD TRADERS LIMITED FOR THE YEAR ENDED 28 FEBRUARY 2015 6.1.4 Notes R Sales (3 423 368 — 3400 -— 1260) 3 418 700 Cost of sales (1 700 000 — 900) (1 699 100) Gross Profit 1719 600 Other Operating Income 72 426 Discount received (2200 -30) 2 170 Rent income (75400 -5800) 69 600 Bad debt recovered 600 Provision for bad debts adjustment (3160 — 3104) 56 Gross Operating Income 1 792 026 Operating Expenses (1 217 550) Directors’ fees (259000 — 38500) 220 500 Bank charges (2400 + 670) 3.070 Stationery 2 860 Insurance (26000 — 840) _ 25160 | Audit fees 15 800 Salaries and wages 434 000 Discount allowed (490 + 20) 510 Bad debts (480 +320) 800 Loss on sale of assets 188 000 Trading stock deficit (87500 +900 — 86950) 1450 Repairs 10 000 Rates (1 590 000 x 2%) 31 800 Sundry expenses (19200 -15800) 3 400 Depreciation (80000 +116000 + 82000 + 1400 + 8000) 280 200 Operating Profit 574 476 Interest Income 1 8 100 Profit before interest expense 582 576 Interest expense (750 + 120 + 20700) 2 (21 570) Profit before tax 561 006 Taxation 9561006 x 28%) (157 082) Net Profit for the year 9 403 924 6.1.2 7. Ordinary share capital Authorised Number of ordinary shares 1.000 000 Issued _ 80 000 shares in issue at beginning of the year @ 18.25 1 460 000 20 000 shares issued during financial year @ 19 380 000 10 000 shares repurchased during the financial year@18.40 (184 000) 1 656 000 90 000 shares issued and outstanding at end of the year 11

6.1.3 8. Accumulated profits / Retained income Balance at beginning of the year 274 200 Net profit after tax for the year 403 924 Repurchase of shares above average issue price (6 000) Dividends on ordinary shares (259 000) Paid 250 000 Recommended 9 000 Balance at end of the year_ 413 124 ACTIVITY 7 Solution 7 NOTES TO THE CASH FLOW STATEMENT NOTE 1 Reconciliation between profit before taxation and cash generated from operations Profit before taxation 660 600 Adjustments in respect of: Interest paid 78 000 Depreciation (63 000 + 192 000) 255 000 Operating profit before changes in working capital 993 600 Changes in working capital (196 320) Changes _in inventories 9 480 Changes in trade and other receivables (41 700) Changes in trade and other payables (164 100) Cash generated from operations 797 280 NOTE 2 Cash & cash equivalents NET CHANGE 2015 2014 Bank 92 100 32 100 (60 000} Cash float 2 400 9 000 6 600 Petty cash 600 4.500 900 95 100 42 600 (52 500) NOTE 3 Dividends paid Amounts in financial statements (195 180) Balance beginning of year (105 000) Balance end of year 120 000 Dividends paid (180 180) OR SHAREHOLDERS FOR DIVIDENDS _ Bank 77 180 | Balance nig | 105.000 Balance cfd 120 000 Dividends 2015 195 180 300 i 300 180 L | Balance b/d} 120000

NOTE 4 Taxation paid Amounts in financial statements (270 000) Balance beginning of year dr 21 000 Balance end of year cr 33 000 Taxation paid {216 000) OR SARS (INCOME TAX Balance bid! 21.000 pee ex 270 000 Bank 72777 | 216 000 Balance cid | 33 000 | | 270 000] 270 000 Balance bid 33 000 NOTE 5 | Tangible assets purchased Land and buildings 480 000 Vehicles 450 000 Equipment 240 000 Total assets purchased 1 170 000 Calculation of fixed assets purchased Land & buildings Vehicles Equipment Carrying value beginning of year 720 000 660 000 420 000 Additions (purchases) ???7 480 000 450 000 240 000 Disposals at carrying value {72 000) Depreciation for the year (192 000) (63 000) Carrying value end of year 1 200 000 918 000 525 000 CASH FLOW STATEMENT Notes R Cash flows from operating activities 323 100 Cash generated from operations 797 280 Interest paid (78 000) Dividends paid (180 180) Taxation paid (216 000) Cash flows from investing activities (1 098 000) Purchase of non-current assets {1 170 000) Proceeds from sale of non-current assets #Ht 72 000 Cash flows from financing activities - 870 000 Proceeds from issue of shares 720 000 Repurchase of shares Proceeds from long-term borrowings 150 000 Payment of long-term loans Net change in cash and cash equivalents 2 95 100 Cash and cash equivalents at beginning of year 2 (52 500) Cash and cash equivalents at end of year 2 42 600 13

ACTIVITY 8 Solution 8 RETAINED INCOME NOTE Balance beginning of the year 423 000 Net profit after tax 714 245V Dividends (588 000) Interim dividends 396 COO” Final dividends 192 000Y Balance end of the year 549 245M] NOTE 1 Reconciliation between profit before taxation and cash generated from operations Profit before taxation 1 020 350 Adjustments in respect of: Interest paid v ¥86 400 Depreciation v ¥ 203 000 Operating profit before changes in working capital M11 309 750 Changes in working capita! 140 655 Change in inventories 27 000 Change in trade and other receivables v ¥ (490 000) Change in trade and other payables v v¥'503 655 Cash generated from operations M11 350 405 CASH FLOW STATEMENT Notes R Cash flows from operating activities 1621 700 Cash generated from operations B11 350 405 Interest paid ¥ (86 400) Dividends paid (-57 700% — 588 000 V+ 192 000v’) {453 700 Taxation paid (-306 105% — 48 00 v’+ 69 000”) (188 605) i Cash flows from investing activities i (71831 500 Purchase of non-current assets (203 000 W +2790 000 Y + 1250 000% 3 824 500%) (418 500) OR (~ 203 000 v - 2 790 000 “ - 1 250 000 “+ 3 824 500 v) Proceeds from sale of non-current assets” ¥1 250 000 Investments placed Cash flows from financing activities 1613 900 Proceeds from issue of shares ¥1974 950 Repurchase of shares ¥ ¥ ¥ (1011 050) Proceeds from long-term borrowings Payment of long-term loans ¥ (350 000) Net change in cash and cash equivalents M2 087 100 Cash and cash equivalents at beginning of year 4 ° (918 100 - 3.000) ¥ (912 100) Cash and cash equivalents at end of year 1 155 000 14

ACTIVITY 9 Solution 9 — ee (a) Current ratio Current Assets : Current Liabilities 2015 2014 315 600 : 132 000 192 000 : 126 000 2,39:1 1,62 :1 Acid-test ratio Current Assets - Inventories: Current Liabilities 2015 214 (315 600 — 242 400) : 132 000 (192 000 — 134 400) : 126 000 73 200 : 132 000 57 600 : 126 000 0,55: 1 0,46: 1 (b) Rate of stock turnover Cost of sales _ Average stock 1 524 000 (242 400 + 134 400) +2 1524 000 188 400 8,09 times (¢) Period for which enough stock is on hand Average stock x 365 days or 12 mths Cost of sales 1 1 188 400 x 365 or 12 months 1 524 000 1 45,12 days or 1,48 months {d) Debtors collection period Average debtors x 12 mths Credit sales 1 (52 800 +43 200)+2 x 12 2 292 000x 10% 4 48 000 x 1 229 200 1 2,51 months 15

[(e) Creditors payment period Average creditors x 12 Credit purchases 1 (93 600 + 75 600)+2 x 12 1524 000+3 1 84600. x 12 508 000 1 2 months Current ratio: There is an improvement in the liquidity position in 2015 i.e. 2,39 :1 compared to 1,52:1 in 2014. Acid test ratio: The liquidity position improved from 0,46:1 (2014) to 0,55:1 (2015). However for both years the ratio is below 1:1. This indicates that the company will find it difficult to meet current liabilities with collection from debtors and cash on hand. It may be forced to sell stocks (possibly at a lower price — this will affect profitability) Stock turnover rate: 8,09 times. Stocks are replaced quickly — indicates that profits are being generated quicker and {ess working capital is required. Period for which enough stock is on hand: 45,12 days or 1,48 months. This indicates that the stock will last for 45,12 days. It gives the directors a clear idea of when goods have to be ordered and delivered to the company so that sales are not disrupted through stock shortages. Debtors collection period and creditors payments period: The credit terms offered to debtors need to be examined as they are too generous. Creditors are paid in 2 months whereas cash is collected from debtors in 2,51 months. Much working capital is required by the company. It will be ideal if debtors settled their accounts before creditors are paid. 16

ACTIVITY 10 Solution 10 [1.1 Complete the following sentences by using filling in the words from the list |__ provided. - _ a: 1.1.1 Solvent 1.1.2 Gearing 1.1.3 Profitable 1.1.4 Return 1.1.5 Liquid 1.2Calculate the missing indicators denoted by (a) to (e) {a) Acid test ratio ( 456 000 + 313 000) : 1 488 000 =0.5:1 (b) Debt/equity ratio 984 000: 4 313 800 =0.2:1 (c) Net asset ratio per share 4 313 800 270 000 = 1598 cents | Note : As 50 000 shares were repurchased on the last day of the year they should not be included in the calculation of the NAV as they will not be there going in the new year. (d) Earnings per share (2 864 000 — 859 200) 320 000 = 626 .5 cents Note : As 50 000 shares were repurchased on the last day of the year they should still be included in the calculation of EPS. (e) Return on shareholders’ equity 2.004 800 x 100 ¥%(3 148 000+ 4 313 800) | = 53.7% OR 2 004 800 x 100 % (3 148 000+4 928 000) | = 49.6% | Note : As 50 000 shares were repurchased on the last day of the year the value of R 615 000 should still be included in the calculation of OSHE | 1.3 e Comment on the gearing ratio Debt equity ratio decline from 0.4 :1 to 0.2 :1 Return on capital employed: 59 % is far greater than the interest rate of 11% Genera! comment: The company should make use of the loan 17

|___¢ Comment on return _; earnings and dividends | Return on OSHE: improved from 32,1% to 49.6% or 53.7% | EPS: Improved from 310 cents to 626 cents DPS: Improved from 320 cents to 385 cents General comments: Shareholders should be satisfied because all the indicators | improved % return greatly exceeds the return from other alternative investments The company is also retaining income for future expansion ( dividend pay —out is 385/625.5 = 61%) whereas thet retained no income in the previous year (DPS exceeds EPS ins 20.2) ACTIVITY 11 Solution 11 Question 1 DEBTORS AND CREDITORS RECONCILIATION 1.1 Record the errors and omissions directly in the Debtors and Creditors List | Debtors List on 31 March 2010 [14] |G. Gents [2 400 + 3004] M2 400 B. Patient [3 120 - 760V + 410\] M2770 R. Smilof980 — 300V- 180V - 1804] M320 R5 790 Creditors List on 31 March 2010 Camby Wholesalers [5 430 - 890y] 4 540 Tel Stores [3500 + 1 310-2 000V- 504] M2 760 R7 300 [1.2 State your observations on the credit terms allowed to debtors [4] and allowed by creditors. Give your recommendations in this regard? e Debtors are allowed 60 days while he pays his creditors within 30 days. This may result in cash flow problems. VV Shorten the debtors’ collection period. VV Approach the suppliers to increase the payment period. e Any other suitable answer. 1.3 Refer to item (iii) above. What internal control measures can be | [2] implemented to prevent this in the future? e Match the order with the invoice issued. VV e Any other suitable answer 1.4 Briefly explain why the Debtors and Creditors control account [4] balances should always be equal to the totals of the Debtors and Creditors Lists. « Control accounts are a summary of all transactions with | debtors and creditors. VV e Debtors and Creditors ledgers are a record of transactions with each individual debtor or creditor. Vv e For control purposes the control accounts should always be in balance with the Debtors and Creditors Lists. e Any two explanations. | 18

ACTIVITY 12 Solution 12 QUESTION 2 2.1 Identify one debtor who could have his credit limit increased and support your answer. e P PeachvHis credit limit is R2 100 and he has bought for R2. 000 and he seems to manage his account exceptionally.vV 2.2. Explain Three different problems reflected by the Debtors’ Age Analysis. Give evidence. (9) | Expiain of problem with evidence Problem 1 Problem VV terms/Possibility of bad debts/Bad debts Evidence V R500 for more than 90 days. e Slow payers/Non-payers/Lack of adherence to time « ORG. Grape owing R4 500 for more than 90 days e debtors such as A. Apple owing R1 200 for 61-90 days OR Problem 2 e Debtors whose accounts are outstanding for more than 90 days are still being allowed to buy on creditvV currently she is owing R3 000. ¥ balance for R1 900. ® such as G. Grape owing R4 500 for more than 90 days and e ORA Apple owing R500 for more than 90 days and current Problem 3 ® Exceeding credit limitvY R4 800V e OR exceeded credit limit by R200. e debtors such as A Apple is owing R6 000 but his credit limit is 2.3 If G. Grape settled her account after receiving her statement, and within the credit terms, how much will she be required to pay? (4) R3 000V x 95/1007 = R2 850M R4 500 vx 110/10V = R4 950M R2 850 + R 4 950 = R7 350M G Grape will pay R7 350M

ACTIVITY 13 Solution QUESTION 3 3.1.1 Calculate the correct bank balance on 31 May 2016 Cash Receipts Journal (Figures only) 87 200 ¥21 000 ¥V¥10 500 118 720 Bank balance on 31 May 2016 : (Figures only) Cash Payment Journal 74 860 ¥¥1 800 6 500 ¥2 250 ¥210 85 620 33 100MM See CRJ total See CPJ total -2 300VV + 118 720M - 85 620M =30800 M1 OR -2 300+87 220-74 860+21 000+ 10 500-1 800-6 500-2 250-210=30 800 143 | 3.1.2.Bank Reconciliation Statement on 31 May 2016 Debit Credit Balance as per Bank Statement R20 400V | Credit outstanding deposit 18 500VV | Debit outstanding cheques No. 162 4 500VV No.178 2 200V No.182 14007 Balance as per Bank Account 30 800M | See 3.1.1 38 900 38 900) 8 | 3.1.3. Refer to information 5. Identify TWO different problems with evidence. Give | advice for ach problem. | PROBLEM WITH EVIDENCE ADVICE | Theft/Fraud/Error/internal control Checks that the total of cash slips agree to measures are lacking. Some of cash the total of the deposit slip. | slips (R7 000) have not been Specific advice required based on deposited/recorded. evidence Problem V evidencey The deposit occurs much later after Cash collected must be deposited receipts of cash (15 days) /Rolling of | immediately/ Sales person must not deposit cash cash/ Divide duties =a Problem v evidencev Specific advice required based on |_| evidence | 6

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