Lucem Gr12 Teachers Guide

ADVANCED ACCOUNTING FOR GRADE 12 Revised edition 15% VAT TEACHERS GUIDE

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INTRODUCTION We trust that your foundation of Accounting was firmly laid in Grades 10 and 11. The knowledge of Accounting you have thoroughly mastered since Grade 8, together with the work ethic in the subject that you have built up over the past four years, is important building blocks for Grade 12. At the start of your Grade 12 year, you should know that: x Time flies in Grade 12. It is thus of the utmost importance that you work very hard every day, from day 1, to ensure that you build up a good portfolio mark, and understand all the work, in order to receive your Further Education and Training (FET) Certificate at the end of Grade 12. x Teaching time in Grade 12 is limited, and therefore a lot of the work for this year’s final examination has already been dealt with in Grade 11. You must ensure that all previous work has been thoroughly mastered. Here we refer to, e.g., the content in respect of Bank Reconciliation, Asset Disposal, Periodic Inventory Systems and the Bookkeeping of Sole Traders, Partnerships and Sports Clubs. Although these aspects are considered to be finished it could very well be tested in the Grade 12 final examination. As far as the Grade 12 curriculum is concerned, we start the year by examining the bookkeeping of the last business form viz., Public Companies. In the case of Companies, particular attention is given to the analysis and interpretation of financial statements, as well as the drawing up of a Cash Flow Statement. The biggest part of the final examination relates to public companies and thorough attention should be given to this very important topic. Business ethics, and the application of ethical values and norms in the business world, is a matter of daily discussion. We look specifically at internal control and audit processes and try to incorporate these aspects into each topic so that they are never forgotten. Disciplinary measures in respect of non- compliance of ethical behavior norms, and the role played by professional bodies and trade unions, are also examined. Specific attention is given to the analysis and interpretation of the payment options of debtors and creditors, and methods of inventory valuation. Your knowledge of VAT-features, and the bookkeeping of manufacturing concerns, will be further expanded. This year we will consider specific aspects of bookkeeping, whereas in previous Grades more focus was placed on calculations. It remains, however, an enjoyable practical part of the year’s work. Lastly we pay attention to cash budgets and the compilation of a Projected Income Statement, for purposes of forecasting and implementation of sound management principles. With the components of neatness, orderliness and accuracy deeply embedded in your system of values, and with the daily evidence of your work ethic by way of faithful, ongoing and honest hard work, you should achieve success at the end of the year. Best wishes for a successful year! W. van Schalkwyk, B.Com. H.E.D. ( U.P.) Compiler 2

CONTENTS TOPIC PAGE NO. CHAPTER 1: Bookkeeping of Public Companies 8 - 99 CHAPTER 2: Revision to determine progress 100 -118 CHAPTER 3: Analysis and Interpretation of Bank Reconciliation Statements and Control Accounts 119 - 149 CHAPTER 4: Value Added Tax (VAT) 150 - 165 CHAPTER 5: Control of Fixed Assets and Inventory 166 - 185 CHAPTER 6: Business Ethics and Internal Auditing 186 - 198 CHAPTER 7: Manufacturing Concerns 199 - 224 CHAPTER 8: Projected Income Statements and Cash Budgets 225 - 240 CHAPTER 9: Revision for final examination 241 - 292 3

Year Plan on the Basis of the new CAPS content FIRST TERM P. 1. BOOKKEEPING OF PUBLIC COMPANIES 1.1 Introduction.……………………………………………………………………….……………………………… 8 1.2 Subsidiary journals and general ledger accounts...………………………………….……………………………. 9 1.2.1 Share capital of a company ………………………………………… Example 1 ………………………………. 9 1.2.2 Retained income …………………………………………………………………………………………………. 10 1.2.2 Repurchase (buy-back) of shares by a company...…………………... Example 2 .……………………………… 10 1.3 Adjustments and final accounts ………………………………………………………………………………….. 12 1.3.1 Depreciation …………………………………………………………………………………………………….. 12 1.3.2 Accrued expenses opposed to prepaid expenses …………………………………………………………….. 12 1.3.3 Accrued income opposed to income received in advance ……………………………………………………… 12 1.3.4 Bad debts and provision for bad debts ………………………………………………………………………….. 13 1.3.5 Consumables on hand and trading inventory deficit ……………………………………………………………. 13 1.3.6 Profit or loss on asset disposal ………………………………………………………………………………….. 13 1.3.7 Income tax …………………………………………………………… Example 3 ….………………………… 14 1.3.8 Declaration of dividends and payments to shareholders …………… Example 4 …………………………… 15 1.3.9 Appropriation account ……………………………………………..… Example 5 ……………………………. 16 Exercises 1.1 to 1.5 ………………….. 17 1.4 Preparation of financial statements ……………………………………………………………………………… 30 1.4.1 Income statement ……………………………………………………………………………………………….. 30 1.4.2 Balance sheet ……………………………………………………………………………………………………. 31 Exercise 1.6 to 1.10 ………………….. 34 1.4.3 Cash flow statement …………………………………………………………………………………………….. 49 Examples 6 to 9 ………………………. 50 Exercises 1.11 to 1.12 ….…………….. 57 1.5 Analysis and interpretation of financial statements …………………………………………………………….. 63 1.5.1 Return on shareholders’ equity …………………………………………………………………………………. 63 1.5.2 Net asset value per share ………………………………………………………………………………………... 63 1.5.3 Dividends per share …………………………………………………………………………………………….. 63 1.5.4 Earnings per share ……………………………………………………………………………………………… 64 1.5.5 Return on average capital used ………………………………………………………………………………… 64 1.5.6 Average debtors’ collection period …………………………………………………………………………….. 64 1.5.7 Average creditors’ settlement period …………………………………………………………………………... 64 1.5.8 Debt/Owner’s equity …………………………………………………………………………………………... 65 1.5.9 Current ratio …………………………………………………………………………………………................. 65 1.5.10 Acid-test ratio ………………………………………………………………………………………………… 65 1.5.11 Rate of inventory turnover …………………………………………………………………………………… 66 1.5.12 Number of months inventory on hand ……………………………………………………………………..….. 66 1.5.13 Degree of solvency …………………………………………………………………………………………… 66 1.6 Financing of expansions ….……………………………………………………………….. ………………… 66 Exercises 1.13 to 1.20. …………….. 67 2. REVISION TO DETERMINE PROGRESS 2.1 Introduction ……………………………………………………………………………………….. 100 2.2 Revision paper ……………………………………………………………………………….. ……. 100 Question 1: Bank reconciliation and Internal control ……………………………………………… 101 Question 2: Balance sheet, Corporate control and Auditing ………………………………………. 102 Question 3: Cash flow, Interpretation and Asset sales ……………………………………. ……… 104 Question 4: Manufacturing ………………………………………………………………………… 106 Question 5: Cash flow and Ratio interpretation …………………………………………………… 108 4

SECOND TERM 3. ANALYSIS AND INTERPRETATION OF BANK RECONCILIATION STATEMENTS AND CONTROL ACCOUNTS 3.1 Introduction ……………………………………………………………………………………….. …. 119 3.2 Revision of bank reconciliation ……………………………………………………………………… 119 Example 1 … …………….. 120 3.3 Analysis and interpretation of bank statements and bank reconciliation statements Example 2 ………………. 121 Exercise 3.1 to 3.4..……….. 122 3.4 Revision of control accounts …………………………………………………………………….. …… 130 3.4.1 Transactions involving debtors ………………………………………………………………………… 130 3.4.2 Transactions involving creditors ………………………………………………………………………. 130 3.5 Age analysis of debtors and creditors ………………………………… Example 3 ……...………….. 131 3.6 Reconciliation of control accounts with account statements ………… Example 4 ……….………… 133 3.7 Ethical considerations ………………………………………………… Exercise 3.5 ……………. 136 3.8 Internal audit and control processes in respect of debtors and creditors …………………………. …… 137 Exercises 3.6 to Exercise 3.10 138 4. VALUE ADDED TAX (VAT) 4.1 Introduction ............................................................................................................................................. 150 4.2 Revision of VAT concepts ……………………………………………………………………………. 150 Exercise 4.1 to Exercise 4.2 ... 151 4.3 Ledger accounts and subsidiary journals ………………………………………………………………. 154 4.3.1 VAT Input …………………………………………………………………………………………….. 154 4.3.2 VAT Output ……………………………………………………………………………………………. 154 4.3.3 VAT Control …………………………………………………………………………………………… 154 4.3.4 Subsidiary journals and posting ………………………………………………………………………. 156 4.4 Completion of VAT201A – returns form ……………………………………………………………… 156 Exercises 4.3 to Exercise 4.8 ... 158 5. CONTROL OF FIXED ASSETS AND INVENTORY 5.1 Introduction …………………………………………………………………………………… ……… 166 5.2 Non-current assets ……………………………………………………………………………. ……… 166 5.2.1 Life-span opposed to service life of a non-current asset ……………………………………………… 166 5.2.2 Residual value opposed to carrying value ……………………………………………………………. 166 5.2.3 Depreciation ………………………………………………………… Exercise 5.1 ………………… 167 5.2.4 Asset Disposal ……………………………………………………… Exercises 5.2 to Exercise 5.4… 170 5.2.5 Control of non-current assets …………………………………………………………………………. 174 5.2.6 Internal audit of Non-current assets ………………………………………………………………….. 174 5.3 Inventory …………………………………………………………………………………………….. 174 Exercise 5.5 ………………… 175 5.3.1 Calculation of the cost of closing inventory ………………………………………………………….. 176 (1) ‘First-in-first-out’ method (FIFO) ………………………………………………………………... 176 (2) Weighted average method ……………………………………………………………………… 176 (3) Specific identification method ……………………………………………………………………. 176 Exercises 5.6 to Exercise 5.10 177 5

6. BUSINESS ETHICS AND INTERNAL AUDITING 6.1 Introduction ………………………………………………………………………………… 186 6.2 Business ethics ……………………………………………………………………………… 186 6.2.1Disciplinary policy ………………………………………………………………………….. 188 6.2.2Labor legislation and policy, including policy regarding HIV ……………………………… 188 6.2.3Professional bodies in respect of accounting establishments ……………………………….. 189 6.3 Internal control and internal auditing procedures …………………………………………... 190 6.3.1Pre-audit - investigation ……………………………………………………………………… 191 6.3.2Audit report and comment regarding the audit report ……………………………………….. 191 Exercises 6.1 to Exercise 6.5…………….. 192 JUNE-EXAMINATIONS x Bookkeeping of companies x Analysis and interpretation of bank reconciliation statements and control accounts x Value added tax x Control of fixed assets and inventories. x Business ethics and internal auditing x All work done in Grade 10 and Grade 11 can also be examined. Pay particular attention to the following aspects in your revision: o Salaries and wages journals – Ledger accounts and Analysis under the accounting equation o Correction of errors in control accounts and trial balances o Asset disposal – General ledger accounts, General journal and the Accounting equation o Periodic inventory systems – Closing transfers and General ledger accounts o Bank reconciliation – Direct notations in bank accounts and under columns o Sole traders – Year-end procedures, Financial statements and Analysis and interpretation of statements o Cash budgets – Debtor collection schedule and Preparation of a budget o Manufacturing concerns – Calculations and Ledger accounts THIRD TERM 7. MANUFACTURING CONCERNS 7.1 Introduction ………………………………………………………………………………… 199 7.2 Production Cost Statement …………………………………………………………………. 202 7.3 Trading Statement …………………………………………………………………………. 203 7.3.1 Calculation of Break-even point, and other Cost calculations ……………………………… 203 Exercises 7.1 to Exercise 7.8…………………. 204 8. PROJECTED INCOME STATEMENT AND CASH BUDGETS 8.1 Introduction …………………………………………………………………………………. 225 8.2 Projected Income Statement ………………………………………………………………… 225 8.3 Analysis and Interpretation ………………………………………………………………… 225 Exercises 8.1 to Exercise 8.5........................…. 226 6

PRELIMINARY EXAMINATION The preliminary examination covers exactly the same work as that of the final examination. It is an excellent “test run” of what you can expect in the final examination. Should you prepare yourself well for the preliminary examination, you will be able to focus on those aspects of the “preliminary” that you have struggled with when preparing for the final examination. The same topics which were tested in the June examination will be asked again. The only additional work to be tested will be the Production cost statement, as used by manufacturing concerns, and the projected income statement that is dealt with in Chapter 8. FOURTH TERM SPECIFIC REVISION WITH REGARD TO THE FINAL EXAMINATION In revising for the final examination you should try to focus specifically on those sections of the work that caused problems in the preliminary examination. Try to answer as many different questions as possible, by yourself. It will be of no help to only look at the questions that you have previously answered – you must do every single question from scratch. You must also pay particular attention to the time taken to answer a question; that means, when answering a question you need to know how many marks the question carries, and how much time you will require in the exam to complete it. Remember that the final exam counts 300 marks, and is 3 hours long. In order to finish the paper you must work at a rate of 1.67 marks per minute. The purpose of Chapter 9 is to assist you in preparing for the final examination. Firstly, prepare all work thoroughly; redo the paper in Chapter 2 as well as your June paper and the preliminary examination paper, before starting with the revision. 9. REVISION FOR FINAL EXAMINATION 9.1 Introduction and Method of Approach ………………………………………………………………………… 241 9.2 Practice exercises 1 to 10 ……………………………………………………………………………………… 242 9.3 Final practice examination paper ……………………………………………………………………………… 272 Question 1: Reconciliation and Internal Control …………………………………………………………….. 273 Question 2: Companies, Financial Statements, Analysis and Interpretation ………………………………… 274 Question 3: Companies, Ledger and General reporting ……………………………………………………… 275 Question 4: Stock systems and VAT ………………………………………………………………………… 277 Question 5: Manufacturing aspects ………………………………………………………………………….. 279 Question 6 Cash budget of a sole trader ……………………………………………………………………. 281 Memorandum: Chapter 2: Practice paper Memorandum: Chapter 9: Practice exercises 1 to 10 Memorandum: Chapter 9: Final Practice Paper FINAL EXAMINATION The final examination question paper should look much the same as the preliminary examination. You must try, however, to answer as many questions as possible on all the aspects of Accounting that have been covered. Try to examine the various ways in which the same aspect can be asked. It is often not “What” is asked that presents a problem to the candidates, but “How” it is asked. The moment a question is framed somewhat differently from the usual, the candidate will struggle. Therefore, try to consider all possible ways or at least as many ways as possible, of asking a question. Good luck to you! 7

CHAPTER 1: BOOKKEEPPING OF PUBLIC COMPANIES 1.1 INTRODUCTION In Grades 10 and 11 attentions was given to three forms of business enterprise, viz., sole trader, partnerships and sports clubs. Two of the major problems that exist in these organisations are the generation of sufficient own capital and the fact that the owners can, jointly and separately, be held liable for the debt of the enterprise. Thus, there arose a demand for a form of enterprise that does not have the problem of acquiring sufficient capital, and where the owners would not be held responsible for the debts of the organisation. The following is a comparison of the three forms of “trading” enterprises, in which the differences between them are detailed: Sole Trader Partnership Public Company One owner. 2 - 20 Owners, who are known as Number of shareholders, which are partners. only limited by the number of authorized shares. Provides all the capital. Each contributes Capital in one form Contributes capital by buying or another. shares. Owners’ equity Owners’ equity Owners ‘equity Capital (B1) Capital: Mr A (B1) Ordinary share capital (B1) Drawings (B2) Current account: Mr A (B3) Retained income (B2) Drawings: Mr A (B5) Solely responsible for debt. Jointly and separately responsible for Shareholders’ liability is limited to debt. the value of shares owned. Takes all the profit. Share the profits as determined in the Profit sharing in the form of partnership agreement. dividends, only if the company’s profit permits it. Final accounts Final accounts Final accounts Trading account; Profit and Trading account; Profit and Loss Trading account; Profit and Loss Loss account. Account; Appropriation Account. account; Appropriation account. A company is a legal entity and is liable for its debts. A shareholder can therefore only lose the amount of money that he has invested in the form of shares in the company. When a company is established the promoters, with the assistance of an attorney, draw up the following documents: 1. Memorandum of Association This document details the aims and the nature of the business of the proposed company, and also contains the name of the company, followed by the word Limited, or abbreviated to Ltd., thus indicating a public company. 2. Articles of Association This is a document that clearly describes the activities and responsibilities of the management of the company. It also contains the internal rules and regulations of the company. 3. Prospectus This is an invitation to the public to purchase shares in the company. 8

1.2 SUBSIDIARY JOURNALS AND GENERAL LEDGER ACCOUNTS 1.2.1 Share capital of a company A company acquires capital by selling shares to the public. It is important that we first differentiate between how many shares, called the Authorised share capital; a company is allowed to issue or sell, and the number of these shares, called Issued share capital that were actually issued or sold. Secondly, the price at which these shares are to be sold must be determined. There are different kinds of shares; we will concentrate on Ordinary shares with no par value. This means there are no fixed prices at which the shares must be sold. The Johannesburg Stock Exchange (JSE) is the market where shares can be bought and sold by the public. Prices of shares fluctuate frequently and are determined by market conditions at a given time. Prices can therefore be more or less than the original issue price. The price at which a share is traded on the JSE is known as the market price of the share at the given time. Summarised then the following: Authorised share capital is the total number of shares a company is authorised to issue with no money value, e.g.100 000 ordinary shares. Issued share capital represents the number of shares which have already been issued or sold to the public multiplied by the issue price per share, e.g. 20 000 ordinary shares at an issue price of R12,25 each = R245 000 and thereafter a further 30 000 ordinary shares at an issue price of R18,50 = R555 000. The total Issued share capital is 50 000 shares with a value of R800 000. The average issue price of the shares is R800 000/50 000 shares = R16 per share. EXAMPLE 1: Issuing of ordinary shares at different issue prices and calculation of the average issue price. 2015 Jan 31 - The company has an authorised share capital of 500 000 ordinary shares. On this day 100 000 shares are issued at an issue price of R2,00 per share. May 31 - A further 200 000 ordinary shares are issued at an issue price of R2,60 per share. Oct 30 - All the remaining shares are issued at an issue price of R3,40 per share. Subsidiary journal Source document Calculations: Average share price after 31 May 2015: Average share price after 30 October 2015: 9

General Ledger Balance sheet -section Ordinary share capital Bl ee Bank CRS} 200 000 May 31 Ban K (RT 520 000 120 000 oct _| 30 Bank ERT| 680 000 1400000 1.2.2. Retained income It is very important to remember that the directors of a company are not obliged to disburse all the profits to shareholders in the form of dividends. Profits can be withheld in order to finance the expansion of the company, which will naturally increase the value of the shares, and the shareholders’ equity as well. The unappropriated income/profit after tax and dividends, as calculated in the Appropriation account (an account which will be explained later on) is posted to the Retained income account. Retained income forms part of the Shareholders’ equity and will always show a credit balance. 1.2.3. Buying back (repurchase) of shares by a company A company may decide to buy back or repurchase shares already issued. Reasons can be e.g. to retain control of the company by reducing the number of issued shares or to adjust the debt/equity ratio or just to reduce the number of issued shares in resulting in bigger returns in the form of bigger dividends for the remaining shareholders. Repurchase of shares can be done at a price higher than the average issue price or lower than the average issue price. It will however only be expected from candidates to record the repurchase of shares at a higher price than the average issue price. Remember: | Average issue price per share= Ordinary share capital balance/Number of issued shares The double entry for the repurchase of shares at a higher price than the average issue price will be: Credit Bank with the total amount paid for the repurchase. Debit Ordinary share capital with the average issue price per share multiplied by the number of shares bought back. Debit Retained income with the difference between the amount paid and the average issue price. 10

EXAMPLE 2: Repurchase of shares at a higher price than the average issue price. INFORMATION: The following balances were taken from Park Traders Ltd on 1 March 2015: Ordinary share capital (250 000 issued shares) 925 000 Retained income 754 000 TRANSACTIONS: 2015 May 30 A further 50 000 ordinary shares are issued at an issue price of R6,70 per share. Sept 30 30000 Ordinary shares are bought back by the company at a price of R7,10 per share. REQUIRED: 2.1 Calculate the average issue price per share on 1 March 2015. 2.2 Calculate the average issue price per share after 30 May 2015. 2.3 Complete the given transactions in the ledger accounts and determine the balances of the accounts on 30 September 2015. 2.1 Calculation of the average issue price per share on 1 March 2015 R 428000 = 250 000 Shares = R3,70 per share 2.2 Calculation of the average issue price per share after 30 May 2015 Soo00x Rb10 = R338 000 R1260000 = 20 per Share “+ 300 000 Shares RK ) per 2 2.3 General ledger of Park Traders Ltd Ordinary share capital Bl ee | 20 [Rank (a0000x Ry,z) tea] 126 006] sen |. | Balance bid| 925.000 Ralance Kid 1134000] may | 30 Rank cea] 335 000 | 260 000 (260 000 oe [1 | Balance Md| 1124 000 Retained income B2 Sep 30 (Rank (30 000 x Re) 40) kay 87 000 | starch | 1 Balance Pla] 7S adc Ralance Fla] 6677 000 TIS 00 Oct 1 Balance Id 667000

1.3 ADJUSTMENTS AND FINAL ACCOUNTS OF COMPANIES All adjustments and year-end procedures that were used in the other forms of enterprises will continue to apply in the bookkeeping system of Companies. There are, however, two very important additional aspects, namely, the payment of Income tax and the appropriation of the profits to the shareholders in the form of dividends that are paid out. We will first, very briefly, review all the well-known adjustments by merely referring to them, in order to draw a few important points to your attention. Then we will pay special attention to the new procedures that specifically apply to Public companies. 1.3.1 Depreciation Two methods are used to write off depreciation on fixed assets, namely, x The Cost price method, also known as the Straight line, or Fixed payment method, and x The Diminishing balance method, also named the Book value or Carrying value method. Whenever depreciation is written off, an expense account named Depreciation is debited and a negative asset account, viz., Accumulated depreciation on Vehicles/Equipment, is credited. The depreciation that is being written off for a particular financial year must be deducted from the profit in the Income statement for that specific year as an attributable expense. 1.3.2 Accrued expenses opposed to Prepaid expenses If an expense has been incurred for a specific financial period, but has not yet been fully paid, the matching principle states that “money is still owed” in respect of the expense for this period. A Temporary liability, namely Accrued expenses, is created in order to increase the expense and thus reflect the correct expenses amount for the period. If an expense in respect of a following financial period has already been paid during the current period it means that, in accordance with the matching principle, “too much has been paid” in respect of the expense for the current period. A temporary asset, namely Prepaid expenses, is created in order to reduce the expense and thus reflect the correct expenses amount for the period. 1.3.3 Accrued income opposed to Income received in advance If an income has been earned for a specific financial period, but has not yet been received in full, the matching principle states that “money is still owed to us” in respect of the income for this period. A Temporary asset, namely Accrued income, is created in order to increase the income and thus reflect the correct income amount for the period. If an income in respect of a following financial year has already been received during the current period it means that, in accordance with the matching principle, “too much has been received” in respect of the income for the current period. A Temporary liability, namely, Income received in advance, is created in order to reduce the income and thus reflect the correct income amount for the current period. 12

1.3.4 Bad debts and Provision for bad debts If a debtor is unable to pay his debt, his account is written off as a bad debt. An expense account named Bad debts, is debited and an asset account named Debtor control, as well as the debtor’s personal account, is credited with the amount of debt that is being written off. The amount owed by debtors must be shown as realistically as possible in the Balance sheet. Provision must therefore be made for the fact that some debtors will possibly not pay their debt. A provision for bad debts is created by debiting an expense account, viz., Provision for bad debt adjustment, and crediting a negative asset account, viz. Provision for bad debts. Should the provision for bad debts increase, the expense account, viz, Provision for bad debts adjustment, is again debited, and the negative asset account, Provision for bad debts, is credited. However, should the provision for bad debts decrease, an income account, named Provision for bad debt adjustment, will be credited and the negative asset account, Provision for bad debts will be debited. Remember! Net Trade debtors = Trade debtors – Provision for bad debts. 1.3.5 Consumable stores on hand and Trading stock deficit At the end of the financial year the amount of all unused consumables e.g., stationery, packaging material, fuel, etc. is determined by a physical stocktaking. Only that which was used during the year must, in accordance with the matching principle, be deducted as an expense from this year’s profit. The unused inventory is shown in the Balance sheet as an asset, since it will only be used during the following financial period. An asset account named Consumable stores on hand, is debited, and the applicable expense account is credited with the amount of unused inventory. The Balance sheet must reflect the correct amount of trading inventory available on the last day of the financial year. The balance of the trading inventory account does not necessarily reflect the physical inventory on hand. A physical stocktaking must be undertaken to determine whether any inventory was lost or stolen. Should the total amount of the physical stocktaking indicate that an inventory shortage does, in fact, exist, an expense account named, Trading stock deficit, is debited, and an asset account, viz. Trade stock, is credited with the amount of the inventory shortage. Inventory shortage is the difference between the balance of the Trading stock account and the amount determined by a physical stocktaking. 1.3.6 Profit or loss on asset disposal Whenever a non-current asset is disposed of, the recording thereof follows a five-step procedure, namely (1) Extract the cost price of the asset. (2) Update the accumulated depreciation. (3) Extract the total accumulated depreciation to date. (4) Do the disposal transaction. (5) Determine the profit or loss on the sale of the asset. If the asset is sold at a profit it will be shown as an income in the Income Statement. A loss on the sale of an asset is, however, shown as an expense in the Income Statement. 13

1.3.7 Income tax This is one of the most important aspects affecting companies, and you must have a thorough understanding of the subject. Every six months an estimated/guessed amount of provisional tax is paid to SARS. The accountant calculates this amount as a percentage of the forecast profits for the period. The tax is thus prepaid, giving rise to the possibility of another amount in respect of income tax becoming payable at the end of the financial year. This amount will have to be reflected in the Balance sheet as a Liability. It could, of course, also happen that too much Income Tax was paid to SARS during the year. This excess will then be shown as an Asset in the Balance sheet. EXAMPLE 3: 2015 Aug. 31 Provisional taxable profit for the year is estimated at R600 000. Company tax is calculated at 28% of taxable income. A first provisional tax payment is submitted. 2016 Feb. 25 A second provisional estimated tax payment of R80 000 is paid to SARS. Feb. 28 Net taxable income, calculated as per the Income Statement, is R650 000. Show the adjustments needed to bring the tax into line with the income tax at 28%. SARS (income tax) B12 cole ug a, Bank <P Bh000]Feb2e Irame tax &F 182000 et as Rank CPS 80.000 29 Balance ¢/d [8000] 182 000] [82000 Income tax N23 | ae SARS (Income GI_1B2000 foz8 Appropriation GI [82000 | Lax) account 14

1.3.8 Declaration of dividends and payments to shareholders If the directors of a company decide to pay the profit, or a portion of the profit, to their shareholders, the portion of the profit thus paid out is called a share dividend. Profits permitting, dividends are normally declared (i.e. promised) more than once per year. These profits, which are declared during the year, are called interim dividends, and are normally paid in full during the financial year in which they are declared. It usually happens that a final dividend is declared/promised at the end of the year, from the year’s profits, but that this dividend will only be paid out in the next financial year. Such a final dividend, that has already been declared, but n@ yet paid out must, as per accounting practice, be shown in the financial year in which it was declaredifatching principle ), and this is then reflected as a LIABILITY in the current year’s Balance sheet. EXAMPLE 4: 2015 Jul. 10 An interim dividend of 25 cents per share is declared. Issued share capital consists of 100 000 ordinary shares. Oct. 5 The interim dividend is paid out to the shareholders. 2016 Feb. 27 A final dividend of 34 cents per share is declared. Shareholders for dividends B13 2015 enie i T 25000 bt 5 Bank CPS _28000]5uy 10 Ordinary share & | dividends 2016 Feb a! Ordinary share Ga 34000 dividends Ordinary share dividends N24 01S 2016 Fil io Shareholders GT 2S000}ry zs se ri i GI S400d ccouvr for dvy danas ee Shareholders GI 3¥ 000 tor dividends 549000 54 200 | 15

1.3.9 Appropriation account The unappropriated income/profit after tax and dividends, is posted to the Retained income account. The calculation of this amount is done in the Appropriation account. The Appropriation account is the last of the final accounts, and is drawn up step by step as follows: (1) Post the net profit from the Profit and loss account to the Appropriation account. (2) Close off the Income tax account to the Appropriation account. (3) Close off the Ordinary share dividends account to the Appropriation account. (4) Calculate the “unappropriated amount” as the balancing figure at the end of the year, and post it from the Appropriation account to the Retained income account. EXAMPLE 5: The following information is available on 28 February 2016, the end of the financial period: Retained income (1 March 2015) 143 000 Net profit for the year before tax 780 000 Income tax (calculated at 30% of net profit) ? Ordinary share dividends 450 000 Retained income B3 i Mor 1 Balance b/d 143000 iG Feb 2@ Appropriation Ga 96 000 account 239 000 Appropriation account N27 2016 ae in Tn eR eo = 28 Lncome tax Gd 23h OOD Fey zs Profit and loss GS 7¥0000 Ordi nary share GS YSo 000 account dividends Rotained income GA _4b 900 180 000 “180000 16

EXERCISE 1.1 PM Traders Limited is registered with an Authorised share capital of 250 000 ordinary shares. On 2 January 2015 the company offered 200 000 of the shares at an issue price of R2,00 per share to the public for registration. The closing date for applications was set as 1 March 2015. REQUIRED: 1.1.1 Complete the necessary entries in the opened subsidiary journals. Take note of the given dates in the subsidiary journals. 1.1.2 Post all the transactions to the opened accounts in the General Ledger of PM Traders Limited. Transactions 2015 Mar. 1 Applications for the 200 000 shares are received together with the amount payable for the shares. All the shares are allotted. Receipt 001 is issued to verify the transaction. Jul. 1 PM Traders Limited offer another 50 000 shares at an issue price of R2,00 per share to the public and set 1 September 2010 as the closing date for applications. Aug. 31 The directors of PM Traders Limited declare an interim dividend of 10 cents per share. Sept. 1 Applications for 50 000 shares are received, together with the amount payable for the shares. All the shares are allotted. Receipt 421 is issued. Sept. 10 The interim dividend owed to the shareholders is paid by cheque B321. Sept. 12 After six months of trading, in the first financial year, the accountant determined that the company will have to pay R80 500 provisional income tax to the South African Revenue Service. Sept. 13 Issue cheque B340 in favour of the SARS for the provisional income tax. 2016 Feb. 20 The accountant estimated the company’s profit for the year, and calculated that a second provisional income tax payment of R83 500 is due. Feb. 22 Cheque B420 is issued in favour of the SARS, for the second provisional income tax payment. Feb. 28 The net profit for the year is accurately calculated at R520 000. PM Traders Limited income tax is calculated at a rate of 30% of the net profit. The directors declared a final dividend of 12 cents on all the shares issued. 17

Cash Receipts Journal of PM Traders Limited for March/September 2015 CRI Doc. : Analysis Sundry accounts Day Details of Bank no. receipts Amount | Fol. Details pega | Ma! | Ondinar 400000 \4op000 | 400000 | B, \Ordinary share capital DERE ent. \Crdinary share hols loo goo _| {00 v00 | 100 000 | &, rdinary share capital Cash Payments Journal of PM Traders Limited for Sept. 2015/Feb. 2016 CPJ Doc. . Sundry accounts Day Name of beneficiary Bank no. Amount | Fol. Details (CBaalsept. 10 | Ordinary shareholders 20000 | 20000 | Bzi| Hareholdes for dindends LB: 13 | SARS? 30500 | B05006 |Bz|\5ARS Crcome Zax) EBepd Feb.22 | SARS |a3sw | 83500 |B22|5R25 Zname tax) General Journal of PM Traders Limited for Aug. 2015/Feb. 2016 GJ Day Details Fol. Debit Credit Aug. ‘ |_| Ordinary hare dividends /z2|__20 000 Sharcholders for dividends | Bz 20000 terim dividend of io cents per ghare_ dedared __— JB 10” Oe | Frofit and 1055 account Nw 520 000 Appropriation account (3p 520000 Tranter o net profit - JB Income tax (73|_156 000 SARS Cncome. tax) 22 (56 000 Company tay @ Loft. Brought into account —- Thay’ Ordinary share dAivideads \Vz2|_ 30 000 Shareholders for dividends \B2i 3a 200 Final dividend of I2cents per shave decayed — JB 52 Appropriation accoupt Ip | 206 000 " "Lrtome tay W393 156 000 Ordinary share diyideads 50 000 Elsi -~ JB 53 a i Nz|_ 3/4000 Retained (ncome. Bo WY 000 Transfer of retained income for the yecy ~ JG5¢ * 18

General ledger of PM Traders Limited. Balance sheet accounts section Ordinary share capital Bl Fiend | Bank ERI 400 000 sept \i| Bank 100 Goo _| : 500.000 Retained income B2 2215, poprigtiGn | 4 000 | Shareholders for dividends B21 Sahl Bank A 20.000 |i. bil Ordinary shares and \4]\20000_| "Be, a Ordinary shares aii 30000 SARS (income tax) B22 aye Bank 80 500 Ld Lncome tax An Biz Bank 500 Balance Td 8000 | /b4 000 164000 [Markl | Zelance bh 000 Nominal accounts section Ordinary shares dividends N32 tugiall Sharehalders for dividend GN 20000 | 425, bel Hnorgariation account |G) s0000 Shareheldes for divin 20000 . 50000 50.006 Income tax N33 [SARS (encome tox) Sees | “EZ Hipropriation a Appropriation account N36 Lancome tax Gl tsb 000 | “262, val Vrakit + lass account \G)\ sz0000 edinacy share dine GN 50 000 | Retantd income angle cai S20000 = nc | 19

EXERCISE 1.2 Use the information and transactions applicable to Park Ltd. to complete the following: 1.2.1 The following opened ledger accounts for the financial year ended 28 February 2016, properly balanced or closed off (pay attention to dates). 1.2.2 Calculate the total ordinary shareholders’ equity of the company on 28 February 2016? Balances as at 1 March 2015, the beginning of the financial year: Ordinary share capital (consisting of 168 750 issued shares) 270 000 Retained income 98 600 Shareholders for dividends 21 600 SARS (Income tax ) (credit) 3 900 Note! The company has an Authorized share capital of 500 000 ordinary shares. Transactions: 2015 March 12 Paid the amount payable to the South African Revenue Service by cheque. March 23 Paid the amount due for dividends to the shareholders. Aug. 27 Paid provisional income tax of R69 000 to the South African Revenue Service. Sept. 2 Declared and paid an interim dividend of 2 cents per share to shareholders. Sept. 15 Buy back 23 750 shares at a buy back price of R1,90 per share. Sept. 15 Issue a further 40 000 shares at an issue price of R2,12 per share. All the money for the shares were received. 2016 Feb. 25 Estimated income tax for the year amounts to R142 000. Issued a cheque to SARS for the amount due. Feb. 28 Net income calculated in the Profit and loss account amounts to R456 000. Income tax for the year amounts to 30% of the net income. The directors decided to declare a final dividend of 3½ cents per share on all shares issued. 20

General Ledger of Park Ltd _ Ordinary share capital Bl ‘sep_| 15 | Rayk(237150xRi,6o) ket, 38.000 | Ma |: | Balance b/d) 270000 BE ke] Balance Fid| 316 800 | xo || Rank al ByY8oo 354800 } 354800 206! | Ralance ld) 3/6 00 Retained income B3 sp_[1s [Rank (237s0xRo,3) oa 12S | iw | 1 | Balance bl 43 600 fb lag | Ralance Hal 400 825 | ix [> [Appropriation acc. 45] 309 350 ol Ise 407450 | imaels | Balance Id woo 32S | | SARS (Income tax) B20 mm | 2 [Rank key 3100 | m | | Ralance bal 3900 Aug | 27 Bank CRS 64 000 aM 28 TrAcome tax cay /36 300 Te | 25 Rank (142000 — 64000) (Al 7.3 000 Ralanceé Kd| 5 200 [42 000 [¢2 000 Mor] 1 | Ralance P| S 200 Shareholders for dividends B21 Mer | 23 Bank fey, 21 600 Mer | 1 Balance bi, 2I 600 Se [2 [Bank rey 3 BTS |] se | 2 Ordinary share fa| 3 375 Aividends Me 28 Ordinary share E3| 6 YTS dividends 21

Income tax N40 2016 Rot Fel bs SAR5(Trcome tax) (a! 136 S00 | Feb led Appropriation acc. \G4_123 6 300 Ordinary share dividends N41 Eng 2|Share holders for G3| 3 37 ae es Mporvpriation ac. 438S0© dividends . 6 Feb bs Shareholders for fal 64 7S dividends AISB59o0 GRSC Appropriation account N44 Qole Feb bs| Income tax fal 136 800 "ob ba Potitand hss acc 456 000 Ordinary Share §3 Fq sso dividends Re-tatned income fA] 309 SSO “Sk 000 YS6b 000 1.2 Calculate the total ordinary shareholders’ equity on 28 February 2016? Ordinary share cae ta/ + Retained tniome T = BIEZOO Zt LOO. B22 = Sl GASES Dy 62S Value of Shares = [85000 shares = R3.88 per-share | Calculations: -eterim dividend = 168780 x eee = R3378 : : 2100007 "Average issue price per share = jggqso Shares = Ri,bo per share « Fral dividend: (168780 ~23 780440000) Shares (nm 1Ssue ~ 195000 Shares x RO, 03S = REGS. 22

Ordinary share capital (Average issue price of R1,80 per share) R 1 440 000 debited credited

13.2 SARS (Income tax B12 ‘mer |1 | Ralance Pl 1s 006724, belTncome tax [246400 Aug lis| Rank Fax] 10S 000 Ralance Kid|_ lo 606) #eb be] Rank Fea] 137 O06] | 2571000} ZS77 000 | Marli | Balance ed] 0 600 1.3.3 Appropriation account N38 > esltnwme tax bal 246 Yoo] BE laslProttord loss ax. lat| $30 000 Ordinary share 3/93. 0000 Retained income |&T| 296 Loo Dividends (420000 +| ¢800007| | 7b400 | (76 00 1.3.4 Note : Retained income Retained income - beginning of the year blo 000 Add: Net profit after taxation (8 80 000 ~2b6yY 400) 633 600 Less: Retained income on 400 000 shares repurchased/ 4 00 000 x(R2, 30 -Rz, 10)) (3 (6) 000 \ Less: Ordinary shares dividends te G30 000) Paid ( 800 000 x 0,6) 480 C00 Recommended Ci 000 000 x 6, 4s) YUS0 000 Retained income — end of the year 262 600 1.3.5 Calculate the average issue price per share on 28 February 2016. Rigyo ovo + R1 S00 000—- R&40000 © R2Wwo ove = Re 10 por shore (800 000 + 600000~4400 000) Shares [000 000 Shares ' 1.3.6 Comment on the dividend policy of the company. Do you think that the dividends declared for this year was a good financial decision? Give figures to support your answer. 7 dividends oe were more than thé protie tor the year. ineol income From previous years had to he used. es ot previous Retameol income was nse and this an harnper future exaansion of the Com »Shareholdérs who rély on dividends as an income will be very satufied. 1.3.7 Calculate the total shareholders’ equity on 28 February 2016. Ordinary share capital _2 (00 000 Retained income 263 52 £00) Total ordinary shareholders’ equity 2 362606 24

EXERCISE 1.4 The following information has been taken from the records of Park Traders Ltd. REQUIRED: 1.4.1 Complete the opened accounts in the General ledger of Park Traders Ltd. for the year ending 30 June 2016. 1.4.2 Complete the notes for Ordinary share capital and Retained income as it would be shown in the Balance sheet on 30 June 2016, the end of the financial year. 1.4.3 Calculate the average issue price per share on 30 June 2016. INFORMATION: Balances taken from the Balance sheet on 30 June 2015, the end of the previous financial year: Ordinary share capital (Average issue price of R5,30 per share) 874 500 Retained income 265 000 SARS (Income tax) (credit.) 11 400 Shareholders for dividends 92 400 Transactions 2015 Jul. 12 The amount owed to SARS is paid by cheque. Dec. 18 Park Traders Ltd. made a first payment of R130 000 in respect of provisional income tax. Park Traders Ltd. declared and paid an interim dividend of R74 250. 2016 Apr. 1 Equipment with a cost price of R10 000 on 1 July 2013, is sold for R6 000 cash. Depreciation is provided according to the diminishing balance method at 20% per year. May 20 Park Traders Ltd. bought back 15 000 shares at a price of R5,90 per share. Jun. 15 Park Traders Ltd. issued a further 50 000 shares at an issue price of R6,34 per share. 20 Park Traders Ltd. made a second payment of R134 000 in respect of provisional income tax. 25 A final dividend of 80 cents per share was declared. 30 Park Traders Ltd. showed a net profit before tax of R870 000. Income tax must be calculated at a rate of 30% of the net profit. Calculations: R *Number of shares issued = BOSS RS)30 per Sharé Final dividend: (IbS000 ~IS 000 +0000) shares x R086 = 200000 shares x R0)80 = R1b0 000 = [45000 Shares 25

General Ledger of Park Traders Limited Balance sheet accounts section Ordinary share capital Bl ray polRank(Is000xRs,30) des| 14500 [Sur] 1] Balance Pid] 374-500 Tun bo] Balance id | 112000 [28 [1s Rank (Soo00¥R6,24) tra] 317000 191 S00 L191 S00 Tul _||1/| Ralance [dl 1112 000 Retained income B3 fray leo Rank (Is d00xRo,60) da| 9000 FI i] Balance ld} 25 000 Tun || Ralance 4a b3071S0 [Fe Appropriation acc: a £34150 eee £39150 Sul | il Kalance bl 630750 SARS (income tax) B21 SARS (incom tax) 3 el Bank dal ti Yoo [FEF | 1| Balance bial 11 oo Dec 1g} Rank at [130000 [3° income tax Zb| 000 unp Rank ct [134 000 Ralance ‘ld|_3 000 2b6Y. 000 264 000 Sulli] Ralance bid | 3000 ae Asset disposal _ B25 Ape || Eq. upment G3 [Io 000 [Fie || Accumulated dopreciet. G3] 4.560 Poftt on sale gz] S60 On &g.uipment of asset Bank ‘a 6000 10 560 _ljo S60 Calculations: Depreciation on equipment Sold: zo jz | Jul qo12 — ZoTun 214: (lo000 —o) Xfox ze = 2 000 jTul 2014 - 30 Tun 201s: (fo 000-2000) x 3 ef x = |} 600 [tule ~ | Apr 20/6: (10 000 - 3600) x 28 x + = 4960 Tota| accumulated depreciation “S60 | 26

Nominal accounts section Ordinary share dividend N32 We lie| Shareholders for 43 [14250 [Ske |26 Appropriation acc. |] 234250 dividends Tun 2s] Sharehalders for G5 |ib0 000 dividends — ~ yae PAT) f2ae250. | | Income tax N33 zete Ll SARS (Income tax) GI |26/ 000 | Sin.» Appeapeisiion acc. 3] 26/ 000 Appropriation account N36 Bibel Treome tax fa] 26/000 | AR8) abHefitard Joss acc. fer| 870.000 Ordinary share divi 234.250 Retained income 374-780 870 000 310 000 | 1.4.2 Notes to the Balance sheet on 30 June 2016 Ordinary share capital Authorized 500 000 ordinary shares Issued .. BS 000. shares in issue at beginning of the year $14 S00 -..3.2..0.09 .. shares issued during the year at R.R.by8Gper share 3177 000 ..1S..900... shares repurchased during the year | (average issue price R.. S989 per share) \ a9 S00) .200. 009... Shares in issue at end of the year [ 112.000 Retained income Retained income at beginning of the year 26S 000 Net profit after tax for the year (3710 000 — 26/ 000) 609 600 Retained income on ...J&.009..... shares repurchased (15 000 x Ro, 60) (4.000) Dividends | (234-25) Interim Wy 250 Final (200 000 x 0,80) _ 160000 Retained income at end of the year 6307S0 1.4.3 Calculate the average issue price per share on 30 June 2016. Ordinary Share Capital Ri iz ooo ae —— SSS - are. Number of shares Jin issue 200000 Shures Rs sb pe sh 27

EXERCISE 1.5 The following information was taken from the books of Parkie Traders Limited, a public company, on 30 June 2015 and 30 June 2016, the ends of the respective financial years. REQUIRED: You are expected to: 1.5.1 Prepare the following accounts in the General ledger: SARS (income tax) Shareholders for dividends 1.5.2 Calculate the net income, before tax, by correctly reconstructing the Appropriation account. 1.5.3 Calculate the issue price at which the new shares were issued. INFORMATION: 1. The following balances appear in the Post-closing Trial balance of the two years ended 30 June: 2016 2015 Ordinary share capital 792 000 270 000 Retained income 153 550 18 900 SARS (income tax) 9 050 (Cr.) 13 400 (Dr.) Shareholders for dividends ? 22 500 2. The dividends payable to shareholders were fully paid on 10 June 2015, and on 12 July 2015 the amount owed by the South African Revenue Service was received. 3. On 30 June 2015 there were 50 000 shares in issue. On 1 September 2015 a further 90 000 shares were issued. 4. On 1 August 2015 the directors declared an interim dividend of 25 cents per share. The payment of the dividend was made on 1 October 2015. 5. The provisional income tax payments to SARS were as follows: 2 January 2016, R44 800. 28 June 2016, R56 400. 6. On 30 June 2016 the directorate declared a final dividend of 36 cents per issued share. Of this final dividend, 5 cents per share was immediately paid out to the shareholders. The balance will be fully paid on 20 July 2016. 28

General Ledger of Parkie Traders Limited SARS (income tax) _ _ B23 BF | Balance bd| 13400 |Full, Rank cet] 12 “oo P| Rawk rro| yy 800 eas Trcome tax I} 110 2s0 2 Ralance {d|__4 0SO 110.250 110 ZSO0 Tutli| Kalance {d|_ 4 0SO . Shareholders for dividends B24 PE lol Rank CAB alance b/d 22 S00 | tli] Bank CA Ordinary share |@T| 12.500 Aiwdends Fun ba Rank Ce Ordinary Share Ga| So ¢00 Balance lad dividends 50 00 15.2 Appropriation account r N45 Bunko! Lncome tax G5] jo 250 |B Hott and hess wel G| 307800 Ordinary, share GI| 62900 divi dends Retamed income G3| 134% 6S0 is3Ss0 —/3400) | [3077 300 077 800 1.5.3 Calculate the issue price at which the new shares were issued. m Charge in ordinary Share Cap(tal — — (192 000— 270060) Number of new Shares lesu'ed 90000 Shares = S522 000 90 000 = RS,30 per-share, 29

1.4 PREPARATION OF FINANCIAL STATEMENTS At the end of the financial period the financial position of the company must be reflected in the form of financial statements that conform to generally accepted accounting practice. Besides the Income Statement and the Balance Sheet we will also pay attention to the very important Cash Flow Statement of Companies. The formats of these statements must be very thoroughly learnt so that no time is wasted in writing it down. 1.4.1 Income Statement Name of company: Park Traders Ltd. Income Statement for the year ending 28 February 2015 Net sales/Turnover (Sales - debtors allowances) 900 Cost of sales (300) Gross profit 600 Other operating income 200 Discount allowed 40 Rent income 30 Profit on disposal of assets 50 Bad debts recovered 10 Provision for bad debts-adjustment (reduction) 50 Etc…….. 20 Gross operating income 800 Operating expenses (200) Salaries and wages 20 Audit fees 30 Directors’ remuneration 40 Depreciation 10 Provision for bad debts adjustment (increase) 40 Sundry expenses 20 Etc…….. 40 Operating profit 600 Interest income 1 50 Profit before interest-expense/Financing costs 650 Interest-expense/Financing costs 2 (30) Profit before tax 620 Income tax (180) Net profit for the year after taxation 9 440 30

1.4.2 Balance sheet Name of company: Park Traders Ltd. Balance sheet as at 28 February 2015 Assets Non-current assets 1 980 Property, plant and equipment 3 1 180 Financial assets Fixed deposit: ABSA (1 000 – 200) 800 Current assets 4 020 Inventory/stock 4 1 100 Trade and other debtors 5 1 070 Cash and cash equivalents 6 1 850 Total assets 6 000 Equity and liabilities Capital and reserves/Shareholders’ equity 3 500 Ordinary share capital 7 2 280 Retained income 8 1 220 Non-current liabilities 1 700 Mortgage bond: ABSA 1 700 Current liabilities 800 Trade and other creditors 9 465 Loan payable within 12 months 300 Bank overdraft 35 Total equity and liabilities 6 000 Notes to the financial statements: 1. Interest income Interest on investments 10 Interest on savings account 15 Interest on debtor accounts in arrears 12 Interest on current account 13 50 2. Interest expense Interest on mortgage loan 15 Interest on creditor accounts in arrears 9 Interest on bank overdraft 6 30 31

3. Fixed assets/Tangible assets/Property, plant and equipment Land and Vehicles Equipment Total buildings Cost price (beginning of year) 200 500 760 1 460 Accumulated depreciation(beginning of year) - (200) (230) (430) Carrying value at end of previous year 200 300 530 1 030 Movements 100 20 30 150 Additions/Acquisitions at cost price 100 100 420 620 Asset sales at carrying value - (50) (310) (360) Depreciation for the year - (30) (80) (110) Carrying value at end of current year 300 320 560 1 180 Cost price 300 540 730 1 570 Accumulated depreciation - (220) (170) (390) 4. Inventory/stock Trading stock 700 Consumables on hand 400 Stationery 200 Packing material 150 Fuel 50 1 100 5. Trade and other debtors Trading debtors 800 Provision for bad debts (40) Net trading debtors 760 Prepaid expenses 30 Insurance 30 Accrued income 80 Interest on fixed deposit 80 Deposit for water and electricity 200 SARS (Income tax) (too much provisional tax paid) - 1 070 6. Cash and cash equivalents Fixed deposit (matures within 12 months) 200 Savings account 700 Bank - Change 350 Petty cash 600 1 850 32

7. Ordinary share capital Authorized 500 000 ordinary shares Issued R 1 000 shares in issue at beginning of the year 1 500 400 shares issued during the year at R1,90 per share 1 160 200 shares repurchased during the year (380) (average issue price R1,90 per share) 1 200 shares in issue at end of the year 2 280 8. Retained income Retained income at beginning of the year 1 078 Net profit after tax for the year 440 Retained income on 200 shares repurchased (200 shares x R0,40 per share) (80) Dividends (218) Interim (1 000 shares x 5 cents) 50 Final (1 400 shares x 12 cents) 168 Retained income at end of the year 1 220 9. Trade and other creditors Trading creditors 200 Accrued expenses 20 Interest on loan 20 Income received in advance 40 Rent income 40 Creditors for salaries 10 Pension fund 5 Medical fund 8 Shareholders for dividends 168 SARS 14 Income tax (if too little was paid) 4 PAYE 10 #Mortgage bond: ABSA (amount payable within 12 months) - 465 # The amount payable within 12 months on the mortgage bond can also be shown on the face of the Balance sheet under Current liabilities. 33

EXERCISE 1.6 You are provided with the Pre-adjustment trial balance of Park Limited. The company buy and sell uniforms and also repair it for their clients, for which a fee is charged. These fees are credited in the Fees income account in the General ledger. REQUIRED: 1.6.1 Refer to Information 2.10 which follows and calculate the profit and loss on the sale of the computer. You may draw up an asset disposal account to calculate the figure. 1.6.2 Complete the Income statement for the year ended 30 September 2015. The Notes to the statements are not required. INFORMATION: 1. Pre-adjustment trial balance of Park Limited on 30 September 2015 Balance sheet accounts section Debit Credit Ordinary share capital 1300 000 Share premium 170 730 Share income (1 October 2014) 170 000 Loan: ABSA 90 000 Land and buildings 1 628 520 Vehicles 220 000 Equipment 190 000 Accumulated depreciation on vehicles (1 October 2014) 41 000 Accumulated depreciation on equipment (1 October 2014) 37.000 Debtors control 36 600+ 546 — 7600 Creditors control 17 960 Trading stock 479 000 + 6400 Bank 13 500 Petty cash 2 200 SARS (Income tax) 83 500 Provision for bad debts 1440 +390 Nominal accounts section Sales 2.720 000 Cost of sales 1310000 — yao Debtors allowance 6200 + Y6o0o Salaries and wages 162 000 Discount allowed 905 Fees-income 104 750 — ASO Rent-income 56000 —gdco Insurance 11 000 Sundry expenses 39 250 — |3.200 Directors fees 390 000 + [390 ga0 + 195 000 Audit fees 53 705 Consumable goods 24 000 Interest-income 2.500 Ordinary share dividends 88 000 Bad debt recovered 580 Trading inventory surplas 4600 Provision for bad debt aajusimant 390 (dt) Interest on loan 1go0o 34

2. Adjustments 2.1 Prepaid expenses related to sundry expenses at the end of the year, R3 200, were not taken into account. 2.2 Received R580, on 30 September 2015, from D. Botha whose account was previously written off as bad debts. This amount was recorded in the Debtors control-column in the CRJ. 2.3. The provision for bad debts must be adjusted to R1 830. (1§36- 14410) = 390 (br), 2.4 There were two directors at the beginning of the financial period. Director’s fees were paid for the first half of the financial period. On 1 April 2009 a third director was appointed. All three directors earn the same fee per month. Provide for the outstanding fees due to the directors. 390 000+2 +6 =R 32500 p.m. ~. New director 32500Xb6 = 195000 2.6 The following credit note was incorrectly omitted from the Debtors allowance journal for the month of September. The mark-up on the goods is 50% on cost price. 2.5. Rent was received for 14 months. Park Ltd. 100 Credit note 4552 ss — = 28 Sept. 2015 Credit: ABC Merchants Cc P a) 9600 k 150 6400_ > P.O Box 3872 = Brooklyn Price /unit Total 24 Uniforms returned R400 R9 600 Reduction on fees required for mending the uniforms R_750 R10 350 2.7 Physical stock taking on 30 September 2015 shows stock of uniforms on hand as R490 000. (479 000 + 64000) = 485400 -' SurpllS oF 490000-485400 = _4600 2.8 Loan statement received from ABSA shows the following: Balance at the beginning of the year R150 000 Repayments during the year — R78 000 Interest capitalised [t 90 000 — (150 000 — 76000 y 18 600 ? Balance at the end of the year R90 000 [220 000 = 41 000) Xa AE == $00 2.9 Depreciation on vehicles is calculated at 20% p.a. on the diminishing balance method. 2.10 Depreciation on equipment is calculated at 10% p.a. on cost price. Take note that a computer was taken over on 30 June 2015 by one of the directors for R800 cash. The relevant page in the fixed asset register follows. No entry with regards to the sale of the computer was recorded. Fixed asset-register Page 12 Item: Apple computer Ledger account: Equipment Date bought: 1 April 2012 Cost price: R22 000 Depreciation diminishing policy: 10% p.a. on cost price Date Depreciation Current Accumulated calculations depreciation depreciation 30 Sept. 2012 R22 000 x 10% x 6/12 R1 100 R1 100 30 Sept. 2013 R22 000 x 10% x 12/12 R2 200 R3 300 30 Sept. 2014 R22 000 x 10% x 12/12 R2 200 R5 500 30 June 2015 22000 XBaxB 1650 7/50 2.11 Income tax for the year amounts to R63 280. Remaining equipment 35 “P = (190000 -22 000) =/6006 . legooo fg xB = 00 63 ,

1.6.1 Calculate the profit or loss on the sale of the computer. Asset disposal Equipment 22006 | Accumulated depron eguipm 1156 Bank 800 loss on asset sale _2Z000 2Z000 1.6.2 Income statement of Park Ltd. for the year ending 30 September 2015 id Sales £2 7Z0000 — ( 6200 +9 b00)] 2 704 260 Cost of sales (1 3lo 000 -— 6400) ! 303 G00 Gross profit | 400 606 Other operating income 157 180 Fees-income Clo4 750 - 750) 404 000 Rent income (5600 - 3000) 4@ 000 a felovered) 580 Tr entory surplis [ 490 000 — C474 000 + b400)] 4 600 Gross operating income | 557 780 Operating expenses | 33/ 350 Salaries and wages 142 000 Discount allowed 905 Insurance 11 000 Sundry expenses (39250 — 3200) 3EB050 Directors fees (390000 + 390000 + 195000) 775 000 Audit fees 53 7O5 Consumables 24 900 Frovision for bad debt adjustment (1830 -/440) 340 4oss on asset dSpbosal /q 050 Depreciation (35 800 +1650 + /eg00) 54 250 Operating profit 226 $30 Interest-income 2500 Profit before interest - expenses/finance costs 223930 Interest-expense/finance costs '@ 90000 — (150000 —78 000)) ( 18 000) Profit before taxation 2/0930 Income tax fé 63 240) Net profit after taxation 147680 36

EXERCISE 1.7 You are provided with information related to Park Ltd. REQUIRED: 1.7.1 Explain the following concepts in relation to companies: Separate legal entity Limited liability 1.7.2 Calculate the correct net profit before tax. 1.7.3 Prepare the Note for fixed assets to the financial statements on 31 December 2015. 1.7.4 Prepare the Balance sheet as at 31 December 2015 (show calculations in brackets where necessary). Some figures are already given on the answer sheet. INFORMATION: 1. Figures taken from the ledger accounts on 31 December 2015: Ordinary share capital R 880 000 Fixed deposit: ABSA 30 000 Fixed deposit: NEDBANK 95 000 Creditors control 18 600 Petty cash 7 000 Equipment 575 000 Accumulated depreciation on equipment 86 000 Mortgage loan: ABSA ? Bank 6 000 (cr.) Depreciation 27 000 Directors remuneration 38 000 2. Adjustments and additional information: The figures in the Pre-adjustment trial balance show that the net profit before tax, amount to R343 500, but the following adjustments have not yet been brought into account: 2.1 The company bought on credit additional equipment for R170 000 on 31 December 2015. The equipment was delivered but no entry was made. 2.2 Depreciation on equipment, R27 000 was recorded. When investigated it was found that the amount should have been R22 000. 2.3 The figure for trade and other receivables is correct. However, the bookkeeper omitted the trading stock deficit of R19 000 and the decrease in the provision for bad debts from R5 000 to R4 500, from the Profit and loss account. 2.4 According to the contracts of the directors they are entitled to the following annual remuneration: Pansegrouw R30 000 and Duvenhage R23 000. Duvenhage’s fees are paid in full. Pansegrouw is paid 50% of the amount due to him. Make provision for the outstanding amount to Pansegrouw. 2.5 The fixed deposit at Nedbank matures on 1 April 2016. 37

2.6 The Interest on loan is capitalized. The loan statement of ABSA on 31 December 2015 was as follows: Balance on | January 2015 320 000 Interest charged 47 600 Monthly payments included interest (12 months x R6 000) 72.000 Balance on 31 December 2010 ? & The interest for the year has not yet been recorded. € Capital repayments on the loan will be R8 500 per month for the following financial year. 2.7 No money is due to SARS for Income tax or VAT. Both these accounts have debit balances. 2.8 According to the bank statement cheque No. 786 for R2 000 issued to a creditor, has not yet been presented to the bank for payment, because it is dated for 12 January 2016. 2.9 Park Ltd. has, as a result of the impact which the bad economic conditions had on the profit, not declared a dividend 2.10 The rent agreement with the new tenant had the following clause: The rent of R2 400 per month for the period 1 April 2015 till 31 December 2Qhfist be used to recondition the existing equipment of Park Ltd. The tenant has met the agreement and the equipment of Park Ltd. was upgraded. No entry has yet been recorded in this regard. 1.7.1 Explain the following concepts: Separate legal entity According to company |5 Seen erate fegal entity, apart from N eink om hon, therefore thas 1 dun (deni ey and the same rights and dgnchitis as as aa individual Limited liability Shareholders cauyot: be held repmisible for any debes of Shareholders ae. onl; oe [ait fer their Oe iar tolare? ) Share. cabrtal. J 1.7.2 Calculate the correct net profit before taxation. Incorrect net profit before taxation 343 500 Depreciation (27000 — 22000) 5.000 Trade [nventory deficit (19 000) _Prousion for Bod debt adjustment (5000 - #500) 520 Directors remyneration (30.000 X33) (15.000) Lnterest on sean (47600) Rent /ntome C2400 x 9 mouths) 2/600 Correct net profit before taxation a) BF 0goc0 38

1.7.3 Note of fixed assets to Financial statements on 31 December 2015: Fixed assets Equipment Cost price at the beginning of the year 5715 000 Accumulated depreciation at the beginning of the year (Sb 000 - 20 00) (54 000) Carrying value at the beginning of the year $16 000 Movements during the year: Additions at cost price (170.0 00 + 21 600) 191600 Depreciation for the year * ie 22 000) Carrying value at the end of the year 685 600 Cost price at the end of the year (S7S 000 + [70 000 + 21 600) bb 600 Accumulated depreciation at the end of the year (94000 —27000 4+ 22000) (31 000) Carrying value at the end of the year 68S 600 1.7.4 Balance sheet of Park Ltd. as at 31 December 2015 Assets Non-current assets TNS 600 Property , plant and equipment 685 600 Financial assets L Fixed deposit : ABSA 30 000 Current assets 752.000 Stock 500 000 Trade and other receivables 150 000 Cash and cash equivalents (71000 + 45 000) {02000 Total assets f 1467600 Equity and liabilities Ordinary shareholders’ equity OL2 [L006 Ordinary share capital $30 000 Retained income 82 400 Non-current liabilities 192 406 Mortage loan: ABSA (29S 600 — (8500 xiz)) 193 600 Current liabilities 3// bdo Trade and other creditors (13 00 +/Jo000 t/so004 200) | 205 600 Short term section of loan! A@SA (3500 x Iz) 102. 000 Rank overdraft (6 000— 2000) 4 000 Total equity and liabilities 1467 600 39

EXERCISE 1.8 The following information is taken from the books of Parkie Traders Ltd. on 30 June 2015, the end of the financial year. REQUIRED: You are expected to complete the following: 1.8.1 The Balance sheet as at 30 June 2015. The following Notes to the financial statements: 1.8.2 Trade and other debtors 1.8.3 Ordinary share capital 1.8.4 Retained income Take note! The company’s policy is that SARS (Income tax), and also Shareholders for Dividends, be shown in the Notes of Debtors and Creditors, depending upon the balance. Parkie Traders Limited has authorised share capital of 100 000 ordinary shares. Parkie Traders Post-closing trial balance on 30 June 2015 Debit Credit Ordinary share capital ( 60 000 shares in issue) 360 000 Retained income (1 July 2014) 85 800 Land and buildings 290 000 Equipment 65 800 Accumulate depreciation on equipment 30 200 Fixed deposit: ABSA 40 000 Mortgage bond: Nedbank 140 000 Deposit for water and electricity 2 000 Trading stock 77 500 Consumable stores on hand 530 Debtors control 19 600 Provision for bad debts 390 Savings account 9 000 Bank 230 450 Cash float 350 Creditors control 20 990 Accrued income 4 000 Prepaid expenses 400 Accrued expenses 2 050 Income received in advance 5 000 Shareholders for dividends 15 000 SARS (income tax) 14 500 40

ADDITIONAL INFORMATION: — The mortgage bond is repayable in equal payments of R15 000 on 1 January of each year. 2. On 1 July 2014, 10 000 shares were issued at an issue price of R8,00 per share. These shares qualified for interim dividends, and have already been recorded. The net profit after tax for the year has been correctly calculated at R127 700. w 4. An interim dividend of 30 cents per share was paid during the year, and a final dividend of 25 cents per share has been declared. 5. On 30 June 2015, the last day of the financial year, the company repurchased 15 000 shares at a price of R9,20 per share. This was done after the final dividend has been declared. The transaction has not yet been recorded. Parkie Traders Ltd. 1.8.1 Balance Sheet at 30 June 2015 | Assets — _ oe ‘ Non- current assets res 36S 600) |_ Property , plantandl eg uipment (240000 + 6S 800 ~ 30200) | 22S 600 Financial assets —— — = Fixed deposit: A@SA 14.0 000 Current assets 219 440; | nventory (7100 + §30) 718 030 ' Trade and other debtors 0 {10 Cash and cash equivalents (230480 — 138000) 101 300 Total assets +4000 + 350 J 585 S40) Equity and liabilities | | Shareholders’ Equity | 402.500, l= Ordinary share capital _ | 210 000 Re tamed income /32S00 Non-currént liabilities [25 000 Mortage loan: Nedbank (140000 ~ 1S 000) |25 000 Current liabs litres ; 53040 Trade andother creditors (20949042050+S000+1S000) | 43 04-0 Short term section of loan: Neclbank [S000 | Total equity and liabilities S&S SO! 41

Notes to the financial statements: 1.8.2 Trade and other debtors Trade debtors 19 600 Provision for bad debts | (390) Net trade debtors 19210 Deposit for vsater and @ lectricity 2000 Acerued income ly 000 Prepaid x penses 400 SARS ( Income tax) {tp S00 4o//0 1.8.3. Ordinary share capital Authorised [00000 ordinary Shares Issued 50000 Shares in issue beqrrung of the yeor 230 060 1ov00 Shares iSsued durira thé year at &,00 per Share| $0000 1S 000 Sraverage’ tsSues price eb, 00 DEF chare) (Vo 060) | US 000 Shares in issue ot end of the y eur 270 000 | ¥ (360 000 ~ 80600) 1.8.5 Retained income Retained income at beginning of the year BS 800 Net protit after tax for Fhe year — 12.7 100 Re tained income on S000 Shares repurchased (iscooxk3eh (4-8 000) Divedends j (33 000) Trterim (60000 x 0,3) 13 000 Final (60 000 x 0) 25) 5000 Retained income at end of the year 132500 42

EXERCISE 1.9 Use the information below, taken from the records of Lucem Limited, and prepare the following: 1.9.1 Complete the Equity and liabilities – section on the face of the Balance sheet on 28 February 2015. 1.9.2 Complete the given Notes to the Balance sheet as at 28 February 2015. INFORMATION: 1.The following balances appear on 28 February 2015 in the General ledger. Balance sheet section Ordinary share capital (average issue price of R2,10 per share) R735 000 Retained income (1 March 2014) 22 500 Loan: ABSA 120 000 Land and buildings at cost price 500 000 Vehicles at cost 200 500 Equipment at cost price 76 500 Accumulated depreciation on vehicles (1 March 2014) 15 568 Accumulated depreciation on equipment (1 March 2014) 23 472 Trading stock 76 480 Debtors control 80 560 Provision for bad debts (1 March 2014) 4 000 Creditors control 32 496 Bank 41 799 Petty cash 1 000 Float 5 000 Deposit: water and electricity 500 South African Revenue Services (SARS) - income tax 10 000 (Dr.) Pension fund 4 500 Nominal accounts section Ordinary share dividend (interim) R56 000 1. Net profit of R110 129 was calculated after considering the following items: x Packing material on hand on 28 February 2015, R589. x Interest on loan due, R3 000. x Provision for bad debts increased with R28. x Insurance prepaid, R4 000. x Total rent received for the year amounts to R43 904. It includes the rent for March 2015. Rent increased by 12% as from 1 October 2014. x Depreciation on equipment, R4 528 and on vehicles, R8 432. 2. A dividend of 8 cents per share was declared by the directors on 28 February 2015, payable on 31 March 2015. 3. Income tax of the company amounts to R45 000 for the financial year. 4. The company has an authorised share capital of 750 000 ordinary shares. During the year another 50 000 shares were issued at an issue price of R2,70 per share. This transaction has already been recorded correctly. 5. The loan agreement with ABSA bank, determines that an amount of R10 000 should be repaid on the loan annually on 31 July. 6. The following post-dated cheques were issued to creditors: Date issued Creditor Date for Amount 15.01.2015 S. Pieterse 15.03.2015 R400 14.02.2015 J. Whelpton 14.03.2015 R670 43

1.9.1 Financial statements Name of company: Lucem Limited Balance sheet as at 28 February 2015 Equity and liabilities Notes Shareholders’ equity 738 624 Ordinary share capital 735 000 Retained Income 3624 Non-current liabilities 110 000 Loan + ABSA (120000 —/0000) [10 000 Current liabilities HT &S0 Trad and other Payables 107 6SO Short term Section'ot’ loan: ABSA {0 000 Total equity and liabilities 966 274 1.9.2 Notes to the Balance sheet 4. Inventory Trading stock 1b 480 Consumables on hand 53 Packag ing | 5 so | “TT 069° 5. Trade and other receivables Trade debtors 80 560 Provision for bad debt (4 o00 + 28) 023 Net trade debtors ToS 3z Oeposi€ : Water and electricity 500 Prepaid expense 4 000_| Trnsurance ty, 000_| Bl o0sz 6. Cash and cash equivalents Rank 41799 Post dated chegues issued (4.00 + 670) 1 0710 Petty casi 1 000 Float S000 eZ Bb4Y 44

7. Ordinary share capital Authorised “150 000 ordinary Shares Issued 300 000 Shares in (Ssue at beginning of the year| 600 000 50000 Shares issued during the year af Rz,rpersha 13S 000 30 000 Shares in iSsue at end of the year | 7135-000 9. Retained income 7 ; Retained income at beginning of Hhe year- 22 S00 Oividends (Sl, 000) Taterim S56 000 Final (350 000 x 0,08) 28 000 Retained income ut &nd of the year 3 629 10. Trade and other payables : Trade creditors 32496 | Post dated cheauées (sued (400 + 67) ! 070 Net Grade crédrtors 33 S66 Accrued ex penses 3.000 Tnterest on loan 3000 | Sncome received in advance 3584 Rent income 358 Shareholders for dividends (350 000 x 0,08) 23 000_ SARS ( Trcome tax) (10000 — 4S 000) 35 000 Pension fun i. SOO lo7 So Calculations: tos Rent inume: bt 6 (a+ wx) = 43 70¢ Tot bce BE = 43 704 1372x = 43% 400 ee = 3200 fs 3 200 x1 iz = 3584 45

EXERCISE 1.10 You are provided with information relating to Park Ltd., a public company listed on the JSE. REQUIRED: 1.10.1 Calculate the following figures in the Income statement for the year ended 30 June 2015 x Income tax x Net profit after taxation 1.10.2 Prepare the Equity and liabilities section in the Balance sheet on 30 June 2015 with Notes for: x Ordinary share capital x Retained income (Where Notes are not required, you have to show calculations in brackets). 1.10.3 On 30 June 2015 the price of Park Limited shares on the Johannesburg Stock Exchange was R5,20 each. Should the shareholders be satisfied with this price and the new price at which the new shares are issued on 1 January 2015? Explain your answer by referring to figures. INFORMATION: 1. The company was registered on 1 January 2011 with authorised share capital of 500 000 ordinary shares. 2. The General ledger show inter alia the following balances on 1 July 2014: x Ordinary share capital, R861 000 (Consisting of issued shares with an average issue price of R4,10 per share) x Retained income, R670 000 x Mortgage loan from ABSA, R800 000. 3. On 1 January 2015 a further 120 000 shares were issued at an issue price of 428 cents per share. 4. Information on income tax is as follows: x Provisional tax paid on 31 December 2014, R86 000 x Provisional tax paid on 28 June 2015, R74 000 x Balance of SARS (income tax)-account on 30 June 2015, R8 800(Debit) x Company tax calculated at 28% on net profit. 5. Dividends: x On 31 December 2014 an interim dividend of 22 cents per share was paid. x On 30 June 2015 a final dividend of 35 cents per share was declared. 6. Mortgage loan from ABSA: x Interest is capitalised at a rate determined by the bank. Interest for the year ended 30 June 2015 amounted to R102 000. x An agreement with the bank, stipulates that Park Ltd. has to pay a fixed amount of R11 300 per month to the bank. 7. The General ledger shows the following balances on 30 June 2015, inter alia: x Creditors control, R158 000 x Debtors control, R175 000 x Accrued income, R15 000 x Accrued expenses, R12 000. 46

1.10.1 Calculate the Income tax figure in the Income statement: SARS (Lnome tax) 000+74000 - 3800 3 ON Bank 6000 ||Ineome tax (51205 = ry = [51200 Rank 74.000 llRulanee Yd ggao 160 000 [60 000 Calculation of Net profit after taxation: J00 Profit before tax = 1200 X 2B = S540 000 ee " » Profit after tax ~ S400 — ($1200 = 388 800 —— 1.10.2 Extract from the Balance sheet of Park Ltd. on 30 June 2015 Equity and liabilities Capital and reserves Lad | 100 Ordinary share capital 7. [ 374. 600 Retained income 8. 897 100 Non-current liabilities 125600 7166 400 Loan: ABSA (§00000 + 102000 — (11 300x12) ) 166 Yoo Current liabilities 314 100 Trade and other payables ( ISB 000 + (2000 ) 1710 000 Short term section of loan: ABSA (R56 oo ES ‘oz O 00) - 83 b00 Shareholders for dividends (230 000X 6 35) {5 Seo J Total equity and liabilities 2 3257 200 47

Notes to the financial statements 7. Ordinary share capital Authorised 500 000 ordinary Shares Issued 2/0000 shares in 1Ssue at bey inrung of the year S61 000 120000 shares issued cluring the year at Ryze per Share §13 600 230000 Shares im 1Ssye ak end of the year 1374 600_| 8. Retained income Re tamed income at beginning of the Year 670000 Net income after tax tor the year 388 800 Dividends C16/ 700) Tnterinn (210 000 x 0,22) 4b 200 Final _ (330.000 X_ 0,35) 11S S00 Rotamed income at tnd of the year 397100 1.10.3 On 30 June 2015 the price of Park Limited shares on the Johannesburg Stock Exchange was R5,20 each. Should the shareholders be satisfied with this price and the new price at which the new shares are issued on 1 January 2015? Explain your answer by referring to figures. No 5 Shareholders should not be satisfied with the price of RS,20 on the ISE as the actual yalue of the Shares _is Rb, gg (2271 700 = 2.30 000 shares). The shares are actually undervalued. New shares were also 1Ssued at only Ky, 2g which means that new shareholdecs paid much less than the market value ard net asset valye of the Shares. 48

1.4.3 Cash flow statement The Companies Act requires that a Cash flow statement be included as an addendum to the financial statements. This is a statement that clearly reflects the cash situation of a business. Information regarding the liquidity of a business is of great importance to the users of annual financial statements, because a cash shortage can cause a business to fail. By providing a cash flow statement, the attention of users can be drawn to possible shortcomings in this respect. The following knowledge is necessary to understand the procedures that are explained hereunder: The cash flow statement consists of 3 main components, viz: 1. Cash flow from operating activities. 2. Cash flow from investing activities. 3. Cash flow from financing activities. The first component of cash flow, namely Cash flow from operating activities consists of four elements: x Cash from operating activities x Interest paid x Dividends paid x Tax paid (1) Cash from operating activities The profit calculated in the Income statement, is not necessary the amount representing the cash flow seeing that it is “polluted” with adjustments, e.g. accrued income, prepaid expenses, etc. as well as with items without any cash flow, e.g. depreciation, etc. The Act further requires that the payments to suppliers of funds (i.e. interest on loans), payment to the State (i.e. income tax), and payments to owners (i.e. dividends), have to be shown separately on the Cash flow statement. These principles and legal aspects are addressed by the following important calculation as first Note to the Cash flow statement: Reconciliation between net profit before tax and cash generated from operations: Net profit before taxation 200 Plus adjustments in respect of: 100 Depreciation 60 Interest paid 40 Operating profit before changes in working capital 300 Changes in working capital (80) (Increase)/decrease in inventory (90) (Increase)/decrease in receivables/debtors 50 Increase/(decrease) in payables/creditors (40) Cash generated from operations 220 49

o Profit before taxation is used, seeing that it does not include income tax and dividends, and these two payments are subtracted separately on the face of the Cash flow statement. o Interest on borrowed money is “added back” because it must be shown separately on the Cash flow statement. It is again separately deducted on the face of the Cash flow statement. o The amount for depreciation is “added back” to the profit, because depreciation does not bring about a flow of cash. o The calculation of Change in working capital is made through the following basic knowledge and logical deductions: x Inventory: An increase in inventory means that we have bought stock which results in a decrease in cash. This amount must be shown in brackets to indicate the decrease in cash. A decrease of inventory indicates that we have sold stock, i.e. an increase in cash. x Debtors: A decrease in debtors means they have paid us, thus resulting in an increase in cash. An increase in debtors means the opposite which results in the decrease in cash. The amount must be shown in brackets to indicate the decrease in cash. x Creditors: A decrease in creditors means we have repaid them, thus resulting in a decrease in cash. The amount is therefore shown in brackets. An increase in creditors means the opposite, i.e. an increase in cash. EXERCISE 6: REQUIRED: Use the given information to prepare the Note of the Reconciliation between net profit before taxation and cash generated from operations (Note 1) on 30 June 2015. INFORMATION: The following information relating to Absolut Limited. The company’s financial year ending on 30 June. 2015 2014 Trade debtors 270 000 285 000 Accrued income 18 000 12 000 Income received in advance 14 000 11 000 Trade creditors 185 000 230 000 Accrued expenses 6 000 9 000 Prepaid expenses 2 000 13 000 Trading stock 144 000 114 000 Additional information on 30 June 2015: Die net income before taxation is calculated at R930 000. The following items were taken into account in calculating the net income: Directors remuneration 68 000 Auditors remuneration 15 000 Depreciation on vehicles 13 000 Depreciation on equipment 12 000 Interest on mortgage loan 8 600 Interest on bank overdraft 2 400 50

Notes to the Cash flow statement: Reconciliation between net profit before taxation and cash generated from operations: Profit before taxation G36 000 Plus Adjustments in respect of: 3A 000 Lepreciation _(13000+12000) 25 00 Tihterest — expense (B600F 2400) |__// 000 _ | Operating profit before changes in working capital G66 200 _| Cash effects of changes in working capital (Ss 000) | Lntrease in inventory (/44 ooo -11y Wo) | (30 000) Decregse jn debtors (3/0000 -290000)| 20 000 Decrease in cred/tors (250 000-205 000) |_(45 000) Cash generated from operations G// 0ce Calculation of income tax paid To calculate the amount that is actually paid over to SARS in respect of income tax, the SARS (income tax) account must be reconstructed from available information that is obtained from the Income statement and Balance sheet of the present and previous year. EXAMPLE 7: INFORMATION: o On 28 February 2015 an amount of R51 000 was due to SARS in respect of income tax. o The net income for the year ending 28 February 2016, R850 000, was calculated correctly. Income tax is calculated at 30% of the net taxable income. o The Balance sheet as at 28 February 2016, shows that an amount of R26 000 is due to SARS for Income tax. REQUIRED: Use the information to prepare the SARS (income tax)-account and thus determining the actual amount paid to SARS during the year by the balancing figure from the account. SARS (income tax) B24 Dank! | Bane ey | Boone 94 | 5/ 000 — | | Bonk 27280 20s) Lneome tax \|G7|256 cao Peel Bark Balance Fa | 26000 306006 306000 wd | Be/ence Yq|_ 26000 The balancing figure is the amount which was actually paid to SARS during the year in respect of the income tax and represents a decrease in cash, shown in brackets on the face of the Cash flow statement. 51

€ Calculation of dividends paid To calculate the dividends payable, the “Shareholders for dividends” account must be reconstructed from information obtained from the Income statement and Balance sheet of the current and previous years. Returns paid to shareholders consist mostly of the previous year’s final dividends and the interim dividends for the present year. EXAMPLE 8: INFORMATION: o On 28 February 2015 the Balance sheet shows the amount of R67 000 as being owed to shareholders in respect of a final dividend declared. o The total of the dividends declared during the accounting period ending on 28 February 2016, amounts to R143 000. This includes both the interim and the final dividends. o On 28 February 2016 the Balance sheet shows that an amount of R60 000 is still owing to the shareholders in respect of the year’s final dividend. ASSIGNMENT: Use the information given to draw up the Shareholders for dividends account completely, and by using the balancing figure, determine the amount that was actually paid out to shareholders during the year. Shareholders for dividends B25 hon t| Zant CPI\ "Go 000) fitey!| Balance | 67000 Fecha Bank aj Warcr|! | Irdinary Shares |G] \ 143 000 Balance Yd\ Go 000 |Z Y dividends 2/0 000 4/0 000 Mac | Palance 4) boo The balancing figure is the amount actually paid out to the Shareholders for dividends during the year, and represents a decrease in cash which is shown in brackets on the face of the Cash flow statement. 52

(2) The second component of cash flow, namely, Cash flow from investing activities consists only of the change in non-current assets, and is calculated as follows: x Purchase of non-current assets means that there was an increase in non-current assets, and this represents a decrease in cash; shown in brackets on the Cash flow statement. x Proceeds from the sale of non-current assets indicate that we have received money for an asset that was sold, and this represents an increase in cash. Take note that the total proceeds, i.e. the selling price of the asset is shown as an increase in cash, and not the profit or loss on the sale of the asset. (3) The third and last component of cash flow, viz., Cash flow from financing activities consists of financing through the issuing or buyback of shares, or the negotiation of or payments on long-term loans, and is calculated as follows: x Proceeds obtained from shares issued means that money has been acquired, and this represents an increase in cash. Take note that the total amount received, i.e. the number of shares multiplied by the issue price per share must be shown as an increase in cash. x When shares are repurchased it will mean that money has been paid resulting in a decrease in cash. Remember that the total amount paid i.e. the number of shares bought multiplied by the price paid per share should be shown as a decrease in cash. This amount must be shown in brackets to indicate a decrease in cash. x Proceeds from long term loans mean that more money has been borrowed, and this also represents an increase in cash. x Repayments of the capital portion of long term loans mean that part of the loan has been repaid, and this represents a decrease in cash. This amount, as all other decreases, must be shown in brackets on the Cash flow statement 53

EXAMPLE 9: Park Ltd. is a public company with an authorised share capital of 2 000 000 ordinary shares of. The financial year ends on 28 February. REQUIRED: Consider the given information and prepare the following sections to the Cash flow statement for the year ended 28 February 2016: &€ Cash flow from financing activities € Cash flow from investing activities INFORMATION: Extract from the Balance sheet: 2016 2015 Non-current assets 1 100 000 1 026 000 Tangible assets (at carrying value) 1 100 000 1 026 000 Shareholders’ equity 1 522 000 1 204 000 Ordinary share capital 1 125 000 960 000 Retained income 397 000 244 00 Non-current liabilities 350 000 500 000 Loan: ABSA 350 000 500 000 Notes and additional information: 1. Tangible assets represent the following: 2016 2015 Land and buildings at cost price 820 000 650 000 Equipment at carrying value 280 000 376 000 1.100 000 1.026 000 Note! ¢ No additional equipment was bought during the financial year, but equipment was sold at carrying value. During 2016, R59 000 was written off as depreciation on equipment. ¢ On 1 March 2015 400 000 ordinary shares were in issue. On 1 July 2015 a further 200 000 shares were issued at an issue price of R2,70 per share. On 1 January 2016 150 000 shares were repurchased at the average share price on that day. Cash flow from investing activities (a (33 0 oo) | Purchase of non-current assets (320 000 — So 000) C 170 000\ Proceeds of sale of non-current assets (376000 ~S$ 400 —230 000) 37000 Cash flow from financing activities |S 000 Proceeds of shares issued (200 000 x R27 o> SYo0 000 Repurchase of shares C ISo 000 x R2,s0) GB 450 00) Repayment of loan (S00 000 — 350000) (180.0 00) * Average iSsue price = 70000 + S4o0000 = Yoo 000 + 200 000 = R2,S0 per share 54

THE COMPLETE FORMAT OF A CASH FLOW STATEMENT It is important that the formats of both the Cash flow statement and the Notes are studied very well. Candidates are expected to be able to calculate missing information, and for this, particularly, the first Note of the Reconciliation of net profit before taxation, and cash from activities, must be thoroughly understood. Make sure that you know exactly which section of the Cash flow statement is affected by which aspects, especially when dealing with investing and financing activities. Also take special note regarding the use of brackets to indicate any reduction in cash. Park Traders Ltd. Cash flow statement for the year ended 28 February 2015 Cash flow from operating activities Notes 300 Cash received from operations 1. 500 Interest paid (50) Dividends paid 2. (60) Income tax paid 3. (90) Cash flow from investing activities (250) Purchases of non-current assets 4. (400) Proceeds from sale of non-current assets 150 Cash flow from financing activities 400 Proceeds from shares issued 700 Repurchase of shares (350) Proceeds from long term liabilities 150 Payment of capital portion of long-term loan (100) Net change in cash and cash equivalents 450 Cash and cash equivalents at the beginning of the year (30) Cash and cash equivalents at the end of the year 420 Notes to the Cash flow statement for the year ended 28 February 2015 1. Reconciliation between profit before tax and cash generated from operations: Profit before tax 1 000 Add: Adjustments for 400 Depreciation 350 Interest paid 50 Operating profits before working capital changes 1 400 Changes in working capital (900) (Increase)/decrease in inventory (1 300) (Increase)/decrease in debtors 600 Increase/(decrease ) in creditors (200) Cash generated from operations 500 55

2. Dividends paid * Amount in financial statements (50) Balance owing on last day of previous year (40) Balance owing on closing date of current year 30 Amount paid to shareholders during the year (60) * For Note 2 the Ledger account of Shareholders for dividends is also acceptable. Shareholders for dividends * Ran kk ©) Ralance Balance “id 30 ary 40 Fd ho Share fa) Peal o 90 Balance God 10 Trome tax /60 3. Income tax paid * Amount in Income statement (140) Balance owing on last day of previous year (20) Balance owing on closing date of current year 70 Amount paid (90) * For Note 3 the Ledger account of SARS (income tax) is also acceptable. SARS (income tax) b * Bank @o) Balance /d Zo /LO 160 4. Non-current assets bought Carrying value beginning of the year (600) Depreciation for the year 350 Carrying value of assets sold during the year 150 Carrying value end of the year 500 Purchase of non-current assets (400) * The calculation can be explained in the following T-account: Non-current assets at carrying value Ralance bid 600 Asset ca | [SO * (od) Neorectatron 350 Bank 09 duane ofol S00 (068 L086 56

EXERCISE 1.11 The following information is taken from the accounting records of Park Ltd., for the financial period ended 28 February 2015. ASSIGNMENT: Consider the given facts and do the following: 1.11.1 Complete the opened ledger accounts in the General ledger of Park Ltd in full. The accounts must be properly balanced or closed off. 1.11.2 Draw up the Cash flow statement of the company, for the year ended 28 February 2015. GIVEN: The following is an extract from the accounting records for the year ended 28 February 2015. Sales 495 000 Cost of sales 260 000 Operating expenses (depreciation and interest paid included) 84 000 Depreciation ? Interest on borrowed money 13 500 Profit before tax ? Normal company tax 45 300 Net profit for the year after tax 122 464 Dividends paid and recommended 57 000 Park Limited Balance sheet on 28 February Assets Notes 2015 2014 Non-current assets 348 300 268 400 Property, plant and equipment 1 348 300 268 400 Current assets 191 250 176 100 Trading inventory 123 000 133 500 Trade debtors 66 790 30 820 Cash and cash equivalents 1 460 11 780 Total assets 539 550 444 500 Equity and liabilities Capital and reserves 364 200 255 500 Ordinary shares capital 2 300 000 240 000 Retained income 3 64 200 15 500 Non-current liabilities 60 000 100 000 Mortgage loan 60 000 100 000 Current liabilities 115 350 89 000 Trade, and other creditors 4 115 350 89 000 Total equity and liabilities 539 550 444 500 57

Notes: 1. Property, plant and equipment - 28 February 2014 Land and Vehicles Equipment 2014 buildings Cost price 200 000 50 000 42 000 292 000 Accumulated depreciation - (12 500) (11 100) (23 600) Carrying value 200 000 37 500 30 900 268 400 Property, plant and equipment - 28 February 2015 Land and Vehicles Equipment 2015 buildings Cost price 250 000 94 685 33 000 377 685 Accumulated depreciation - (18 435) (10 950) (29 385) Carrying value 250 000 76 250 22 050 348 300 Take note! Used equipment with carrying value of RS 920, was sold at carrying value on 28 February 2015. No new equipment was bought. No vehicles were sold during the accounting period 2. Ordinary share capital 50 000 shares in issue at beginning of the year 240 000 20 000 shares issued during the year at R5,85 per share 117 000 11 176 repurchased during the year (57 000) (average issue price R5,10 per share) 58 824 shares in issue at end of the year 300 000 3. Retained income Retained income at beginning of the year 15 500 Net profit after tax for the year 122 464 Retained income on 11 176 shares repurchased (16 764) Ordinary shares dividends paid and declared (57 000) Retained income at end of the year 64 200 4. Trade, and other creditors 2015 2014 Trade creditors 87 860 69 160 SARS (income tax) 8 490 9 040 Shareholders for dividends 19 000 10 800 115 350 89 General Ledger of Park Ltd. Balance sheet accounts section Equipment Bo marlt| Balance ld| U2 000 | 238 bel Asset disposal |aa| 4 000% | Ralance Yd] 33.000 4-2 000 Y2 000 marl | Balance _ id] 33000 58

Accumulated depreciation on equipment B8 fb bs Asset disposal Gal 3080 mar |)| Balance __°/4 11 100 Ralance * Fl lo 4So| #86 ps Depreciation &I| 2930 4 O30 ° Ig. 030 Mar |i| Balance Pal 10 9S0 Asset disposal B20 328 bg Equipment GI| 9000 | Ro bs\Accumulated deprec.43| 3 080 * on eG uipenen nt Bank® rR S920 9 000 4 000 Nominal accounts section Depreciation N15 oR bel Accumulated denrec. f3| 2930 | 3b be Profit and loss acer] 8 8bS on equipment. Accumu lated deprec. 5935 an vehicles — (18 yas ~/2 500) 3 86s 3 36S Park Ltd. Cash flow statement for the year ended 28 February 2015 Cash flow from operating activities Note TIS 2049 Cash received trom operations 1. [ 183 359 Faterest paid (13 S00) Dividends ‘pad Cy 8 800) Trncome tax paid Cys $50) Cash flow from investing activities + ( 33 7 6s) Purchases of non -current assets [50000 -200000) FERS; Magy a, GBS) Proceeds from sale of non- current assets | 5 420 Cash flow from investing activities 3236 Proceeds from shares issued (20 000 x RS/85) | 11 000 Repurchase of shares (J1176xRSl0) t(/6 164) (13 764) Payment of loan (100 000 — 60000) (40 000) Net change in cash and cash equivalents ( 10 320) Cash and cash equivalents at beginning of the year 11 730 Cash and cash equivalents at the end of the year {460 59

Notes to the Cash flow statement: 1. Reconciliation between profit before tax and cash generated from operations Febzs Bank wor; Galane 201 Profit before tax C [224by + Y“s 300) om| 164 Adjustments for: = 22 34S Depreciation (2930 + $9435) 3 86S Trterest paid 13 S00 Operating profit before changes in working capital 140 124 Change in working capital C 677 0) Decrease in inventory (133.S00— /22000) {0 Soo Increase in debtors (66790 - 30820) (35 970) Tnerease in Creditors (81860 - 64/60) 1& 100 Cash generated from operations 13 3 3SY 2. Dividends paid : Shareholders tor dividends bld 10 00 Balance ‘fd 19000 |Febz2e Ordinary share 57000 dividends e18e E1800, 3. Income tax paid SARS (Trcome tax) 21S a Ald 0lWLO Febes. Rank Gs 89) rar 1 Balance Foy 205 Balance ‘ld S440 |iRebzs Thome tax 8 300 SY 340 | SY. 340 60

EXERCISE 1.12 The information that follows relates to the public company Absolute Ltd., for the years ended 30 June 2014 and 30 June 2015. ASSIGNMENT: 1.12.1 Use the given information to fully draw up the Note to the Reconciliation of the net profit before tax and the cash generated from operating activities (Note 1). Tip! You will have to draw up the Appropriation account and determine the profit before tax. 1.12.2 Complete the notes for Ordinary share capital and Retained income as it would be shown in the Balance sheet on 30 June 2015. 1.12.3 Calculate the amount paid to SARS during the year regarding income tax. INFORMATION: The following information is in respect of Absolute Ltd. The company’s financial year ends annually on 30 June. 2014 2015 Ordinary share capital 192 000 338 400 Retained income 78 000 ? Land and buildings 360 000 330 000 Mortgage bond 90 000 270 000 Trade debtors 270 000 285 000 Accrued income 3 900 4 200 Trade creditors 243 000 165 000 Accrued expenses 6 000 9 000 Trading inventory 144 000 114 000 SARS (income tax) 6 000 3 000 Shareholders for dividends 21 000 36 000 Additional information on 30 June 2015: x On 1 July 2014 there were 60 000 ordinary shares in issue. x On 1 September 2014 a further 50 000 shares were issued at an issue price of R4,08 per share. x On 1 March 2015, 16 000 shares were repurchased at a price of 4,20 per share. x An interim dividend of 30 cents per share was declared on 31 December 2014. A final dividend of 120 cents per share was declared on 25 June 2015. Part of the final dividend has been paid to shareholders on the day. x Company tax for the year amounts to R60 000. x Retained income for the year after income tax and dividends amounted to R30 000. In the calculation of the net income the following items were brought into account: Directors fees 63 600 Auditors fees 2 250 Depreciation on vehicles 36 000 Depreciation on equipment 12 000 Interest on mortgage loan 6 690 Interest on bank overdraft 2 310 61

1.12.1 Calculation of net profit before taxation Appropriation account N20 sus, bo] Lncome tax 3] 60 000 [Sun lal Arotitand [oss acc. GI] 23S Foo Ordinary Share | 14S Boo Arvidends (3000 #112800) Retained income &3| 30000 23S 500 23S 800) Notes to the Cash flow statement: 1. Reconciliation between profit before taxation and cash generated from operations Net profit before tax 235 800 Adjustments for : 571 000 Depreciation (36000 + /2 000) 48 000 Tyterest- expense (6 6907 23/0) 4.000 Operating protr t before changes in working Capital 292.800 Change Tv Ta. Wor king capital ied (60 300) Decrease in inventory (/4y oo0 — //¢ 000) 30000 TDrcrease in debtors( (286 000+ 4 200) — (2700004 3400) ) (1S 300) Decrease in creditors (243 0004 6 0) —(/65000 + 7 000)) (15 000) Cash generated from operat-ons 232.S00 1.12.2 Notes to the Balance sheet Ordinary share capital 60.00.Q.... shares in issue at beginning of the year 192 00 5.90.9... shares issued during the year at R4, 08. per share 204 000 00. i 192.000 + 204000 16.020... shares repurchased during the year = R 3, 6 2) (87 600) (average issue price R.3.60. per share) 110 doo Shares 44000 .. Shares in issue at end of the year 3328 4oo Retained income Retained income at beginning of the year 7% 000 Net profit after tax forthe year C235 800 — 60 000) [TS 800 Retained income on 16,000... shares repurchased Clg 800 X (Ruy, 20 -R3, to)) (4 600) Dividends (igs 300 p) Interim _ (|{0 O00 X 03) 33 000 Final (94 000 x _/,20) [12300 Retained income at end of the year q zg 400 1.12.3 Income tax paid SsAes (Tncome tar) Bank ¥ Geom) | Balance "FB 000 Balance chA 60 rtncome Cax bo 000 Bb 000 _&6 000 _ 62

1.5 ANALYSIS AND INTERPRETATION OF FINANCIAL STATEMENTS It is very important to evaluate figures obtained from financial statements, so that informed decisions can be taken in respect of profitability, lucrativeness, liquidity and solvability of the company. The following calculations and ratios apply specifically to a company with limited liability: 1.5.1 Return on shareholders’ equity Formula Comment Net income after tax X 100 This represents the returns earned on share- Average shareholders’ equity 1 holders’ equity. It must be compared with the previous year’s returns, as well as with the following: = ……% x Interest rates on bank investments x Similar investments i.e., the rate on the Take note! Average shareholders’ equity refers returns that similar companies offer. to: ½ (opening balance + closing balance) x Debt/shareholders’ equity ratio Shareholders’ equity = Ordinary share capital x Market conditions + Retained income 1.5.2 Net asset value per share Formula Comment Total ordinary shareholders’ equity X 100 This represents the net asset value of a share Number of shares issued 1 at any given moment. The calculated amount must be close to the market value of the shares. If the calculated amount is much = …….. cents per share lower than the market value, the company is not being managed properly. Should the Take note! amount be much higher than the market value Shareholders’ equity = Ordinary share capital of the shares, then the shares are under- + Retained income valued. 1.5.3 Dividend per share Formula Comment Total dividend X 100 This determines the amount earned by the Number of shares issued 1 shareholder per share, as remuneration for investing in the business. Some investors seek = ……….cents per share high dividends, others wish to see growth in the value of their shares. The company must Take note! determine with what type of investor it Total dividend = Interim dividend + Final mainly has to do. dividend 63

1.5.4 Earnings per share Formula Comment Net income after tax X 100 This determines the amount of profit the share earned after tax was deducted. Should there be no retention of Number of shares issued 1 profits for the year, this will be the amount per share that can be paid out in dividends. = ……… cents per share 1.5.5 Return on average capital employed Formula Comment Net profit before tax and interest 100 A percentage lower than the interest at the bank Average capital employed X 1 indicates negative gearing and no further loans are to be made. A percentage higher than the bank interest = …….% indicates positive gearing and loans should not be repaid immediately. Take note! Average capital employed = (Shareholders’ equity + Non-current liabilities) / 2 1.5.6 Average debtors collection period Formula Comment Average debtors 365 This is a very important liquidity ratio. An attempt is X made to collect debtor’s obligations within 30 days. Credit sales 1 The faster the money comes in, the better the cash flow situation will be. Debtors can be encouraged to repay = …….days quicker by offering discounts or imposing interest charges on accounts in arrears. Take note! Average debtors = ½ (Opening balance + closing balance) of Trade debtors. 1.5.7 Average creditor’s settlement period Formula Comment Average creditors X 365 This is also a very important liquidity ratio. An attempt is made to bargain with creditors to repay what is owed Credit purchases 1 to them only after 90 days. The longer we can delay payment, the better it is for our cash flow situation. It is = …… days here that bargaining power plays an important role, e.g. through bulk purchases, good credit and repayment Take note! records, and long-term relationships. Average creditors = ½ (Opening balance + closing balance) of Trade creditors. 64

1.5.8 Debt/Equity ratio Formula Comment Non-current liabilities : Shareholders’ equity The norm for this ratio is between 0,5:1 and ….…. : 1 1:1. If the ratio is lower than 0,5:1, financial institutions will readily lend money to the Take note! business. If the ratio is greater than 1:1 Shareholders equity = Ordinary share capital + financial institutions will not find it easy to Retained income lend money to the business. 1.5.9 Current ratio Formula Comment The acceptable norm is 2:1. If the ratio is 2:1 Current assets : Current liabilities or more, the liquidity position of the business …… : 1 is very good. If it is less than 2:1, the liquidity position is not good at all, and ways and Remember to always compare the current means must be found to improve the situation year’s ratio with that of the previous year. by e.g. encouraging debtors to pay more quickly, or to bargain with creditors for a longer settlement period, or to increase the stock turnover rate. 1.5.10 Acid test ratio Formula Comment (Current assets – Inventory) : Current liabilities The acceptable ratio is 1:1. If the ratio is 1:1 …… : 1 or greater, the liquidity position of the business is very good. If it is less than 1:1, the Remember to always compare the current liquidity position is not good at all, and ways year’s ratio with that of the previous year. and means must be found to improve the situation by e.g. encouraging debtors to pay more sooner, or to negotiate with creditors for a longer settlement period, or to increase the stock turnover rate. 65

1.5.11 Rate of stock turnover Formula Comment Cost of sales This represents the number of times the stock was Average stock replaced or sold during the financial year. The turnover of inventory must be compared with that of previous = …….. times per year years to see whether the rate has improved or weakened. It is also important to look at the turnover of Take note! similar products to be able to come to conclusions. Average stock = ½ (Stock at beginning of year + Stock at end of year) 1.5.12 Number of months stock on hand Formula Comment Average stock 12 This represents the total number of months for which Cost of sales X 1 there is enough stock on hand. It also determines when stock must be replenished and encourages good = ……… months internal control of stock. 1.5.13 Degree of solvency Formula Comment Total assets : Total liabilities The acceptable norm is 1 : 1. Should the business have …… : 1 more liabilities than assets it means that some of the shareholders’ equity have to be used to repay liabilities. Take note! This implies that shareholders would lose some of their Total liabilities = non-current liabilities + current investments. liabilities 1.6 Financing expansions by means of a loan or by issuing more shares A business is highly geared when the ratio of borrowed capital to own capital is high, i.e. there is more borrowed capital in comparison to own capital. A business is low geared when the ratio of borrowed capital to own capital is low, i.e. there is less borrowed capital in comparison with own capital. In order to determine whether the business should issue additional shares rather than to negotiate an additional loan, the following information must be taken into account: x The effect that the interest on the loan would have on the profitability of the business, i.e. return on shareholders’ equity and return on average capital employed. x The effect on the earnings per share, dividend per share, and net asset value per share, if issuing of additional shares are considered: 66

EXERCISE 1.13 The given information for the accounting period 1 March 2015 to 28 February 2016, with comparison figures for the previous period, where applicable, was taken from the books of Park Limited. INSTRUCTION: 1.13.1 Draw up the following ledger accounts, properly balanced or closed off, on 28 February 2016: SARS (Income tax) Appropriation account 1.13.2 Draw up the following Note, as it will appear to the Cash flow statement for the year ending 28 February 2011: Change in working capital 1.13.3 Prepare the section “Cash flow from investing activities” in the Cash flow statement. 1.13.4 Calculate or answer the following on 28 February 2016. Net asset value per share An intended buyer offers to buy your shares in Park Limited at R2,30 per share. Do you think this a reasonable price? 1.13.5 Determine the period (in months) for which enough stock will be on hand, if the goods are sold at a mark-up of 25% on cost price. Park Limited Extract from the Income statement for the year ending 28 February 201 Turnover 545 625 Depreciation 23 000 Interest on money borrowed 12 000 Net income before taxation ? Income tax 76 000 Extract from Balance sheet as at 28 February 2016 2015 Ordinary share capital 1. 378 000 300 000 Retained income 64 800 25 000 Non-current liabilities – Mortgage loan 2. 60 000 60 000 Current liabilities Creditors 3. 37 300 36 100 Bank overdraft - 9 000 Instalment on loan 40 000 30 000 Shareholders for dividends 18 000 7 000 Non-current assets 4. 444 200 380 600 Current assets Stock 91 400 54 100 Debtors 5. 58 500 47 400 Cash 4 000 - 67

Notes: 1. Ordinary share capital Authorised 250 000 ordinary shares Issued 2016: 180 000 ordinary shares in issue 378 000 2015: 150 000 ordinary shares in issue 300 000 2. Mortgage loan on the same day. Repayment of R30 000 was made on 31 Augustus 2015. A new loan of R40 000 was concluded 3._ Creditors 2016 2015 Trade creditors 27 000 32 000 Accumulated expenses 3 500 4 100 SARS (Income tax) 6 800 - 4. Non-current assets 2016 2015 Land and buildings(cost price) 249 800 153 000 Vehicles (book value) 123 600 160 800 Equipment (book value) 70 800 66 800 444 200 380 Equipment of R10 000 was bought during the year, while an old delivery vehicle was sold at book value on 28 February 2016. No equipment was sold and no vehicles bought during the accounting period. An additional warehouse was built during the year. 5. Debtors 2016 2015 Trade debtors 55 000 39 000 Accumulated income 3 500 2 800 SARS (income tax) - 5 600 Additional information: The dividends due on 28 February 2015 were paid in full on 8 March 2015. The interim dividend declared and paid during the year, was R36 000. No shares were repurchased during the year. 1.13.1 SARS (Income tax | 201s y mar |i | Balance bid i 5 600] 786 bslTncome tax 16 000 ‘Voll Pob_bs| Rank cet [*63 600 Balance ld] 6800 76006 716000 Mor |: |Ralance bid| 6 800 68

Appropriation account BP lad Trcome tax “1b c00| 72% esl Aofit and loss acc. | 164 800 Ordinary share St 000 dividend (36000 + (8.006) Retaned income 34 800) (64800-25000) | /69 800 164 300 1.13.2 Cash flow from changes in working capital Trerease in inventory (9/400 —Sy 00) (37300) Trcrease in debtors ((SS 000 + R500) ~ (29000 2800)) (1b 700) Decrease in creditors((21000 +350) —C32000+u10)) | ( S 600) (S54 600) 1.13.3 Cash flow from investing activities Pur chase of non-Current assebs (( 244 00 —/53000) + /o00)| (/06 300) Proceeds from Sales of nen-current asseés 20 200 [380 00 + [0b 800 - 23000 — yyy 200 | 00 Ordinary shareholders’ egucty | 100 1.13.4 Net asset value per share = Aum ber ot shares (Ssued ] ~ S7g000 + 64 go00 x 100 = (30000 Shares | x. HY2 Goo x 100 = 1 30 Ooo i = 2yb cents per share 5 No, the price of R2,30 15 less than the NAV per-share of R2, 4b. ; during the year ata gontce New shurés were issued REA Be old ep gles p oF R260 por Share C eps 7s0.000 R2,60) Average Stocle [P= 1.13.5 Number of month’s stock on hand = Cost ot sales x { £ (54 wo + 91400) x = Sys 62S xg i T2780 ie G3esgoo “| = Bmonths tS 69

EXERCISE 1.14 The following information is taken from the accounting records of Melissa Traders Limited for the years ended 28 February 2015 and 28 February 2016. Melissa Traders Limited has a registered share capital of 500 000 ordinary shares. REQUIRED: 1.14.1 Complete the following Notes to the Cash flow statement for 2016: x Reconciliation of net profit with cash for the year, generated from operations. x Dividends paid. 1.14.2 Determine the increase or decrease in cash for the year without drawing up a complete Cash flow statement. 1.14.3 Calculate the issue price per share of the new shares issued on 1 March 2015. 1.14.4 Calculate the average issue price per share on 28 February 2016. 1.14.5 Comment on the liquidity of the company. Refer to the following ratios. 2016 2015 Current ratio 1,11 : 1 0,79 : 1 Acid-test ratio 0,47 : 1 0,36 : 1 1.14.6 Calculate the period in days for which there is enough inventory on hand. 1.14.7 Calculate the average number of days that the company had to wait in 2016 for debtors to settle their accounts (use average debtors in your calculation). 1.14.8 Cash flow problems are experienced because debtors pay their debts too late. Suggest two methods whereby the management can encourage debtors to pay their debts earlier. 1.14.9 Calculate the earnings per share for 2016. 1.14.10 Calculate the Return on average shareholders’ equity for 2016. Is the return on average shareholders’ equity reasonable? Motivate your answer. INFORMATION: Information taken from the Income statement for the years ended 28 February 2016 2015 Turnover ( R426 320 credit sales included in 2016 figures) 608 820 600 600 Cost of sales 405 880 400 400 Profit before taxation 210 000 154 800 Interest expense: interest on loans 9 750 12 000 Depreciation ? 24 000 Income tax 73 500 54 180 Take note: On 28 February 2015 the average share price was R2,30 on issued shares. On 1 March 2015 a further 110 000 shares were issued. No shares were repurchased during the year. 70

Information taken from the Post-closing trial balance on 28 February 71 2016 2015 Ordinary share capital 704 500 391 000 Retained income 100 000 60 000 Long-term liabilities (15% p.a.) 50.000 80.000 Land and buildings 399 490 204 560 Equipment at carrying value 94 320 122 320 Vehicles at carrying value 138 400 184 540 Trading inventory 103 450 63 350 Debtors control 64 150 52 650 Cash 11 360 - Bank overdraft - 10 000 Creditors control 87 760 90 530 Accrued expenses 16 800 12 750 South African Revenue Service (Income tax) 2 610 (Cr.) 4 140 (Cr.) Shareholders for dividends 54 000 30.000 Take note! A vehicle was sold for cash at carrying value of R12 000, but no vehicles were purchased. No equipment was sold during the year. 1.14.1 Reconciliation between profit before tax and cash generated from operations Profit before taxation 210 000 Adjustments for: 71.890 Qepreciation (28 000 + 63350) 62 Io Trterest paid 9 7S0 Operating profit before working capital changes 2318490 Changes in working capital: (SO 320) Tnereay in inventory (1034.50 — 6339) (Yo [00) Tacrease in debtors ( by iSO — §2 6S0) (11.800) Tr crease increditocs(( 877160 +/6800) ~(90530+/278))| 1 280 | Cash generated from operating activities 231570 Calculation of depreciation: = : 2 ) Equipment: Eqypment at Carrying Value | Ralance Bid j2zz320] Depreciation @83 000) Ralance Cd 94 S20 zz 320 | jz2 320 | Vehicles: Vehicles at Carrying value Balance bid Igy.Syol Aset dispose | 2.000 De p reciation 5 Ralance eld [3g G00 FSGS [xt SHo

1.14.1 Calculation of dividends paid: s horeholders for dividends Fue2e Rank * QzS00) ie © Balance bid 30000 Balance ‘ld Sy 000 |Fyzs Sraiaey shure 946500 ( ————— 126500 shy [26 .S60 Calculation of dividend amount in financial statements: Appropriation account 742 Income bax T3800] RE. PoLt and lngsac. 2I0 000 Ordinary Share 6.500 divi de Y ‘Gs Retained income 40000 Cid0000—60000) 210 000 Z10 000 1.14.2_Change in cash Rank overdratt at the beainnung ot the year (10 000) Favourable bunk balance aE tnd of the year 11366 Dncrease in Cash during the year 21 360 1.14.3. Issue price per share on 1 March 2015: Charge in Ordinary Share capi tal = Jo4uSoo — 39/000 Number of shaits (ssuad aise! Ho 000 Shares = Te 355 = R285 Db shure 1.14.4 Average issue price per share on 28 February 2016: 7 Coie share Capita | = TO. S00 Number 0+ shares 1ssued Gre Bee ue 000) Shares — {oe} % Shares ps Sank a beginnngot yar = paar = ako per sare =! Shes = RO S2 per shore 1.14.5 Comments on liquidity ¢ Current ratio improved trom 079%: ] & Silt ‘Tet is still weaker than the acces te norn7 of Zl, » The acid~test ratio mprovedfrom_0,36:1 Eo Oy 71. ‘Tet is also still under the accep ted “norny of "7%. Although Che lig uidi by oft the Company improved (E15 still nvé af an Tacceptable lyel. The’ comp any paught Lxperi ence. problems in meeting ther short ter OB liga tions: 72

= Average stock y vs 1.14.6 Number of days’ stock on hand Cost ot sales ] — £(633S0 + J03uso) , 3 405 880 J =s SS3yoo 2 36s ~s 4oS B80 } = IS days “ps — _-rerage abotors SoS Credit sales 2 C52 6S0 + 64/50) , B45 y26 are ' = S38 Yoo — 426 320 in = So cae =5 1.14.8 Methods of achieving quicker debtor payment - Offer discount debtors for payments on time. » Impose interest charges on Accounts in arréors - NOt income after Caxation x 12 Number of issued Shares i = 2lo000 ~— 73500 {ao ~ C170 000 + 110000) Shues Ty 136500 _ 100 2Bo00e Shares XI = U8,71S cents per share si § 1.14.7. Debtors collection period 1.14.9 Earnings per share = i = Neb ineme after toxatron ye 1.14.10 Return on shareholders’ equity Average Shareholders" ey uity J es (210 000 — 73500) x & ((3%1000+ 600m) + (704.500 +1000) “> = 13b.S00 x 2 100 627 7S0 = 2 4A Is it reasonable? Yes- Mots, Te is hghr than the Interest rates ottéered anks on Fixed degosit, and money Wmarket nds which 15 7 4S fo . 73

EXERCISE 1.15 Park Ltd is authorised to issue 700 000 ordinary shares. On 30 June 2015, the end of the previous financial year, 450 000 shares were in issue. REQUIRED: 1.15.1 Draw up the following ledger accounts for the period 1 July 2015 to 30 June 2016: x Accumulated depreciation on vehicles x Asset disposal 1.15.2 Answer the following questions: x Determine the number of new shares issued on 1 July 2015. x Calculate the dividend per share for the year ended 30 June 2016. x Explain whether the new shareholders will be satisfied with the dividends for 2016 that were declared, and paid out. 1.15.3 Draw up the Cash flow statement for the year ended 30 June 2016 (show all your calculations). INFORMATION: 1. Extract from Income statement of Park Ltd. for the year ended 30 June 2016 Operating profit before demonstrable expenses 211 620 Expenses (93 120) Audit fees 25 000 Directors fees 40 000 Depreciation on vehicles 20 120 Depreciation on equipment 8 000 Profit before interest expense 118 500 Interest expense (12 000) Profit before taxation 106 500 Income tax (52 500) Net profit for the year 54 000 2. Further shares were issued on 1 July 2015 at an issue price of 70 cents per share. No shares were repurchased during the year. 3. The earnings per share for the year ended 30 June 2016 were 9 cents per share. 4. Interim dividends of R30 000 were paid during the year. 5. On 30 June 2015 Park Ltd. had a loan of R75 000. The loan was increased to R100 000 on 1 October 2015. 74

6. Extract from the Balance sheet on 30 June Assets 2016 2015 Non-current assets 322 000 246 200 Property, plant and equipment 322 000 246 200 Current assets 203 400 152 200 Inventory 116 150 86 200 Debtors 63 000 66 000 SARS (income tax) 5 250 - Cash 19 000 - Total assets 525 400 398 400 Current liabilities 71 000 62 000 Creditors 35 000 28 000 SARS (income tax) - 4 000 Shareholders for dividends 36 000 22 000 Bank overdraft - 8 000 7. On 31 December 2015, Park Ltd. sold its only vehicle for cash, at carrying value, and a new vehicle was purchased. The old vehicle was bought on 1 July 2013 for R80 000. Depreciation on vehicles is written off at 20% per year on the reducing balance. All these transactions were properly recorded. No other assets were bought or sold during the year. 1.15.1 General Ledger of Park Ltd. Accumulated depreciation on Equipment B8 ‘beckil Asset disoosal &t| 33420] Sui || Salance Pd] 28 800 j ec! aDepreciation GI| 5/120 33920 33 920 Fla Depreciation FT| |S 000 Asset disposal B20 [Bee | Vehicles Ga] 80 000 | Beds: /Accunulte dewec. Ga] 33420 on vehicles Rank fa} Ub 080 80 000 0000 75

1.15.2 Number of new shares issued on | July 2015 Lik ty L Total number of Shares in issue — Dee m@mearcer bax, 100 at the end of the year Earns per Share 7 - —S4000 7, Les = x - = 600 000 shares BOO OGO Snares es + Number of new shares issued = 400 000 — 4. S000 = 150000 Shares, Dividend per share for the year ended 30 June 2016 Total dwidend declared and paid x 182 Number of shares in 1Ssue | = 30000 + 326000 100 600 000 acer = It cents per share, Will new shareholders be satisfied with the dividends for 2016 that were declared, and paid News Shares wert issued af an issue price of 70 cents per share iving a return of —lcentS § j00 AG) Jocrts *~ | = (S04 Remarks 7 Shareholders will be Ssatstied aS this is higher than the interest rate of #4,.5% offered by banks on fixed deposrts and money market accounts. Calculation of cost price of new vehicle: | Jul 201% ~ 30Tun 20'S! C80 000 —/6000) x 52 x4z = /2 800 Depreciation on new vehicle! " (20120 —Siz20) = [S000 ~ Put the cost price of the new vehicle aS 2 20 5 BS es Re, = eS oe 00 |2 y= IS 0OX BD XZ = 00 x= [SO 000 Depreciation on old velnucle 22 12 _ 14000 Railance da | Tul 2013 —30Tun 204! (Zoooo — o)X to XTx = | Tuly 20H lal 76

Park Ltd Cash flow statement for the year ended 30 June 2016 Cash flow from operating activities Notes. Y 20 Cash generated from operations i. [126670 Trterest paid (12 000) Dividends paid (22 000 + 30 000) x [| ($2 000) “Tracome tax paid (4000452500 + § 250) 3. | (61750 Cash flow from investing activities a oO 20 Purchase of non-Current asseés CIS© 000 Proceeds from sale of non—current assets 4b 080 Cash flow from financing activities 130 000 Proceeds trom Shares issued (IS0 000 x 0,7) [05 000 Tnecreage in loan (100 000 ~ 75000) 25 000 Net change in cash and cash equivalents 27 000 Cash and cash equivalents at beginning of the year C 8 000) Cash and cash equivalents at the end of the year 19 000 Notes to the cash flow statement: 1. Reconciliation between profit before taxation and cash generated from operations Profit before taxation /06 Soo Adjustments in respect of: 4.0 120 Depreciation (20120 + $000) 2ZRszo Trterest expense /2000 Operating profit before changes in working capital [ & & 620 Changes in working capital: C 19 950) Trcrease in inventory (1/6150 — 36200) (2.9 480) Becréase in debtors (64 000~ 63600) 3 000 Tncrease in crea tors ( 35000 — 28000) 7000 Cash generated from operations /26 670 2. Dividends paid = 22000 +f 30 000 tt $2000, Final dividend trom Previous year # Lateérim dindend B ares Current yea be 3. Income tax paid (Trtopae EaX) eRe go Bank , 25, Balance Hol 4 000 Eee so Income Lax 52500 Ralance Cfo SS 250 bi 180 77

EXERCISE 1.16 The following information was taken from the financial statements of Park Ltd. REQUESTED: 1.6.1 Prepare the following: The Note for the reconciliation between the profit before the tax and cash generated from operations. The Cash flow statement for the year ended 28 February 2015. 1.6.2 Calculate the following for 2015: Current ratio Acid test ratio Net asset value per share Debt/Equity ratio (Gearing ratio) 1.6.3 Explain why the directors have decided to reduce the long term loan worth mentioning, to such extent during the present financial year. Was it, according to you, a wise decision? Explain, by producing proof (figures/financial indicators) from the question. 1.6.4 Comment upon the returns on the shareholders’ equity, earnings and dividends of the shareholders. Produce proof (figures/financial indicators) from the question. 1.6.5 Show the note for Retained income in the Balance sheet on 28 February 2015. 1.6.6 The present shareholders are unhappy about the price at which the additional shares were sold. Discuss by producing ONE figure or financial indicator to support your answer. INFORMATION: 1. Extract from Income statement R Depreciation 33 500 Interest-expense 164 450 Net profit before tax 844 300 Income tax (30% of net profit) ? 2. Ordinary share capital on 28 February 2015 R 210 000 shares in issue at beginning of the year 1 302 000 90 000 shares issued during the year at R6,73 per share 605 700 60 000 shares repurchased during the year (372 000) (average issue price R6,20 per share) 240 000 shares in issue at end of the year 1 535 700 78

3. Balance sheet 28 Feb. 2015 28 Feb. 2014 Asset Non-current assets 2 568 795 3 117 500 Fixed asset at carrying value 2 418 795 2 967 500 Fixed deposit: ABSA 150 000 150 000 Current assets 318 750 231 250 Stock 251 250 110 250 Trade debtors 60 000 76 000 Cash and cash equivalents - 45 000 SARS (income tax) 7 500 - Total Asset 2 887 545 3 348 750 Equity and liability Capital and reserves 2 197 910 1 543 000 Ordinary share capital 1 535 700 1 302 000 Retained income 662 210 241 000 Non-current liabilities 300 000 1 525 000 Loan: ABSA at 15% p.a. 300 000 1 525 000 Current liabilities 389 635 280 750 Trade creditors 266 585 220 475 Bank overdraft 46 250 - Shareholders for dividends 76 800 52 525 SARS (Income tax) - 7 750 Total equity and liabilities 2 887 545 3 348 750 4. ADDITIONAL INFORMATION: 4.1. Shares were repurchased on 31 August 2014, after the interim dividend was declared, at a price of R6,35 per share. The additional new shares were issued on 1 October 2014. 4.2 Fixed assets were sold for R900 000 cash at carrying value. 4.3 Earnings and dividends per share as follows: 2015 2014 Earnings per share 246 cents per share 80 cents per share Total dividends 72 cents per share 47 cents per share Interim dividends 40 cents per share 22 cents per share Final dividends 32 cents per share 25 cents per share 4.4 You are also presented with the following financial indicators: 2015 2014 Return on average shareholders’ equity 31,6% 11% Return on average capital employed 21,2% 5,5% Debt / Equity ratio ? 0,9 : 1 Net asset value per share ? 735 cent 4.5 The price of the shares on the Johannesburg Security Market (JSE) varied between 680 cents and 780 cents over the past year. 79

1.16.1 Reconciliation between profit before tax and cash generated from operations Net profit before tax Say 300 Adjustments: 197 4S0 Depreciation 33 S00 Tnterest expense 164 4SO Operating profit before changes in working capital | 042 250 Changes in working capital ( 78 89 0) Tnerease in inventory (251250 — 1/0250) (141 000) Decrease in deters (76 000 — 40 000) 16 000 Tnerease in creditors (2 66 58S — 220475) “bil 0 Cash generated from operations g 633 60 Cash flow statement for the year ended 28 February 2015 Cash effects of operating activities 34 3 845 Cash generated from operations 963 360 Thteres& paid : (iby 480) Dividends paid (Sr S2S + Sy 000) (136 S25) Trreome tax paid (1150+ 253240 + 7500) (268 S4s) Cash effects of investing activities £3-947S500—= 400 G00. \ Pag 208 Purchase of fixed agsets EK 33s00 —2y/874s/ (384 795) Proweds fomsalé of Fixed agse és 900 000 Cash effects of financing activities ( | 000 300) Praceeds from scale of shares (40 000 xk 6, 73) 60S Joo Repurchase of Shares (60 000x Rb/3S) (381 000) Payment on loan (| S25 000 ~ 300 000) (1228 000) Net change in cash and cash equivalents b 4 | 250) Cash and cash equivalents at the beginning of the year us 000 Cash and cash equivalents at the end of the year ( Lb 2.50) Fixed assets at carrying value Oo A261 500\|Asetdisoom| 400 000 Ralrit Mt de rcheink 223.500 Bonk Bal ance d2Usd Te 3 382248 3.352 248 80 80

1.16.2 Calculate the following: Current ratio: Current agsetS + Current labiltes 219 750 : 384 63S 0,82 ¥ | — Acid-test ratio: Current assets — inventory : Current liabs lees 213 750 — 2812S0 3849 6385 67 s00 * 389635 O17 tt Ordinary Shareholders! eguity , pee Number of Sharésin issue * = oR ba iba ©) x 192 240 000 Sharés ] Net asset value per share: Gib cents per share Debt/Equity ratio: Non- current liabilities + Shareholders! eg usty 200 000 : 21979/0 0,14 * | ——_—_—_——_? 1.16.3 Explain why the directors have decided to reduce the long term loan, worth mentioning, to such an extent during the present financial year. Was this, according to your opinion, a wise decision? Explain by producing proof (figures and financial indicators) from the question. f . . Yes he return on shareholders eg aity increased from II 4, to 3b/. . return an coprtal employed increased from S,S% 0 21,270 and iS Now greater thanthe interest on loans oF /27. . » debt / eg ur ratio Increased From 0)ag71 to O14 +t and shows a lou risk Sréuation. . ~The Saving on interest increased the profi€ as Shown by the earnings per share which incr eysed frorn 80 cents per Chare ho aye cents per Share. 81

1.16.4 Comment on the return on the shareholders’ equity, earnings and dividends earned by shareholders. Produce proof (figures/financial indicators) from the question. Return on the shareholders’ equity: » ROSE Increased from i % to 31, 6A. » This 1S Much higher than interest rates o Hered by banles on fixed deposits and money markel- funds of + 4,SA- Earnings per share: - EPs increased from 80 cents to 24.6 ents per share. This Compare favourable with the net asset Value per share of 1b cents per Share. Dividend per share: ~The DPS increased fom 47 cents to 12 cents per share . » The company stillretams profits for expanding and saprilved nde of infra Sie TAIS ta ptagse| the nek asset value of the shares - 1.16.5 Retained income R Retained income at beginning of the year 2L-l OOO Net profit after taxation ( Sule 300 ~ 283 2490) S41 010 Retained income on 60 000 shares repurchased (60000x (Rb ,35 —R4,20)) C4 000) Dividends a 608 00) Interim C2lo 000 X O, ¢) &Y. 000 Final (240 000 X 0,32) “16 800 Retained income at end of the year 6622/0 1.16.6 The present shareholders are unhappy about the price at which the additional shares were sold. Discuss by producing ONE figure or financial indicator to support your answer. 1 lower than the » The shares were issued at Rb,73 which is NAV of R735 or R416; Chis Indicates that Current shareholders were harmed. ~The price 15 also lower than the market price of between R6,80 and 7,80 also indicating that existing shareholders were harmed. 82

EXERCISE 1.17 You are provided with information relating to Park Limited, a public company. REQUIRED: 1.17.1 Prepare the Appropriation account on 28 February 2015. 1.17.2 Complete the note for Retained income in the Balance sheet on 28 February 2015. 1.17.3 Complete the note for reconciliation between profit before tax and cash generated from operations as well as the Cash flow statement for the year ended 28 February 2015. 1.17.4 Calculate the following for 2015: x Rate of stock turnover x Debt/Equity ratio x % return on average shareholders’ equity 1.17.5 The Cash flow statement reflects some important decisions that have been taken by the directors during the current financial period. State THREE of these decisions and explain the effect on the company. Quote figures to support your answer. 1.17.6 One of the directors is of the opinion that the company should make more use of loans. Do you agree? Quote TWO relevant financial indicators to support your answer. 1.17.7 The directors feel that the shareholders should be satisfied with the performance of the company. Do you agree? Comment on the dividends, earnings and % return earned by the shareholders in the 2015 year. Quote financial indicators (actual ratios or percentages) to support your comments. INFORMATION: 1. The following financial indicators were calculated: 2015 2014 Earnings per share 142 cents 156 cents Dividends per share 110 cents 126 cents Return on average capital employed 40,4% 35% Return on average shareholders’ equity ? 43,2% Net asset value per share 290 cents 249 cents Debt/Equity ratio ? 0,7:1 2. Extract from the Income statement for the year ended 28 February 2015: Cost of sales 1 640 000 Depreciation 168 000 Interest expense 132 900 Net profit before tax 850 000 Income tax 225 000 3. Note to the Balance sheet on 28 February 2015 Ordinary share capital on 28 February2015 R 400 000 shares in issue at the beginning of the year 960 000 100 000 shares issued during the year at R3,10 per share 310 000 60 000 shares repurchased during the year (152 400) (average issue price of R2,54 per share) 440 000 shares in issue at end of the year 1 117 600 Take note! x The new shares were issued on 1 September 2014 after the interim dividend of 68 cents per share was declared. x Shares were repurchased 1 February 2015. This was before the die finale dividend of 42 cents per share was declared. 83

4. Extract from the Balance sheet on 28 February 2015: 2015 2014 Ordinary shareholders’ equity 1 276 000 995 800 Ordinary share capital 1 117 600 960 000 Retained income 158 400 35 800 Long-term liabilities (15% p.a.) 125 000 700 000 Investment in fixed deposit 120 000 400 000 Inventories(all trading stock) 230 000 180 000 Debtors 160 000 120 000 Creditors 126 000 76 000 Bank overdraft ? 690 200 Fixed/tangible assets 2 300 000 2 100 000 SARS- Income tax 12 000 (Dt.) 18 000 (Kt.) Shareholders for dividends 184 800 320 000 Note! A vehicle was sold at carrying value, R294 000 on 1 May 2014 and a new vehicle was bought. 1.17.1 Appropriation account TOR hslLrcome tax 225000 |S be Profit and loss acc. | 850000 Ordinary share deviderds 456 800 Retained income [68 200 850 000 BS0 000 1.17.2 Retained income Retained income at beginning of the year 35 3800 Net profit after tax for the year € 850000 — 22S 000) 62S 000 Retained income on .4.9.9° ., shares repurchased (4S 600) Dividends (4S6 300) Interim (400000 x 0,68) 272 000 Final (4.0000 x 0,42) [84 300 Retained income at end of the year ($8 400 1.17.3 Reconciliation between profit before tax and cash generated from operations Net profit before tax SSO Coo Adjustments for: 300 900 Depreciation 168 000 Snterest expense 132 700 Operating profit before changes in working capital 11S0 Joo Changes in working capital (0 000) Tnerease in inventory (230 000— (80 000) (50 000) Sncrease in debtors (/60000 ~ /20 000) (40 000) Tnurease in Creditors (126000 — 76000) 50 000 Cash generated from operations {110 9700 84

Cash flow statement for the year ended 28 February 2015 Cash flow from operating activities 13| 000 Cash received from operations / 110 900 Interest paid (132 400) Dividends paid (320 C00 + 272 000) (54 2 000) Income tax paid (18 000 + 225000 + 12.000) (255 000) Cash flow from investing activities ( 38 000) Purchases of non-current assets Q 100 000 — [68000 ~294.000- 2.3000) rs 662.00 0) Proceeds of sale of non-current assets 294.000 Proceeds from decrease in investment (400000 — 120000) _ 280 000 Cash flow from financing activities ( 463 000) Proceeds from shares issued 310 000 Repurchase of shares (/S2 400 + 4S 600) (198 000) ‘Payment wn loan (100 000 —/25 000) (S71S 000) Net change in cash and cash equivalents (4420 000) Cash and cash equivalents at beginning of the year (690 200) Cash and cash equivalents at the end of the year "4 [Ho 200) Cost ot Sales Clvereas stock / “640 000 = (180 000 + 230 a00) 640 600 2oOS 000 BS times per year 1.17.4 Rate of stock turnover: = Non- current. liabilities * Shareholders! equity Debt/Equity ratio: [28 000! 1/276000 OO; 01-2] ——_—*_&8 Net profit after tax 100 Percentage return on average shareholders’ equity: = Average shareholder s! equity x ! 8S0000 —22S 000 is 190 £ (995 goo + 1276000) 625 000_ ,/00 1135 400 ] 55,02 % 85

1.17.5 The Cash flow statement reflects some important decisions that have been taken by the directors during the current financial period. State THREE of these decisions and explain the effect on the company. Quote figures to support your answer. *Tssued newsshares ~ generated R310009 ¢0 try and improve Cash Flow. Sold fixed assets - generated R244.000 but this decreased infrastructure and can have a negative influence on prof tabi lity in the “Esters Decreased inveckment — Ganerated R2zg0000 tp try and improve cash flow bu interest (income will be lost. ¢I » Bouahit-Fixed assets ~ Spent. RO62.000 which has neqative, influence on cash tla This will however better infrastracture andl wr have a positive influence on profitabi Ii'ty tin the future. I Z ; Paid loan —Spent RSS 000 which influence cash flow negative but will resu in huge Savings on interest exoense - * Repurchase shares Spent R198 000 which will have a pos Lie influence on NAY. 1.17.6 One of the directors is of the opinion that the company should make more use of loans. Do you agree? Quote TWO relevant financial indicators to support your answer. Yes, - The debt /equity ratio decreased from, 0,1:| to o,orrt » Retum on capital a plied iS YOu and exceeds the intérest€ on loan of IS% Showing a positive geartng - - Shareholders equity exceeds long term liabilitres and the risk gituation decreased. 1.17.7 The directors feel that the shareholders should be satisfied with the performance of the company. Do you agree? Comment on the dividends, earnings and % return earned by the shareholders in the 2015 financial year. Quote financial indicators (actual ratios or percentages) to support your comments. Yes/No. “Dividends per share decreased from 12b cents Eo M0 cents per shore - Earnings per share decreased from 156 cents to 142 cents per share. TI centage return on shar eholders| ur increased fora 43 2% to bagi we pete the return of inane: ve investments at banks of £4,642. “The dividends per share were 32 cents lower than the earnings per Share which means the company (Ss retain furds for expanding infrastructure which will resalé tn & higher net asseé value per hare . 4 86

EXERCISE 1.18 You are provided with information relating to Park Limited for the year ended 30 June 2015. REQUIRED: 1.18.1 Concepts relating companies are given in Column A and descriptions in Column B. Choose a description from Column B that matches a concept in Column A. Write only the letter next to the question number in the space for the answer. Column A Column B 1. Liquidity A. Indicates the benefit that the owners receive from their investment in the business. 2. Solvency B. Indicates the extent to which a business is financed by borrowed capital. 3. Gearing C. Indicates whether the business can pay off immediate debts. 4. Return on equity D. Indicates whether the business will be able to pay off all its debts. 1.18.2 Refer to the Note for Fixed assets (Information C) and the Cash flow statement (Information D) for the year ended 30 June 2015, and prepare the Asset disposal account. 1.18.3 Refer to the Cash flow statement (Information D). x List the THREE most significant decisions that the directors made during the year. Quote figures from the Cash flow statement in each case. x Comment on any TWO interesting points indicated in the Cash flow statement. Quote figures to support your answer. 1.18.4 Refer to Information B. Calculate the following financial indicators on 30 June 2015: x Operating profit on turnover x Acid-test ratio x Earnings per share 1.18.5 Comment on the operating efficiency of the company for the year ended 30 June 2015. Quote TWO financial indicators or figures to support your comments. 1.18.6 Comment on the liquidity of the company for the year ended 30 June 2015. Quote THREE financial indicators or figures to support your comments. 1.18.7 Comment on the returns, earnings and dividends earned by the shareholders. Quote THREE financial indicators or figures to support your comments. 1.18.8 Refer to the newspaper article (Information E) and answer the following questions: x Voice your opinion on the attendance of shareholders at the AGM. x What is meant by a qualified audit report? Explain. x How does this type of report affect the company and the shareholders? Explain. x Why did the independent auditors issue a qualified report in respect of this asset? Explain. x Explain why several of the shareholders would think that the long-term prospects of the company are being threatened. Mention corporate governance in your answer. 87

INFORMATION: A. Figures extracted from the financial statements on 30 June 2015: Sales 2 730 000 Depreciation 560 000 Operating profit 650 000 Interest on borrowed funds 210 000 Net profit before tax 440 000 Net profit after tax 308 000 Ordinary share dividends 390 000 Ordinary share capital (average issue price of R2,00 per share) 3 000 000 Loan from ABSA (14% p.a.) 2 800 000 Current assets 610 000 Trade stock 410 000 Trade and other receivables 180 000 Cash and cash equivalents 20 000 Current liabilities 360 000 Trade and other payables 150 000 Shareholders for dividends 210 000 B. The following calculations were done in respect of the past two financial years: 2015 2014 Operating expenses on turnover 28,6% 33,1% Operating profit on turnover ? 17,5% Net profit after tax on turnover 11,3% 8,2% Return on average shareholders’ equity 8,6% 7,2% Earnings per share ? 18 cents Dividends per share 26 cents 12 cents Return on capital employed 12,8% 22,1% Debt-equity ratio 0,7:1 0,4:1 Current ratio 1,7:1 1,9:1 Acid-test ratio ? 0,7:1 Period of stock on hand 136 days 85 days Debtors collection period 23 days 30 days Creditors payment period 38 days 42 days C. Fixed Assets Total Land and Equipment buildings Carrying value-beginning of the year 2 360 000 792 000 1 568 000 Cost price 3 592 000 792 000 2 800 000 Accumulated depreciation (1 232 000) - (1 232 000) Movements Additions 4 858 000 4 100 000 758 000 Disposals (1 March 2015) (370 000) - (370 000) Depreciation (560 000) - 560 000 Carrying value-end of the year 6 288 000 4 892 000 1 396 000 Cost price 7 058 000 4 892 000 3 066 000 Accumulated depreciation (1 670 000) - (1 670 000) 88

D. Cash flow statement for the year ended 30 June 2015 Cash effects of operating activities 738 000 Cash generated from operations 1 370 000 Interest paid (210 000) Income tax paid (132 000) Dividends paid (290 000) Cash effects of investing activities (4 348 000) Fixed assets purchased (4 858 000) Fixed assets sold for cash 370 000 Investments redeemed 140 000 Cash effects of financing activities 3 580 000 Proceeds of issued shares 980 000 Loans raised 2 600 000 Cash surplus/deficit for the year (30 000) Cash and cash equivalents at the beginning of the year 50 000 Cash and cash equivalents at the end of the year 20 000 E. As a shareholder of Park Limited you did not attend the Annual general meeting (AGM) and noticed the following article in the local newspaper. Several shareholders of Park Ltd. accused the directors of unwise decisions that in their opinion would threaten the long-term continuation of the company. Only 80 of the 6 000 shareholders of the company attended the AGM. The company received a qualified audit report from the auditors based on an amount of R3,5 million that had apparently been spent on a luxury residence on a golf estate in the Southern Cape. The directors’ report stated that this asset was reflected in the company’s Balance sheet and was used for business purposes to accommodate business partners from overseas countries. The local newspaper has found that this property was in fact being used for holiday purposes by the CEO and senior directors. The CEO was also criticised for accepting a 45% increase in his remuneration. He defended the decision, saying that all remunerations in the company are reviewed by the board of directors which is appointed at the AGM each year. 89

1.18.1 In Column A are a number of concepts on companies and in Column B are descriptions. Column A Column B 1. c 3. 8 4. a 1.18.2 Asset disposal 2Ufireh! | Equipment 492 000 | “BB yt Accumulated deprecia-| /22 200 Lion an egujoment Bank s 376 000 | 49Z 000 492000 1.18.3. Refer to Cash flow statement (Information D). € List the THREE most significant decisions that the directors made during the year. Quote figures from the Cash flow statement in each case. > Fixed assets putchaged for K-4 G58 000 > Loans incurred fer R2 600000 -P Shares (issued at 'e9G0000 &€ Comment on any TWO interesting points indicated in the Cash flow statement. Quote figures to support your answer. PA big increase in fired asses (hy ¢5¢ 000) showld have > Operating ote gactated a fontive castf low of R13 1000 © interest, dwidehds and LAX were fla. . +The decrease of cashflow from 50000 to fi20000 Ca be of Great worry, especialy 425 /nyestents also HEC e4SE with f2/Y0 000. 1.18.4 Refer to Information B. Calculate the following financial indicators on 30 June 2015: & Operating profit on turnover = 50 006 Z 730 coo ae = 2384 € Acid-test ratio nw (610 000-410 000) ; 360000 : 0,56 3; | ——_—_ & Earnings per share = 4 308 000 |500 000 Shares 20,5 cents per Share. 90

1.18.5 Comment on the operating efficiency of the company for the year ended 30 June 2015. Quote TWO financial indicators or figures to support your comments. - Current expenses on sales has impraved from 23/h to ze,bh which jnaitate beter confro/ ane a as oe chine 1S . Goerating profit has improved from 175 fo 8 fos © 4 indice that the ple, Htabihti of the eg) ven «Net profit after baxation improv from 9,20 bol, 3 bs 9 indicates that the propicability improved, even after tax and Interest WHE paid. 1.18.6 Comment on the liquidity of the company for the year ended 30 June 2015. Quote THREE financial indicators or figures to support your comments. ‘Inventory period weakened from 95 days to 136 days. This can pue pene a the pr as sto {s $0 GG @ sw sigs ‘Debtors collection period improved from go tozadays. Ts MEP Cashflow in a positive way as debtors how py ae 'Creditor's settlement period weakened from 4zdays @ 36cA/s. check usure, the company beeps good Se oo these figures shauld be checkes against the obeyt terms of the Ml Siac + Current ratio slightly weakened from hGit bo yTih | Singers ratio eh tay” improved from abil to ® Tel 47G.uidl , hol "9 y , in Li 1.18.7 Comment on the returns, earnings and dividends earned by the shareholders. Quote THREE financial indicators or figures to support your comments. Return on shareholders equity improved from 72% to %6%, This is siighth higher than the a Mb at banks, but still not goed Hot Wt satisfied shareholders because of the risk- Factor business invest mene, - EPS improved from ('ecents to 20,5 cents por ehare . “DPS improved from i2ceats to 26 cents per share. +> Although these indicators hay an Improvement, the sharehofaels will nob be satisfied, 4S more dividends are pid out than carhed. Ths indicates that prefies are not. withheld for future improve Ment or expanding. 91

1.18.8 Refer to the newspaper article (Information E) and answer the following questions: e Explain your opinion on the attendance of shareholders at the AGM. -» Sharcholjers should all be present at the AGM. + All shareholdes appolut: the directors at Che fiM 5 the directors are the dicision makers a the company / bussuess, + Very important dtcisions are. made at the HUM. What is meant by a qualified audit report? Explain. Tt means that independent auditors found aspects of concern with regards to the financial statements and mentions se in ther audttor’s report. How does this type of report affect the company and the shareholders? Explain. Vv Some aspects Financial statements camot be Cop ended on for making ale cl'SIOns. + The company can get a bad peputation and that can hflucnce their abiity obtain further capital Why did the independent auditors issue a qualified report in respect of this asset? Explain. > They ave not Satisfied that it is a real current eset. —plhe directors miss represented the asset in the Balance sheet and in the report of the direccars, +The. directars ‘havea benefit cut. o Chis ass that Myst be dedated asa renumeration in the financial statement which can have a eaulfmplication. e Explain why several of the shareholders would think that the long-term prospects of the company are being threatened. Mention corporate governance in your answer. + A considerable eset (5 Purchased that will not benefit the company in future — Joans are taten cut to finance it aud interest will be paid on the (eat, + The CFO is wiven @ 6°% factease 1 Hite of the company not achieving the last few years 92

EXERCISE 1.19 You are provided with information relating to Park Limited for the year ended 30 September 2015. REQUIRED: 1.19.1 Prepare the SARS (income tax) account in the General ledger. 1.19.2 Prepare the following on 30 September 2015: x Notes to the Balance sheet for: Retained Income Trade and other payables x Equity and liabilities section of the Balance sheet 1.19.3 Calculate the following on 30 September 2015: x Net asset value per share x Debt-equity ratio 1.19.4 You were one of the original shareholders who bought shares at an issue price of R3,00 per share when the company was established many years ago. You are also aware that the price of the shares on the JSE is currently R5,75. Refer to Information 2.2 below. Would you be happy with the issuing of the new shares on 1 April at an issue price of R5,80 per share? Explain TWO points, quoting figures or financial indicators to support your answer. 1.19.5 Comment on risk and gearing of the company. Explain TWO points, quoting figures or financial indicators to support your answer. Apart from the financial indicators calculated above, you are also informed of the following: Return on total capital employed 23% Interest rate on loans 13% to 15% INFORMATION: 1. Extract from the financial records of Park Ltd. on 30 September 2015: Balance sheet accounts section Retained income (1 October 2014) 960 000 Creditors control 87 500 Expenses payable (accrued) 50 400 Bank overdraft ? Nominal accounts section Interest on loan 103 600 Rent income 105 980 Ordinary share dividends 112 000 93

2. Adjustments and additional information 2.1 The income tax details are as follows: & The amount owed to SARS on | October 2014 2.00.0... R11 000 & The amount owed to SARS in respect of the previous financial year was paid on 30 October 2014. & The total tax assessment for the 2015 financial year ........... eee eee eeeeeeeee R243 600 € First provisional tax payment made on 31 March 2015 ... R115 000 & Second provisional tax payment made on 28 September 2015 ? & Amount owed to SARS on 30 September 2015 R19 400 2.2 800 000 shares have been in issue on 1 October 2014 at an average issue price of R3,00 per share. On | April 2015, 100 000 new shares were issued at an issue price of R5,80 per share. 2.3. Net profit after tax for the year is R626 400. 2.4 The loan statement received from ABSA reflected the following: Balance at the beginning of the year ........ 0... e cece eee cee ee eec eee eeeeeeeeeeenee R880 000 Interest capitalized for the year ... R103 600 Monthly payments to ABSA (capital plus interest) .............. eee R15 800 Balance at the end of the year .......... cece eceece eee cneeeeeeeeeeeeeeeeeeeeeeaeeeaee ? In terms of the loan agreement, fixed monthly repayments of capital plus interest are paid until the loan is settled. 2.5 Rent income for October 2015 was received in September 2015. The rent was increased with R820 per month on | July 2015. 2.6 A final dividend of 20 cents per share was declared at the end of the year. 2.7 The total current assets of the company amounted to R846 900. 2.8 The current ratio for 2015 is 1,8: 1. 1.19.1 SARS (income tax) Tog “ck 201 Rank 11000 | “Bc |i | Balance Sid] 11 O00 t 2015 hil Rank [LS 000 || 22:3. gol Lrcome tax 2y.3 600 Sept. | Ran k * | 109 200 Bo| Ralance fd 14 Yor 243 boc 24.3 600 94

1.19.2 Notes to the Balance sheet Retained income Retamed income at the beginning of the year 960 000 Net profit after tax 626 400 Dividends (2:42 000) Interim (12.000 Final (400 000 X 6,2) 130 000 Retained income at the endof the year- 12.9% 400 Trade and other payables Trade creditors Bl SCO Accrued expenses 50 400 Tneome received in advance 8 720 SARS (Income tax) 19 400 Shareholders for dividends 130 000 346 020 Balance sheet of Park Ltd on 30 September 2015 Assets Fixed assets 4 606 000 Current assets 846 900 Total assets 5 452 900 Equity and liabilities Shareholders’ equity [ae 274 Loo Ordinary share caprta/ (2 4.00000 + 530000) | 2 930 000 Retained income: | 294 4L00 Non-current liabilities 703 000 Loan: Asn (880000+ (08 600 ~ (15 s00x12)~Rb000)| 703 000 Current liabilities (5 452 900 — 4274 yoo - 703000) L770 S00 Trade and other payables 3yb O20 Short term section of (oan :AbsA (USB00xIz)-103b0\| 86 O00 Bank overdraf t (470 S00 ~ 24.6020 ~¢b000) ¥ 38 480 Total equity and liabilities § YSZ 900 Rent income: Set rent ab %X +, Go ty (+820) = (05480 13x = /02 700 x= 1900 ———s ¥, 1900+ 820 = 3720 +» 95

1.19.3 Calculate the following on 30 September 2015: / . Ordinary shareholders’ eguity | 100 e Net asset value per share = Number of | oi Ty issue x ; s 4 24 Yoo 100 - 900 000 Shares x~ = 474,94 cents per Shure | = Non current liabilities + Shareholders epui Jow000 +4 274 400 Oya as e Debt-equity ratio 1.19.4 Would you be happy with the issuing of the new shares on 1 April at an issue price of R5,80 per share? Explain TWO points, quoting figures or financial indicators to support your Yegi- The issue price of RS,30 is higher thar, the NAV ot Ry1s and usill tacrease the yalue. even more. — The issue price of RS,8 is also close to the market price of R575 and thus represents a realistic value . ~The shareholders Hat purchased the shares when the | hares a was founded book a risk b buy ing the S at a,e0 per share - the new shes ldhiees did not hae the initial risk and 1S Nous prepared to pay a realistic R&,7S per share . 1.19.5 Comment on risk and gearing of the company. Explain TWO points, quoting figures or financial indicators to support your answer 2 The debt /eq uty ratio of 0,175) fs fous whith indicates that the conpany is not financed by much debt. TE (5 low geared and ina low-risk profile . The return on capital employed of 23% exceads the interest rate on loans of between (2% and Sh , indlicabing that the Company can Increase shareholders’ Feturns By making uge of borrowed funds. 96

EXERCISE 1.20 You are provided with information relating to Absolut Limited. The financial year-end is 28 February 2015. REQUIRED: 1.20.1 Use the information below to prepare the Balance sheet on 28 February 2015. All workings must be shown in brackets. The Notes to financial statements are not required. 1.20.2 The managing director currently owns 45% of the issued shares. The board of directors has decided to issue the unissued shares to the public. The managing director wants to use this opportunity to gain control of the company. x How many shares will he have to buy to gain control over the company? x He plans to purchase the shares at R2,00 per share without advertising it to the public. The current market price of a share is R3,10. If you were a shareholder in this company would you be satisfied with the arrangement? Explain. 1.20.3 Absolut Limited has donated funds to build a high school in the community and they have spent considerable amounts in cleaning up a river and a forest area which had been neglected. x Explain why companies like Absolut Ltd. are expected to be involved in such projects. x Explain how the directors should reflect these projects in the annual report which is published for shareholders. 1.20.4 Audit report x What is the purpose of an independent audit report and who is it addressed to? x Explain the difference between a qualified and an unqualified audit report. x The independent auditors want to qualify the report. List THREE consequences there could be for the company or its directors. INFORMATION: 1. The authorised share capital comprises of 1 000 000 ordinary shares. On 28 February 2014, 600 000 ordinary shares were in issue at an average issue price of R2,00 per share. During the financial year another 200 000 shares were issued at an issue price of R2,70 per share. 2. The following balances appeared in the books on 28 February 2015: x Land and buildings at cost, R1 800 000 x Equipment at cost, R300 000 x Creditors control, R720 000 x Debtors control, R530 000 x Creditors for salaries, R36 000 x Accrued income, R24 000 x Cash, R66 000 3. One of the fixed deposits, R175 000, matures on 30 September 2015. Die rest matures in 2017. 4. A loan of R1 500 000 from ABSA was originally received on 1 March 2013. This loan is to be repaid in equal monthly instalments over 5 years. 5. All the equipment was purchased on the same day, 1 October 2012. Depreciation is done at a rate of 20% p.a. on the cost price. 6. The following financial indicators apply at the end of the financial year: x The net asset value is R2,58 and the price on the JSE is R3,10. x The current ratio is 1,5 : 1. 97

1.20.1 Absolut Limited Balance sheet on 28 February 2015 Assets Non-current assets (3 120 000- 1S8y 000) 2 136 000 Property, plant and eq wament-(/300000+200000- 145000) | | ISS 000 Financial assets es Fixed deposit (2136000 — 1 9SS 000) 131 000 Current assets fa OS6 000 x I iS) | S84 000 Lrventory Ci 584.000 ~SS4000 ~ 241000) 1&4 000 Trade- and other debtors (S30 0004 24 060) SS 000 Cash and cash equivalenés (66000 175000 241 000 Total assets e 3 720 000 Equity and liabilities Ordinary shareholders" equity (C300 000 XR2,58 ) 2 06 000 Ordinary share capital ((600 000x R2,0) +(zo000c0xRz, MT | 14-0 000 Retained income ((g00000x R288) — (740000) 324 000 Non-current liabilities 500 000 Loan: ABSA(CI S00 000 — 600 000) — 300000) 600 000 Current liabilties { OS6 000 Trade ond other creditors (120000 + 36000) 1S6 000 Short term section of loan: Aesa (1500000 +S) 300 000 Total equity and Liabilities 3 720 d00 1.20.2 The managing director currently owns 45% of the issued shares. The board of directors has decided to issue the unissued shares to the public. « How many shares will he have to buy to gain control over the company? +He currently owns YS% of B00000Shares thus 360000 shares. He must own Soft! of /000000 Shares thus Soo 00! Shares. 1 He must buy another 14000) Shares. « He plans to purchase the shares at a price of R2,00 per share without advertising it to the public. The current market price of a share is R3,10. If you were a shareholder in this company would you be satisfied with the arrangement? Explain. * This 's a public Company and therefor shares Should be presented ty the public at the market price of R310 which will arn an intome of Rb20000. IR Ii be receives : . 00 000 Wi Ata price of R2,06 ccna dent Other shareholders ‘ok the manaain seg OO ee be the lowering of the NAV of the shares. 98

1.20.3. Absolut Limited has donated funds to build a high school in the community and they have spent considerable amounts in cleaning up a river and a forest area which had been neglected. Explain why large companies like Absolut Ltd. are expected to be involved in such projects. +The Kin i fade EG UITES economjcal, social and enviromental ae ae vaiiies rely on commumbes 20 manta thefr rabege ihe fas that. they give back te the comprurity, 1S yerypore ¢ Explain how the directors should reflect these projects in the annual report which is published for shareholders. . ’ The cast of the projet should be highlighted th the LraMme State ment a the Obes to thé Phancfal ge sane / j cle tHe frrancia, +The directors should tnform readers of he ef peels Statements fully around the pature of and all the good work the company 1s thvolved urth, Fe 1.20.4 Audit report * What is the purpose of an independent audit report and who is it address to? + [a do a report om the financial statements of the ipa and to determine if everything ks reliable and if Lh Company policy do not djper from previous Years. +Tt 4s addressed to the Sharchulders. Explain the difference between a qualified and an unqualified audit report. PUngual fied report 18 4 goed repare without any prablene + Qualified report show problems jn certain areas of the company — all Is nol good. The independent auditors want to qualify the report. List THREE consequences there could be for the company or its directors. AEXtINg shareholders will fase confidence (um the COM, and ad writ frvtikly SC) Chel HUVECS. + frospective Shareholders will net invest in the compay lt can rest jn a dechhe (In the poarket price Gf HUE. -? Linanelal Statements are not a reasonable version ahd are unrellable. > Supliers will José COnpiMence in the company + Directors can lose their posltlons. 99

CHAPTER 2: REVISION TO DETERMINE PROGRESS 2.1 INTRODUCTION It is of the utmost importance that Grade 12 learners should note that the testing of their knowledge early in the academic year is crucial to determine on which level they are performing, and how much extra work has to be done to make a success of the final examination. This Chapter comprises a typical 3 hour paper to be worked through at the end of the first term in order to test the abovementioned level of work that the learner already should have accomplished during Grades 10 and 11 as well as during the first term in Grade 12. The memorandum of the paper is at the back of the book. It is very important that learners should first try and do each question within the allotted time framework, before consulting the memorandum. 2.2 REVISION PAPER TIME: 3 hours TOTAL: 300 marks INSTRUCTIONS AND INFORMATION 1. The paper comprises 5 compulsory questions. Answer ALL the questions. 2. Use the formats provided in order to reflect your answers. 3. All workings must be shown in order to obtain part-marks. 4. It is recommended that you must attempt to comply with the suggested time allocations. 5. Non-programmable calculators may be used. Proposed time allocation Marks Time Topic of the question 1. Bank reconciliation and internal control 30 marks 20 minutes 2. Balance sheet, corporate control and audit 80 marks 48 minutes 3. Cash flow, interpretation and asset disposal 80 marks 48 minutes 4. Manufacturing 35 marks 21 minutes 5. Cash flow and analysis of ratios 75 marks 45 minutes Total 300 marks 180 minutes 100

QUESTION 1 (Bank reconciliation and internal control 30 marks, 20 minutes) Park Merchants appointed Jannis Basson as bookkeeper to make bank deposits and to issue cheques. As internal auditor you are requested to assist. REQUIRED: 1.1 Why does a business prepare a bank reconciliation statement every month? (2) 1.2 Calculate the correct totals for the Cash receipts journal (CRJ) and Cash payments journal (CPJ) for October 2015. (10) 1.3 Prepare the Bank reconciliation statement on 31 October 2015. (10) 1.4 Refer to the information at numbers 4 and 8 below. 1.4.1 It seems like Park Merchants would not be able to recover all amounts or part of it, which were lost due to Jannis Basson’s dishonest activities. If you were the owner of this business what steps would you have introduced against Basson? Supply TWO steps. (2) 1.4.2 Explain why the rule of cautiousness should be applied when bringing dishonest activities into account in the books and financial statements. (3) 1.4.3 Explain what was wrong with the procedures in the accounting department which gave reason to this fraudulent activity. (3) INFORMATION: 1. The following items appeared in the Bank reconciliation statement at the end of the previous month, 30 September 2015: Balance per bank statement 17 000 Outstanding deposits for cash sales: x dated 28 September 2015 30 000 x dated 30 September 2015 12 400 Outstanding cheques: x No. 502 (dated 19 April 2015) 6 200 x No. 613 (dated 24 September 2015) 13 400 x No. 614 (dated 27 September 2015) 9 100 Balance per bank account 30 700 2. Favourable balance on Bank statement at 31 October 2015, R40 092. 3. Preliminary totals in the journals for October 2015 before reconciling with the bank statement are: CRJ – R510 000, and CPJ – R463 600. 4. From the Bank reconciliation statement for September 2015 only the outstanding deposit of R12 400 and cheque no. 614 appeared on the Bank statement for October. An amount of R30 000 which appears on the deposit slip, dated 28 September, was never deposited by Basson. He could not explain where the cash was. 5. The Bank statement for October indicates bank charges of R1 310 and interest of R102 on the favourable bank balance. 6. A cancelled cheque appears on the Bank statement, R1 700. It was received from a debtor in settlement of an account of R2 000. 7. A direct deposit of R5 500 from a tenant appears on the bank statement. 8. As internal auditor you have discovered that cheque no. 642 for R18 000 appears on the Bank statement, but was never entered in the CPJ. Suspicion exists that Basson forged the signature and used the funds for his own gain. 9. Cheque no. 633 appears in the CPJ as R2 630, but as R6 230 on the Bank statement. The amount on the Bank statement is correct. 10. The following items appeared in October’s journals, but not on the Bank statement: x Cheque no. 652 for R3 800, dated 15 November 2015 as well as cheque no. 655 for R1 300. x A deposit of R12 700 for cash sales. [30] 101

QUESTION 2 (Balance sheet, corporate control and audit; 80 marks, 48 minutes) 2.1 ABSOLUT LIMITED Absolut Ltd. supplies the following information regarding the year ending 30 June 2015. REQUIRED: 2.1.1 Complete the following Notes to the Balance sheet on 30 June 2015: x Retained income (8) x Trading and other payables (31) 2.1.2 Complete the Equity and liabilities section in the Balance sheet on 30 June 2015. (24) INFORMATION: 1. The following balances appeared in the Pre-adjustment trial balance on 30 June 2015. The adjustments were already taken into account to calculate the correct net profit which amounted to R988 000 as calculated in the Profit and loss-account. 2. The adjustments MUST still be taken into account when completing the Balance sheet and Notes. 3. Absolut Ltd. Extract from Pre-adjustment trial balance on 30 June 2015 Balance sheet account section Debit Credit Ordinary share capital 1 437 500 Retained income (1 July 2014) 450 000 UIF 590 SARS (PAYE) 9 000 Medical fund 4 200 Bank 109 000 Creditors control 87 000 Loan: ABSA 300 000 Petty cash 2 200 SARS (income tax) 248 976 Creditors for salaries 22 120 Nominal accounts section Salaries and wages 192 000 Rent income 184 800 Ordinary share dividends 88 000 Interest on loan: ABSA 39 600 4. Adjustments and additional information: 4.1 The authorised share capital consists of 300 000 ordinary shares. The average issue price per share on 30 June 2015 was R11,50 per share. 102

4.2 An employee who only started working at the company on 1 July 2015 was accidentally included in the salaries journal for June. The amount due to her was luckily not yet paid out to her. Details of her salary are as follow: € Gross salary, R18 000 € Deductions: PAYE, 30%; Medical fund, R1 500; UIF 1% (The company contributes on a Rand-to-rand-basis for the Medical fund and UIF). 4.3. The tenant paid the rent for July and August 2015 in advance. As a result of bad economic circumstances it was agreed that the rent would decrease by 10% as from 1 January 2015. 4.4 The loan from ABSA was negotiated on 1 June 2009. The loan agreement stipulates that repayment will take place over 12 years with 12 equal annual instalments as from 31 December 2009. Interest for the year was calculated correctly. *. 6 instalments have been pa A 4.5 The Bank reconciliation process for June 2015 revealed the following additional transactions which still have to be recorded. & Outstanding cheque no. 786 for R20 000 issued to a creditor, dated 9 Augustus 2015. & Bank charges of R7 000, as well as interest on bank overdraft, R18 900. & Direct deposit by a creditor, RS 000 as repayment of an amount that has been overpaid on their account of the previous month. 4.6 A final dividend of 150 cents per share was declared. 4.7 On 30 June 2015 the business has traded in equipment at a loss of R1 500. The cost price of the equipment was R97 000 and the depreciation thereof for the present year amounted to R7 500. The cost of the new equipment was R80 000. Depreciation is calculated at 20% p.a. on.the diminishi year method. - * Carrying value € of Year = (7800 x £9) ~7.50 = R20000 - 7 Teadg in, = Joon 1s00 = R2eS00 4.8 Income tax according to the income tax assessment for the year amounted to R276 640. 2.2 ANSWER THE FOLLOWING QUESTIONS: 2.2.1 Give ONE reason why it is important that financial statements should be prepared according to GAAP & IFAS- principles. (2) 2.2.2 Explain what is meant by Historical cost- and Going concern principles. (4) 2.2.3. State another TWO reports published by a company apart from the Income statement and Balance sheet AND explain the purpose of these two. (4) 2.2.4 Why is it important that companies on the one side pay good dividends to shareholders, but that on the other hand part of the profit is retained as Retained income and not paid out to shareholders? (4) 2.2.5 Why is it important that the directors of companies in South Africa should at all times apply good corporate management? (3) [80] 103

QUESTION 3 (Cash flow, interpretation and asset disposal; 80 marks, 48 minutes) You are provided with information and the partially completed Cash flow statement of Park Limited. The financial year ended 30 June 2015. REQUIRED: Study the given information and answer the questions that follow. 3.1 Prepare the Asset disposal account on 31 December 2014 in the General Ledger. (9) 3.2 Complete the Note for Fixed/Tangible assets on 30 June 2015. (15) 3.3 Complete the Cash flow statement for the year ended 30 June 2015 (Some amounts are already filled in on the Answer sheet). (18) 3.4 Complete the Retained income account in the General Ledger of Park Limited for the period 1 July 2014 to 1 July 2015. (6) 3.5 Calculate the following financial indicators for 2015: 3.5.1 Earnings per share (3) 3.5.2 Debt-equity ratio (3) 3.5.3 Return on average capital applied (5) 3.6 Comment on the debt-equity ratio and return on average capital employed. Quote figures on these financial indicators and comments on each one. (4) 3.7 Comment on the liquidity situation for 2015. Quote THREE separate financial indicators (actual ratios or figures) to support your answer. (8) 3.8 An existing shareholder is disappointed with the price of R7,20 which new shares were sold at. Quote a financial indicator to support this opinion and comment thereupon. (3) 3.9 A friend of yours is not interested in buying shares in this company. Quote figures for TWO financial indicators, besides those discussed above, to support his opinion and comment on each one. (6) 104

INFORMATION: 1. Equipment bought on 30 June 2012 for R40 000, was sold at carrying value for cash on 31 December 2014. New equipment was bought on 1 February 2015 for R160 000. Depreciation on equipment is calculated at 15% p.a. on cost price. 2. The authorized share capital of the company consists of 500 000 ordinary shares. On 1 July 2014 there were 350 000 shares in issue. On 1 September 2014 another 50 000 shares were issued at an issue price of R7,20 per share. On 30 June 2015, 40 000 shares were repurchased at a price of R6,40 per share. All the above transactions have been recorded. 3. The following totals were taken from the financial statements on 30 June: Balance sheet 2014 2015 Ordinary shareholders’ equity 2 460 500 2 755 000 Ordinary share capital 1 960 000 2 088 000 Retained income 500 500 667 000 Land and buildings 4 139 000 2 764 000 Equipment at cost price 300 000 420 000 Accumulated depreciation on equipment 135 000 ? Loan at 16% interest p.a. 650 000 280 000 SARS (income tax) 6 400 (Dr) 9 000 (Cr) Shareholders for dividends 38 500 53 200 Income statement Interest on loan 104 000 89 200 Net profit before taxation 420 000 374 700 Income tax 126 000 93 000 4. The following financial indicators were calculated: 2014 2015 Debt-equity ratio 0,3 : 1 ? Return on average capital employed 19% ? Return on shareholders’ equity 16% 10,8% Earnings per share 84 cents ? Dividends per share 60 cents 24 cents Net asset value per share 703 cents 765 cents Current ratio 0,3 : 1 1,9 : 1 Acid-test ratio 0,2 : 1 1,2 :1 Rate of inventory turnover 9 times 6 times Period of stock on hand 40 days 60 days Debtors’ collection period 32 days 15 days Creditors’ payment period 30 days 42 days [80] 105

QUESTION 4 (Manufacturing; 35 marks, 21 minutes) 4.1. PARKIE TOY MANUFACTURERS You are provided with information regarding Parkie Toy Manufacturers for the year ended 28 February 2015. The business manufactures and sells one brand of toy cars. REQUIRED: 4.1.1 Prepare the Note for Factory overhead cost to the Production statement. (20) 4.1.2 Prepare the Production cost statement. (7) 4.1.3 Calculate the unit cost of production. (3) INFORMATION: 1. Units produced: 11 100 units were produced during the year. 2. Stock on hand: 1 March 2014 28 February 2015 Raw materials stock R80 000 R ? Work-in-progress stock 35 000 62 337 Finished goods stock 27 900 ? Consumables 4 700 1 900 3. Transactions during the year: Raw materials issued for production R 231 575 Consumables bought for cash 9 900 Cost of finished goods produced ? Sales of finished goods (mark-up 50% on cost price) 540 000 Totals on 28 February 2015: Wages: Direct wages 174 000 Indirect labour 19 800 Salaries (including benefits): Factory foreman’s salary 48 120 Sales and distribution staff 38 000 Administrative and clerical staff 28 050 Depreciation: Depreciation on factory equipment 20 000 Depreciation on office furniture 2 400 Depreciation on sales vehicles 17 150 Factory maintenance 6 077 Insurance: Factory 6 240 Administrative buildings 11 220 Commission on sales 561 Rent expenses: Factory 10 400 Administrative buildings 5 830 Sundry administrative expenses 16 555 106

4. The factory manager has received a salary increase of R2 500 per month as from 1 February 2015, but the bookkeeper forgot to take this as well as the Pension fund into account. PAYE amounted to 20% and the Pension fund to 8%. The business contributes on a Rand-to-rand-basis towards the Pension fund. Contributions are debited to the appropriate salaries- and wages accounts. 5. The factory undertook repairs to the amount of R500. Parkie Toys paid for this, however, the owner is kept responsible for it, and it will be deducted from their rent due for February. The amount was debited to the Rent expense account. Rent for the factory amounts to R900 per month. 6. Insurance cover of the factory includes an annual premium of R6 000 which was paid for the period 1 July 2014 to 28 June 2015. 7. Only 75% of the consumables are used in the factory and the balance in the Administrative- and Sales departments. 4.2. MCC CRICKET BAT MANUFACTURERS The factory has produced 6 000 cricket bats during the year. There was no Work-in-progress stock at the beginning or end of the year. Cricket bats are sold at R1 800 each. The variable costs per unit were R620 per cricket bat. All cricket bats produced were sold. REQUIRED: 4.2.1 Calculate the number of cricket bats to be produced and sold, to break even. (3) 4.2.2 Should MCC Cricket Bat Manufacturers be satisfied with the break-even point? Provide a reason for your answer. (2) The following information is given regarding the financial year ending 30 June 2015: Direct materials cost R 1 320 000 Direct labour cost 1 500 000 Factory overhead costs (all fixed costs) 2 820 000 Cost of production of finished goods 5 640 000 Income statement for the period ending 30 June 2015 Sales (6 000 units) 10 800 000 Cost of sales ( 564 000 ) Gross profit 5 160 000 Sales and distribution costs (all variable costs) ( 900 000 ) Administrative costs (all fixed costs) ( 960 000 ) Net profit 3 300 000 [35] 107

QUESTION 5 (Cash flow statement and analysis of ratios; 75 marks, 45 minutes) The information below was taken from the financial statements of Park Ltd. on 28 February 2015, the end of the financial year. REQUIRED: 5.1 This question consists of FOUR multiple choice questions. Draw an X across the correct letter on the answer sheet. 5.1.1 What abbreviation should a public company end with? A. CC. B. LTD. C. (PTY) LTD D. JSE (2) 5.1.2 Who appoints the external auditors of a company? A. Employers B. Directors C. Managers D. Shareholders (2) 5.1.3 Which of the following items should not be considered to determine the effect of operational activities on the cash flow? A. Audit fees B. Salaries C. Depreciation D. None of the above 5.1.4 Which of the following financial indicators are used to analyse the solvency of the company? A. Total assets versus total liabilities B. Gross profit on sales C. Net current liabilities D. Debt/Shareholders’ equity (2) 5.2 Complete the Appropriation account on 28 February 2015. (10) 5.3 Prepare the Cash flow statement for the year ended 28 February 2015 (show calculations). (25) 5.4 Calculate the following for 2015 (show calculations to two decimal places): 5.4.1 Debt/Shareholders’ equity (gearing ratio) (3) 5.4.2 Dividend per share (all shares qualified for interim and final dividends). (3) 5.4.3 Net asset value per share (3) 5.4.4 Acid-test ratio (4) 5.5 The shareholders are concerned about the increase in borrowed capital. They are of opinion that an increase in interest will have a negative effect on the profits. Do you agree? Discuss by quoting TWO financial indicators to support your answer and comment briefly. (7) 5.6 Your friend owns 2 000 shares in Park Ltd. 5.6.1 What was the value of his investment according to the books on 28 February 2015? (3) 5.6.2 Why do the prices of shares on the JSE differ from abovementioned prices? (2) 5.6.3 Your friend is considering to buy 1 000 more shares in Park Ltd. at market price. (1) What is the total amount that he will pay for the shares on 28 February 2015? (3) (2) Mention ONE point in favour of his decision to buy more shares (quote figures). (2) (3) Mention ONE reason why he should not buy more shares (quote figures). (2) 108

INFORMATION: 1. Information from the Income statement Depreciation ? Interest-expenses 76 500 Net profit after taxation 630 000 Income tax (rate of 30% of net profit) ? 2. Extract from Balance sheet 28 Feb. 2015 28 Feb. 2014 Trading stock 920 000 1 060 000 Trading and receivables (see 3.2 ) 688 000 612 000 Ordinary shareholders’ equity 2 800 000 2 088 000 Retained income 600 800 560 000 Loan: ABSA 552 000 375 840 Trading and payables (see 3.3 ) 968 100 808 000 Current assets 2 218 688 ? 3.1 Fixed assets Land and Vehicles Equipment buildings Cost price – beginning of the year 2 000 000 360 000 168 000 Accumulated depreciation 0 ( 36 000 ) ( 31 920 ) Carrying value-beginning of the year 2 000 000 324 000 136 080 Movements: Additions ? 0 36 000 Depreciation 0 ? ( 14 268 ) Asset disposal at carrying value ( 240 000 ) 0 ? Carrying value – end of the year 2 400 000 252 000 ? Cost price – end of the year 2 400 000 360 000 184 000 Accumulated depreciation 0 ? ( 41 308 ) 3.2 Trading and other receivables 28 Feb. 2015 28 Feb. 2014 Trading debtors 648 000 576 000 Accrued income 25 600 36 000 SARS (income tax) 14 400 0 3.3 Trading and other payables 28 Feb. 2015 28 Feb. 2014 Trading creditors 568 800 520 000 Income received in advance 34 400 30 400 Accrued expenses 4 100 0 Shareholders for dividends 360 800 240 000 SARS (income tax) 0 17 600 ADDITIONAL INFORMATION: 1. On 1 March 2014 Park Ltd issued 10 000 new shares. 2. An interim dividend of R228 400 was paid to shareholders on 31 August 2014. 3. You are also provided with the following financial indicators: 2015 2014 Debt/Shareholders’ equity ? 0,18 : 1 Dividend per share ? 1 060 cents Net asset value per share ? 6 960 cents Return on average capital employed 33,6% 23,2% Market price on JSE 4 743 cents 6 681 cents [75] 109

ANSWER SHEET QUESTION 1 1.1 Why does a business prepare a bank reconciliation statement every, month? % To compare books of business with that of the bank in order ta trace mistakes. +Te rege ‘le balance of bank account with balance of bank statement and trace mt Zé improves internal control and management and decrease fraud because ‘the books are Compared with an external Source. 1.2 Calculate the correct totals in the CRJ and CPJ for October 2015. CRI CPJ Preliminary totals 510 000 463 600 Depos/t and cheque cancelled 6200 30006 Tnterest bank charges 102 1310 Direct cleposit for rent Soo Chegue Aishonoured 17109 Forged chégue on bank statement! 18 000 Chegue Corrected (6230 —2 680) 3606 Correct totals S2!1 802 S18 210 1.3 Bank reconciliation statement on 31 October 2015. Debit Credit Credit loalane as per bank statement 40 092. Credit outstanding deposit [2 700 Debit outstanding-chegues no. 613 [2 %00 SS if 652 3 800 68S | 200 Debit balance as per bank Account 24292 (30100 ¢ S21 802. — 518 2/0) S2 7192 [52792 1.4.1 TWO steps introduced against Basson if you were the owner. *Conduct a disciplinary hearing So that he can F nd to Accusations. «Recover what Is olsible Momhis Salary ard terminate his Contract - » Suspend him untill the investigation is completed. f shay a charge against him with Bhe police and get a Case number as reterencé. 1.4.2 Why is the rule of cautiousness used? . ; fs <The business must rather consider the transaction with pessimism and Conservative in order to show the most realistic picture because there is no g varantee that the money willever be recovered from Eagson . 1.4.3 What was wrong with the procedures in the accounting department? | - . « Basson is responsible for all the important actwities regarding receipts, deposits and chegue ihe ments, a Duties must be spit in order foe workers to check on each other. 110

250 000 12/6 250 000 579 994 12/6 50 000

2.2.1 Give ONE reason why it is important that financial statements should be prepared according to GAAP & IFAS- principles. ’ s ‘ ‘ sLt ensures that international standards are main tained. + So that Comparisons con be made between the Financia | statements of different companies . 2.2.2 Explain what is meant by Historical costs and Going concern principles. Historical costs: Assets must be shown at the Inveta | cost price at whith ft Was bought . Tt is assumed that the business will Continue with its trading activities in the foreseeable future : Going concern: 2.2.3 State another TWO reports published by a company apart from the Income statement and Balance sheet and explain the purpose of these two. Cashflow statement — this explains the cash flow achvities and &xplains the increase or decrease'in cash during the Financial year-- Auditors report — ASsess and contro] whether the financial stabenents \Wablé or not: Directors copay Rarer on other activities that took place dur ing &h year and which is not stated and presented by the fig ures 2.2.4 Why is it important on the one side that companies pay good dividends to shareholders, but on the other hand that part of the profit is retained as retained income and not paid out to shareholders? » Some investors buy Shares to €arn an income from dividends ~ they are interested In high and mamtanable dividends . « Other (nvestors buy shares to sellata higher rice ata later stage -| they want to expérience rowth in the value of the Shares thr retained income and the expansion of the Company. 2.2.5 Why is it important that all the directors of companies in South Africa should at all times apply good corporate management? + They are trusted with the use of the money of the shareholders - Shareholders seek security and Want to see the company managed ina sustainable haanner - she e directors are unethical in executin the tasks of the business , the image of the business will suffe- in the eyes of clerts and othe- business participants ‘ 112

QUESTION 3 3.1 Asset disposal aaa Eq ulament 40 000 peat Accumulated Aepreciat, IS: 000 v Ul Dvr 64 upment (oon fs, 2 Bank 25 000 4-0 000 4.0 000 3.2 Fixed/tangible assets Land and Equipment buildings Carrying value at beginning of the year 4 139 000 165 000 Cost price 4 139 000 300 000 Accumulated depreciation 0 (135 000) Movements (1 37S 000) 33 000 Additions at cost price 0 160 000 Asset disposal at carrying value C1378 000) | (2S 000) Depreciation (34000 +3000 + /0000). = (§2 000) Carrying value at the end of the year 2 Tb 000 ZY 8 000 Cost price 2164 000 YU20 000 Accumulated depreciation _ ia {72 00 0) 3.3 Cash flow statement for the year ended 30 June 2015 Cash flow from operating activities 327 100 Cash recovered from operations 570 400 Interest paid (89 200) Dividends paid (76 500) Income tax paid (77 600) Cash flow from investing activities {| 240 000 | Purchase of non-current assets C160 000) Proceeds on disposa| of hon- Current assets | Goo ooo C1 37S 060 + 28000 } Cash flow from financing activities iG R y (266 000) Proceedsfrom shares issued (So000 x R7,20 BEO 00 iE Repurchase of snares Cyooorx Rbypeoy ___ Payment on | oan (650000 — 280 oc0) (310000) Net change in cash equivatents |] 30! loo Cash equivalents at beginning of the year (i 295 000) Cash equivalents at the end of the year b 100 113

3.4 Retained income 2014 nso Bonk (gooooxné\ | 24 000) in |Balance d| S00 S00 Balance Md) 667 O00] ims |Profitard loss uc | 190 Soo F 641 000 641 000 mi |Balance Id) 667000 wermge ‘aut price per-share, = Eo = Rs)80 per Share . 3.5 Calculate the following financial indicators for 2015: . _ Net income after tux x lod 3.5.1 Earnings per share — Number ot Shares int. fl ~, 74700 — 13000 peg lee, = 350000 + Soo00 ~40000 ' = 231700 __ , 10 = 360 000 U = 18,28 cents per share 3.5.2 Debtequity ratio = Non-current liabilities + Share holders’ eg wity 230000 : 2788 000 Oy > 4 3.5.3 Returns on average capital applied = Net profit before tax and Interest x 100 Average capital employed { 3747100 + 87200 ge + [ Qyeosoo0 + 650000) + (2 7SS000 + 280 000)] / 463 900 100 Zo721s0 * 1 = 1S310'% D 3.6 Comment on the debt-equity ratio and return on average capital employed. Quote figures of these financial indicators, and comments on each one. Debt [equity ratio has improved from 0,311 tp ot: which means the company relies less on loans, is lous geared and isa low risk investment ‘The earnings an capital employed of ISI Ze is lower than the interest on loans of (6%. This indicates a ne ative gearing which means the company should not take external loand. the re turns on Capital emplo ed decreased from 197. €0 IS17, indica tag that the Company does not benefit fron using loans because the interest on loans 's /6 ZA. I 114

3.7 Comment on the liquidity situation for 2015. Quote THREE separate financial indicators (actual ratios or figures) to support your answer. «Current ratio has improved from 0,371 fb 1,9 +I- Acid- test ratio has improved from 0,2+1 te 1221. Rate of stock turnover has weakened from 9 times to 6 times per year and the period of stock on hand from 4ddays to 60 days. - Debtors collection period Improved from 32 days to IS days. ‘Creditors settlement period improved from 3odays to 42 days. —p The liquidity situation is satistactory and Che Company Should not Struggle to meet their short-term obi. gations The increase in the peri of stock on hand should however be in ves tiga ted. 3.8 An existing shareholder is disappointed with the price of R7,20 at which new shares were sold. Quote a financial indicator to support this opinion and comment thereupon. ~The Issue price is lower than the Net asset value of R165 at the end of theyear. The Company Could hae generated more funds From the shares being (siued. ~ He is dissapointed in the market's under valueing of be shares J tee sees thé repurchase price of Rbsuo er share . The market is, for Some reason, nob prepared to Pay at least the book-value of Ra 6S per shur€, 3.9 A friend of yours is not interested in buying shares in this company. Quote figures for TWO financial indicators, besides those discussed here above, to support his opinion, and comments on each one. *Return on Shareholders' eguity decreased from [67 €0 10 8, which is not much more than the interesE rate of = b/, offered ly banks on fixed deposits - «Earnings por share decreased trom Sy cents to 718,25 nts Aniith te Wes Com pared to the value o€ the Shares ig 16S cenks. “Dividends per share clecreased from 60 cents to 24 Lents which i's also low Compared to the value of the Shares 115

QUESTION 4 4.1 Parkie Toy Manufacturers 4.1.1 Factory overhead costs Consumables (4100 + 9900 — 1900) x 01S 9 §25 Salaries : Factory foreman (48 (20 + 2500 t+ 206) 50 $20 Wages : Indirect labour [4 800 Factory maintenance 6 077 Rent expense (/o 400 — S00 + 9 00) 10 800 Depreciation on Factory @gupment 20 000 Trsurance (6240 ~ (6000 x 4)) 4240 121262 4.1.2 Production cost statement for the year ended 28 February 2015 Direct materials cost 2321 57S Direc€ labour costs i174 000 Primary cost 4-0 STS Factory overhead Costs (21262 Total cost of production 526 3 37 Work-in-progress stock on 1 March 2014 35 000 S6!1 837 Work-in-progress stock on 28 February 2015 ( 62 337 5 Cost of production of Finished products 449 9 S00 4.1.3 Calculate the unit cost of production. 4-49 SOO : S per unt 1] 100 umts Ry p D 4.2 MCC Cricket bat manufacturers 4.2.1 Calculate the break-even point. = Fixed COS ts r Selling price per unt — Variable cost per ant _ 2.820 000 + 960 000 = 1800 — 620 130 000 x siesee 3204 units a 4.2.2 Should they be satisfied with the break-even point? Provide a reason for your answer. f Yes, they manufacture and sell 6000 ba which 1S much more than the break-even point of 3204 bats | 116

QUESTION 5 5.1.1 A p= Cc D 5.1.2 A B Cc B 5.13 A B a D 5.1.4 x B Cc D 5.2 Appropriation account FQ laa |Tacome tax 270 000 [79% 2g [Profitand loss acc.| FOO 000 Ordinary shareholder S84 200 (630 000x <8 Aividlends (2284.00t 3608 Retained income io $00 Goo 000 400 000 5.3.1 Cash flow statement for the year ended 28 February 2015 Cash flow from operating activities 247 068 Cash received from activities 1093 968 Tnterest pad (1b 500) Dividends paid (24.0 000 + 228 400) (4.68 4.00) Tneome tax paid (17 600+ 270000 + 14 400) (302 000) Cash flow from investing activities (420 3 30) Purchase of non-current assets (64.0000 t 360000) (6716 000) Proceeds from sales of non-Current assets (2.40 000 + 15 120) 255120 Cash flow from financing activities ; 347 360 Proceeds From shares issued (2900000 —600 800) ~ (2 088000 —56000)| G7} 200 Proceeds from increase in loan (552.000 — 275340) 116 160 Net change in cash and cash equivalents 6 73 S¢B Cash and cash equivalents at beginning of the year (28 000) Cash and cash equivalents at the end of the year 645 Sys 5.4.1 Debt/Shareholders’ equity ratio 552000 : 2800 000 O27 | —_ 5.4.2 Dividend per share 5 539 200 100 Shares. wm issue — mas tee Be ee ip0000 Shares TT beginning of year 646 as per NAV = 30000 shares | = 1473 cents per Share 5.4.3 Net asset value per share 2 800 000 {00 1.0 000 Shares 1 = 7000 cents per share. 117

5.4.4 Acid-test ratio (2.218 688— 920000) + 968 100 (298 688 * 968/00 L3y * I, 5.5 The shareholders are concerned about the increase in borrowed capital. They are of opinion that an increase in interest will have a negative effect on the profits. Do you agree? Discuss by quoting TWO financial indicators to support your answer and comment briefly. | Although Debt/ Shareholders’ equity Weakened from 0,81: | He Ke res itis ei lows geare whidh raeans pyre (reéle on external loans and will not battle £v settle debts. « Return on average Capital employed A aed from 23, 27> to 336% wuhich is much higher than the interest rate on loans of tian. 5.6 Your friend owns 2 000 shares in Park Ltd. 5.6.1 What was the value of his investment according to the books on 28 February 2015? 2000 x R70 = R i¢b 000 5.6.2 Why does the price of shares on the JSE differ from abovementioned prices? «The market price does not reflect €4e book value o the Shares. » Future expectations and the Supply and denrand of Shares lin fluence the market pric. The Shares dre ‘unde valued which rught show that the market 1s concerned about the way in Which the company 1s managen . 5.6.3 Your friend is considering to buy 1 000 more shares in Park Ltd. at market price. (1) What is the total amount that he will pay for the shares on 28 February 2015? jooox RUT43 = RYT430 (2) Mention ONE point in favour of his decision to buy more shares (quote figures). >The market price is lower than the Net agset value per share of 000 cents. <The dividends increased from [060 cents to (473 cents per Share. (3) Mention ONE reason why he should not buy more shares (quote figures). «The market rice dropped From. 6631 cents bo a4 143 cents per share hich 1s TE diccton that the market does no have positive future expectations regarding the pector mance of the Company - 118

CHAPTER 3: ANALYSIS AND INTERPRETATION OF BANK RECONCILIATION STATEMENTS AND CONTROL ACCOUNTS 3.1 INTRODUCTION In Grades 10 and 11 attentions was given to the drawing up of control accounts and bank reconciliation statements. It is important that you go back and look again particularly at Chapter 6 of Grade 10, that deals with Control Accounts, and Chapter 2 of Grade 11, that deals with Bank Reconciliation. Although we will be revising these aspects briefly, it is important that you have a thorough understanding of them. In this Chapter we will mainly concentrate on what these statements can mean to an organisation, and how the management of a business can analyse and interpret them in order to extract important information in respect of the liquidity situation of the business. This is so that correct decisions can be taken, and control of the cash flow can be exercised. 3.2 REVISION OF BANK RECONCILIATION The purpose of a bank reconciliation statement is to explain why there is a difference at month end between the balance of the Bank account in the organisation’s books and the balance shown in the Bank statement received from the bank, i.e. the organisation’s account in the books of the bank. The reason for the difference can be, firstly, the bank has already reflected certain entries on the bank statement that we know nothing about, e.g. direct deposits made, stop orders paid, bank charges imposed, interest earned or paid, etc. Upon receipt of the bank statement these entries are immediately recorded in the organisation’s subsidiary journals so that all entries appearing in the bank statement are also shown in our books. A second reason for the difference is of course, we have made deposits or issued cheques that have already been added to, or subtracted from the organisation’s bank account, but of which the bank has no knowledge as yet. These outstanding deposits and cheques not yet presented for payment, are shown on the bank reconciliation statement so that we can check in the following month whether the bank has increased or decreased our account accordingly, thus resolving the differences. Thirdly, it could happen that the bank has made a mistake in the bank statement by having wrongly increased or reduced our account. Such a mistake will only be corrected in the following month’s bank statement. That is why an entry is made in the bank reconciliation statement, to remind us to check next month whether the bank has, in fact, made the correction. From the above it is clear that, when the bank statement is received, it must first be compared with the previous month’s bank reconciliation statement. This is done to ascertain whether the bank has credited the outstanding deposits, which of the outstanding cheques have been cashed, and whether the bank has corrected any errors appearing in the previous bank statement. 119

EXAMPLE 1: The following information is taken from the books of Park Stores on 31 May 2015. INSTRUCTION: Study the information and only draw up the bank reconciliation statement for 31 May 2015, to explain the differences between the balance of the Bank account and the Bank Statement. Answer the questions that follow. INFORMATION: &€ The bank statement received from ABSA on 31 May 2015 in respect of Park Stores, shows a favourable balance of R34 000 in the bank. & After having recorded and taken into account several items appearing on the bank statement, but not in our cash journals, our bank account now shows a credit balance of R12 900. € It is also discovered that a deposit of R21 800 has not yet been brought into account by the bank. & The following cheques were issued and recorded in the cash payments journal, but the recipients had not cashed them as yet: o Cheque no. B115 for R67 400 and cheque no.B189 for R17 400. & As the Bank reconciliation statement still does not balance, the Bank statement is again examined. A careful analysis reveals two mistakes on the Bank statement: o A deposit made by Park Traders into their own account was incorrectly added to our account by the bank. The amount is R2 600. o A stop order signed by Parkie Stores for R18700, in respect of rental, was incorrectly deducted on our Bank statement. Bank reconciliation statement of Park Stores on 31 May 2015 Debit Credit Credit balance according 6 donk states 3g 000 bredit olutstantiy deposit 2/ B00 | Petit guéstanding Cheques no B/S 67420 va B87 L7400 Create amaunt hoorrectiy debrted 1/3700 Lett amount theorrectly seated 2B Get balance according to bank acca (2900 B87 400 B74 How will you approach the bank about the mistakes made on the Bank statement? ‘Contact the bank immediately and report MiStQkes. ‘Request @ pew pantsta iL from the hawt to verify that the mistakes were rectited as soon as passible. What will you do if the cheques are not cashed within six months? The cheque is cut dated after b months and cannct LE CasHey. “Lt must be canceled by @ contra~ entry in the CRI. 120

3.3. ANALYSIS AND INTERPRETATION OF BANK STATEMENTS AND BANK RECONCILIATION STATEMENTS A Bank reconciliation statement is a very powerful control instrument in the hands of the management of an organisation in exercising control of cash. It gives a very clear picture of what is happening in the organisation’s bank account, and draws attention to cash flow problems that might occur. EXAMPLE 2: The internal control of Park Traders regarding cash transactions is not satisfactory. The owner suspects that the cashier, who is responsible for receiving cash and depositing it in the bank, is stealing some of the money. INSTRUCTION: Use the information in respect of the cash situation of the business to answer the questions. INFORMATION: & The Bank statement received from the bank on 31 May 2015 reflects a credit balance of R35 600. It includes interest on the current account, R800, bank charges of R190 and a dishonoured cheque of R720 that has not, as yet, been taken into account by our bookkeeper. € Our bank account shows a credit balance of R42 800. This balance includes an amount of R9 180 that was received, but not yet deposited in the bank. It also includes the following cheques issued but not yet cashed: no. 21 for R560, no. 88 for R390, no. 90 for R830, no. 96 for R540, no. 102 for R600 and no. 113 for R830. & The cashier, who receives all moneys, and deposits it in the bank, compiled the following Bank reconciliation statement: Bank account balance on 31 May 2015 42 800 Plus: Outstanding cheques 2.090 Interest on current account 800 45 690 Less: Receipts not yet deposited (9 180) Bank charges (190) Dishonoured cheque (720) Balance of Bank statement as at 31 May 2015 35 600 1, Determine whether the cashier has stolen any money. If so, calculate the amount stolen and explain how she tried to concealed _the theft. Yes. The outstardin cheques amount t6 R37S0. The banle balance is therefore Shounas Ri bb0(37S0—20%) too Mt. She could have varitten out "eagina tive a cheques and then take the cash from the bank account and never present the cheques for Payrvent - 2. Evaluate the internal cash control procedures critically and make recommendations. »Finarcial dutres should bedivided Qqmengst em loyees. ~The cashier should not receive money , Pecord it, deposit r€ 121 and be resporisible to prepare the bank reconciliation statemant -

EXERCISE 3.1 You are provided with information relating to Park Stores. REQUIRED: 3.1.1 Why is it important to prepare a Bank reconciliation statement every month? 3.1.2 Calculate the correct totals of the Cash receipts and Cash payments journals for May 2016. 3.1.3 Calculate the bank balance on 31 May 2016. State whether it is favourable or unfavourable. 3.1.4 Prepare the Bank reconciliation statement on 31 May 2016. 3.1.5 Refer to Information 3 below. The fixed deposit of R84 000, matures the following month. What advice would you give to the owner in this regard? State TWO points and quote suitable figures to support your answer. 3.1.6 Refer to Information 4 below. x Explain why the internal auditor should be concerned about the outstanding deposit of R20 295. x Explain how cheque no. 674 should be treated when the financial statements are prepared on 31 May 2016. Give a reason for your answer. INFORMATION: 1. The Bank reconciliation statement showed the following items at the end of the previous month, 30 April 2016: x Favourable balance in the Ledger of Park Stores, R6 325. x Favourable balance on the Bank statement, R12 545. x Outstanding deposit (dated 28 April 2016), R12 000. x Outstanding cheques: no. 261 (dated 5 November 2015), R5 000 no. 519 (dated 14 April 2016), R8 920 no. 543 (dated 18 May 2016), R4 300 Note! Cheque no’s. 261 and 519 did also not appear on the Bank statement for May. 2. On 31 May 2016 the preliminary totals in the journals were: x CRJ, R70 600, and CPJ, R105 320. 3. The following items appeared on the Bank reconciliation statement, but not in the subsidiary journals for May 2016. x Direct deposit by debtor, S. de Swardt, R2 400 x Bank charges, R520 x Interest on fixed deposit for May, R700 x Interest on overdraft bank account for May, R810 x Stop order in favour of Vosloo Insurance company, R660 x A cancelled cheque received from K. Meyer for R6 200, in settlement of debt of R6 500. 4. The following differences were noticed: x Cheque no. 565 for repairs was recorded in the CPJ, as R1 570, but the correct amount of R1 750 appeared on the Bank statement. x A deposit of R12 000 appeared on the Bank statement on 1 May 2016. x A deposit of R20 295 dated 20 May 2016, appeared in the CRJ, but not on the Bank statement. x The following cheques appeared in the CPJ for May, but not on the Bank statement: No. 654 (dated 23 May 2016), R2 800 No. 674 (dated 29 August 2016), R2 520. 122

3.1.1 Why is it important to prepare a Bank reconciliation statement every month? |, -Lnprove tternal control, combat fraud and Witales, as Our Yetords are ch agaist an external SAUICE. ‘To compare books of Company with that. of Laut; beled 10 TEOHCHE LCM) HHEL Wen 3.1.2 Calculate the correct totals of the Cash receipts and Cash payments journals for May 2016. CRI Bank CPJ Bank Preliminary total 70 600 Preliminary total 105 320 Deposte of 5.deSwardt| 2400 | Bank charges $20 Ly terest on fixed de Zan \Laterest cn Werdra ED) lL fe. S000 LS AM iStOg a a Correct total 7E74U 3.1.3 Calculate the bank balance on 31 May 2016. State whether it is favourable or unfavourable. O325 +76 700 — 113690 = 28665 overdraft balance 3.1.4. Prepare the Bank reconciliation statement on 31 May 2016. Credit ZOZGE 3.1.5 The fixed deposit of R84 000, matures the following month. What advice would you give to the owner in this regard? State TWO points and quote suitable figures to support your answer. ‘Clear the oeapafe. The interest rate. J, lo Ja Gh Eh 2 hi Sand 43 lower then the tnlerese- (ate On filha t§ he-inest the. difference (8yoca - bank overabufe) to earn 9 return of lole er year on the fixed epost. 3.1.6 Explain why the internal auditor should be concerned about the outstanding deposit of R20 295. Et shoud refleck promptly on the bant statestnent. ‘Fraud can be shitlyed 2.9. rotting of cash by the cashjer Explain how cheque no. 674 should be treated when the financial statements are prepared on 31 May 2011. Give a reason for your answer. Decrease bank overdraft; Increase number of creditor, ~The money 18 not yet drawn on the date of the balance Sheet, because the chegne ks past gated. fhe money ss therefore 123

EXERCISE 3.2 The following information in respect of Park Traders is presented to you on 28 February 2015, the end of the financial year of the business. INSTRUCTION: Take the given information into account and answer the following questions: 3.2.1 Cheque no. 305 has not been handled correctly by the bookkeeper. What entry had to be made in respect of this cheque? 3.2.2 What would you do, as the bookkeeper, should a cheque that has not been issued by Park Traders appears on the Bank statement? 3.2.3. How will cheque no.645 be handled in the financial statement on 28 February 2015? 3.2.4 Park Traders received a post-dated cheque on 21 February 2015. The cheque is dated for 13 March 2015. Why does this cheque not appear on the Bank reconciliation statement? 3.2.5 What will happen if cheque no. 623 is also not shown on the bank statement for March 2015? INFORMATION: Bank reconciliation statement of Park Traders on 28 February 2015 Debit Credit Credit balance according to Bank Statement 34 900 Credit outstanding deposit 19 000 Debit cheques not yet presented for payment no. 305 (dated _18 August 2014) 1.900 no. 623 (dated 20 December 2014) 15 890 no. 645 (dated 18 March 2015) 14 000 no. 649 (dated 26 February 2015) 28 900 Credit amount wrongly debited 1 800 Credit balance as per Bank account 4990 60 690 60 690 3.2.1 Cheque no. 305 has not be handled correctly by the bookkeeper. What entry had to be made in respect of this cheque? The chegue was 6 months old ch 18 teb. 2015. feouire, entey Would fae been made ty the CRT to cance! the ch gue. 3.2.2. What would you do, as the bookkeeper, should a cheque that has not been issued by Park Traders, appears on the Bank statement? | Watity the bent about the mistake, Uati/ the mistake 18 rectified gn the bank statement, a creat entry is Shown tn the BRS for the MCOMECT Geb/t- 3.2.3 How will cheque no. 645 be handled in the Financial Statement on 28 February 2015? As 5 the cheg il. 2 [3 past--dated and cami be casted yet, /t shoud herlere BE pe addled to, the notes f for Cash and cash equivalents as Wel! 3.2.4 Park Traders received a post-dated cheque on 21 February 2015. The cheque is dated for 13 March 2015. Why does this cheque not appear on the Bank reconciliation statement? When receiving a post-daled chegue, jt camel be entered /n the CRY, but Must" be kept in a safe wnpl the date Shown op fhe 3.2.5 What will happen if cheque no. 623 is also not shown on the Bank statement of March 2015? La ZE will spall. appear on the peconcijation statement for March as 0 4 cheque can be spown as eutstapapy for BHONE: be} re iE becomes stale. 124 YJ

EXERCISE 3.3 The information given below relates to Park Merchants, a general dealer. Refer to the given information and answer the questions that follow. INFORMATION: Bank reconciliation statement of Park Merchants on 30 June 2016 Unfavourable balance per Bank statement 12 300 Outstanding deposit 4 650 Outstanding cheques: no. 789 (dated 25 December 2015) 750 no. 1032 1 365 no. 1040 (dated 5 July 2016) 2 355 Amount credited erroneously debited by the bank 1 550 Balance per bank account ? REQUIRED: 3.3.1 What is the purpose of a Bank reconciliation? 3.3.2 Cheque no. 789 is stale. The cheque was issued to MP Aid fund as a donation. The organisation does not exist anymore. Show the double entry to record the stale cheque. 3.3.3 The financial year of Park Merchants ends on 30 June, annually. How would cheque no. 1040 be treated in the financial statements? Give a reason for your answer. 3.3.4 State ONE error by the bank, which could result in the erroneously debit entry of R1 550 on the Bank statement of Park Merchants. 3.3.5 Calculate the balance of the bank account. State whether the balance is favourable or unfavourable. Consider the error in Question 3.2.2 when calculating the balance. 3.3.6 A cheque of R175 received from a debtor, was dishonoured due to insufficient funds. Show the double entry in the General ledger, to record the cancelled cheque. 3.3.7 Cheques are mainly cancelled due to insufficient funds. State TWO other reasons for the cancelling of cheques. 3.3.8 South African companies are worried about the increase in “white collar crimes”, as well as “blue collar crimes”. x “White collar crimes” can be defined as sofisticated crimes committed by managing personnel, while “blue collar crimes” can be defined as salient crimes which do require entry to the business’ books. Give one example of each of these crimes that could occur in a business. x Explain the meaning of the term “internal control”. x What is the function of an internal auditor? x What is the function of an external auditor? x Why should the external auditor also care about the quality of the internal control of a business? 125

3.3.1 What is the purpose of a Bank reconciliation? To check the accuracy ¢ all transactions sx the CASH Suns and to conpirin the valane f Zhe bank account aganst an external source. 3.3.2 Show the double entry to record the stale cheque. Account debited Account credited Bath DOMMES ONE. 3.3.3 The financial year of Park Merchants ends on 30 June, annually. How would cheque no. 1040 be treated in the financial statements? Give a reason for your answer a Lt /s added to the bank tn the palance sheet if Financial statements: the. bank Is Favourable and subtracted if over ara, Tt bs Ve added to Creditors im the nove of Trading qnd other creditors. :The amount *9 still in the bank and thug owed Reson because the chegue can only be exchanged ' future. * The principle of prodence reguires the west realistic Scene of money in the bark ana’ amoumg owed to creditors 3.3.4 State ONE error by the bank, which could result in the erroneously debit entry of R1 550 on the Bank statement of Park Merchants. ‘Subtract other chent!s chegues from our acount. ' Double. or incorrect recording of s9p order. ‘Debit incorrect bank charges on our bane statement 3.3.5 Calculate the balance of the bank account. State whether the balance is favourable or unfavourable. Consider the error in Question 3.2.2 when calculating the balance 12300 — Yb50 + /365 + 2355 -/550 = 9820 unfavourable balance , 3.3.6 Show the double entry in the General ledger, to record the cancelled cheque. Account debited Account credited Debtors contra! Prank 126

3.3.7 Cheques are mainly cancelled due to insufficient funds. State TWO other reasons for the cancelling of cheques. J m . cheque nat sjgnecl Cheque '$ Stale. - Amount differs i” numbers -Cheque /3 damaged and Words. : Srqnature on cheque aiffets - Cheque 15 post-dated from proof-siqna ture $1i ik P at La at aii ci 3.3.8 Give one example of each of these crimes that could occur in a business. White collar crimes: Fraud commited fy management “a the books of company Blue collar crimes: i ess sphisticated; theft of stock, vandalism. Explain the meaning of the term “internal control”. Follow processes within the company to Prevent Fray. What is the function of an internal auditor? ' The evecut/on of ob b jective QSSESSPHEME regarding the 2ffectiVenes of the Control processes wrthin the business, What is the function of an external auditor? An independant person, expressing Aisfher obsective opinion regarding the rediaby ty of the companys financial stotemends. Why should the external auditor also care about the quality of the internal control of a business? Froper Internal centrof will resalt in reliable and just financial statements wafted for the business, 127

EXERCISE 3.4 The following information was taken from the books of Park Stores on 30 June 2015. REQUIRED: 3.4.1 Prepare the Bank reconciliation statement on 30 June 2015. 3.4.2 Cheque no.74 was issued to CNA for stationery, R267. The transaction was entered in the Cash payments journal as R276 by mistake. x In which journal will it be corrected, and what is the amount? x Give the double entry to record the correction. x Make two proposals to prevent similar mistakes in future. 3.4.3 State the double entry to record a cancelled cheque. 3.4.4 State the effect of the reverse entry of stale cheques, on the bank account. INFORMATION: 1. The bank account had a favorable balance of R3 996 on 30 June 2015. 2. The Bank statement of ABSA showed a credit balance of R1 020 on 30 June 2015. 3. Comparing the Bank statement and the Cash journals for June 2015, showed the following differences: 3.1 A cheque received from debtor, E. Human, for R300 in settlement of his debt R325, was dishonored by the bank due to insufficient funds. 3.2 A deposit of R2 420 on 30 June 2015 in the Cash receipts journal did not appear on the bank statement. 3.3 The following debit orders appeared on the Bank statement, but not in the appropriate Cash journal x R975 for annual fire insurance premium in favor of Outsurance. x R890 in settlement of the monthly installment of the private vehicle of the owner, D. Smit, in favor of Nedbank. 3.4 The following cheques, issued during June, is not yet presented to the bank for payment: x no. 72 – R90 for packing material x no. 75 – R510 for trading stock x no. 76 – R120 for telephone account 3.5 Tenant, M. Cloete, paid the rent for June, R880, directly in the bank account of the business. 128

3.4.1 Prepare the Bank reconciliation statement on 30 June 2015. Bank reconciliation statement on 30 June 2015 Debit Credit Credit bdlance according Lo lankstatenen (020 Credit outstonding debostl 2YZO Deblt outstanding chegues no, 7Z Io e4 ix wo. 5 5/0 20. 76 1d8 bebit bolanee atcording Co bank ae. | 2720 (3996 — 300-975 -890188049) 3440 3446 3.4.2 In which journal will it be corrected, and what is the amount? CRI an amount of KF Give the double entry to record the correction. bn Bank + ce Stationery Make two proposals to prevent similar mistakes in future. - Compare the cheque counterfoil with the amounts th the CPT "Let a senor persen check the entries tu the journals. 3.4.3 State the double entry to record a cancelled cheque. br. Oebtors control 325 T= Cr Bank 300 Cr. Liscount allowed 25 3.4.4 State the effect of the reverse entry of stale cheques, on the bank account. > Tacrease the Bank, /f the bank rs favourable. > Decrease bank overaraft, 129

3.4 REVIEW OF CONTROL ACCOUNTS In Grade 10, in particular, much attention was given to the drawing up of control accounts of both debtors and creditors. Refer to Chapter 6 in your Grade 10 workbook where the focus was on the reconciliation of the totals of the debtors and creditors lists with the totals of the control accounts. Make sure that you understand it thoroughly. In this Chapter we will pay more attention to specific debtors and creditors accounts. We will look at the reason why the amount owing to the creditor, as shown in our creditors ledger, differs from the amount shown on the account statement we received from that creditor. Also, why the amount we calculated for each debtor in our debtors’ ledger perhaps differs from the amount the debtor thinks he owes us. The following is a short summary of transactions with debtors and creditors: 3.4.1 Transactions involving Debtors Transaction Sub. Account debited Account credited Journal 1. Sales on credit to a debtor DJ Debtors control Sales 2. Service rendered on credit to a debtor DJ Debtors control Current income 3. Bank payment made on behalf of a debtor CPJ Debtors control Bank 4. Petty cash payment made for a debtor PCJ Debtors control Petty cash 5. Cash received from debtors CRJ Bank Debtors control 6. Discount allowed to debtors CRJ Discount allowed Debtors control 7. Cheque from debtor dishonoured CPJ Debtors control Bank 8. Discount on dishonoured cheque cancelled GJ Debtors control Discount allowed 9. Goods returned by debtor DAJ Debtors allowance Debtors control 10. Interest charged on overdue accounts GJ Debtors control Interest on overdue accounts of debtors 11. Debtors written off as bad debt GJ Bad debts Debtors control 3.4.2 Transactions involving Creditors Transaction Sub. Account debited Account credited Journal 1. Purchases on credit from a creditor CJ Trade inventory Creditors control 2. Payment made to a creditor CPJ Creditors control Bank 3. Discount received from creditors CPJ Creditors control Discount received 4. Goods returned to creditors CAJ Creditors control Trade inventory 5. Interest charged on our overdue accounts GJ Interest on overdue Creditors control accounts from creditors 130

3.5 AGE ANALYSIS OF DEBTORS AND CREDITORS Here is an interesting practical aspect that demands good reasoning and problem solving ability. Whenever a debtor buys on credit an agreement is made regarding a date of repayment. This is known as the credit period. Debtors usually tty postpone payment as long as possible, in spite of the credit conditions imposed. Before accounts are sent to debtors, age analysis is conducted for control purposes on every debtor’s account. This is to determine which debtors have exceeded their credit period, which debtors are only taking a chance by paying toolate, and which debtors will have to be written off as a bad debt, or be handed over to attorneys for debt collection. The following is an example of a Debtors Age Schedule. See if you can provide creative answers that will encourage debtors to pay their overdue accounts. EXAMPLE 3: The accountant of Parkie Stores conducted an age analysis of outstanding debtors on 31 May 2015. The findings are summarised in the age schedule given below. INSTRUCTION: If the credit period granted by Parkie Stores to all debtors is 30 days following the date of the first account statement, state what your recommendations would be in respect of action to be taken against each of the given debtors. GIVEN: DEBTORS AGE SCHEDULE ON 31 MAY 2015 Name of debtor Balance Current 30 days | 60 days | 90 days > 90 days J. van Wyk 19 700 12 500 7.200 F. Neiteler 6 980 6 980 S. van Staden 13 560 2 890 4 100 2 810 3 760. -Y. de Waal _ 3 420 | | _ _ 3 420 A. Swanepoel 450 450 44 110 22 370 11 300 2 810 4210 3 420 General comments in respect of control of collection of debtors’ obligations: Only one debtor's account "(Sup to date This (s an Indication that. the cohecting of Seppe and the investigation of credit worthiness debtors were not propetly conducted, 131

Recommendations of action to be taken against each of the debtors LJ. van Wyk: fg 1$ indebted with £7200 regarding goods Purchased during April He should Ge areminder with 4 reguest to pay his debt with immediate effect. 2.F.Neiteler: Phys gecount 16 OF Ne concern at Enis SERGE. He might be a new debtor, or a prompt Payer. 3. S. van Staden: She Is an unwilling payer, and should recuve a final warning to pay. In spite of the fact that she Ji slow ever credit. Fs stil fered to her. Te should be considered not to sell anything co her, unless her account 3 settled, 4.Y.de Waal: he owes A3420 regarding putchases made th January, or even earlier. She didnt make any purchases during the last few month, which means She cannet ee braced or she nuyght Aave a2 HEW AAV ESS. Her account should be handed over £0 4 lawyer for collection, 5. A. Swanepoel: He 18 fa d. PD) ted with z 450 for good pure did, In February. He should ge 4 final tenner to pay his debt, The amount 1's probably not big enough to Justify the cost o an attorney &0 recover what he owes, NOTE! An age analysis in respect of our repayments to creditors is also drawn up for internal control purposes regarding payments to creditors. This will guarantee prompt payment to creditors and prevent them from imposing interest on our accounts. Even more importantly — it ensures that our business establishes a good name and maintains its credibility. 132

3.6 RECONCILIATION OF CONTROL ACCOUNTS WITH ACCOUNT STATEMENTS Whenever credit transactions between two parties occur both the buyer and the seller will make entries of each transaction in their books. It could, however, happen that one of the parties has already recorded a transaction of which the other party has not yet taken note or simply has not yet made the relevant entries. As in the case of Bank reconciliation a debtor will draw up a “Creditors reconciliation statement” purely for internal control purposes to explain the differences between the account statement received and the account as it appears in the creditors ledger. 3.6.1 Reconciliation of the Account statement received with the account of the creditor in the creditors ledger. As already mentioned all transactions that are made between two businesses are recorded in the books of both organisations. The business supplying the goods, and to whom money is owed, is the creditor, while the business purchasing the goods, and thus owes the money, is the debtor. The balance of the amounts owed should be the same in the books of both organisations, it is however not always the case. The reasons for this discrepancy can be the following: x A cheque sent by the debtor to the creditor has not been received, or has simply not been recorded as yet. x Goods already recorded by the creditor have as yet not been received by the debtor. x Goods returned and recorded by the debtor have not yet been received, or recorded, by the creditor. x Mistakes could have been made on the account statement or on the source documents, or even in the recording of transactions in the sub journals. The purpose of reconciliation between the account statement, as compiled by the creditor and the account of the creditor as prepared by the debtor in their Creditors ledger is to explain any differences that may appear. EXAMPLE 4: The following information in respect of transactions that have taken place between Lucem Stores, the debtor, and Park Traders, the supplier/creditor, is made available to you in the form of the account statement and the ledger account. INSTRUCTION: Use the information to do the following in the books of Lucem Stores: 4.1 Do the entries for the correction of the wrong entry made on 20 May 2015 in the General journal. 4.2 Draw up the Creditors reconciliation statement on 31 May 2015. 4.3 With decision making in view, what important information can be obtained from the reconciliation procedures? 4.4 Should Lucem Stores be satisfied with the credit period of 30 days? What amount must be paid to conform to the credit period? 133

INFORMATION: On 31 May 2015 the following account in respect of Park Traders appears in the Creditors ledger of Lucem Stores: Creditors Ledger of Lucem Stores Park Traders C1 Date Code Document no. Fol. Debit Credit Balance 2015 May 1 Account rendered 16 150 4 02 CC 889 CPJ 12 900 3 250 03 CC 889 CPJ 1 400 1 850 10 01 CPI 114 CJ 4 970 6 820 13 01 CPI 120 CJ 3 170 9 990 15 05 DD/N 27 CAJ 2 600 7 390 20 02 CC 901 CPJ 2 150 5 240 26 01 CPI 126 CJ 1 800 7 040 30 05 DD/N 32 CAJ 760 6 280 On 31 May 2015 Lucem Stores received the following Account statement from Park Traders as it would appear in their Debtors ledger: Debtors Ledger of Park Traders Lucem Stores D1 Date Code Document no. Fol. Debit Credit Balance 2015 May 1 Account rendered 16 150 4 02 DRCC 114 CRJ 12 900 3 250 03 DRCC 114 CRJ 1 400 1 850 10 01 DCSI 809 DJ 4 970 6 820 13 01 DCSI 817 DJ 3 170 9 990 15 05 DC/N 44 DAJ 2 600 7 390 22 01 DCSI 820 DJ 4 930 12 320 Note! This statement only includes all transactions up to the 25th of every month. Terms: 30 days Amount owing 12 320 Payment advice 90 days 60 days 30 days Current month 1 850 10 470 ADDITIONAL INFORMATION: When the Account statement received from Park Traders was compared with the Creditors ledger of Lucem Stores, it was noticed that three entries in the Creditors ledger did not appear on the account statement, viz. 1. The payment of R2 150 on 20 May 2015. 2. The credit purchase invoice of R1 800 on 26 May 2015, and 3. The Debit note of R760 on 30 May 2015. A closer examination showed that the payment on 20 May 2015 was made out to Park Outfitters, and was wrongly posted to the account of Park Traders. This error must be rectified. Both the other entries are correct, but as the Account statement only includes transactions up to 25 May 2015, they will only be shown on next month’s account statement. 134

On the Account statement received from Park Traders, there is only one entry that does not appear in the Creditors ledger, viz. 1. The credit sales invoice for the amount of R4 930 on 22 May 2015. Lucem Stores are concerned that neither Invoice 820 nor the goods bought on 22 May 2015 were received from Park Traders. Upon enquiry, Park Traders discovered that the Lucem Stores account was wrongly debited with thmount. The correction will reflect on the account statement for June 2015. 41 General journal of Lucem Stores for May 2015 GJ Day Details Fol. Debit Credit [Creditors ec Debit | Credit 31 | fart Oubfriters C2| 2150 2150 Fark Traders Gr £150 PIETA) Correction of incorrect posting —ITV we £150| 2150 4.2 Creditors reconciliation statement on 31 May 2015 Debit Credit Debit balance as per Account statement received 12326 Credit amount wrongly debited YI3BG6 Debit purchases after 25 May 2015 4800 Credit all returns after 25 May 2015 FOO Credit balance as per Creditors ledger (after correction of errors) 2430 C6Z80+ 2/50) (41Z0 14/20. 4.3 With decision making in view, what important information can be obtained from the reconciliation procedures? VELENCSS. the Lolances of triwduadl creditors aswell as creditors on the financial Statements can be confirpard, ASO) f EL USE Dk fi ¢ £3 va LO, these yslak LENLOTS Shot, thformed itimedrately of any inaccuracies on their account Statements. 4.4 Should Lucem Stores be satisfied with the credit period of 30 days? What amount must be paid to conform to the credit period? No. There shold always be attempts to stretch the Cerm v= sgoner. of 4 within 30 dais, they auld grant Some Lind, als LD According to accoitt. stntepient, [0/850 must! be fad thuteH ately, rw4 135

3.7 ETHICAL CONSIDERATIONS It is expected that businesses and their employees will at all times act in accordance with ethical norms and values. Business ethics is comprehensively dealt with in Chapter 8 of your Grade 11 workbook. One aspect that causes concern, however, and requires more attention when it comes to deciding which suppliers to use, is the so-called system of “kickbacks” or bribery money in practice, for the supply of certain products by certain suppliers. Suppliers tend to give an employee of an organisation some kind of “kickback”, whereby the employee benefits personally if he can influence the decision that will cause a specific supplier to win a contract. It is usually the case that these suppliers do not necessarily offer the best price or the best service. Both parties are acting unethically — the supplier who is offering bribery money and the employee that accepts the offer. “Kickbacks” have a detrimental effect on the economy as they counteract healthy competition in the market place, and bring the credibility of the tendering procedure, and the ethical behaviour of employees, under suspicion. EXERCISE 3.5 Consider the following case critically and provide a solution to the problem. Mr Burger works for the Department of Correctional Services in the Northern Cape. He is responsible for all repairs and maintenance done within the department. Private contractors, whom he appoints, are employed to undertake the work. An investigation brought to light that costs in respect of repairs and maintenance are excessively high. For example, an account of R30 000 for the repair of a broken stove, was discovered. Do you think that Mr Burger is acting unethically? What makes you say this? Can you come up with a solution to this sort of problem? At give th he MEALS who Stippil t @ HM tender “avd thet sn tare fay hath @ part of the _ money as _“"kickback” 4 solution can be, that the state _apomits self a YAO @ Contractors that can be send out frém @ centr of office RI to do lepaurs GH MGULEN ALICE. 136

3.8 INTERNAL AUDIT AND CONTROL PROCESSES IN RESPECT OF DEBTORS AND CREDITORS. 3.8.1 Control of Debtors The internal control process in respect of debtors ensures that debtors are Credit-worthy, that credit sales are properly recorded, reconciliation is done between personal accounts and control accounts, and that overdue accounts are properly managed. The following are examples of mechanisms that could be of assistance in this respect: x A credit policy for the approval of debtors should be in effect; x Credit control must be regularly carried out to identify debtors that are in default; x Credit sales transactions must be approved in terms of price, payment, credit availability and limitations placed on the debtors account; x All credit sales must be fully recorded on pre-numbered credit sales invoices, and signed by the sales person – every invoice number must be able to be accounted for. x Monthly statements to overdue debtors must be evaluated, and sent out by someone other than the bookkeeper; x The balance of the debtors control account in the General ledger must be reconciled with the total of the debtors list in the Debtors ledger at the end of each month; x Bad debts and other adjustments affecting debtors must be properly authorised; x Interest must be imposed on overdue accounts of debtors. The internal auditor must check debtors for debt recoverability, in order to decide whether the provision for bad debt is adequate, or whether it might possibly need adjustment. 3.8.2 Control of Creditors The internal control process in respect of creditors, must ensure that credit purchase invoices received from creditors, agree with the items actually received, that they have been accurately recorded, that reconciliation has been done with the creditor accounts, and that amounts payable are constantly monitored. The following are examples of mechanisms that could be of assistance in this respect: x Purchase prices and the correctness of invoices received from creditors, must be controlled; x The quantity of goods received must be controlled by clearly ticking off the quantity stated on the invoice; x Bargaining must take place for the best possible terms and discounts; x Invoices must be properly checked and recorded before payment is made – they can, e.g., be stamped; x The same person must not be responsible for both purchasing and receiving the goods; x Creditors’ accounts must be paid as late as possible without incurring interest. 137

EXERCISE 3.6 You are provided with three examples of reconciliations which were prepared by the employees in the accounting department of Park Stationaries. REQUIRED: Look at the information provided and answer the questions that follows: INFORMATION: Bank reconciliation on 28 Feb. 2015 Credit balance according to Bank statement 8 000 Example Outstanding deposit 3 000 A Outstanding cheques: no. 1040 dated 13 Feb. 2008 2 200 no. 1052 dated 18 Aug. 2008 10 000 no. 1055 dated 28 Feb. 2008 4 300 Balance according to bank account ? Park Wholesalers Creditors reconciliation on 28 Feb. 2015 Debit balance according to Creditors statement on 25 February 2015 5 000 Example B Invoice not reflected on statement: Invoice no. 225 18 400 Invoice wrongly on the statement and not in the creditors ledger: Invoice no.187 3 100 Payments not reflected on the statement: Dated 23 Feb. 2008 9 000 Returns not reflected on the statement: Debit note no. 44 1 100 Balance according to creditors ledger on 28 Feb. 2015 ? Reconciliation of creditors account With creditors on 28 Feb. 2015 Example Balance according to creditors control account 46 000 C Balance according to creditors ledger 47 900 Park Wholesalers ? Absolut Furniture 20 000 Brooklyn Security Services 12 000 Lynwood CC. ? Difference 1 900 3.6.1 Explain briefly: x What do you understand under the term “internal control”? x Why is it important to apply internal control in a business? x Why is reconciliation important for internal control? 3.6.2 Does the business have a favourable or overdraft bank account according to the Bank statement? Give a reason for your answer. 3.6.3 Calculate the bank balance in the ledger of Park Stationaries on 29 February 2015. Is this balance favourable or unfavourable? 3.6.4 Name FOUR steps to be followed when preparing a Bank reconciliation statement. 3.6.5 When financial statements of Park Stationaries are prepared at the end of February 2015, what amount will you present under cash and cash equivalents in the Balance sheet? 3.6.6 Calculate the correct amount that Park Stationaries owes Park Wholesalers? 3.6.7 Explain briefly what steps to be taken regarding the difference of R1 900 in Example C. 138

3.6.1 What do you understand under the term “internal control”? “Control processes and a/viae duties t ensure that all asserts bre safe. Lt involves eo control and moncitig of the apphcation of control measures set Why is it important to apply internal control in a business? ‘To reach target and to realise projected profits. -Lt protects the ‘nvestment of bhe owner: Why is reconciliation statements important for internal control? It confirms the correctness of the balances. Lt gives explonatjons of differences that: CGH OXISC, Mistakes made ore (dentified and followed up. 3.6.2 Does the business have a favourable or overdraft balance according to the Bank statement? Give a reason. Fayourable— tnthe bank's boots s6 15 @ creart balance and Chat means the bank Owes weney bo the busjnes 3.6.3 Calculate the bank balance according to the ledger. Is this a favourable or overdraft balance? 9000 + #@0 —2Z00 —/0000 - $300 = 5500 cverdtaft balance. 3.6.4 Name FOUR steps to be followed when preparing a bank reconciliation. * Mark stems that appear in both the Cash journal LENEN| : fo a See tries in Cash Jour nile of MEMES. Show Hews notin bank statermerit on patie recon ah GH ‘Balance the ban account ofter subsiduay journals are 4, -Frebare. the Lunkreconcthatioy statestele 3.6.5 What amount will appears under cash and cash equivalents on the Balance sheet. Bank + fest-dated chegues 5 5lUe7. = -5500 + /00o° = 49020 3.6.6 Calculate the correct amount that Park Stationaries owes Park Wholesalers. 5000 + 18400 — 7000 — 4/000 — 3/00 = /0 200 se 3.6.7 Explain briefly the steps to be taken regarding the difference of R1 900 in Example C. : Lifferences between creditors control acount and creditors generat ledger must be found and rectified ‘The balances has to cotrespand wibthe total of the creators led! 139

EXERCISE 3.7 You are provided with the creditors control account which appeared in the General Ledger Park Furniture. It is their policy to settle the accounts of creditors as soon as possible, even if the creditors allow 30 days credit. REQUIRED: Study the account and answer the questions that follows. CREDITORS CONTROL 2015 2015 June 30 ? CPJ 47 000 June 1 Balance b/d 28 000 ? CAJ 6 900 30 ? CJ 34 500 Sundry accounts GJ 200 Sundry accounts GJ 500 Balance c/d 8 900 63 000 63 000 Jul. 1 Balance b/d 8 900 QUESTIONS: 3.7.1 Name the source document that supports the entry of R34 500 on the credit side. 3.7.2 Give the contra-accounts for the entry of R47 000 on the debit side. 3.7.3 Give ONE possible explanation for the entry of R500 on the credit side. 3.7.4 Creditors allowed Park Furniture discount of R420 for early payment. How much was therefore, actually paid to creditors. 3.7.5 The creditor’s list on 30 June shows a total of R12 200. What steps does the bookkeeper has to do? Explain briefly. 3.7.6 Park Furniture are not satisfied with the quality of the furniture that they receive from the suppliers. Provide a figure with an explanation to support this opinion. 3.7.7 The creditors are paid to soon. Explain briefly and quote figures to support your answer. 140

3.7.1 Name the document that supports the entry of R34 500 on the credit side. Original re-numbered credit purchase inoies (CP/) 3.7.2 Give the contra-accounts for the entry of R47 000 on the debit side. Bank ahd dstount recelved 3.7.3 Give ONE possible explanation for the entry of R500 on the credit side -daterest charged on arrear accounts by credttor. : Correctlon (nCorrece posng -scouml Cancelled. ‘Transfer of debtor with dremet belante ..-ete. 3.7.4 Creditors allowed discount of R420 to Park Furniture for early payment. How much was therefore, actually paid to the creditors? 47000 —- 4206 = 6550 ——“(+ 3.7.5 The creditors list shows on 30 June a total of R12 200. What steps does the bookkeeper has to do? Explain briefly. - Reasons for the afperence with the bdlance must be searched and petifled. 3 - alétce of the creattors contro) must correspond with the totdl of the creditors list. 3.7.6 Park Furniture are not satisfied with the quality of the furniture that they receive from the suppliers, Provide a figure with an explanation to support this opinion. “The CAT figure of R6900 Shows an excess return tn comparison with the figure of the - Ltis zofo of the credtt piitchases, 3.7.7 The creditors are paid to soon. Explain briefly and quote figures to support your answer. ‘The palance decreased from fzgooo to 8900 because Payments of k4u7000 mvyolve more than half. ya the present month's creat purchases plus the Qpening palate. = = Nor, ow: Lt 4apdays ond they 45 Such pay SOON aE Ee ie Oe Oe ee ae 141

EXERCISE 3.8 3.8.1 REQUIRED: Prepare the Creditors reconciliation statement in the books of Lucem Stores on 31 May 2015. INFORMATION: On 31 May 2015 the following account of Park Merchants appeared in the Creditors ledger of Lucem Stores: Creditors ledger of Lucem Stores Park Merchants Date Details Fol. Debit Credit Balance 2015 May 1 Account rendered b/d 5 500 4 CC 1234 CPJ 5 225 275 CC 1234 CPJ 275 - 10 CPI 1140 CJ 4 200 4 200 16 DD/N 56 CAJ 1 300 2 900 31 CPI 1296 CJ 600 3 500 CC 1335 CPJ 2 900 600 Lucem Stores received the following monthly account statement from Park Merchants on 2 June 2015: Account Statement Tel: 012 342 8897 Park Merchants Fax: 012 342 8898 2377 Lynwood Road Menlopark Information of client Date: 25 May 2015 Account no. 1198 Lucem Stores P.O. Box 2292 Menlo park Date Details Debit Credit Balance 2015 May 1 Account rendered 5 500 4 Payment – cheque 1234 5 225 275 10 Purchases – invoice 1140 4 200 4 475 16 Returns – debit note 56 1 300 3 175 19 Purchases – invoice 1182 500 3 675 Note: This statement includes all purchases and payments up to the 25th of the month. Comparing the Creditors ledger with the statement the following differences were noticed: (1) Park Merchants neglected to consider the discount for an early payment on 4 May 2015. (2) Invoice no. 1182 appearing on the Account statement of 19 May 2015, was incorrect. It should be for purchases by Lucem Wholesalers. The other entries in the Creditors ledger and Account statement were correct. 142

3.8.2 Study the given information regarding Parkie Merchants and answer the questions. Parkie Merchants sell 80% of their stock on credit. Their credit terms are 30 days. REQUIRED: (1) Explain what action the bookkeeper should have taken when he discovered a difference of R6 800 in the Debtors reconciliation statement. State 2 actions. (2) Calculate the correct balances owing by the following debtors: H. Behr H. van Tonder J. Muller (3) Calculate the correct opening balance in the Debtors control account on 1 February 2015. (4) The summary of the age analysis of debtors at the end of January, showed the following. More than 90 days 60 – 90 days 30 – 60 days Current R20 000 R24 000 R8 000 R10 800 Does the business manage their debtors effectively? Why do you say so? Give 2 measures to be taken to improve the situation. (5) To receive a discount of 5%, Parkie Merchants pay their creditors within 30 days. Do you agree with this philosophy? Why? Name 2 factors to be considered before paying creditors within 30 days. INFORMATION: Parkie Merchants Reconciliation of Debtors control and Debtors list on 31 January 2015 Balance per Debtors control account 62 800 Balances per Debtors ledger 56 000 L. Bouwer 12 000 H. Behr 9 000 R. Visser 17 000 H. van Tonder 11 000 J. Muller ? Difference 6 800 ADDITIONAL INFORMATION: The following errors were discovered and should be rectified: 1. Goods sold on credit to H. van Tonder for R2 600, was correctly entered in the Debtors journal, but was posted as R6 200 to H. van Tonder’s account in the Debtors Ledger. 2. No entry was made for a cheque of R6 000, cancelled by the bank due to insufficient funds. This cheque was original received from H. Behr, as settlement for his account of R6 400. 3. The Debtors Allowance Journal was under cast by R5 600. 4. An invoice issued to J. Muller for R2 400, has been posted to the wrong side of his account . 143

3.8.1 Creditors reconciliation statement on 31 May 2015 Debit Credit Debit balance per Account statement 326 735 Credit discount neglected on 4May 275 Credit rncorrect imbvotee no Ez 500 bebit invoice on 31 May 200 Credit payment nade on 3/ May 2900 Credit balance per Creditors ledger COO Y275 YF2ZIS 3.8.2 (1) Two actions when the difference was noticed: * Chea entries’ (nu subsidiary journals ‘hook for adding errors or “posting Mistakes (Q) H. Behr C9000 t 6400) ple Le) H. van Tonder l/1000 — &200 + 2600) 7400 J. Muller C7000 + 2400 + 2400) 4 800 (3) Debtors control balance on 1 February 2015 62800 + 6Y00 —5600 = 6260 (4) Age analysis No, tne verut ts 20days but 52000 13 cutstandin, tore than 50 days and Aygo for more thaw 60 aie bear wiscounl bo Aebéors paying witht Bodays Charge interest on overdue acXounts. -Seny out account Statements sore ofLCM Lavestigate the _credtt worthihess gf debtors Lherough ly. (5) Creditors payment period Yes/No. Cash fyw: Creditors are pad before money [5 LOCO E: from debtors: this can cause cash flow problems. dyterest on money borrowed: While they “only Get 5 fo DSCOWN they can Ltchably Jose more interest by Loosen wibey {con thelv Fixed debastt_or Ly taking ok a loa ‘on. Which jrterest 18 Aarged. 144

EXERCISE 3.9 The Creditors control account and Creditors list of Lucem Stores were prepared by an inexperienced bookkeeper. She has calculated the following figures at the end of the month: & Balance of Creditors control, R55 670 € Total of Creditors list, R39 240 REQUIRED: 3.9.1 Why should the figures correspond? 3.9.2 Calculate the correct balance of the Creditors control account and the Creditors list. Use the format which is provided to show your calculations. INFORMATION: An inquiry has exposed the following: (1) An adding mistake in the Creditors list resulted in the total been added up with R480 less. (2) An invoice for stationery bought from Brooklyn Ltd, R1 960, was omitted from the books. (3) Trading stock returned to Excelsa Ltd., R720 was correctly entered in the Creditors allowance journal but posted as R270 to the creditor’s account of Excelsa Ltd. (4) The Creditors control total in the Cash payments journal is R8 200. The bookkeeper has credited this amount it in the Creditors control account. 3.9.1 Why should the figures correspond? 2 E ie at all the “The Creditors control account 1S a Summary individual Ertsaitbions tn the personal accounts of the creditas in the Creditors ledger. TAS 1S an internal contre! process whereby the one process checks the other process - 3.9.2 Creditors control Creditors list Preliminary balance/total R55 670 R39 240 Transaction (1) t+ R 480 Transaction (2) +f R 1960 +R 960 Transaction (3) — A4yso Transaction (4) —R/Ib 400 Correct balance/total RY! 230 RW&l 230 145

EXERCISE 3.10 You are provided with information relating to Park Furniture. The financial year-end is 28 February 2015. A new credit manager was appointed on 1 March 2014. REQUIRED: 3.10.1 How can the preparation of a Debtors collection schedule and Debtors age analysis assist in controlling debtors? 3.10.2 Refer to Information 2 below. Calculate the expected monthly collection of credit sales for March 2015 for inclusion in the Debtors collection schedule. Total sales for the year ended 28 February 2016, is expected to increase to R960 000. 3.10.3 The balance on the Debtors control account was R42 500 on 1 March 2014, the beginning of the financial year and R83 500 on 28 February 2015, the end of the financial year. x Calculate the average debtors collection period (in days) for the past financial year ended 28 February 2015. x Explain whether the owner should be satisfied with this. x Give a reason for your opinion. 3.10.4 The owner feels that the control of debtors has not been satisfactory since the new credit manager was employed. The owner wants you to report to him on what appears to have gone wrong. Refer to the Debtors age analysis (Information 3) and the Debtors control account (Information 4) provided below. Explain FOUR points that you would include in your report. You must quote specific information from the Age analysis of debtors (TWO points) and from the Debtors’ control account (TWO points) to support your answer. 3.10.5 Refer to the newspaper article (Information 5). How would these regulations influence Park Furniture in the granting of credit to clients? Explain TWO points. INFORMATION: 1. Credit limits and credit terms: It is the business’ policy to grant debtors credit limits of R15 000 each. They are expected to settle their accounts in 30 days. 2. Sales and collections for the year ended 28 February 2015: x Total sales for the year, R840 000 x Sales occurred evenly throughout the year x 25% of sales are for cash, the rest are on credit x 30% of debtors settle their accounts in the same month as the sales transaction month subject to 2% discount x 50% settle in the month following the sales transaction month x 15% settle in the second month following the sales transaction month x 5% are written off as bad debts in the third month following the sales transction month. 146

3. Debtors age analysis on 28 February 2015 Note: x Business policy is to set credit limits at R15 000 per account. x The credit terms are 30 days. Name Total Current 30 days 60 days 60 days + K. Kruger 15 000 15 000 D. Mans 31 000 12 000 4 000 2 000 13 000 R. Bekker 9 100 9 100 M. Karsten 11 600 9 200 2 400 R. Nkoana 16 800 7 800 5 500 3 500 83 500 44 000 11 900 14 600 13 000 4. Debtors control account 2015 2015 Feb. 1 Balance b/d 86 500 Feb. 28 Bank and discount allowed CRJ 61 000 Feb. 28 Sales DJ 52 500 Debtors’ allowances DAJ 3 000 Bank CPJ 9 700 Bad debts GJ 2 000 Sundry accounts (Discount- reversed) GJ 800 Balance c/d 83 500 149 500 149 500 2015 March 1 Balance b/d 83 500 5. Furniture retailers fear that National Credit Act will restrict business In June 2007, the government introduced a new law, the National Credit Act (NCA), which stipulates strict requirements before granting credit to any customer. Legal expert Wiko Steyn said, “The NCA was designed to save consumers from themselves. Before the implementation of the NCA, many businesses could do exactly what they wanted to. They were actively encouraging customers to buy on credit in order to increase the sales volumes of their businesses. Now, they will have to apply responsible measures before allowing customers to open new accounts” In a survey of 15 local furniture retailers, it was found that 12 retailers were extremely worried about the effect of the NCA on their businesses. One of these retailers, said that customers should be trusted to make their own decisions about whether they can afford to settle their debts, and that the new measures might force some retailers to close down their businesses. 147

3.10.1 How can the preparation of a Debtors collection schedule and Debtors age analysis assist in controlling debtors? Debtors collection schedule: Le estimates future recepis from Vebfors, ‘Ensure that debiers are kept to the terms 7 Lheir accounts ne. : "Can ae in davance when debtors do not beep to their cree ems Compare. expected budgets with actual Figures. Debtors age analysis: ~ ‘It is an effective method of creat control. * Bad debtS can be minimized ‘ActionS can be taken aganst aebters who de not ache ea the terms @9- interest can be charged, Jegal steps cam be i ‘ Decisions are made based on the debtars age analysis. 3.10.2 Debtors collection schedule Month Credit sales March 2015 April 2015 May 2015 75. B Fi 2 f [xet000 ZB] (62000 Xi “fg [ 0000 x4 (60 000 #5 March 2015 =60000, | ~/2bio, | =J0000, | = _7000, 3.10.3 Calculate the average debtors collection period (in days) for the past financial year ended 28 February 2015. age debtors 363 _ (42500 +83500) » 366 Creal Sales / 940000 x $2 / 63000 , 265 = Bgo000% 7 — = 36,5 ays Explain whether the owner should be satisfied with this. Give a reason for your opinion. No. - Debtors do not: conform to the creat terms of 30 days and tale too lng to pay. Tt was expected that: some debtars will pay within odays, but still q lo 1S 1N @rreMe. 148

3.10.4 The owner feels that the control of debtors has not been satisfactory since the new credit manager was employed. The owner wants you to report to him on what appears to have gone wrong. Refer to the Debtors age analysis (Information 3) and the Debtors control account (Information 4) provided below. Explain FOUR points that you would include in your report. You must quote specific information from the Age analysis of debtors (TWO points) and from the Debtors control account (TWO points) to support your answer. Debtors age analysis VMans now has 13000 debt tor moethn bo days. “D Mans (Rs1000) ard R. Nkcana (h16 800) have palances higher than the credjt restriction of 18000. Debtors control account ‘Dishonourea chegues (R 9 100+ hace) amount: t° 17,2 to of paymene received from: deptors (Rbl000) — thisis unacceptable. pene Bad debts of R.z000 were written off, which means the cre! worthiness of debtors was not yay Mmvest{9aced. Debtors discount. (3000) 18 &7/ of the Sales whic indicates that Loo much stock js returned by Aebvors, 3.10.5 Refer to the newspaper article (Information 5). How would these regulations influence Park Furniture in the granting of credit to clients? Explain TWO points. » fossil new clients must: be proved Properly ; that will decrease. bad debts iv the business. “Tt is easy to deceive clients; the National Creal Bet 15 necessary” for the protecti@n of che cent. * Sales increase because of creat sales - lf chents “ie aprrale, had debts will not. jacrease with more /Mgher FUes. + Businesses are forced to be awate of Seal aS. : ‘It 15 essextia/ to moke use of Ehe best deb risk management techniques, when new cheats are recridted. 149

CHAPTER 4: VALUE-ADDED TAX (VAT) 4.1 INTRODUCTION In Grades 10 and 11, attention was given to the calculation of VAT, and the terminology and theoretical aspects in respect of VAT. The following is a short summary thereof. You must ensure that you have a thorough understanding of the applicable terms and concepts. 4.2 REVISION OF VAT - CONCEPTS Value added tax (VAT) is a tax levied upon the delivery of goods and services provided by any business. The current standard rate of VAT is 15%. Any business with a turnover in excess of R1 000 000 per year must register for VAT. Businesses with a turnover of less than R1 000 000 per year can also voluntarily register for VAT. A business that is VAT registered is compelled to recover VAT from its clients on behalf of the South African Revenue Service. VAT is divided into two groups, namely, VAT input and VAT output. VAT input is the VAT that the business pays to the supplier and can be claimed back from SARS. For example, if the purchase price of a product is R3 306 inclusive of VAT, then R3 335 x 15/115 = R435 can be claimed back from SARS. VAT output is the VAT that the business levies upon the delivery of goods and services to the clients and must be paid over to SARS. If goods for R16 100 inclusive of VAT are sold, then 16 100 x 15/115 = R2 100 must be paid to SARS. A VAT control account is used to calculate whether VAT is to be paid to SARS, or whether an amount is to be refunded by SARS. The above mentioned example will appear as follows in the VAT control account: VAT - control VAT input GJ 435 VAT output GJ 2 100 Balance c/d 1 665 2 100 2 100 Balance b/d 1 665 Certain products and services (called Exempted goods) are exempted from VAT under the law, and others are not exempted, but currently enjoy a 0% tax rate (called Zero-rated goods). It is important to know which products and services are exempted and which are zero-rated for VAT calculation purposes. The list is as follows: Exempted goods and services: Financial services, Interest and levies, Export services, Educational services and services that are not profit seeking, Hire of a private residence, Transportation of persons on roads or by rail. Zero-rated goods: Brown bread, Milk, Milk powders and milk blends, Maize products, 150

Rice, Lentils, Dried beans and legumes, Fruit and vegetables, Cooking oil, Eggs, Tinned sardines, Paraffin. Petro] and diesel are also zero-rate products, but are subject to fuel levies. Take note that the Minister of Finance can, at any time, change the rate on these and similar products, Remember that there are two methods by which VAT can be paid or claimed, namely, the invoice based and the receipt based. According to the invoice based, VAT is paid and claimed on all invoices issued or received. When the receipt based is in use, VAT is paid and claimed only on amounts already received and paid. For the purpose of the exercises the invoice based will always be used. EXERCISE 4.1 Fill in the missing figures in the following table. Cost price of product VAT Cost price of product VAT excluded @15% VAT included R120,00 o R13 @ R138 ® R100 @ R210 RI 640,00 © R700 R105,00 © RBOS R1 300,00 R1IAS R1IYIS RL260 R639 R48497.00 RZ 600 R1290,00 RY84O Calculations: Is © I20x1o = 18 ® j2ox ts = 138 ® l6lox ps =14.00 @ lbioxje = 210 ul © losx = 700 © los x = = BOS 151

EXERCISE 4.2 You are provided with information regarding Cheetah General Traders. The business is registered for VAT. INSTRUCTION 4.2.1 What is meant by ‘VAT input’ and ‘VAT output’, and how does it influence the payment the business makes to SARS? Refer to the invoice below. Calculate: 4.2.2 The amount of VAT output included in R11 300. 4.2.3 The net selling price of one spade excluding VAT output. 4.2.4 The cost of one spade excluding VAT input. 4.2.5 The profit per spade earned by the business. 4.2.6 The amount of VAT input levied on one spade. 4.2.7 The amount of VAT output on one spade. 4.2.8 Calculate the amount of VAT that Cheetah General Traders must pay to the SARS in respect of one spade. INFORMATION Cheetah General Traders use the secret cost price code of ‘VOLKSWAGEN’ where V = 0 and N = 9. VAT input is included in the cost code that is determined for each product. The following invoice is presented to you: CHEETAH GENERAL TRADERS Invoice: 1189 Debit: Johann Hardware 24 July 2019 P O Box 1234, Lynwood COST CODE VAT UNIT TOTAL RATE PRICE 4 Spades KSW.VV 15% R552 7 728 16 Garden Forks LLL.WV 15% R356 2 852 8 Litres milk OV.VV 0% R12 720 TOTAL R 11 300 Signed: J. de Kock For. Cheetah General Traders 152

4.2.1 What is meant by ‘VAT input’ and *VAT output’, and how does it influence the payment the business makes to SARS? °VAT input is paid to Suppliers and can be Claimed back from SARS. “VAToutput is levied by the business on sales and must be paid over to SARS. 4.2.2. The amount of VAT output included in R11 300. Only (1728 +2852)= 10580 includes VAT. Je 10580 x47 4.2.3 The net selling price mY one Tie excluding VAT. 552. * ts = 4-30 4.2.4 The cost of one spade excluding VAT input. Cost including VAT. = KSW.VWV = 345,00 $: SUS kT = 300 4.2.5 The profit per spade earned by the business. 4-80 — 300 =. $6... 4.2.6 The amount of VAT input levied on one spade. ZyS xae 4.2.7 The amount of VAT output on one spade. 552x = at 4.2.8 Calculate the amount of VAT that Cheetah General Traders must pay to SARS in respect of one Spade, 72—-4s = 27, 153

4.3 LEDGER ACCOUNTS AND SUBSIDIARY JOURNALS 4.3.1 VAT input As already explained, VAT input is the amount of money paid by the business to suppliers of products. This amount can be claimed back from SARS. It is money that has been paid on products but which SARS “owes” us. We can view it in the same light as a debtor. VAT input is thus an asset. At the end of the accounting period the VAT input account is transferred to the VAT control account. A framework of the VAT input account in the General ledger will be as follows: VAT input B10 2019 2019 May 31 Bank CPJ 100 May 31 Creditors control CAJ 40 Creditors control CJ 200 Drawings GJ 30 Petty cash PCJ 20 VAT control GJ 250 320 320 The VAT input is paid on goods and services that were purchased from another business. Input tax can be claimed back from the SARS. Study the given account. Whenever goods are purchased for cash, on credit, or from petty cash, VAT is included in the amounts that the Bank, Creditors control and Petty cash are credited with. These amounts can be claimed back from SARS and thus VAT input is debited. If goods are returned to creditors, their account is debited with the full purchase price, inclusive of VAT. The amount of VAT that we can claim back from SARS thus decreases, and VAT input is therefore credited. It is also important to note that if we receive discount from a creditor, from whom we bought earlier on, it will also reduce the VAT that we can claim back from the SARS. This amount is already deducted in the VAT input column in the Cash payments journal. Should the owner withdraw goods it means that the owner is the final consumer of the goods and therefore the business can no longer claim back the VAT. The VAT input is reduced, because the VAT was already claimed when the goods were purchased. 4.3.2 VAT output As explained, VAT output is the amount of money that the business receives through selling products to customers. This amount must be paid over to SARS. It is therefore money that has been received, but that is “owed” to SARS. We can view it in the same light as a creditor. VAT output is therefore a liability. At the end of the accounting period the VAT output account is transferred to the VAT control account. 154

The following is a framework of the VAT output account in the General ledger: VAT output B11 2019 2019 May 31 Debtors control DAJ 100 May 31 Bank CRJ 500 Debtors control GJ 40 Debtors control DJ 800 VAT control GJ 1 160 1 300 1 300 VAT output is levied on all goods and services that the business supplies. The business owes the output tax to SARS. Study the given account. Whenever goods are sold for cash or on credit, VAT is included in the amounts that are debited to the Bank and the Debtors control. These amounts are owed to SARS and therefore VAT output is credited. If a debtor returns goods to us, his account is credited with the full purchase price, which includes VAT. The amount of VAT owed to SARS therefore decreases and VAT output is thus debited. It is also important to note that should we have allowed discount to a debtor, who had bought from us earlier on, this would also reduce the VAT payable to SARS. This amount has already been deducted in the VAT output column in the Cash receipts journal. If a debtor’s account is written off as a bad debt it means we did not receive the amount from the debtor and it will reduce the amount payable to SARS. If it has already been paid over, the VAT portion can be reclaimed from SARS. 4.3.3 VAT control We close off the VAT-input and VAT-output accounts to the VAT-control account at the end of the tax period. If the VAT control account should show a credit balance, it represents the amount payable to SARS in respect of VAT for a specific period. If, however, the VAT control account shows a debit balance, it means that SARS owes the business an amount in respect of VAT for the tax period. The VAT control account can therefore be shown in the financial statements as either an asset or a liability. The following is a framework of the VAT control account in the General journal; VAT Control B12 2019 2019 May 31 VAT input GJ 250 May 31 VAT output GJ 1 160 Balance c/d 910 1 160 1 160 Jun. 1 Balance b/d 910 In this case the VAT control account will appear as a liability of R910 in the financial statements. 155

4.3.4 Subsidiary journals and posting It is not expected of candidates to record transactions involving VAT in the subsidiary journals. Nevertheless, it is important to be able to do calculations in respect of VAT, in order to calculate missing amounts in the subsidiary journals. Information regarding column totals will be given so that ledger accounts can be drawn up. A column for VAT is included in every subsidiary journal in order to record the VAT portion of transactions. The following subsidiary journals will include VAT-input columns: x Cash payment journal (VAT on discounts received from creditors is already deducted here) x Creditors journal x Petty cash journal x Creditors allowance journal x Withdrawals in the General journal will also influence VAT input. The following subsidiary journals will include VAT-output columns: x Cash receipts journal (VAT on discounts allowed to debtors is already deducted here) x Debtors journal x Debtors allowance journal x Bad debts in the General journal will also influence VAT output. 4.4 COMPLETION OF VAT 201A – RETURNS FORM All businesses registered for VAT must submit a VAT 201A-return to SARS at the end of the tax period. This form is sent to the postal address of the business immediately upon registration. This returns form includes all the details of the business, as well as the VAT registration number. Amounts entered on the VAT 201A-return, must correspond with amounts on all tax invoices received and issued, so that internal audit procedures and control can be facilitated. It is also expected of businesses and accountants to act in an ethically correct manner by paying the correct VAT that is owed to SARS. Unfortunately, this is not always the case. Some businesses evade VAT by not revealing correct information to SARS. In some cases input tax is claimed back for amounts that are unsupported by valid tax invoices. Such behaviour is fraudulent and can result in heavy penalties or even imprisonment for tax evasion. Remember that accountants and bookkeepers must always be ethically correct and act in a professional manner. The basic ethical principle of integrity, objectivity and confidentiality must be maintained at all times. 156

The following is a basic layout of the VAT 201A-return form: VALUE ADDED TAX VAT 201A SARS Return for remittance of PART 2 VAT S. van der Walt 635 754 0987 1 Atterbury Road Last day for 25 April 2019 Pretoria rendering 0001 returns/payments Amount of payment R8 134 58 Trading or other name AB Traders Tax period ending: 31 March 2019 VAT registration number PART 1 A. CALCULATION OF OUTPUT TAX (Rand only) Supply of goods and/or services by you Consideration VAT (Including VAT) Standard-rate (excluding capital goods and/or services and accommodation) 431 250 52 960 53 Standard-rate (only capital goods and/or services) 132 600 16 284 21 Zero rate XXX Exempt and non-supplies XXX Adjustments: Other : Bad debts recovered 570 70 00 TOTAL A TOTAL OUTPUT TAX 69 314 74 B. CALCULATION OF INPUT TAX (Input tax in respect of): Capital goods and/or services imported or supplied to you 41 484 21 Other goods and/or services imported or supplied to you (not capital goods) 19 938 96 Tax on adjustments Bad debts 515 79 TOTAL B TOTAL INPUT TAX 61 938 96 VAT PAYABLE / REFUNDABLE (TOTAL A – TOTAL B) 7 375 78 Additional penalty R 737 58 + interest R 21 22 758 80 AMOUNT PAYABLE /REFUNDABLE 8 134 58 157

EXERCISE 4.3 The information below relates to Stormers Stores. The perpetual inventory system is used. REQUIRED: Explain briefly when a business is compelled to make entries for VAT. 4.3.2 Analyse the transactions for the financial year under the headings on the answer sheet . 43.1 TRANSACTIONS FOR THE YEAR ENDED 30 JUNE 2019: UsbwWwne account. . Credit purchases of trading stock for the year, amounts R165 600, including VAT. . Cash sales amounts to R393 300, including VAT of 15%. Mark-up on cost price is 20% . . A debtor owing R10 925 (VAT included), is insolvent. The account must be written off. . Stock valued at R5 600 (VAT included) was returned to creditors. . A cheque of R72 000 issued to SARS for payment of VAT as calculated in the VAT control 4.3.1 Explain briefly when a business is compelled to make entries for VAT. Ary business with a turnover of Rimillion per year must register -for VAT. 4.3.2 Analyse the transactions for the financial year under the headings : General Ledger Amount ~ eran 20 Account credited Tiny aD - | Tra: Ing Stoc . ' eT Bank Sales 342.000 VAT ~— output 5/300 : Cost e r Sales Trading stock 255 00 . t 500 __|VAT=outpu Debtors cals ips . : | In Cc 6. es VAT— Contro Bank “12.000 158

EXERCISE 4.4 The following information appears in the relevant subsidiary journals of Whelpton Stores, in respect of the VAT period that ended on 21 March 2019. REQUIRED: 4.4.1 Calculate the VAT in each journal if all the given amounts include VAT. 4.4.2 Calculate the amount of VAT that has to be paid to SARS for the tax period ending 21 March 2019, without preparing the ledger accounts. 4.4.3 Prepare the opened ledger accounts in order to determine the amount due to SARS. INFORMATION: The following information appears in the subsidiary journals in respect of thet tax period ending Ss on 21 March 2019 (all totals include VAT at 15%): WS % po 3 aT 4.4.1 Calculate the VAT included in each amount Total VAT Sales in the Cash receipts journal 33 235 ease Sales in the Debtors journal 75.900 900 Debtors allowance in the Debtors allowance journal 4485 Ss ZS Purchases in the Cash payments journal 24 150 3 1S< [e) Purchases in the Creditors journal 15 640 Purchases in the Petty cash journal 690 Returns in the Creditors allowance journal 5 980 | General journal: Drawings by the owner 1380 130 Bad debts 2760 3 60 4.4.2 Calculate the amount of VAT that must be paid to SARS for the tax period ending on 21 March 2019, without drawing up the ledger accounts: VAT- Output VAT- in = (1-335 +9900- wae ~360) ~ — (31s0+20 $90-780-486) 13290 4.320 S3I10 oO S eT General ledger of Whelpton Stores VAT inpu B10 Tt, 3 1S0 Concol Ay “120 n ZO4O 180 Pe kh Pes 90 = Ks p¥e) 5230 VAT output BI = * 240 pe 159

EXERCISE 4.5 Winterton Stores is registered for VAT at SARS. Their gross profit margin is 100% on cost price. Totals of most of the subsidiary journals at the end of June 2019 are provided. These totals were checked and verified as correct. INSTRUCTION: 4.5.1 What is the difference between VAT input and VAT output? 4.5.2 Complete the omitted information marked [1] to [13]. (All calculations must be rounded off to the nearest Rand.) INFORMATION: Totals of subsidiary journals on 30 June 2019: Cash receipts journal VAT Cost of sales Debtors control Sundry Bank output Sales Receipts Discount accounts [2] [1] 88 000 44 000 24 000 2 800 12 500* * Rent income Cash payment journal VAT Trading Consumable Creditors control Sundry Bank input stock goods Payments Discount accounts 142 842 [3] 28 000 4 300 [4] 1 500 78 000* * Equipment Petty cash journal Petty cash VAT Trading stock Consumable Sundry input stores accounts [6] 165 [5] 650 850* * Wages Debtors journal Debtors control VAT Sales Cost of output sales [8] 840 [7] [9] Debtors allowance journal Debtors control VAT Debtors Cost of output allowance sales [11] [10] 1 600 800 Creditors journal Creditors control VAT Trading Consumable Equipment Sundry input stock goods accounts [12] 5 565 18 000 3 100 16 000 - Creditors allowance journal Creditors control VAT Trading Consumable Equipment Sundry input stock goods Accounts 2 530 [13] 1 940 260 - - 160

4.5.1 What is the difference between VAT input and VAT output? “VAT input is paid to Supplier of goods and can be claimed back from SARS. “VAToutput is levied on the sales of goods and must be paid over to SARS. 4.5.2 Complete the omitted information marked [1] to [13]. Number Answer Calculation Is” (B8000%70) — 7 m [127180 13200 — Y20 " |}37700 | 13200 + 88000 + 24.000 +12 500 " |16320 |\(28000-+4300-/500+78000) x455 115997 |1ly2842- (1654S +28000+4.300+78000) © | 2ZUS | 6S +4¢so + 650+850 m | 5600 yo xe “| o4Ho | eyo x ie " |2800 | S600 x £% 0 240 | |600xe m™ || 840 | 1600 x 8 m™ |42 665 |SS65+ 18000 +3100 +/6000 m | 230 | 2530 x qe 161

EXERCISE 4.6 Africa Imports is a dealer who is registered for VAT. On 31 July 2019 the VAT control account had a credit balance of R12 455. REQUIRED: 4.6.1 Complete the VAT control account at the end of August 2019 by recording all transactions directly therein (Thus there is no VAT input and VAT output accounts). INFORMATION: Totals of subsidiary journals on 31 August 2019 are provided. All relevant totals include VAT at 15% and the dealer uses a profit mark-up of 33ѿ% on cost price. Cash receipts journal Bank VAT Sales Cost of Service fees Debtors Sundries control sales control 110 500 12 000 63 400 47 550 16 600 18 500 0 Cash payments journal Bank VAT control Trading Equipment Stationery Creditors Sundries stock control 85 008 8 498 43 180 8 090 2 480 19 860 2 900 Petty cash journal Petty cash VAT Trading Consumables Wages Stationery Sundries control stock 2 995 ? 900 180 1 500 220 0 Debtors journal Debtors VAT Sales Cost of control control sales 52 440 6 840 45 600 38 000 Debtors allowance journal Debtors VAT Debtors Cost of control control allowance sales 4 968 ? 4 320 3 600 Creditors journal Creditors VAT Trading Consumables Sundries control control stock 34 845 4 545 24 560 4 320 1 400 Creditors allowance journal Creditors VAT Trading Consumables Sundries control control stock 2 070 ? 1 800 0 0 General Ledger Details Fol. Debit Credit Drawings B2 1 380 VAT control B12 180 Trading stock B8 1 200 162

4.6.2 A street dealer exhibits the following advertisement: Genuine leather shoes R368,00 per pair VAT included Asked whether he is registered for VAT, he replied: “No, it is not necessary. I have to ask VAT on my shoes because I pay VAT when I buy it from the factory shop. Only dealers who sell stolen goods cannot ask VAT, because they have not paid VAT.” He also said that the factory shop pays VAT to SARS and that the government receives enough, he therefore may keep his VAT. REQUIRED: Give one reason why the street dealer cannot ask VAT. What can clients do to prevent the street dealer from asking VAT? 4.6.1 General Ledger of Africa Imports VAT control Pid 12455 ay 81098 A Balance Petty cash Fo 195] “3 Rank R3| 12000 Ctcontrol ¢3/ 4545) | Dtcontrol D3) 6840 rol 648 Ct Control CAT! 270 Ja | 17359 rawings Ga 130 V 74S: 1745 — Ken alance 17854 4.6.2 Give one reason why the strect dealer is not allowed to ask VAT. *He is not r behalf ". istered -for- VAT and thus SARS will not receive the money that he levies ‘on their What can clients do to prevent the street dealer from asking VAT? » Report him to SARS in order for him to 163

EXERCISE 4.7 The following information was taken from the books of Wonder Stores for February 2019. All goods bought and sold are subject to 15% VAT. REQUIRED: Calculate the VAT amount payable to/by SARS on 28 February 2019. Indicate whether the amount is payable to or receivable from SARS. Show all calculations. Ledger accounts for VAT are not required but you may use it to calculate your answer. INFORMATION: VAT excluded VAT included Stock bought by cheque 1.760 000 ? Equipment bought by cheque 40 000 46 000 Sales of goods for cash and on credit 2 938 400 Goods returned by clients 48 000 55.200 Discount allowed to debtors 4000 2? Drawings of stock by owner 24 000 27 600 Bad debts 2 18 400 Calculate the VAT amount payable to/by SARS on 28 February 2019. Indicate whether the amount is payable to or receivable from SARS. [12200 WAToutput: 122 400 —1200 — 600 -2400 = VAT input : 2by-000 + 6000 — 3600 = 266 400 = [54-200 owed by SARS to Wonder Stores. OR General ledger of Wonder Stores VAT control +600 ‘Dtcontrol bY) “*~ DAT 7 Winas GI| 3600 ee ee 600 lance? Sa | ISY 200 20200,

EXERCISE 4.8 Sevens Supermarket is a registered VAT dealer. VAT is calculated at the standard rate of 15%. Goods are sold at a 50% mark-up on cost price. REQUESTED: 4.8.1 Calculate the VAT payable to SARS or receivable from SARS. Show clearly whether the amount is payable or receivable. 4.8.2 Calculate VAT on the net purchases of trading stock for February 2019. 4.8.3. Calculate the VAT amount which was shown on invoices issued to debtors during February 2019. 4.8.4 Calculate the debt of debtors that was written off as bad debts. INFORMATION: The following accounts were taken from the General ledger of Sevens Supermarket. VAT control 2019 2019 Feb. | 28 | Vat input GJ 12000 | Feb. | 28 | VAT output GJ 33,300 Trad ing stock —= 2019 2019 Feb. | 1 | Balance bid 122 000 | Feb. | 28 | Creditors control _| CAI 8 000 28 | Creditors control Cc 80 000 Cost of sales DI 83 000 Cost of sales DAJ 1200 Cost of sales CRI 65 000 Debtors control ~- —-— 2019 2019 Feb. | 1 | Balance b/d $5000 | Feb. | 28 | Bad debts GJ 2 28 | Sales and VAT- Cc 143 175 output VAT-output 60 4.8.1 Calculate the VAT payable to, or receivable from, SARS. 33300 — 12000 = 00, Payable to SARS 4.8.2 Calculate on et purchases of trading stock for February 2019. C80 000 — B00) x 3, = 10800, 4.8.3 Calculate the VAT amount which was shown on the invoices issued to debtors during February 2019. Ss _ 143 INS x 4.84 Calculate 1c is rs that was written off as bad debts. 100 60x aS 60x Ts = Lbo total debt = 4.00 _, loss for the cota dels the business 165

CHAPTER 5: CONTROL OF FIXED ASSETS AND INVENTORY 5.1 INTRODUCTION In this Chapter we will especially look at the determination of the value of two non- current assets, namely, Vehicles and Equipment, and we will also look at the value of a current asset, namely, Trading stock at a specific point in time. Much of the work has already been covered in Grade 10 and Grade 11. There are, however, specific aspects in connection with the calculation of what the specific asset’s value is at a specific point in time that need further attention. 5.2 NON-CURRENT ASSETS In this Chapter, wherever mention is made of non-current assets, we will be specifically referring to Vehicles and Equipment. Non-current assets are purchased for use within the business in order to increase the income of the business. Non-current assets are usually bought to be used for an “indefinite time” within the business. They are not purchased with the specific intention of being sold again. If, however, the relevant non-current asset is dispensed at a later stage a further profit/loss could be realised from the sale. 5.2.1 Life expectancy as opposed to Service life of a non-current asset “Life expectancy” means the actual physical life of the asset, i.e., until it becomes utterly useless and is worth nothing. Such an asset will then be merely written off, or be disposed of at a very low price. The “service life” of an asset, on the other hand, refers to the period of time for which the asset will be useable and of value to the business. A very good example to illustrate these differences is technologically sensitive equipment such as computers. Although a computer may have a life expectancy of 10 years, or more, it will usually become technologically obsolete within 3 to 4 years, and be no longer of any use to the business. The useful life or service life for the business is thus 3 to 4 years, and depreciation will consequently be written off for this period. The asset is at this stage usually still of use for personal needs where the latest technology probably does not play such an important role. It is therefore possible to sell these computers even though they have reached the end of their service life for the business. 5.2.2 Residual value as opposed to carrying value When the service life of the relevant asset has been determined, we can also determine what the possible selling price of the asset will be at the end of its service life. This possible selling price of the asset is known as the “residual value”. The carrying value, on the other hand, refers to the value that the asset will have for the business at that specific time. The carrying value is determined by deducting the total amount of depreciation written off up to that date, from the original purchase price. If the asset is to be sold at the end of its service life the potential profit/loss on the sale will be represented by the residual value minus the carrying value of the asset. 166

5.2.3 Depreciation According to the matching principle all income and expenditures must be paired to the specific year in which they were earned or expended. If a specific asset have not been used for a specific time we would not have been able to earn income that we did for that period. The fact that an asset has been used caused its value to decrease. It is therefore necessary to deduct the depreciation on the specific asset, that was written off during that period, as attributable expense for the relevant period. Always remember that depreciation can be calculated in two different ways, viz., x Cost price method: This method is also known as the fixed payment method or the straight line method. According to this method a fixed amount of depreciation is written off over the service life of the asset. x Diminishing balance method: This method is also known as the carrying value method or the book value method. According to this method, depreciation is calculated each year as a percentage of the carrying value of the asset. In this case the service life of the asset is not known, and it is assumed that the value of the asset at the outset will be diminished by much more than in the following years. EXERCISE 5.1 Information and transactions in respect of Park Stores for the period 1 March 20015 to 1 September 2017 is given. INSTRUCTION Show all transactions under the correct headings in the given table. Amounts must be clearly shown, and the specific accounts in the General ledger that are to be debited and credited must be shown as well. All calculations must be rounded off to the nearest Rand. INFORMATION: 2015 March 1 A new vehicle is bought on credit from Hatfield Auto for R340 000. An alarm system costing R8 000, and a gear lock costing R1 800 are installed and paid for in cash. The vehicle was insured with Outsurance and the annual premium of R4 200 paid by cheque. New office equipment of R130 000 purchased by cheque. 2016 Feb. 28 Depreciation on the vehicle must be written off, using the fixed payment method. It is estimated that the vehicle will have a service life of 5 years and that the residual value of the vehicle will then be R49 800. Depreciation on equipment is written off at 15% per year of the book value. 167

2016 Nov. 30 An additional vehicle at a cost of R240 000 was bought for cash. A new desk and furniture for the office was bought on credit for R9 800. 2017 Feb. 28 Depreciation on vehicles is written off on cost price. It was estimated that the vehicle, which was bought 30 November 2016, would have a service life of 10 years, and that the residual value would be R15 000. Depreciation on equipment must be written off at 15% per annum on the book value. Jul. 31 The vehicle bought on 1 March 2015, was traded in at carrying value on a new vehicle of R430 000 at Hatfield Auto. General ledger Date Account debited Account credited Amount Maren 1 | VoAlcles Creay tors contral 240 000 Vehicles Bik F3LD Lysupante. Bai Y2L0 Cqupphnene Bate (20 200 te. 28 | Lereciation Aecaulaed dapedabiy, G0 200 On VLHIES Lebrecation Letimiloted depreciatin, (7 $22 i on GU Dine: Now 30 Vehicles Lae 2Y0 200 Eguypptent Credias control 7600 feb. 28 | Deprechation Hacumulited depreciatin, CG 625 (000456285) on vehyofes—_" Lepteclatioy, Picumulatec Mebreciation| (6 9 #3 Ub56 +268) on eguipment Sua | Asset dispacal Vehicles 3YG 800 Lepretiation fiicamulated clooreciay 25000 : On VeWfOles rcumulaled wbbreciation | fpssel ai stpsal 145 COD on yencles ” ue Creditors control Asset dispesa/ 204800 Vehicles Credi’tots. coutzol 430 000 168

Calculations and remarks 20/8 Tate nme that the cast prlee of the vehjde thcla ges =, ea Wars! she alarm system and geek, page — 3yggon 208 Depreciation on Vewcres. ne / vals Write off amount = Total cast price — resjdual valle = 34990 — 497800 =_K200 200 : See 3 * Service life of syears means 272" _ fpp200 ay “nee Lepredation on egy = dt bho p.a. on batvalve (190200 12 xB = KM 500 Leppeciation on VeHlAes. New "vehicle bayghe ott FOfYWN. 2AE Write off amomt = 2¢0000 — 15 200 = 225000 an 225000 - {22500 , ervice lite of Jo years means = ipraiation pa. : 2Nov. 20 -2eeb 2017 = 32 racntHs. = Z2.500K2 = VA 5 B25 Od vehicle: R ooo aeprecigtion per year. Lepreciation on eg.ul pment: od epee (iz 000 —/9 520) Xfoxte -LBIF, New equa pment : (9300 -0) x = R368. 2017 Trade tn_o Vehitfe: me ” Bird deprecfation for 5 mamins = LO 000K Fz = =Z5 700 +. Total accumulated depreqation == 0000+ 60000 425000 =h/¢5 000 Carrying value on day of brade tn = 29800 — 145 000 20/7 Feb 28 169

5.2.4 Asset disposal It is very important that you study Chapter 3 of your Grade 11 work book in which the Asset disposal is comprehensively discussed, again. The practical exercises are not repeated in this book, but will definitely be examined in the final examination. Remember the following: When a Non-current asset is sold, all information in respect of that asset must be removed from the books of the business — i.e., the original cost price and the total accumulated depreciation up to the date of the sales transaction, must be cancelled. NOTE! If an asset is sold during the financial year the depreciation must first be brought up to date. STEPS TAKEN IN ASSET DISPOSAL: 1. Remove the cost price of the asset that is sold. (Dr. Asset disposal and Cr. Vehicles /Equipment) 2. Bring the extra depreciation into account if the asset is sold during the financial year. (Dr. Depreciation and Cr. Accumulated depreciation on vehicles/equipment) 3. Then remove the total accumulated depreciation up to the date of the sales transaction. (Dr. Accumulated depreciation on vehicles / equipment and Cr. Asset disposal) 4. Do the “disposal transaction” Sell for cash: Dr. Bank and Cr. Asset disposal Sell on credit: Dr. Debtors control and Cr. Asset disposal Trade in on a new asset: Dr. Creditors control and Cr. Asset disposal Owner takes for personal use: Dr. Drawings and Cr. Asset disposal Give as a grant / donation: Dr. Donations and Cr. Asset disposal 5. Close off the Asset disposal account to — Profit on sale of asset (Dr. Asset disposal and Cr. Profit on sale of asset) Loss on sale of asset (Dr. Loss on sale of asset and Cr. Asset disposal) EXERCISE 5.2 Complete the Asset disposal account if a vehicle with a cost price of R320 000 and accumulated depreciation of R189 000 on 25 May 2015 the date of the sale, was sold on credit at a profit of R23 000. Assets disposal B23 Hay \25| Vehicles QT | 320 000 ad 25 Actumlated der GI| 189 bop Mbt on asset \GI| 23 v00 evectation on vehi ont degposaf Lebtars. combed \GI| 154.000 343 000 243000 170

EXERCISE 5.3 The financial year of Park Merchants ends annually on 31 December. REQUIRED: Consider the given information to complete the asset register on the answer sheet in full. All calculations must be shown clearly. Calculations to be rounded off to the nearest Rand. INFORMATION: The asset register regarding Vehicle NFF 167 GP, a Ford Bantam bakkie, bought from Hatfield Auto on 1 June 2013 for R125 000, has to be completed. Take the following into account: ¢ Depreciation on vehicles is written off at 20% according to the diminishing balance method. Calculations to be rounded off to the nearest Rand. e The bakkie was sold on 1 May 2016 for cash, R69 156 to S. van Staden. ASSET REGISTER P.tZ General ledger account: WM, Lhicles Dae Ocelge cae eBoy Mega Me avs noone oecemyns Vehicle éépistzaiton:. NEC ‘ 61 GF j Date bought: Jf 5 June 20/3 ante Bought from: _ Hatt teld pute ee ee Cost price: 125000 Method and rate of depreciation: 20 fh fi aa LOO: fe UV Whe DETAILS IF SOLD: Date soie:... lay 2018 To whom sold: 3. van SCaceh Selling price: KELL Profit/Laaes_ with selling: 3200. Details of depreciation: Date Current depreciation Accumulated depreciation 31 Dec. 2013 l(Ia5 000-0 )B2 x58 = ( fae" 4583 K/p 282 31 Dec. 2014 | ¢/25 000 -/4 583) XFS XE (/4 SSS F2ZZ°C8EZ) 22083 Ke 36666 31 Dee. 2015 | (125000 Sb SEL)K2E x fe (2h bLE6 F-17667) (bb G4 BBR 1 May 2016 | C725 000-27 SAB)x 20 x Z (B4233 + E71/) 4 4.59 O44. 171

EXERCISE 5.4 The following information was taken from the books of Park Stores. The financial year ends annually on 28 February. PREPARE THE FOLLOWING: 1. Use the information below and open the given accounts in the General ledger of Park Stores by calculating the balances on 1 March 2017. ( Calculations of depreciation to be rounded off to the nearest Rand). Park Stores own three vehicles of which the following information is available: number No. | Registration Date bought Cost price Method of depreciation 1 GGH 445 GP 1 January 2015 | R120 000 | 10 %p.a. on book-value KNV 345 GP 30 July 2015 | R 89000 | 12 %p.a. on book-value 3 RTD 229 GP 1 April 2016 | R220 000 | 10 %p.a. on cost price 2. On 1 August 2017, vehicle KNV 345 GP was sold on credit to M. van Rooyen for R82 196. Show calculations for the depreciation and transfer the transaction to the General ledger. 3. Calculate the depreciation that has to be written off on the remaining vehicles on 28 February 2018 and enter it in the General ledger. 4. Balance all accounts on 28 February 2018. Calculation of depreciation: GGH 445 GP 28 Feb.2015 [Cpggag—0) Xf x B = f2z000 28 Feb. 2016 |(jpp gap —2000) XAG x 4 = 2/1800 28 Feb. 2017 20 000 - 13800) x $2, x B = £9 620 28 Feb. 2018 Ozo00 — 2yyz0)x fx = 7553 KNV 345 GP 28 Feb. 2016 | (gagap-o) X 1B Xi = £4230 28 Feb. 2017 | (agg —b220) XB xB = RIFB2 1 Aug. 2017 | (9900 —/6162) xB XZ = h3642. RTD 229 GP yt 28 Feb. 2017 | a70000 x8 xfE = R20 67 28 Feb. 2018 | 2a90m x JE xB = £2200 172

General Ledger of Park Stores Vehicles B8 Haral (| Balance Ml 429 c00 \Gen\/| Asset drGoase/ 590 ZB bd Salone” UY 2000 Y29 000 429-400 itr 1| Lalance Yh 340 000 Accumulated depreciation on vehicles B10 fi| Asset ofspasa/ 19 600 Vopr! | Polance YA 60 247 EB bal Lexlance” Us bugil Depreciation |g 3 o42 ZB bel Lépyeclation 5/55 5 49 doe k reeese e452 Wir | Latonce WA VAL a Asset disposal B25 Fee-|) | Vehicles gr 29200 \tie|)| Acumubted dyweastin | 19 04 Liopit on asset (3000 an vehicles dgpasa! bebtors contrd \W| 82/96 102000 182 000 Depreciation N13 fg \Pccamalated ceaciation \GT| 3 242 \eb lel Hraofit and toss VG\ 35 2000 on vehuidles accoutt Feo 1 Recum wl 3/558 on vel les 35 2.00 35 Z00 173

5.2.5 Control of Non-current assets The internal control procedures of Non-current assets must provide assurance that assets are only bought and sold with proper authorisation, also that they are completely safeguarded, and are accurately recorded. The following are examples of mechanisms that can be of assistance: x Non–current assets must be physically protected against theft and break-ins; x Proper authorisation must be obtained before any new assets are purchased; x Every new asset purchased must be properly recorded and maintained in the Asset register; x These asset registers must be regularly checked by physical stocktaking; x Lost, stolen or damaged stock must be reported immediately; x A depreciation policy must be devised and implemented; x Any change in respect of non-current assets must immediately be recorded in the relevant subsidiary journals. 5.2.6 Internal audit of Non-current assets The effectiveness of the use of non-current assets must be continuously evaluated. Measures taken to protect the assets must be reviewed, not only in respect of theft, but also against unnecessary wear and tear that could possibly decrease the service life of the asset. Efforts must be made to utilise the asset optimally at all times without unnecessarily ruining and damaging it. 5.3 Inventory When we talk about inventory, we are referring to the Trading stock that is bought by a business with the intention of selling it again at a profit. In Grade 11 you learnt that a business can record the amount of stock on hand either by means of the perpetual inventory system or by means of the periodic inventory system. If the perpetual inventory system is used the Trading stock account is always debited when inventory levels increase, and credited with the cost price when inventory levels decrease. The balance of the Trading stock account therefore always reflects the balance of the inventory that should be on hand. However, a physical stocktaking must be done at the end of the accounting year to determine the actual balance of trading stock on hand. If the periodic inventory system is used, no continuous record of the increase or decrease of inventory is maintained. When goods are purchased the Purchase account is debited. When goods are sold only the selling price is recorded. At the end of the accounting year a physical stocktaking will reveal the value of the unsold stock. This closing inventory is used to calculate the cost price of the goods that were sold during the year. All organisations, irrespective of which inventory system is used, must still conduct a physical stock-taking. This physical stocktaking embraces two aspects: x Determination of the physical quantities of inventory on hand x Ascertaining the value of the physical quantities of inventory on hand. 174

EXERCISE 5.5 The given information was taken from the books of Park Merchants on 28 February 2015, the end of the financial year. Note that Park Merchants retains a mark-up of 25% on cost price. REQUIRED: Use the information and prepare the following in the Ledger of Park Merchants: 5.5.1 Trading account, if Park Merchants uses the perpetual inventory system. 5.5.2 Trading account, if Park Merchants uses the periodic inventory system. INFORMATION: On 28 February 2015 the following figures appeared inter alia in the books of Park Merchants: Trading stock (1 March 2014) 478 000 Purchases of stock during the year 370 000 Stock returned to creditors 12 900 Carriage paid on trading stock 16 100 Customs duty paid on trading stock 28 000 Trading stock on hand (28 February 2015) 189 200 Sales 924 800 Debtors allowance 62 300 5.5.1 General Ledger of Park Merchants Trading account (perpetual inventory system) N23 te) 7 : alee Coto cabs |o7| 690 wo \eee.|z6] Ses G\ 66270 (abs x25) (ete aR) Profit. ond lass acroun\ QT | 172700 (y0%s Profit) ‘2500 B62500 _| 5.5.2 General Ledger of Park Merchants Trading account (periodic inventory system) W23 20) . febloa| Owning stock |G | 4reoon \Fek us| Saks GI | 36250 Pouchaies raoco rata) GT 357 a0 (zy $00 62300) Freight on purchases | C1\ Up 000 Chasing Stock | G3 129200 Customs duty |GT| 28 006 Arfit ond lo3S accoumbs QT | 172.590 Grass peabit 105/700 1051700 175

5.3.1 Calculation of value of closing inventory During the financial year different prices are paid for goods purchased. At the end of the year only a portion of the inventory will be left and this portion will not necessarily have been purchased at the same price. It is thus clear that a problem exists in respect of the value at which the inventory must be shown in the financial statements. A decision must be taken as to which of the different prices paid for the inventory during the year, would be shown as the cost price for the remaining inventory. The choice made, should be the one that brings with it the most realistic determination of profit. If we for example, have inventory that was bought a long time ago, but which became very scarce and is currently selling at highly inflated prices, we can show the old inventory in the financial statements at the new, higher price as well. This is because the old inventory can be sold at the same price as the newer inventory. There are 3 methods which are generally used to determine the value of inventory on hand at the end of the financial year: x First-in-first-out method (FIFO) x Weighted average method x Specific identification method (1) First-in-first-out method (FIFO) This is a very simple method whereby costs are allocated on the basis that whatever goods were bought first will also be sold first, and that the closing inventory will therefore consist of the last inventory purchased. (2) Weighted average method When this method is used, it is important to differentiate between whether the business is using the periodic- or the perpetual inventory system. If the periodic inventory system is used, the weighted average cost of every item is calculated by merely dividing the total cost of the items bought during the period by the number of items purchased. The number of items in the closing inventory is then multiplied by the weighted average to calculate the total value of the closing inventory. If the perpetual inventory system is used, a new weighted average must be calculated every time new inventory is purchased. The Cost of sales account is debited with the new weighted average of inventory every time inventory is sold. (3) Specific identification method This is the method that you have used up to now and is the easiest method. The specific cost price of every article that forms part of the closing stock is provided and the stock must then be shown at those given prices. 176

EXERCISE 5.6 The following information relates to commercial activities of Park Merchants ended 28 February 2015. The business sells only one type of TV, and decided to keep the selling price unchanged during the year. Park Merchants is eager to negotiate a loan at the bank. They want to assure that the profit in the financial statements creates a positive impression on the bank. The business uses the periodic inventory system and the FIFO method to value the stock. INFORMATION: Number of Unit price (R) Total (R) units Sales ? 1 400 252 000 Stock on hand 1 March 2014 40 units 950 38 000 Purchases during the year: 210 units 170 000 June 2014 30 units 900 27 000 October 2014 80 units 850 68 000 January 2015 100 units 750 75 000 REQUIRED: 5.6.1 Explain the difference between the periodic and perpetual inventory systems. Also state one advantage of each. 5.6.2 Calculate the total number of TV sets sold during the year. 5.6.3. Calculate the total number of TV sets on hand on 28 February 2015. 5.6.4 The business uses the FIFO valuation method. € Calculate the value of the closing stock according to the FIFO method. € Calculate the gross profit by preparing a complete trading account. The FIFO method and periodic inventory system are used. 5.6.5 To obtain a loan, Park Merchants wants to change the inventory valuation method to the weighted average method. Calculate the value of the closing stock on 28 February 2015 by using the weighted average method. 5.6.6 Will it be, according to your opinion, ethical correct for Park Merchants to change the inventory valuation method? Give one reason for your answer. ‘odie imentory system stack on hand 1S atl Gopermined «With “Ete perpetual inventory system continucus record labia, at the hd of the accounting period ly means of physica, Stacktabing. Advantage of each: ‘Perpetual mates 1teasier to trace any loss of Stock avd to reptifies aes Peewee balance of trading stack has © al Stack tatings. ais lebfool 1S easy Ne cheap because (& 1s ngt pecessary ty calculate the cost of sales continuously. 177

5.6.2 | Number of TV sets sold during the year: 232000 = ; fe? = [20 ants 5.6.3 Number of TV sets on hand on 28 February 2015: ldo + 210) —/80 = zountts 5.6.4 Value of closing stock: 7ounts x K-75 = R52 500 Gross profit calculation Trading account opening Stok (VOXP) = 2g 000| = Gales 252.000 Farcha Closing stack 52.500 (ana lac ato) ath) 4 Profit ond less account: 96 300 (Gross profit) L 2224 2, 5.6.5 Value of closing stock according to weighted Feta} acts Weighted aver - ole! COS cv) ave Number of Products = ZOE 000 250 2 = £632 per whl . Jounits xf 832 = RSG 240 5.6.6 Is change ethically correct? Give a reason No. Method te determine value of Steck canmot change Just to increase the. GEOSE (pe: The methed used to deternite the valye of Steck, has to be shown in the notes of Stith Jn the bilince sheet. te enable readers of the statements to come to thelr Cwn COACIESIONS. 178

EXERCISE 5.7 The following information regarding Park Stores is available for the purchasing and selling of stock for May 2015. The periodic inventory system is used. Amount Unit price Total Opening stock on hand on 1 May 2015 50 R12 R__ 600 Purchases on 8 May 2015 60 R14 R_ 840 Sales on 10 May 2015 40 R22 R__ 880 Purchases on 20 May 2015 20 RIS R__ 300 Sales on 25 May 2015 80 R22 R_1 760 REQUIRED: 5.7.1 Calculate the value of the closing stock on 31 May 2015 according to the FIFO stock valuation method. 5.7.2 Calculate the value of the closing stock on 31 May 2015, if the weighted average method is used. 5.7.3 Explain briefly the effect of the different stock valuation methods on the financial statements; in other words which figures will be different. Refer in your answer where the figures will specifically have an effect, by referring to figures. 5.7.1 Value of closing stock according to FIFO method: Number of units on hand = 50+b0-YO720~80 = (0 Wntes (0 Wnlts kA = L150 : 5.7.2 Value of closing stock according to weighted average method: =a Nuwiber of, Qh _ Conia) + leck 2x) + (20K ls) o. R/3,.385 x 10 unis oreo” téa 720 = 423, BF 2 “Es, 385 per unit, . io aifrerene “Vebhods po calculate the value has i effect on the value of the closing SLOG. FIFO =Kls0 and weighted average = fi33,08 | This will therefore have the effeck thet te cost of sales will differ with 76,15. (Reo -k/3385) + The Gross profit will also show a difference of Rick f 179

EXERCISE 5.8 PARK MOTORS Park Motors sell second hand cars. They make use of the specific identification method of valuing stock. REQUIRED: 5.8.1 Calculate the following: x Value of trading stock on 28 February 2016 x Gross profit earned during February 2016 5.8.2 Explain why it would be unreasonable for the business to value its stock on the basis of FIFO or weighted average. 5.8.3 Explain why it would be unreasonable for certain businesses e.g. Supermarkets to use the specific identification method of stock valuation. 5.8.4 Park Motors does not want the cost price of stock items to be known. What strategy could they apply to keep the cost price confidential? INFORMATION: 1. Record of stock Item no. Description Cost price Selling price 1 KIA Sportage (Red) R220 000 R319 000 2 Nissan Pathfinder (White) R180 000 R260 000 3 Toyota Corolla (Silver) R178 000 R240 000 4 Mercedes ML500 (Blue) R350 000 R460 000 2. Items 2 en 4 was sold during February 2016. PARK SPORT Park Sport sells hockey sticks. They make use of the FIFO method of stock valuation. REQUIRED: 5.8.5 Park Sport is not satisfied that the business uses the FIFO method of valuation, and would rather have used the weighted average method. The necessary calculations for both methods were done and showed the following: FIFO method Weighted average method Cost of sales R94 900 R95 844 Gross profit R56 940 R55 996 Value of closing stock R19 200 R18 256 They approach you for advice. Comment on the following: x The difference which the two methods will make to the financial statements x The reason why the figures differ. x Advise them whether the stock valuation method should change or not. 180

5.8.1 Value of trading stock on 28 February 2016 R220 000 + Ritg000 == R398000 Gross profit earned during February 2016 Sales — Costof sales = (260000 + 460000) — (1800004 350000) = R190 000 5.8.2 Explain why it would be unreasonable for the business to value its stock on the basis of FIFO or weighted average. . “They sell costly items that are very difterent from each other Pegarding price and character, Tt would be unrealistic to value cars based on Ehe last nein bought or the weighted average as the Cost prices Vary consideraé/y. ; ? F Also they sell lows yolumes at these large articles. Tas makes it easier to identify the specific cost on each Car. 5.8.3 Explain why it would be unreasonable for certain businesses e.g. Supermarkets to use the specific identification method of stock valuation. tes 3 ‘They sell numerous similar articles at similar prices. » Cost prices might change from day to day and arbicles are placed on the shelve “or consumers to Select whith to buy First: “Tt is difficult to apply a specific price to any one article. 5.8.4 Park Motors does not want the cost price of stock items to be known. What strategy could they apply to keep the cost price confidential? a F «Keep the cost prices ina catalogue which is Secured in an office. | «Secret cost Code, e.g. a lo - letter word VOLKSWAGEN’ where V=/ | + Allocate oe product numbers to ach item andN=0. and record them on the computer systern together with the Cost price. 5.8.5 Difference in financial statements. _ . The value of closing stock in the Balance sheet will be more according to the FiFo-method. + This willresulin a lower Cost of sales which will result in a Wigher Gross protrt jn the Income Statement. Reason why figures differ. *The price of the product increased during the year and According to the FIFO - method, closing stock iS shown at the last price «Gross profit wall be higher according to the FiFo~method as the cheaper products are Sold Firgt ~ Wi th the Weighted average methed the more expensive cos E prices haw’ already been brought into consideration. Advice to change or not. . There cannot just be a chame e hy Yes/ Me to make ‘the protit look. better, ie eee = The value of the stock shown in the Balance sheet, should reflect the most realistic Picture. 181

EXERCISE 5.9 You are provided with information regarding Parkie Merchants for the financial year ending 28 February 2015. The business buys and sells soccer balls and jerseys. The business uses the periodic inventory system. The soccer balls are bought from South African suppliers and the soccer jerseys imported from different overseas countries. They appointed salesman to control each stock-item: x Jaco controls and sells the soccer balls x Nicolai controls and sells the soccer jerseys They decided on the following accounting policy to value the stock: x Soccer balls – Weighted average method x Soccer jerseys – First-in-first-out method (FIFO) REQUESTED: 5.9.1 Although the business successful the owner is considering closing it and investing his capital in fixed property. Name TWO points which he should consider before making his final decision. 5.9.2 The owner suspects that a number of soccer balls have been stolen from the store. Calculate the number of soccer balls stolen. 5.9.3 Use the appropriate information to calculate the value of the closing stock of: x Soccer balls (use the weighted average method) x Soccer jerseys (use the FIFO method 5.9.4 Calculate the following for the soccer jerseys: (You may prepare a Trading account to calculate the figures): x Cost of sales x Mark-up % on cost of sales x Stock turnover velocity 5.9.5 Should the owner decide to proceed with the business, what advice would you give to him? Name TWO points, and record financial indicators and specific information from this question, to support your answer. INFORMATION: 1. Stock: The stock has been valued at the beginning and end of the financial year, as follows: Soccer balls Soccer jerseys Date Number Per Total value Number Per Total of units unit of units unit value 1 March 2014 1 200 120 144 000 520 320 166 400 28 Feb. 2015 900 ? ? 250 ? ? 182

Purchases: During the year ending 28 February 2015, the following stock-items were bought: Soccer balls Soccer jerseys Date Units Per Total value Units Per Total value unit unit 31 Mar. 2014 1300 R120_ | R156 000 400 R200 R80 000 30 June 2014 900 R150_| R135 000 600 R225 R135 000 30 Sept. 2014 1.000 R175_| R175 000 1400 R255 R357 000 2 Jan. 2015 200 R180 R 36 000 100 R300 R30 000 Total 3 400 R502 000 2500 R602 000 Carriage on purchases: The business has paid R30 200 in total during the year for transporting the soccer balls to the store. The price of the soccer jerseys, includes the carriage and customs duties. Sales: Items Details Total Soccer balls 3 500 units at R320 each R1 120 000 Soccer jerseys 2.770 units at R400 each R1 108 000 Financial indicators: Items Mark-up % on cost Stock turnover velocity Soccer balls 48.5% 3,9 time p.a. Soccer jerseys ? ? times p.a. 5.9.1 Although the business is successful, the owner is considering closing it and investing his capital in fixed property. Name TWO points which he should consider before making a final decision. - Fryperty prices are low a present and 1é 13 the ty ght time to invesl — it 18 expected that property prices should rase. : See whether he Could receive a good and fair value for WS bussnegs. ‘Property can be let and in that manner earn an Income. in future. ‘Lplications for staff are aismesds 183

5.9.2 Calculate the number of soccer balls stolen. 1200 + 2400 — 2500 —f000 = 200 , 5.9.3 Use the appropriate information to calculate the value of the closing stock of: + Soccer balls (use the weighted average method) t_20260 144 000 t+ 802 000 $600 / - 676200 a» 0K B47 =o = Ry peru - =f [32 300 wee + Soccer jerseys(use the FIFO method) (100X R300) + ( OXR2) = 30000 t+ 28220 - £68 250, 5.9.4 Calculate the following for the soccer jerseys (You may prepare a trading account to calculate the figures): . Cost of sales Cenng stock + PUIARES Soy ake AOL = (46800 + 602000 — 28 = 4700/50 * Mark-up % on cost of sales ot 26S profit x JO Cost of S@les / — / (08000 — 700 120 700 720 = 58,30, + Stock turnover velocity Cost SHES AVEQGE FEOL FOO (FO S] - 5,97 thes f 5.9.5 Should the owner decide to proceed with the business, what advice would you give to him. Name TWO points and record financial indicators and specific information from this question to support your answer. hement. mote Strick contral meesies wer sitter balk 200 seccer pails fe SIE, ‘Navertise more to increase the clemand for balls and i crease the rate of tarnover (29 times) (N Camparl san with EPSEUS (3,97 Limes, at ge bel aly ieee am mark-up '9 higher (68,25 compared With 48,5 %)and rate of Curnover Is better: -lonsjder another supplier because prices raised wth 5010 from K120 to ig. 184

EXERCISE 5.10 You are provided with information relating to Park Music, for the financial year ending 28 February 2015. The business sell CD’s. REQUESTED: 5.10.1 Calculate the value of the stock on hand at the end of the year according to the weighted average method of stock valuation. 5.10.2 Calculate the number of CD’s stolen. 5.10.3 Calculate the value of the CD’s stolen. 5.10.4 State THREE points of advice to Park Music on how to improve the stock control. INFORMATION: 1. The business applies the perpetual inventory and weighted average method of valuation of stock. 2. Number of CD’s for the year: Units Price Total value per unit CD’s on hand 1 March 2014 2 500 R70 175 000 CD’s on hand on 28 February 2015 3 020 ? ? CD’s bought during the year 15 000 R1 150 000 Bought on 20 April 2014 4 000 R60 R240 000 Bought on 24 August 2014 3 000 R90 R270 000 Bought on 30 November 2014 8 000 R80 R640 000 CD’s sold during the financial year ended 28 February 2015 14 400 R125 R1 800 000 5.10.1 Calculate the value of the stock on hand at the end of the year according to the weighted average method of stock valuation. Weighted average = 175 000 + / 180 C00 2500 t 15000 = -L75,7/ per gne fe SS eS -3020 X R75, 7/2 229644, 20 5.10.2 Calculate the number of CD’s stolen. (2500 + 15000 — 14400) — 3020 = SOunsts 5.10.3 Calculate the value of the CD’s stolen. B0X R75,7! = 602,60 5.10.4 State THREE points of practical advice of how to improve stock control ‘Reinforce security at dooms &.9- Gari at déor with bars - Divide dutes so tiut. on person can control another, % Gl bia internal quart te lt theft, traud and mistakes. ‘Consider purchase procedures - PUG hing ¢ TEM INE a 185

CHAPTER 6: BUSINESS ETHICS AND INTERNAL AUDITING 6.1 INTRODUCTION In Grade 11 much attention was given to what is meant by ethically correct behaviour, and how employees should act in specific circumstances and situations. You even drew up your own behaviour policy for your own business undertaking. In this Chapter we will look at the disciplinary and punitive measures that can be applied when the code of ethics has been violated. Last year we also looked at what internal auditing is, and who would have an interest in this subject. This year we will concentrate on the composition of an audit report by referring to the different components of such a report. It will also be expected of you to interpret an audit report, and to provide comments thereupon. 6.2 BUSINESS ETHICS Ethics is all about how we must act and what our behaviour pattern must be. It also has to do with how and why we must act morally, honestly and correctly. Ethical behaviour and conduct is therefore based upon: x The ability to differentiate between right and wrong x The commitment to doing that which is right The purpose of a behaviour policy is to lead you, and to support you, in identifying business ethical situations in the workplace, and to consider, to understand and to react in an appropriate manner. Whenever you are confronted with ethical problems, they must be solved in the light of the following three steps: 1. Analyse the situation ƒ How did the situation arise? ƒ What must be decided? ƒ Who can take the decision – you, or someone else? ƒ What will be the implications of the decision? ƒ Which written instructions must be consulted? ƒ Does existing procedure or policy throw light upon the situation? ƒ Who must be consulted? ƒ What is die ethical alternative and rationale for each one? The facts and assumptions must be carefully evaluated should any of the choices require that an ethical principle shall be the victim. Is there any leeway for a compromise that will not violate the organisation’s standards of integrity? Finally, would another employee agree with your ethical verdict? 186

2. Think about the possible outcomes ƒ Which outcome would be the best, from an ethical viewpoint? ƒ Who could be hurt and/or who could be helped by the verdict? ƒ To what degree can the persons affected, be hurt? ƒ How can they be helped? Which alternative would be ethically permissible? ƒ Which of the choices identified would minimise the damage the most; would provide the greatest help; would be most in agreement with the organisation’s values; and which would protect the rights of those affected the most? 3. Ask the following questions ƒ Would I be content to tell my family what I had done, or would I be happy if it were made public? ƒ Would I have regarded it as reasonable had I been on the other side of the table? Would my peers approve of my conduct? ƒ Would my decision still look good a year from now; five years from now; ten years from now? ƒ Would my decision embrace a contravention of a law, procedure or guideline? Remember that it is always expected of an employee to apply and maintain certain principles and rules in his workplace. The following are basic principles that are acceptable to most professional bodies, and are underwritten by all professions: o Integrity Integrity can be described as the quality a person possesses to be honest, and to demonstrate strong moral values. A person of integrity will always strive to carry out tasks assigned to him, to the best of his ability. He will set high standards and be determined never to lower those standards. o Objectivity Objectivity is the ability to act impartially, honestly and without any prejudice. A person who is objective will make decisions that are based on facts, and who will not allow personal feelings to influence his decisions and recommendations. He will always be just and unbiased in the execution of his duties, and will not be influenced by others. o Professional competence and proper care Professional competence refers to the ability to perform your duties well through having the necessary technical skill, capability, knowledge and experience. Exercising proper care will ensure that tasks are carried out responsibly, carefully and promptly. o Confidentiality Confidentiality refers to the ability to keep confidential any information affecting the organisation that has been revealed to you, as an employee, in the execution of your duties. This information may not be imparted to anyone outside the business, unless it is required from you professionally, or by the law. o Professional behaviour Professional behaviour refers to the manner in which a person behaves in his workplace. No employee should ever, in any way, act in a manner that would have a negative impact on the reputation of his profession, or on that of his employer. A professional will, at all times, act in a thoughtful, courteous, friendly and polite manner, and will always be considerate of others as well. 187

6.2.1 Disciplinary policy The Labour Relations Act stipulates that all employers must have a fixed policy, i.e., a procedure that must be followed in attending to the complaints of employees. It must also clearly state the disciplinary action to be taken against employees and the steps that must be followed in the possible dismissal of an employee. The disciplinary policy, therefore, gives an explanation of why a worker does not conform to the standards of the employer as spelled out in the Code of Conduct. It is the responsibility of all employees to ensure that they conform to the standards of ethical business behaviour that are set by the employer, and they must seek guidance if they feel concerned that those standards are not being followed. Remember that every employee signs an employment contract, in which he agrees to adhere to the organisation’s Code of Conduct. The following principles should be applied in the drawing up of a disciplinary policy: x It must be made available to workers in writing. x The workers must be assured that information in respect of disciplinary hearings will, at all times, be handled confidentially. x It must be the policy that workers will be advised in advance of the charges, and the evidence against them, before any hearings are held. x Workers must be given the opportunity of stating their side of the matter before any decisions in respect of disciplinary action is taken. x Workers must be assured that they will be given an explanation for any disciplinary steps that are taken against them. x The employee must have the right to appeal against a decision. 6.2.2 Industrial legislation and policy, including policy in respect of HIV The Constitution and other relevant laws, including the Law of Industrial Relations, the Law of Basic Employment Conditions, etc., regulate industrial relations in South Africa. You are welcome to look at the internet on website http:/www.workinfo.com if you would like to know more about the various laws. These laws provide employers and employees with clear guidelines regarding what can be done, and what cannot be done. It is expected of a business owner to be conversant with the existing industrial legislation. He must know his legal rights and duties as an employer, as well as those of the employees. In South Africa today, protest actions and strikes have become very general. The owner of a business must include in his policy on industrial relations clear guidelines regarding the handling of such situations. This policy ought to be based on the Constitution and other laws of the country. The policy must be applied uniformly and consistently. The basis of the policy on industrial relations must, however, always be the applicable industrial legislation and the code of ethics. 188

In the policy on industrial relations specific attention must be given to the organisation’s attitude regarding HIV/AIDS. This is an aspect that affects every workplace in South Africa. It has an effect on the productivity and morale of workers, and the business as a whole. Most businesses have a HIV/AIDS programme in operation to try and reduce the effect that HIV / AIDS has on the activities of the business. Such programme should contain the following: x The viewpoint of the organisation regarding HIV/AIDS. x Details of the business’s policy regarding employment, e.g., whether a HIV/AIDS test is required, medical benefits, leave conditions, etc. x Handling of communications within the organisation regarding HIV/AIDS matters. x Behaviour policy in respect of employer and employee regarding HIV/AIDS matters. x Details of aid programmes for workers affected by HIV/AIDS. x The person responsible for implementing the programme, and what the employee’s responsibilities are. x How the effectiveness and success of the programme are tested and controlled. 6.2.3 Professional bodies in respect of accounting establishments Society has certain expectations of every profession. Standards must be maintained and certain requirements must be satisfied in order to work within a particular profession. . Professional bodies regulate the standards and requirements of the profession they represent. They therefore ensure that you satisfy the requirements before you are admitted to the profession. This is a great responsibility, because the credibility of the profession can suffer damage untold if the requirements that have been set are not met, and problems arise in respect of work done. – just think of the damage that can be caused by a builder whose work does not satisfy the safety and quality standards, resulting in the collapse of a building. It will make the credibility and the reliability of the professional body to which he belongs, suspect. Professional people have an ethical responsibility to acquire the necessary specialised knowledge and experience before offering their professional services. The professional accountancy institutions all have their own code of ethics that is a guarantee for that to which they commit themselves. The following are examples of professional bodies in the field of accounting that monitor the standards and requirements of accountants and auditors. To practice as an accountant or an auditor you or your organisation must be registered with one of these bodies. x South African Institute for Professional Accountants (SAIPA) x South African Institute for Chartered Accountants (SAICA) x Chartered Institute for Administrative Accountants (CIAA) x Institute for Internal Auditors (IIA) x Chartered Association of Certified Accountants (CACA) 189

6.3 INTERNAL CONTROL AND INTERNAL AUDIT PROCESSESS Internal control comprises of the daily control and management in respect of the application of pre-determined control measures. There is therefore continuous assurance that these fixed control measures and processes are being conformed to, so that appointed goals can be achieved. Internal control or management can be divided into four types, viz., x Preventive control – here the accent is on the formulation of plans, procedures, programmes, budgets and standards before the work is done, so that controls can be correctly implemented right from the start, e.g., burglar proofing of windows. x Tracking control – a mechanism is put in place to track down problems after they have arisen, e.g., an alarm sounds when there has been a break-in. x Corrective/remedial control – a control mechanism is in place which assists in the handling of problems, e.g., the alarm is linked to a reaction unit that will immediately respond when the alarm goes off. x Indicative/directive control – a mechanism is in place to prevent undesirable events from happening, e.g., a sign stating that the property is protected by an alarm system. Internal control is designed and implemented to ensure that the goals of the organisation are achieved. These goals, among others, are: x to ensure that financial information is accurate and reliable; x to ensure that employees adhere to the policy, guidelines and rules of the business; x to ensure that all employees respect and honour the norms and values of the organisation; x to protect the assets of the organisation, and x to ensure that resources of the business are economically and effectively utilised. Internal accounting methods of checks and controls, form part of the total internal control system of a business. These measures are not only installed to ensure that bookkeeping is done accurately and correctly, but also to protect the business against fraud and other white-collar crimes. Goals of internal accounting control: x to ensure that all income that is earned is actually received, and that it is correctly recorded; x to authorise all expenditures, and correctly record payments; x that all assets are protected, and are properly entered in the accounting records; x that all creditors and other liabilities are paid on time, and are correctly recorded; x that all accounting reports are 100% correct and reliable., x that any errors or irregularities in the accounting records are identified. Internal auditing is done to check whether the control measures conform to specific requirements and standards, and whether it is applied correctly. It therefore comments on the manner in which measures are applied, and recommend possible improvements. 190

6.3.1 Pre-audit investigation As much information as possible must be gathered before an audit can commence, and the various aspects regarding the audit instructions must also be considered, e.g. to find out more about the general nature and circumstances of the business which is to be audited. Also, to get to know the people who are responsible for the setting up and keeping of the accounting records, so that they can easily be approached, should any problems arise. Audit back-up evidence that consists of source documents, accounting records and any other applicable information must be collected. It is not necessary to study every transaction. Judicious test samples are taken from each division to arrive at conclusions regarding the effectiveness of control measures in a particular division, and then to comment upon it. 6.3.2 Audit report and comments upon the audit report An internal audit report is set up to draw the attention of the business management to important matters, of which they probably were not aware of. The aims of the audit report are firstly, to inform management of the findings of the auditor, secondly, to convince management of the reliability and validity of these findings, and thirdly, to persuade management to change or improve ineffective control measures. There are certain components that must always be present in an audit report, viz., x Heading, date and to whom the report is addressed. x An introduction that spells out the roles of the auditor and the management. For example, that the internal control and the setting up of accounting records are the responsibility of the management, and that the auditor is only responsible for expressing a professional opinion on the domain that has been covered. x A scope confirming that the audit has been conducted in accordance with general audit standards and that the opinion offered, has been thoroughly researched and is credible. x A summary for management reflecting the findings and recommendations that the auditor considers of enough importance for management’s attention. x A paragraph in which the opinion of the auditor in respect of the internal checks and control processes of the business is again stated. o The opinion of the auditor can be “qualified”, which means that the report contains recommendations for changes in respect of the statements and the information supplied. o The opinion can be “unqualified”, which means that all statements and information can be accepted as correct, and no changes or recommendations are made. o The auditor can also “withhold opinions”, which means that the statements and information do not conform to standards and must be redone completely. x The last component of the audit report is the name and signature of the auditor. An auditor should not take the signing of the report lightly, as the audit process is considered final and done with, when it is signed by the auditor. 191

EXERCISE 6.1 6.1.1 What is an external (independent) audit report? 6.1.2 Why is it important that an external auditor should be “independent”? 6.1.3. Why is it important that an external auditor of a public company should be a member of a professional body, like SAIPA? 6.1.4 You are appointed as external auditor of Park Limited. The managing director requested that you should show his directors’ remuneration of R5,5 million under Salaries in the Income statement. Would you comply to his request? Give a reason. 6.1.1 What is an external (independent) audit report? , 5 ; dpinion given by an independent. auditor (appointed hy sparenoleders) 0 te Ki sas Dae fi Lonel ootements nal eonti! AGpects ae afair reflection 9° all the affairs of the DLUSWESS. FE 15 the opihion of an external wajlr on a rarilon Sample a transactions of the compatty. 6.1.2 Why is it important that an external the should be “independent”? Te 15. inportant. that the auditor gives 2 honest, wblassed op/nion Toihae the /nfluenice SOMEONE ose. the Companies ct reg wires that the quartor should be Wngepand ent, Independence mates the report trustwartty with the Possible resule that the others can trust the report, 6.1.3 Why is it important that an external auditor of a public company should be a member of a professional body, CORI. knowledge of accounting and audit prineipkes. ‘Assure standard “handling of financial statements, ih accordance with IFRS. wt ‘Assure that 4 code of conduct 15 pec Me asciphnary procedures will follow /n case of negl gence. 6.1.4 You are appointed as external auditor of Park Limited. The managing director requested that you should show his directors’ remuneration of R5,5 million under Salaries in the Income statement. Would you comply to his request? Give a reason. No. Lt fs @ substantial antount which ts (mperbane to the shareholders who have appointed the directors “Lt ought to be shown separately in the fhancral statements according to the meteriality principle. Temaspirel 15 an “spar bane characteristic of corporate manage me, b, +s has bobs According to the Companies Act this Item has tobe made Public and ye 'will not be ethical to hide wey 192

EXERCISE 6.2 South African companies are worried about the increase in “White collar crimes”, as well as “Blue collar crimes”. 6.2.1 “White collar crimes” can be defined as sophisticated crimes committed by managing personnel, while “Blue collar crimes” can be defined as salient crimes which do require entry to the business’ books. Give one example of each of these crimes that could occur in a business. 6.2.2 Explain the meaning of the term “internal control”. 6.2.3. What is the function of an internal auditor? 6.2.4 What is the function of an external auditor? 6.2.5 Why should the external auditor also care about the quality of the internal control of a business? 6.2.1 Give one example of each of these crimes that could occur in a business. White collar crimes: Fraud comms tled ty ma ement wn GOOkS of business by misrepresentdtlen Gf figures, ete. Bluecollarcrimes: pg sph ygtitated €+9- theft , Vandal sry, ete, 6.2.2 Explain the meaning of the term “internal control”. «Control over the execation of regula tions and arofted rues, : Consicts of internal contre! qa wuanagerment C2 preven fraud. 6.2.3 What is the function of an internal auditor? : z Execute. objective aESeEnene regarding whether the. taternal Eontrol 13 effective ad ts - He controls and gives attention to all areas af the YUKU ESS, 6.2.4 What is the function of an external auditor? - Ait independent pers express/ig an ajeriwe pinion teqaraing the reliability of Lhe companys f/yantlaf Statements. 6.2.5 Why should the external auditor also care about the quality of the internal control of a business? - Proper internal contrat will resule in relrable abd talr financial statements orafted for the business, and thus mating the task of the external aédcor easier 193

EXERCISE 6.3 You were appointed as accountant of Ben’s Mini market. After an internal audit you found some irregularities regarding the cash register slips. It seems that the information of Cashier 5 is incorrect. The manager of Ben’s Mini market feels that it is not necessary that he has to pay the VAT collected from clients over to SARS. Cash register 5 is programmed to levy VAT on certain zero-rate items. No slips from cash register 5 are shown in the accounting records of Ben’s Mini market. REQUIRED: 6.3.1 How would you react towards the manager if he feels that it is not necessary to pay over all the VAT to SARS? State ONE remark that you would make. 6.3.2 Calculate the VAT amount levied on zero-rate items, if the total selling price of the zero-rate items on which VAT is levied, appeared as R29,10 on the cash register slip, including VAT. 6.3.3 In the abovementioned case the management did not act ethical. Give TWO reasons to support this point of view. 6.3.4 What can the consequences be if their actions come to light? Name TWO consequences. 6.3.1 How would you react towards the manager if he feels that it is not necessary to pay over all the VAT to SARS? State ONE remark that you would make. ‘LE ($s Mhsponest. ‘Tt is @ transgress/0n f the meome bax act if VAT ls withheld. 6.3.2 Calculate the VAT amount levied on zero-rate items, if the total selling price of the zero-rate items on which VAT is levied, appeared as R29,10 on the cash register slip, including VAT. 29,104 re = #3 #7 ——_—_—— 6.3.3 In the abovementioned case the management did not act ethical. Give TWO reasons to support this point of view. - Fraud (8 commytted. They steal mone from the CUSCOMES, steal! pitey From PRS. Je~1s @ tremsression of Lhe VET ect. 6.3.4 What can the consequences be if their actions come to light? Name TWO consequences. “Will have to pay a penalty to SARS. -Chente will Lp buy yg an they Seeing that. certayy Cd. tems Ht be‘ ave i ye0s ee ouch Cope fraud see/hg that the Megenent 1s setting an exanple of a shonesiy 194

EXERCISE 6.4 You are provided with an extract from a report of an independent auditor Audit opinion — To the shareholders We have audited the financial statements set out on pages 8 to 17. In our opinion, the financial statements fairly present, in all material respects, the financial position of the company at 30 June 2015, and the results of their operations and cash flow for the year then ended. It is prepared in accordance with International Financial Reporting Standards (IFRS), and in a manner required by the Companies Act of South Africa. Van Wyk & Tshele Chartered Accounts (SA) Registered Accountants and Auditors Pretoria 5 August 2015 REQUIRED: 6.4.1 State whether the shareholders will be satisfied or dissatisfied with the auditor’s report. Give a reason for your answer. 6.4.2 Explain why it was necessary for the auditors to stipulate the pages ( 8 to 17) in the report. 6.4.3 Explain why the Companies Act requires an independent auditor to audit a public company? 6.4.4 Explain TWO important consequences for Van Wyk & Tshele, should it be founded that they were careless in exercising their duties. 6.4.5 Which steps should Van Wyk & Tshele take to verify the figure for Fixed assets in the Balance sheet? Mention THREE points. 6.4.6 The managing director informed the auditors that he plan to buy the unissued shares the next year without advertising the new issuing to the shareholders or the public. What advice should the auditors give to him? Explain. 6.4.1 State whether the shareholders will be satisfied or dissatisfied with the auditor’s report. Give a reason Satisfied. It is an ungualfied report and the auditors for your answer. did not mention any Wregular/t1es. ‘The financial statements are a reasonable Version whit means iE 1s @ positive refoatt. 195

6.4.2 Explain why it was necessary for the auditors to stipulate the pages (8 to 17) in the report. «Lt 15 the pages investigated Ly the and they we onl responsible jar the pages mentioned jn Lhe anda, report. 6.4.3 Explain why the Companies Act requires an independent auditor to audit a public company? _ Lt gives to the Shareholders of MC CUPUY conpidene iM the companys ability to Mote ofter their investment ‘tn “The Company. 6.4.4 Explain TWO important consequences for Van Wyk & Tshele, should it be founded that they were careless in exercising their duties. They can be siutmened . 7h oie nat be appointed aS WUMNLOIS ei Sik whi ‘ Bll tins’ “can be EMH WISE Dist COT ot aecioug! Lod iss, 6.4.5 Which steps should Van Wyk & Tshele take to Verify the figure for Fixed assets in the Balance sheet? Mention THREE points. ohesess the accounting ferind pres mole «investigate the. Pied! asset register Lavestiet the pynancfal VCOAAG ag the Guy hess by an external audjcor - Agseas the internal contral of fried essere, 6.4.6 The managing director informed the auditors that he plan to buy the unissued shares the next year without advertising the new issuing to the shareholders or the public. What advice should the auditors give to him? Explain. eae Te 1s unethical and the (tiling of Shares “us Hie be aWOt{sed accoriig ZY Mewrandlipes of fasociation £0 every body because 16'S a Explanation: p ube comp ay. he oh y si J 5 ‘ hareholders will be harmed P6CaUse 11K panceneege of shavechaliing which wil definitely decrease ‘the other Sharchildas' (eeu On Capita Lipleyed ond dinidenae which they ae supposed yy fo 2am. “Py Seling shares on the free market, the he will gather more funds as When (E16 Sal aoe buyer at an agreed price. 196 cy ate compelled to belongs.

EXERCISE 6.5 You are provided with information relating to Park Hardware, for the year ended 28 February 2015. REQUIRED: 6.5.1 The business own three delivery vehicles. Refer to information on each of the vehicles in the Fixed asset register. x Calculate the cost price of delivery vehicle 3. x Explain why delivery vehicle 2 is shown at book value of R1,00 (one Rand ) in the financial statements 6.5.2 As a service to clients the business delivers goods in an around Pretoria. They charge a fixed amount of R250 per delivery. Clients pay this amount direct to drivers of the vehicles. A total of 3 680 deliveries were made during the 260 days in which the service was committed during the year. You are the internal auditor and you are concerned about possible problems with the delivery vehicles and the drivers. Refer to the information below. Identify and explain ONE big problem with each delivery vehicle and its driver. Quote figures from the information to support your answer. Provide a solution for each problem. INFORMATION: 1. Fixed asset register on 28 February 2015. Vehicle 1 Vehicle 2 Vehicle 3 Date bought 1 April 2014 1 January 2006 1 April 2012 Cost price of vehicle R315 000 R144 000 ? Accumulated depreciation R94 500 R143 999 R168 000 Carrying value R220 500 R1 R72 000 2. Information in respect of delivery vehicles on 28 February 2015. Vehicle 1 Vehicle 2 Vehicle 3 Name of driver Pieter Gert Kobus Number of days worked 210 days 260 days 260 days Number of deliveries made 280 deliveries 2 100 deliveries 1 300 deliveries Cash paid in by drivers R70 000 R525 000 R275 000 Salaries paid to drivers R52 000 R52 000 R52 000 Fuel and maintenance costs – total for the year R36 400 R430 500 R201 500 Fuel and maintenance costs – per kilometre R1,30 R2,05 R1,55 197

6.5.1 The business own three delivery vehicles. Refer to information on each of the vehicles. ¢ Calculate the cost price of delivery vehicle 3. hie 000 + fC72000 = Lg 240 000 . Explain why delivery vehicle 2 is shown at book value of R1,00 (one Rand ) in the financial statements “Iohicle 18 sti! qperating and has pot reached etd a life expectan Theis complete depyrec(at/on as been WHILE Off. i oy ee sol and completely waitter off | 520g thie (E15 Still nyse, the wustyes haglt Shaw i v Gs Val#E TH JES GOONS. 6.5.2 Identify and explain ONE big problem with each delivery vehicle and its driver. Quote figures from the information to support your answer. Provide a solution for each problem Delivery vehicle 1: Problems: Dri ss lazy ad wade onl 2hodEdjverled Delve pe Mey abstht — Was Z, ays nol Ge WOrk: Wehidle 15 wae utilised ehaugh - has aniy atone 10 fo of- epi ss lowesl’ petating (038té Of fel, 30 deliveris but Aa ih J, Dstaiition “Dr i id the GUNE WAGES dee (o) that: he Joes a, ob af the work. ‘ ay tterna! control this vehicle peraces a @ 108 "of (7000008 400) = K/8400 Solutions: «fay the. Wives #9 er delivery -fé will motivate them to work farder. . : Give this vehicle to the test ond busiest A/V. i Delivery vehicle 2: Problems: This driver has worked toc hard — a made. deliveries, per day (2loo + 260 days). in. "ThE dé By, L 9 vende £5 By 1, i qpeitOHG pers Lipa Solutions: r 2/00 b Allocate this venicle to the ynast [alle Ar/Ver «Limit the use of ths vende. Delivery vehicle 3: « Manager” 1 dishonest. — fees collected is 50000 shart, (h32500 — 4275000) Solutions: Do a complete audit of fees cobected. “Make 9 ataiplinary investigation against the manager: 198

CHAPTER 7: MANUFACTURING CONCERNS 7.1 INTRODUCTION In Grade 10 we learnt about the different types of costs, and in Grade 11 drew up the ledger accounts of manufacturing concerns. In this Chapter we will discuss the Production cost statement and the Trading account of a manufacturing concern. It is very important that you look again carefully at Chapter 11 of your Grade 11 workbook in order to refresh your memory in respect of certain concepts and cost aspects regarding manufacturing organisations. The following is a short summary of the costs and ledger accounts. Remember that the total production cost of a product consists of three costs, viz., x Direct material cost x Direct labour x Factory overhead cost It is important to note that all other expenses will be classified to form part of one of these three expenses. It will therefore be important to know which portion of each expense is closed off to which specific cost account. Explanation of ledger accounts: ACCOUNT DESCRIPTION EXAMPLES Raw material Asset account, and maintained by Leather, planks, meal, stock periodic inventory method sugar, etc. Work-in- Asset account that shows the cost of raw Leather used, salary of progress materials, direct labour and factory shoemaker, rent paid for inventory overheads already expended in factory, etc. manufacturing Finished Asset account that shows the production Shoes, chairs, tables, products cost of completed products. cakes, etc. Consumable Expense account that shows the cost of Cleaning materials, stock materials not directly included in the Stationery, etc. manufacturing of each specific product. 199

ACCOUNT DESCRIPTION EXAMPLES Direct material Expense account that refers to the raw Leather, planks, meal, cost materials needed in the manufacturing of sugar, etc. a specific product. Closed off to the work-in-progress inventory. Direct labour Expense account that refers to the wages Factory workers, cost and salaries of workers directly involved shoemaker, baker, etc. in the manufacturing process of a specific product. Is closed off to the work-in-progress inventory. Factory Final account that is used to close off all Salaries of managers, overhead cost those expenses connected to the cleaners, security, etc. manufacturing process, but which are electricity, insurance, not specifically visible in the final rental expense, product. Indirect labour will also form depreciation, etc. part of the factory overheads. The factory overhead costs account will close off to the work-in-progress inventory. Every expense or part of an expense is closed off as follows: Direct material cost Close off to the work-in-progress inventory account Direct labour Close off to the work-in-progress inventory account Indirect cost Close off to the factory overhead cost account. Factory overhead cost Close off to the work-in-progress account Besides production costs, a manufacturer will have administrative, sales and distribution costs. Thus it is possible that a share of an expense like insurance, is paid for the factory as factory overhead cost which form part of the production costs; while a further share of the insurance is paid for the office which form part of the administrative cost, and the share of the insurance regards to the delivery vehicle which form part of the sales and distribution costs. When calculating the break-even point it is important to distinguish between fixed and variable costs. The following table explains it clearly: Fixed costs Variable costs Factory overhead cost Direct material Administrative cost Direct labour Sales- and distribution cost 200

SCHEMATIC REPRESENTATION OF LEDGER ACCOUNTS Raw Material stock Balance b/d * Direct material cost Purchases Balance c/d * Raw materials are transferred to Direct material cost for further processing. Wages Total b/d * Direct labour Factory overhead cost * Wages directly linked to the manufacturing process are first transferred to Direct labour cost. Factory overhead cost Consumables * Work-in-progress Wages Work-in-progress stock “Incidental expenses” Balance b/d Finished * Total factory overhead cost is closed off to Direct material products Work-in-progress inventory. Direct labour Balance c/d Factory overhead Direct material cost cost Raw material stock * Work-in-progress * Total direct material cost is closed off to Work-in-progress inventory. Direct labour cost Wages * Work-in-progress * Total direct labour cost is closed off to Finished products Work-in-progress inventory. Balance b/d * Cost of Sales Work-in-progress Balance c/d * Cost price of finished products sold during the year, is shown. 201

7.2 PRODUCTION COST STATEMENT We calculate the production cost of finished products in a Production cost statement. In a Production cost statement the three costs in respect of the production process are clearly set out. These are: Direct material, Direct labour and Factory overhead cost. The Production cost statement is used mainly for management and decision-making purposes. FORMAT: Park Manufacturers Production cost statement for the year ended 28 February 2015 Note Direct cost 700 Direct materials cost 1. 450 Direct labour cost 2. 250 Factory overhead costs 3. 1 400 Total manufacturing cost 2 100 Work-in-progress at the beginning of the year 1 000 3 100 Work-in-progress at the end of the year (800) Cost of production of finished goods 2 300 Notes to production cost statement: 1. Direct material costs Opening stock 140 Net purchases (purchases-returns) 350 Freight on purchases 50 Import duties, etc. 60 600 Closing stock (150) Direct materials cost for the year 450 2. Direct labour cost Wages of factory workers 200 Pension fund contributions 30 Medical fund contributions, etc. 20 Direct labour cost for the year 250 3. Factory overhead costs Consumables 250 Salary of factory foreman 300 Depreciation of factory equipment 150 Wages of cleaners 100 Rent of factory 400 Insurance of factory equipment, etc. 200 1 400 202

7.3 TRADING STATEMENT The Trading statement of a manufacturing concern looks very much the same as the Trading statement of a business that uses the periodic inventory system. Remember that the purpose of the Trading statement is merely to calculate the gross profit for the accounting period. This is the upper portion of the Income statement, i.e., net sales minus the cost of sales. We know the sales amount, but the cost of the finished products sold must be calculated. FORM: Park Manufacturers Trading statement for the year ended 28 February 2015 Net sales (sales - debtors allowance) (7 000 – 600) 6 400 Cost of sales (4 000) Finished goods: opening stock 3 000 Cost of production of finished goods 2 300 Finished goods available for sales 5 300 Finished goods: closing stock (1 300) Gross profit for the year 2 400 7.3.1 Calculation of the break-even point and other cost calculations Determining how many products must be sold before a profit is shown, in other words, how many products must be sold to cover all costs so that the business at least does not suffer a loss, is a very important decision for any business to make. The number of products that allow the organisation to exactly “break even”, is known as the “sales break-even point”. Take for example a product is sold for R1 000, while the primary cost, i.e., raw materials + direct labour required to manufacture the product, amount to R600. This means that every product that is sold, makes a contribution of R400 towards paying the fixed cost. The fixed cost per unit must first be covered before a profit can be made. Fixed costs are those costs that remain the same, irrespective of how many units are made, e.g., rental of the factory, salaries of managers, insurance, etc. If 500 products are manufactured and sold, it would mean that R200 000 (500 x R400) is available to pay the fixed cost. If the fixed cost amounts to R256 000, a total of 640 units of the product (R256 000/R400) are be sold in order to break even. This is known as the “break-even point”. It indicates exactly how many units of a product must be manufactured, and sold, before the business can make a profit. It means that only when 641 units have are sold that the business will show a profit for the month. FORMULA Breakeven point = Fixed cost / (Selling price per unit – Variable cost per unit) = ……………. units 203

EXERCISE 7.1 The following information in respect of Park Manufacturers, for the accounting period 1 March 2014 to 28 February 2015, is made available to you. INSTRUCTIONS: 7.1.1 Complete only the opened ledger accounts in the General ledger of Park Manufacturers for the given period. 7.1.2 Fully prepare the Production cost statement and Notes for the year ended 28 February 2015. 7.1.3 Set up the Trading account for the year ended 28 February 2015. INFORMATION: On 1 March 2014 the following balances, amongst others, appeared in the General ledger: Raw material stock 33 000 Work-in-progress stock 74 600 Finished products 445 000 Consumables on hand 2 000 Consumables: factory 1 320 Consumables: office 680 The following is a summary of the transactions that took place during the year ending on 28 February 2015: Raw materials bought for cash 357 000 Raw materials bought on credit 431 200 Consumables for the factory bought for cash 3 480 Consumables for the factory bought on credit 4 720 Consumables for the office bought for cash 1 560 Raw materials returned to suppliers 9 680 Carriage charges on raw material purchases paid in cash 7 800 Wages Direct labourer wages paid 390 800 Indirect labourer wages paid 70 660 Sales and distribution department wages paid 49 600 Unemployment insurance fund contributions in respect of: Direct labourers 2 400 Indirect labourers 840 Salaries Factory manager and foreman 139 300 Sales and distribution department 225 500 Administrative department 153 080 Insurance Factory insurance 19 300 Sales and distribution department 6 900 Administrative department 2 440 Maintenance costs of factory plant 35 280 Maintenance of office furniture 2 900 Depreciation Factory plant and equipment 26 400 Office equipment 17 200 204

Sales during the year were as follows: Cash sales during the year 711 780 Credit sales during the year 950 220 Finished products returned by debtors (selling price) 17 040 ADDITIONAL INFORMATION: & Finished products are sold at cost plus 25% mark-up. € During the year raw materials to the value of R740 000 were used for the manufacture of products, and products to the value of R1 400 000 were made. & On 28 February 2015 the following consumables were still on hand: ® Consumables for the factory, R1 300, and ® Consumables for the office, R500. TAA General Ledger of Park Manufacturers Balance sheet accounts section Raw material stock B12 Hin! | Galolice Oy| 33 000 [esles| Creditors conte] 7280 223, |28| Bane CN 244500 Litect material assG| 7yb000 (35700047800) Creator scopprol || 43/220 Balance %| 77320 BLZF 000 8290) torn! | Bajance Y\ 79.320 Work-in-progress stock B13 thees| | | Balance. \Yd| 74600 | 2b. \e8| Finished! pmauds ay YOO 000 Bb be | Direct material \ar | 740 000 Palanct TA 107800 COStE Direct labour _\4\ 393.200 Costs (s9pgop+ zy) Factory avuerhead costs \GT |_ 300 000 = , FE 1507 800 Wore i | Batance “i {107 800 205

Finished products B14 Haty| 1 | Balgnce. W| 445 000 (BE | 2] Cast of soles be] 569424 2 (23 | Work - in- pracess \GT Cast of SH/6§ _\2]| BO17b inventory Lafanle Val $2902 | Cost of sars _R)|_/7622 B5G E22 [458 £22 lal || Balance Yi 429032 Consumables on hand B21 Noes| | Patuce Yd\_ 2.000 Viet! |\Cnsumables-faton\@|_/320 Lonsumatles- office | 680 Z000 2000 ZB \es| Consumables- GT\ 1220 Constuna byes opice 500 {800 Nominal accounts section Sales Nl 25 |ea| Debtors aowances \GT| szego \Bb.\e8| Bank bed 7// 780 Leading account \QT\ 649% Lebtors. control \D)\ 970220 ‘| [bO2000 Consumables - factory N5 abl | Consumables onhannGl\ 1220 _\22.\2q\ Consumables nbaag) 1300 Bb \es| Bank (er| 3480 ‘actory overhead \G]\ B20 __| |Gewitors conmtral \CI| 4720 _| ‘20sté | 9520 F520 Marcil | \Consumables on hand \GT\ 1320 206

Cost accounting section Factory overhead cost C3 bal Drairect- wages |97| ze 6h0 |Z l28| Work-m-prcess GN aa00e0 Lnetybley mont: insraee G7 Ye MMM EOF 4 Fand_contriby tions FUGUE. GI \ 139 200 LYS UN aCe: GT | 14 500 Man tenance GT| 25250 Lepreciation. GI| 26400 Consumables factory GT 8220 =e 700000 Final accounts section Trading account Fl es| Cast of sales QJ | 13/60 |\Fhles] Sees | WL be 992+ T60176- (IL) 7/7804: 290220 -/70) Papit-ond Joss ace. GT | 328.992 (Gross profit) Lott 2b lolly 900 72 Park Manufacturers Production statement for the year ended 28 February 2015 Notes Direct cost LI33 ZZ | Direct material cost G0 GOO Direct labour 293 200 Factory overhead costs S00 O00 Total production costs 1Y¥3B3 200 Work-in-progress inventory at the beginning of the year 4 620! [507 BOO Work-in-progress inventory at the end of the year / Cost of production of finished products [3p 000 207

Notes to the Production cost statement 1. Direct material cost Opening inventory 323000 Net purchases (357 000 + 43/200 —9680) 778 520 Carriage charges on purchases 7800 Customs duty, etc. _ 8/4 320 Closing inventory (79 2H) Direct material cost for the year TLD 000 2. Direct labour cost Factory workers’ wages 390800 Unemployment insurance fund contributions 2400 Direct labour cost for the year 393 200 3. Factory overhead costs Indirect material cost (329 +3¢807¢4720- /300) 82279 Indirect labour cost 70 660 Salaries of factory manager and foreman (39300 Unemployment insurance fund contributions 849 Factory insurance 19300 Maintenance of factory plant FB2ZEO Depreciation of factory plant and equipment BL Factory overhead cost for the year 320 C00 713 Park Manufacturers Trading statement for the year ended 28 February 2015 Net sales (1062000 — 7042) 1644 960 Costs of sales 4 3/5 Z2 Opening inventory of finished products Y4 5000 Production costs of finished products f LOC 000 fF Finished products available for sale | 845 G00 Closing inventory of finished products (529 032) Gross profit for the year 328 992 208

EXERCISE 7.2 You are provided with incomplete information regarding Park Soccer Manufacturers. The business manufactures and sells soccer balls. There were no unfinished products at the beginning or at the end of the financial year ending 30 June 2015. During the year 20 000 soccer balls were manufactured and sold. REQUIRED: 7.2.1 Complete the following Production cost statement, including the cost per unit, by completing the missing information marked with an asterisk (*). Park Soccer Manufacturers Production cost statement for the year ended 30 June 2015 R Per unit Direct/primary cost 500 000 * R25 Direct material cost Zoe o0G * Rio be Direct labour cost 200000 * R15 Factory overhead costs YOO COD * k2e * Total production costs 0006 * LYS Work-in-progress — beginning of the year 0 F700 000 LES Work-in-progress — end of the year (0) Cost of production of finished products G0 000 * yg * 7.2.2 Complete the Income statement including the unit cost by completing the missing information marked by an asterisk (*). Income statement for the year ended 30 June 2015 R Per unit Sales 144YD O00* R72 Cost of sales (906 obb)* R45 Gross profit SLD 000 * Sales- and distribution cost f00 poo * R5 Administrative cost 80 000 R4 Net profit 3600 R/g * 7.2.3 Calculate the break-even point. Fraed costs Selling Price per unit - dp is eet \\ (ga0000 + 86.000) 7Z— (to He + 5) 430000 GZ M429 wuts , 209

Cost per unit available regarding the previous financial year ended 30 June 2014: Direct cost R22 Direct labour cost R10 Cost of production of finished products R40 Selling price R72 7.2.4 Give 2 reasons for the increase in direct labour cost? ‘ Iucrease in wage LAYS. _ pd Lt. Aiur. ° Wore laboutexs were qponied. 7.2.5 Explain why an increase of R5 in labour cost gave rise to an increase of only R3 in direct cost? ° Direct matetlal casts pe Wile fas. wechined. ° Material probably ayphed more productive, fess material was wasted or cHeaper supphers were used. 7.2.6 Do you agree with the decision of the owner regarding the selling price? Why do you say so? Yes/No - The production cast. has Increased therefore the plofit in 2015 will be /e3s, — Wore balls can Ltebally te Sofd because GE Pllc. Was hot /ncregsed. 7.2.7 Supersport gave through their “Let’s Play” initiative, thousands of soccer balls to under- privileged children. They have approached the owner to donate soccer balls to them. The owner has decided not to donate any balls because he says that it will have a negative effect on his financial results. Do you agree with this standpoint? Why? Explain in detail. Mo -_fccording t2 the king Commission report, business e& have 2 contribute annually ta the foc OLA: aad social sphftment. —The reason for this js that businesses fave £0 con brityte part of their profits tt local commmbes and chiariti = Bysipesses are dependant on the Copuyyrty and He _zaviten ment’ and 1 1S therefore eth/ta/ correct ta _put bad im the Community. 210

EXERCISE 7.3 You are provided with information related to Park Dustbin Manufacturers for the year ended 28 February 2015. The business manufactures and sell only one product, viz. plastic dustbins. REQUIRED: 7.3.1 Prepare the following Notes to the Production cost statement: x Direct material cost/raw material cost x Direct labour cost x Factory overhead cost 7.3.2 Prepare the Production cost statement. 7.3.3 Calculate the unit cost of production per finished plastic dustbin. INFORMATION: 1. Units produced: 58 000 dustbins were finished during the financial year. 2. Stock balances 1 March 2014 28 Feb. 2015 Direct material/raw material stock R57 900 R34 200 Work-in-progress-stock 169 500 120 600 Factory indirect material stock 8 100 7 400 3. Transactions for the year: Raw material bought for cash and on credit 1 622 700 Defective raw material returned to suppliers 23 100 Carriage paid on raw material bought 28 800 Salaries: x Factory foreman 241 000 x Office workers 270 000 Wages: x Office workers 48 000 x Factor workers in production process (see Information 4 below) ? UIF – contributions(to be allocated to each specific cost calculation) x Factory workers in production process 11 520 x Factory foreman 2 410 x Office workers 2 700 Factory indirect material bought 125 900 Sale of finished goods (R120 per unit) 7 800 000 Commission for sales personnel (10% of sales) ? Advertising 145 000 Factory maintenance 85 000 Bad debts 8 400 Rent (to be allocated in ratio of floor space – see 5 below) 133 000 Dustbin stolen (Rand-value) 960 Water and electricity (see Information 6 below) 36 000 Depreciation on factory equipment 52 000 Sundry administrative expenses 150 800 Sundry factory expenses 25 000 211

4. Factory workers in the production process: Number of factory workers working direct with dustbins 12 workers Normal hours worked by each worker during the year 1 600 hours Number of overtime hours worked by each worker during the year 240 hours Wage scale (normal time) R60 per hour Wage scale (overtime) R100 per hour 5. Floor space: Factory Office Sales department Square meter 1 200 sq. meters 600 sq. meters 600 sq. meters 6. Water and electricity: 15% of the amount is allotted to the office and 25% to the sales department. The balance applies to the factory. 7.3.1 Park Dustbin Manufacturers Notes to the Production cost statement Direct material cost/Raw material stock Coening stock E7900 Prdinses._ (/b22.700 -23/00) 1299 600 EPelaliE On Pitt lt aSes. 28 800 oi EVE Casing LOL. (34200) ii / £52 /00 Direct labour cost / [82 000 + 238 000 Factory wages Live x 1600 x baetiexeyonia)| | 440 200 Unemployment tasitance fund contribution. /| 522 s / 48) 520 212

Factory overhead cost L[ypirect material (Bloo + 12580-7400) \/Z6 600 ndirect labour (2.4 000 + 24/0) 243 410 Factory mamcengie B5 000 Rent é expenses (32000 X * $5) 66 200 Water ad electricity (36000 XP) 21 B20 Depreciation an fail, <gujprnene $2000 Lidbaty fatty eXDeM SES 25000 620/10 7.3.2 Production cost statement for the year ended 28 February 2015. Direct material cost/Raw material cost / 652 (00 Virect labour cast 1 YSl $20 Total direct cost/Primary cost 3/03 620 Factory ovethédd Costs 420 /10 Total production cost 3 723 730 Work-in-progress on 1 March 2014 (EF 520 3 873.230 Work-in-progress on 28 February 2015 €/20 600) Cost of production of finished goods 2772 620 7.3.3 Calculate the unit cost of production per finished plastic dustbin. _3 772 630. Total production cost Zz 4 53 000 Number of products produced =k bs OS per MSLE ly 213

EXERCISE 7.4 Park Manufacturers manufactures plastic chairs. The following information relates to the year ended 30 June 2015. Number of chairs manufactured 12 000 Sales for the year (all manufactured units were sold) R480 000 Total fixed cost R210 000 Total variable cost R300 000 REQUIRED: 7.4.1 Give ONE example of a fixed and ONE example of a variable cost. 7.4.2 Explain why it is important to calculate the expected break-even point for a business before the financial year starts. 7.4.3 Use the above figures to calculate the break-even point. 7.4.4 Comment upon your calculations in 7.4.3. What advice would you give to Park Manufacturers? Explain briefly. 74.1 01 le ofa fixed cost:, _, 1 ie “Reng “Exe CASES, SOlArlES 3 Mairecke wages; Water and electricity One example of a variable cost: ‘Direct water(al, dlvect labour sales and adstributson COSES. 7.4.2. Explain why it is important to calculate the expected break-even point for a business before the beginning of the financial year. Tt determines the mini name of wuts tobe LOSSES. : Be sire a he a ae broduction can be forecast, ~Start aftirmative action in good time before [osses OCCUE 7.4.3. Use the figures above to calculate the break-even point. LOOSE _ Pit serees see eee = Z var Cost, al a +z: Saliprice per unit — v4 ae pas 4 Hf Tre am 3 s /4 000 WALES 7.4.4. Comment upon your calculations in 7.4.3. What advice would you give to Park Manufacturers? Explain briefly. Comment: ‘Only 12 units are produced whith pteans 1275 less Han the preat-eyén pone of /¥000 units which meaqus the bus/ness SUES 1055S, Train workers to be wore efficient and productive, "Find cheqper Seapplicts to decrease raw material aud wtrt costs, 214

EXERCISE 7.5 Park Table Manufacturers, produce solid wooden dining room tables. REQUIRED: 7.5.1 Refer to information at point no. 8, and calculate the direct labour costs for the month. 7.5.2 Prepare the Production cost statement for the month ending 31 May 2015. Show a separate Note for Factory overhead costs. Show ALL other calculations in brackets. 7.5.3 Calculate the unit costs of production of 410 tables completed for May 2015. 7.5.4 The owner’s opinion is that power failures had a huge negative impact on his business. Mention TWO points from this question to indicate that he is correct. Give figures/calculations from the question to support your answer. 7.5.5 The owner worries about the control of certain costs. Direct raw materials making out more than 40% of the costs of a table, while direct labour costs are responsible for 30% thereof. x Make TWO proposals how to improve the effective use of direct raw materials. x Make TWO proposals on how to improve the effectiveness of the direct labourers. INFORMATION FOR MAY 2015: 1. Initial and closing stock on hand for the month 1 May 2015 31 May 2015 Raw materials stock 40 000 65 000 Work-in-process 55 000 40 000 Finished goods Nil Nil Indirect raw materials 8 000 2 000 2. Raw materials bought on credit, R180 000. 3. Depreciation: x Factory machinery, R7 400 x Office equipment, R2 400. 4. Factory maintenance paid in May, R8 000. A further amount of R3 500 is still due for repairs to machinery. 5. Water and electricity paid for May amounts to R4 600. The administrative office used 10% of this, while the balance was used by the factory. 6. Rent and insurance are divided between the factory and the administrative office according to the ratio of the floor areas. The factory consists of 630 square metres, and the office, 270 square metres. The annual rent for the whole premises amounts to R360 000, and the monthly insurance for the whole premises R3 600. 7. Cash purchases of indirect raw materials, R20 000. The factory used 75% of the indirect raw materials, while the balance was used by the office. 215

10. 11. . The 15 factory workers making tables, work 9 hours each per day. The normal tariff is R36 per hour per worker. Normally there are 20 working days in a month, but due to power failures the factory only operated for 14 working days in May 2015. To catch up on time lost the 15 factory workers had each worked 45 hours overtime. The overtime tariff is double that of the normal tariff. Although they have worked overtime, they could not reach the target of 450 tables per month. They could only complete 410 tables. The break-even point was 320 tables. . The factory cleaner earns R2 600 per month. The factory foreman earns R15 000 per month. The bookkeeper has forgot to record the foreman’s pension. The employers’ pension contributions are 7%, and the employer’s contribution is 10%. These contributions are added to the salary account. The administrative staff earns R11 000 in total, per month. The selling price of each table is made up of the production costs of the table plus R500 gross profit per table. Two of the salesman work from their homes on a commission bases. The business does not carry any fixed costs in this regard. Their commission for May was respectively R12 300 and R11 800. 7.5.1 Refer to information at point no. 8, and calculate the direct labour costs for the month. Je workers X 9 hour§ * R26 x 14 AQYS = 69 04¢0 /8 workers x 4w5hours X R72 a= ve £00, 7.5.2 Production cost statement for the month ended 31 May 2015 Pirecé material costs ©Y0000 + /90000-65000) | [FS 000 Direct labour CAS 1/6 646 Primary costs 276 640 Factory overhead costs GS EO Total manufacturing cost of production 356800 Work-in-process on 1 May 2015 55000 401800 Work-in-process on May 2015 (40000) Cost of production of finished goods 37/800 Factory overhead costs = Lpiatitect /natetial (8000 f-20 000 — 2060) XZ 14 300 ( Deprectation on faclery masipeay 7400 Fbctory marntenancZ (e000 + ~Z500) 11 309 Water and electricity ¢C¢600 % ZB) B/YO CHSES 00CO 2) 2/ 200 Lnsurace. (3600 x Be) 2520 Wages of Factory Yeaouer. 2600 Slory bf factory fore ban. (15000 + 1500) L630 portale sane ot 85/60 216

7.5.3 Calculate the unit cost of production of 410 tables completed during May 2015. B7/ 800 - W/o tables =~ “906, 85 pertable | 7.5.4 The owner’s opinion is that power failures had a huge negative impact on his business. Mention TWO points from this question to indicate that he is correct. Give figures/calculations from the question to support your answer. , Production 1s fo ants 125 thar their target of 450 Ea@bIes. Te results in a (oss of gross prople of yor ks00 = 20 000 ‘The overtime paid 95 wages results tn adltttora! hoy 300 (Rye b00K2) expense to Lirect wages. ‘The target 1s to ex ceed the breq&even pont of (20 tables — the suplus presently 1s gotables. 7.5.5 The owner worries about the control of certain costs. Direct raw materials making out more than 40% of the costs of a table, while direct labour costs are responsible for 30% thereof. Make TWO proposals how to improve the effective use of direct raw materials. -Laentify the exact amount of direct material needed for each table ae r3sue just enough for complet! 0H of table. Gover documentation to be compebed when 5 both: 1G thten out of stares. - Aeses the Grade of wasting C off-cats) Make TWO proposals on how to improve te effectiveness of the direct labourers Control exactly how long st Should take to comp jete a tabje. * Deceml training of direct WONELS. » Muniter tea breaks, lunch, g/tk leqwe, etC. -Let workers sign in and out for hours yvorked. - Decrease overtime py by obtaining a power Gelato, to restrice the work to normal hours 217

EXERCISE 7.6 You are provided with information related to Absolut Bed Manufacturers for the financial year ended 28 February 2015. The business manufactures beds and sell it at a mark-up of 70% on cost. They use the perpetual stock system for finished goods and the periodic stock system for raw and indirect materials. REQUIRED: Prepare the Production cost statement for the year ended 28 February 2015, and show the Notes for Direct material cost and Factory overhead cost. INFORMATION: 1. The following balances appeared inter alia at the beginning and end of the financial year: 1 March 2014 28 February 2015 Stock of raw material 95 000 110 500 Stock of work-in-process 71 500 191 600 Finished goods 480 000 96 200 Indirect material 20 500 18 000 2. Transactions during the year: x Raw material bought on credit, R521 000. x Transport charges of raw material to the factory, R29 500. x Indirect material bought for cash, R77 500. x Wages paid to factory workers who manufacture the beds, R300 800. x Salary of factory manager paid, R105 000. x Commission paid to sales personnel, R90 000. x Maintenance of factory equipment paid, R37 000. A further amount of R11 000 is still due. x Water and electricity paid, R21 000. It must be divided between the factory and the office in the ratio 4 : 1. x Rent paid, R108 000. It must be divided between the different departments according to the floor space – the factory fill 800 square meter out of the total area of 1 200 square meter. x Depreciation on factory equipment amount to R60 500. 218

Production cost statement for the year ended 28 February 2015 Primary / Direct costs 835 800 Lirect material caste 525 000 Livecé labour costs 3c0 800 Factory everhead Coste 3E2 200 Total production costs 12/8 /00 Goods -n- progress — beginning of Lhe year 41 200 1289 600 Goods -/h ~progpess — end of Ehe year (19/ £00) Production costs of finished goods / C98 200 Note: Direct material-/raw material cost Eqlanee Leaning of the year 95 006 Purchases. during’ the year’ 52/000 Frelght on purchases 24 200 645 300 Falqute até the end of CHE year 6/1/0500) 525000 Note: Factory cost Ludirect, material (20500 + 77400 — 1/8000) 20 000 Salary of factory foreman /05 000 Maiutenante of Camoment (37900 +//000) 48 000 Water and electriiily (2/000 X$) 18 000 Rent expenses C/o 800% 2%) 72000 Leprecidtion 60 500 BBZ3B00 219

EXERCISE 7.7 The following information relates to Absolut T-shirt manufacturers. REQUIRED: 7.7.1 Calculate the unit cost for 2015 which is indicated as (1), (2) and (3) in the table below. 7.7.2 Compare the unit cost for 2015 with that of 2014. Some unit cost is influenced by inflation. State in each of the following cases another possible reason, except for inflation, for the change: & Direct material cost per unit & Direct labour cost per unit & Factory overhead cost per unit 7.7.3 Break-even point: & Calculate the break-even point for 2015. & Comment upon the break-even point calculated above. Should the business be satisfied with the number of units manufactured at present? Explain. INFORMATION: 1, Absolut T-Shirts Manufacturers sold 34 000 T-shirts during the year ended 28 February 2015.They have manufactured 25 000 T-shirts the previous year. 2. All the T-shirts were sold at a fixed price of R45 each in 2014 and 2015. 3. All the finished goods were sold. There was no work-in-progress at the beginning or end of the financial year. 4. The following table and unit cost is available: 2015 2014 34 000 units manufactured 25 000 units manufactured Total costs Unit cost Total costs Unit cost Variable costs 980 000 28,82 801 000 32,04 Direct material costs 500 000 (69) 462 000 18,48 Direct labour costs 320 000 9,41 205 000 8,20 Sales- and distribution costs 160 000 (2) 134 000 5,36 Fixed cost 333 000 9,79 296 000 11,84 Factory overhead costs 205 000 (3) 205 000 8,20 Administration costs 128 000 3,76 91 000 3,64 Total costs 1313 000 38,62 1.097 000 43,88 7.7.1 Calculate the unit cost for 2015 indicated as (1), (2) and (3): 7 Oe = ALL per anit Oar = Aa per ane @) 206 pee = £b03 per ait. 4 00 as 220

7.7.2. Compare the unit cost for 2015 with that of 2014. Give in each of the following cases a different reason, excluding inflation, for the change * Direct material cost per unit Bigger anus were probaly, poughe and wracng neste 2 ee a Maverial Was used more eff eclive and lest es waste Local material was boughe from cheaper Fu flEr ¢ Direct labour cost per unit + Wa Mncredse Was GWeH to workers or wage ee correction + Mire overtime was probably pald aut a higher nee we + Bonusse, were allotted to workers for rcs fe ; ; +> Inefficient production because wore WOTkEIS per unl were used. + Bed cost which remains the same When more proaucs gre. produced. | + Hipler number of unite are prodiced. . + There was better control and managehtche of COSCE. + Change of depreciation jn the case of boot valde Method. 7.7.3. Calculate the break-even point for 2015. Tatal fixed LOStE — _332 000 “ng pri t— ati — 28,82 Selling price per wire oe 5 ed 4S 85 3BZB3.0CO /b, /8 = 2058) Wis Comment upon the break-even point calculated above. Should the business be satisfied with the amount of units manufactured at present? Explain. Veo, the busness produces and Sts 34000 wmts which are far gove the break-even (port. 221

EXERCISE 7.8 The information below was extracted from the financial records of Park Manufacturers. The business manufactures one style of raincoats. The financial year ends on 28 February 2015. REQUIRED: 7.8.1 Indicate whether the following statements are TRUE or FALSE. (1) Fixed costs remain unchanged in relation to the number of units produced within a period of time. (2) The salary of the factory foreman will be regarded as a direct labour cost. (3) Factory rent will be regarded as a variable cost. (4) Prime cost is calculated by adding direct-material cost and direct labour cost. (5) Advertising will be classified as an administration cost. 7.8.2 Refer to Information B. (1) Calculate the value of raw materials on hand on 28 February 2015, using the FIFO method. (2) Calculate the value of raw material cost that would appear in the Production cost statement. 7.8.3 Refer to Information C. Calculate the value of direct-labour cost that would appear in the Production Cost Statement. 7.8.4 The business produced 4 000 raincoats during the year. There was no work-in-process at the beginning or at the end of the year. Factory overhead costs amounted to R67,55 per unit. Calculate the following: (1) The total production cost of finished goods. (2) The unit cost of production (per raincoat). 7.8.5 You were asked to investigate further the control over raw materials. (1) Identify the number of meters of raw material fabric that appear to be missing. (2) Apart from theft, give ONE most likely reason for this shortage. What advice could you offer in this regard? Name ONE point. 7.8.6 Break-even point: (1) Calculate the break-even point for the current financial year. (2) The break-even point for 2014 was 2 273 units. Should the owner be satisfied or dissatisfied with the break-even point for 2015 calculated in Question 7.8.6(1)? Briefly explain. INFORMATION: A. Production: 2014 2015 Number of raincoats produced 4 500 4 000 B. Raw materials: x Usage: It should take 1,8 meters of fabric to make one raincoat. x Stock of raw material on hand: Number of meters of Cost per meter fabric Opening stock 700 meters R30 Raw materials issued to the factory 9 100 meters ? for the production of raincoats Closing stock 4 300 meters ? 222

x Purchases of raw materials during the year were as follows: Number of Cost per meter Total meters of fabric cost Purchases 12 700 meter R490 600 April 2014 7 000 meters R34 R238 000 November 2014 3 500 meters R42 R147 000 February 2015 2 200 meters R48 R105 600 C. Workers: x The business employs the following workers: Details Number Basic Total cost Overtime of monthly including Hours Rate workers salary/wage benefits per worker Workers in the 5 R5 000 ? 180 hours R70 production process (each worker) Factory foreman 1 R8 000 R112 000 - - Salesman 1 R4 000 ? - - x Employment benefits and overtime o Employment benefits are allocated to the cost account applicable to the salaries/wages of the specific employees. o All employees are registered with the business’ pension fund and the UIF. Deductions are made from the basic salary for the pension fund (8%), and the UIF (1%). The employer contributes 10% towards the pension fund and 1% to the UIF. o Overtime and commissions are not subject to pension fund and UIF deductions or contributions. o The five workers who make the raincoats each worked 180 hours of overtime during the year at a rate of R70 per hour. D. Stock of finished goods on hand were: Number of raincoats Value per unit Opening stock 110 R284 Closing stock 420 R246 E. Analysis of total costs and unit costs: 2015 2015 2014 Total Per unit Per unit Selling price R1 400 000 R350,00 R350,00 Variable costs R863 800 R215,95 R184,60 Direct material cost ? ? R63,30 Direct labour cost ? ? R82,20 Selling and distribution cost R150 000 R37,50 R39,10 Fixed costs R350 200 R87,55 R83,54 Factory overhead cost ? R67,55 R58,04 Administration cost R80 000 R20,00 R25,50 223

7.8.1 Indicate whether the following statements are TRUE or FALSE. qd) True (2) GSE (3) False (4) TRUE (5) False 7.8.2 Refer to Information B. (1) Calculate the value of raw materials on hand on 28 February 2015, using the FIFO method. 108600 + (2(ooxk42) = kL /92B00 ———_—_ + (2) Calculate the value of raw material cost that would appear in the Production cost statement. 2/600 + £90600 —193G00 = fe BY? 80 7.8.3 Refer to Information C. Calculate the value of direct-labour cost in the Production cost statement. Vidpary time (8X G00 %42) = 300000 ges e (180 X70 XS) = 83000 -. R3EIf 000 + fensjon (300000 It fo 332000 7.8.4 The business produced 4 000 raincoats during the year. There was no work-in-process at the beginning or at the end of the year. Factory overhead costs amounted to R67,55 per unit. Calculate the following: (1) The total production cost of finished goods. 3/7800 + 396000 + (623.55 x 4000) = R984 OCC (2) The unit Tae waiprosit diqndpacsiain ¢pet)raincoat). ot ‘ Fae = R246 per unib, 7.8.5 You were asked to investigate further the control over raw materials. (1) Identify the number of meters of raw material fabric that appear to be missing. WOO —Che x £000) = 1900 preters (2) Apart from theft, give ONE most likely reason for this shot rtage. . «Waste during proddction 93 4 VeEzil/e of anlsed water /als, - Unstilled workers cause. too Matiy WASLE P1eces, - Leteel “Sper ysion ar big peal Hon and conétal ter hand out of rat mater(a/s «Training of WHEE «Use good guality matersa]. 7.8.6 Break-even point: (1) Calculate the break-even point for the current financial year. Fixed costs Bs 382 200 Selling price per unit —varlable Cost per Unit 3 350 —2/5,93 = 350 200 (345,05 = 2612,45 = 26/3 wnt , (2) The break-even point for 2014 was 2 273 units. Should the owner be satisfied or dissatisfied with the break-even point for 2015 calculated in Question 7.8.6(1)? Briefly explain. Ves, the business has produced 400 units Which 15 More than the breakeven pont of 2613 Unies aoe ea 224

CHAPTER 8: PROJECTED INCOME STATEMENT AND CASH BUDGETS 8.1 INTRODUCTION In Grade 11 we drew up the complete Cash budget, as well as the debtor’s collections and creditors payments schedules. It is important that you thoroughly study Chapter 10 of your Grade 11 workbook again, because the drawing up of a Cash budget will be evaluated in the final examination. Remember that a Cash budget is a forecast of how much cash will be received or paid at certain stages in the future. Only cash receipts and cash payments are considered when drawing up a Cash budget. A debtor collection schedule must always be drawn up at the same time to determine exactly when debtors will actually pay, what they owe. A Cash budget is an important control instrument in the hands of management for continuously monitoring whether the business activities are running according to plan. It also serves as guideline and motivation for employees to achieve established goals. In most businesses the previous budget period is used as basis for the drawing up of the new budget. The disadvantage of this method, however, is that no new thinking is introduced and the figures of the previous period are simply adjusted by a percentage. In Grade 10 we became acquainted with the Zero-based budget in which every item is evaluated afresh. Every item in the budget is considered from the start to make sure that the specific expense is really a necessity. This method can have a positive effect on the employees in that new challenges are set to motivate them. A realistic but tight budget is important because it acts as a motivator for the personnel. Difficult goals and targets are better motivators than goals and targets that are easily achieved. 8.2 PROJECTED INCOME STATEMENT A Projected Income statement is nothing more than a forecast of all incomes and expenditures for a given period, which is known as the budget period. Where non-cash items such as bad debts, depreciation, discounts received and discounts allowed had no effect on the cash budget, these items will nevertheless appear in the Projected income statement. Remember, of course, that cash receipts and cash payments such as Loans negotiated, Trading stock purchased, Cash drawings by the owner, etc., do appear in the in the Cash budget, but will not be shown in the Projected income statement, as they do not represent incomes or expenses. 8.3 ANALYSIS AND INTERPRETATION The ratios and percentages used in the analysis of financial statements can also be used in a meaningful manner with Projected income statements and Cash budgets. The performances of different months can be compared with each other in order to effect early revisions and adjustments, should this be necessary. 225

EXERCISE 8.1 You are provided with the Projected income statement and additional information relating to Park Hairdressers for the period April to June 2015. A Cash budget is also prepared for the same period. The financial year-end is 31 March. REQUIRED: 8.1.1 Refer to the Projected income statement to identify/calculate the following: x Monthly salary paid to each hairdresser. x Percentage increase in wages that the cleaner will receive during the projected period. x Percentage interest rate on the fixed deposit. x Rental per square meter and the number of additional square meters the business should rent from 1 May 2015. 8.1.2 As internal auditor you compare the following projected figures with the actual figures at the end of April. Provide FOUR comments that you would include in your internal auditor’s report in respect of scenarios A, B, C and D below. Projected for Actual figures for April 2015 April 2015 A Telephone 2 200 4 150 B Water and electricity 6 000 4 900 C Fee-income 120 000 136 800 Consumables 14 400 15 120 Sales of hair products 87 500 112 000 D Cost of sales 50 000 70 000 Gross profit 37 500 42 000 8.1.3 The owner is considering changes to the fixed assets of the business. x Calculate the costs of the new vehicle that she plans to purchase on 1 May 2015. x Prepare the expected asset disposal account for the trade-in of the old equipment on 1 July 2015. x State the effect that the following expenses will have on the expected profits of the business due to the purchase of the new equipment. Provide calculations/figures to support your answer. o Interest on loan o Depreciation o Maintenance x The owner is thinking of purchasing the business premises rather than renting it. Explain ONE major advantage and ONE major disadvantage of this option. x Explain whether the owner has acted responsibly in the decisions taken/planned regarding the equipment and vehicles (see Information 5). 8.1.4 The owner is not sure whether she has made the right decision when she resigned at her previous job years ago and to invest R800 000 in this business. Refer to the projected monthly profit for this period. Based on these projections, explain your opinion on the decision that she took. 226

INFORMATION: Park Hairdressers Projected income statement for April to June 2015 April May June Sale of hair products 87 500 105 000 122 500 Cost of sales 50 000 60 000 70 000 Gross profit 37 500 45 000 52 500 Other operating income 122 000 122 000 162 000 Fee-income from customers 120 000 120 000 160 000 Sundry income 2 000 2 000 2 000 Gross operating income 159 500 167 000 214 500 Operating expenses (95 350) (120 072) (127 372) Salaries of hairdressers 25 500 25 500 34 000 Wages of cleaner 3 400 3 672 3 672 Rent of premises 24 600 30 750 30 750 Consumables 14 400 14 400 19 200 Water and electricity 6 000 6 000 7 000 Telephone 2 200 2 200 2 200 Advertising 8 000 15 000 8 000 Vehicle expenses 1 400 5 600 5 600 Maintenance of equipment 3 500 3 500 3 500 Sundry expenses 2 300 2 300 2 300 Depreciation on vehicles 2 000 9 100 9 100 Depreciation on equipment 2 050 2 050 2 050 Operating profit 64 150 46 928 87 128 Interest income 3 315 0 0 Profit before interest expenses 67 465 46 928 87 128 Interest on loan (750) (625) (500) Net profit 66 715 46 303 86 628 ADDITIONAL INFORMATION: 1. The owner resigned her job to start this business in 2014. She invested her life savings of, R800 000, in this business. The business styles hair and sell hair products. 2. The business employs three hair stylists and plan to expand the business by employing a fourth hair stylist from 1 June 2015. The business also employs a cleaner. 3. The rent is calculated on a fixed amount per square meter. The business currently rents 60 square meters, but will increase this floor space as from 1 May 2015 due to expansion. 4. The fixed deposit of R468 000 matures on 30 April 2015. 5. Fixed assets Date bought Cost price Accumulated depreciation Depreciation on 31 March 2015 rate Equipment 1 April 2009 R164 000 R153 750 15% on cost price VW Van 1 July 2012 R120 000 R66 000 20% on cost price BMW 5-range 1 May 2015 ? ? 20% on cost price There are plans to make the following changes to fixed assets: x The VW Van will be retained by the business. x The new BMW will be purchased on 1 May 2015. Some of the funds from the fixed deposit will be used to buy the vehicle. x To replace all the old hairdressing equipment on 1 July 2015. The old equipment will be traded in and the difference will be financed by way of a loan at a interest rate of 15%. The trade-in value is expected to be R23 000, while the cost of the new equipment will be R402 000. 227

8.1.1 Refer to the Projected income statement to identify/calculate the following: & Monthly salary paid to each hairdresser. 27500 . R 34000 + 8500 ee = 3 [6700 & 4 £8500, & Percentage increase in wages that the cleaner will receive during the projected period. 272 100 so * 17 = Of —— aoa & Percentage interest rate on the fixed deposit. 29/5 y 100» 2B 463000 "~] "7 Zz BIf., & Rental per square meter Z4gg0 = £40 pe dh A &€ The number of additional square meters the business should rent from 1 May 2015 a JG »: 76-60 = 15 Sauare metas exed 8.1.2 As internal auditor you compare the following projected figures with the actual figures at the end of April. Provide FOUR comments that you would include in your internal auditor’s report in respect of scenarios A, B, C and D below. A Comments on telephone: ; Telephone. costs. exceeded the prepections with f2/990, “New measures will have to be set, as the catremt measures are not controlled wel B Comments on water and electricity: fe : ‘Water and electricity costs as below the pryjedien of felon Le 1s well controled if electricity carif increases aswell as the increase in chentS are taken tuto account. Cc Comments on fee-income and consumables: « The increase in 4% ih fee-income shows that the company 1s popular with CUStOMerS. ‘The consumables increased with only 5% which 1s /ow in_relation with the smcrease in fee-licqtHe D Comments on sales, cost of sales and gross profit: “Sales increased With R24500 or 26% caused bY a decrease n the mark-up (75% £0 60%) o *The increase in sales vaume on the lower uath-Up, resulted in an increase in gross profit (*Rysoooer 72%) That was q good strq 228

8.1.3 The owner is considering changes to the fixed assets of the business. Cc late the costs of the new vehicle that she plans to purchase on 1 May 2015. re zs P P y 7/00 K L220 x zo 1 = la ¢26 006 & __ Prepare the expected Asset disposal account for the trade-in of the old equipment on lJuly 2015. Asset disposal “hi.s| Eg aypmeat 14 000 \Fuis| Accum dep. on equpl 59 900 Profit_an asset digas /8 900 Credtters control |_23 000 B2IGO 162900_ State the effect that the following expenses will have on the expected profits of the business due to the purchase of the new equipment. Provide calculations/figures to support your answer. o Interest on loan: es 279 000 X my * = rz, ” : o Depreciation: a i x *e. 3 70 P. mm. Negative effect, (4o2000x 8 xk - 2050 =f 2 Ti p.m-Negatwe feck, o Maintenance: Dechne of R 3500 p.m. - Posivive effect. The owner is thinking of purchasing the business premises rather than renting it. ONE major advantage of this option ‘Savings on reat, yalue of property rise which can /ead to ‘a capital income, ONE major disadvantage of this option. ‘Maintenance and repairs must be paid for; @ mercage loan with high repayments must be Caken out. Explain whether the owner has acted responsibly in the decisions taken/planned regarding: Equipment: "Zt was responsible te replace old equipment. ‘Et will attfact new customers, improve working Conditions and require less maintenance, Vehicles: «Te was irrespons/ble to buy @ expensive Mew whicle, especially as customers come to the busitess “The Fixed deposit is used to finance the vehicle ‘The monty could rather be utilise. to finance the eghioment with Aigh wmterest rates. 8.1.4 The owner is not sure whether she has made the right decision when she resigned at her previous job years ago and to invest R800 000 in this business. Refer to the projected monthly profit for this period. Based on these projections, explain your opinion on the decision which she took. -The Projections shew an average income of bb549 2.11. and about” R79a5by p.a contemplated. “Interest. 13 /ost on savings — about &b68000P-A oF R67 fm based on the juterest [ate f ew p-& “A benefit of more than R7q00 pa received, means that she did make the Hight dec! sion. 229

EXERCISE 8.2 The owner of MP Dealers is concerned about the profitability of his business. He asked his accountant to prepare a projected Income Statement, for the 3 months ending 30 June 2015. He asked him to explain and advice on several aspects of the Projected Income statement. INFORMATION: Projected income statement for the period ended 30 June 2015 April May June Sales 45 000 49 500 48 375 Cost of sales ( 25 000 ) ( 27 500 ) ( 26 875 ) Gross profit 20 000 22 000 21 500 Other operational income 800 800 800 Rent income 800 800 800 Gross operating income 20 800 22 800 22 300 Other operating expenses ( 16 510 ) ( 17 580 ) ( 17 064 ) Salaries and wages 5 000 5 500 5 500 Bad debts 410 800 0 Insurance 1 200 1 200 1 200 Depreciation 900 900 1 000 Sundry operating expenses 9 000 9 180 9 364 Operating profit 4 290 5 220 5 236 Interest income 510 524 538 Profit before interest expenses 4 800 5 744 5 774 Interest expenses ( 700 ) ( 700 ) ( 700 ) Net profit for the year 4 100 5 044 5 074 REQUIRED: 8.2.1 Give explanations to the owner on the following aspects: (1) What was the percentage increase of salaries and wages? (2) Would employees and the trade union be happy with the salary increase in salaries and wages? Why? (3) Give a possible reason why there are no bad debts in June. (4) Give a reason why depreciation has increased in June. (5) By what percentage is sundry operating expenses increasing every month? (6) Explain why is interest income increasing each month yet the original investment amount has not changed. 8.2.2 Advise the owner on the following areas: (1) Mark-up percentage – what is the gross mark-up percentage on the cost of sales? (2) What will the consequences of an increase in the mark-up percentage be? (3) Do you think the owner should keep the investment or rather cash it in to repay or reduce the amount of the loan? (4) Rent income – the lease agreement expires on 30 August 2015. Do you think the lease agreement should be renewed? The owner also needs to know whether the rent amount should be increased seeing that he has not increased the rent in past two years. 230

8.2.1 (1) What was the percentage increase of salaries and wages? S00 y 100 | S000 * i Sy Lh, (2) Would employees and the trade union be happy with the salary increase in salaries and wages? Why? Yes, (& 18 shghtly hygher chan the inf lation rate of 284 (3) Give a possible reason why there are no bad debts in June. * Beter debtors contre! excercjsed ‘The Credié Sales has been terminated. (4) Give a reason why depreciation has increased in June. +e were purchised. (5) By what percentage is sundry operating expenses increasing every month? qn = 28. (6) Explain why is interest income increasing each month yet the original investment amount has not changed. Zaterest is capitalised, in other Word this 13 EAE effect of copspouref Z -The tnterest Tale may have (nereased. MOE, 8.2.2 (1) Mark-up percentage — what is the gross mark-up percentage on the cost of sales? 20000 100 25000 ~* / = 80%, (2) What will the consequences of an increase in the mark-up percentage be?. »Lé can result (n Nghe Prdfits. * The increased price tmay Jead to a tower Lurn over, (3) Do you think the owner should keep the investment or rather cash it in to repay or reduce the amount of the loan? ‘Interest: rates on foans are higher than jntetest races on fixed deposits. “The profit can be tcteased ty rather rerayng the loan. (4) Rent income — the lease agreement expires on 30 August 2015. Do you think the lease agreement should be renewed? The owner also needs to know whether the rent amount should be increased seeing that he has not increased the rent in past two years. ‘es, it must be renewed, as it provides a good income to the Business, ‘The rent must increase annually jnked bo the éaflation rate. 231

EXERCISE 8.3 You are the accountant of Park Merchants, and had prepared a Cash Budget for the three months ended 31 March 2015, to present to the owner. REQUIRED: 8.3.1 What is the main aim when preparing a Cash Budget? 8.3.2 You have identified the following figures at the end of October 2014. Explain what you would say to the owner in connection with the following items, at the end of October: October 2014 Budgeted Actual Repairs and maintenance 23 000 18 000 Telephone 15 000 24 000 Rent income 72 000 22 000 Advertising 25 000 25 000 8.3.3 Calculate the total sales expected for February 2015. 8.3.4 Prepare the Debtors collection schedule for the period ended 31 March 2015 to check the figures in the Cash budget. 8.3.5 The owner is of opinion that it would be good an idea to start selling on credit, but the shop manager disagrees. Name ONE point, taken from the question, to support the owner’s opinion, and ONE point against his opinion. Present figures to support your points of view. 8.3.6 Refer to the completed Cash budget for the three months ended 31 March 2015. The owner cannot actually interpret the budget, and asked you to highlight the most important aspects. Explain THREE points excluding the abovementioned. Supply figures from the question to support your explanations. INFORMATION: 1. Credit sales: x The owner decided to start with credit sales as from 1 February 2015. It is expected that credit sales would make out 80% of all the total sales. The business at all times uses a mark-up of 50% on the cost price. x Debtors are expected to pay as follows: x 10% during the same month of credit sales transaction. x 55% during the month after credit transaction took place. x 28% during the second month after the credit transaction took place. x 7% expected to be written off as irrecoverable. 2. Mortgage loan: x The owner decided to take out a mortgage loan on the property bought for cash, years ago. Interest at 15% p.a. is capitalized. 232

Park Merchants Cash budget for the three months ended 31 March 2015 Receipts January February March 675 000 1176 600 1093 600 Cash sales 600 000 144 000 162 000 Cash from debtors (see information 1) - 57 600 381 600 Mortgage loan: ABSA (see information 2) - 900 000 - Rent income 72 000 72 000 80 00 Interest on fixed deposit 3 000 3 000 - Fixed deposit matured - - 470 000 Payment 771 700 960 470 1 240 780 Cash purchases of stock 400 000 480 000 540 000 Repayment of loan and interest - 10 370 10 370 Bank charges 13 000 8 000 8 000 Insurance 7 700 7 700 10010 Salaries 140 000 140 000 168 000 Wages 60 000 62 400 62 400 Telephone 16 000 16 000 16 000 Advertising 15 000 15 000 15 000 Sundry expenses 20 000 21 000 22 000 Purchase of vehicles - - 180 000 Vehicle expenses - - 9 000 Drawings by owner 100 000 200 000 200 000 Surplus/(deficit)for the month (96 700) 216 130 (147 180) Cash at beginning of the month 55.000 (41 700) 174 430 Cash at end of the month (41 700) 174 430 27 250 8.3.1 What is the main aim when preparing a Cash budget? He ‘? bes and cay CaSh [ec pee aug pout ey ete iM waey ACLEt MINE HAS ng with cas Ash flow Limes! ly ha B esynete F future receipis and payments ih trder fo celcu/ate Ube" bank DageHces. 8.3.2 Repairs and maintenance f Ry than what was buds ated or, which Maltates ue pied oe well controbled, t ye, e hee repairs were neaded, Fay Tf they underspend, 1€ could tndicated Ae ied a Nee scary Telephone y was overspend, Attention must be given to pala: sey e control fight phe sage a of the ae ile pe for hon-b QUSIH Hf ‘i cals j4 ere. agen ndicale. on enreay Miget hee hid te- BD ould be ausled, Rent income - Reat (ntome ts be his than what was dui eted for, which indicates that the tenant doesnt well "The budget might have been unrealistic hgh, Advertising “The budgeted amaumt was spend which MAI CAEES E ciel sos Manly, ese ‘The guestion may arise if it was necessary to ahd ad ail; aid whether ¢ Lager dhocatio for adéerising rt. ae MCcESSOL Y Se 233

8.3.3 Calculate the total sales expected for February 2015. Cash Sales + credit sales = 4 00 + [c194 000 x 22 )x Ba ] = 144000 + 74000 = 720 000 8.3.4 Debtors collection schedule for the THREE months ended 31 March 2015 Credit sales Collections February March February BY 000 57600 3/6 800 March 648 000 Tt 64800 27606 38/600 8.3.5 ONE point to support the owner’s opinion: + Sales will increase seeing Chat 80h apsales ate credic, much more wil therefore be sold. + An extra gross profit of K40000 13 earned ONE point against the owner’s opinion: Wait for money, it takes amorthe to cole 7 fo of Che money, —+ There are 7h had debts, > The Niguiaily and cashflow situation are jn fluenced. > Cremt sqles mean extra administrative eXPtHnsEes. 8.3.6 Explain THREE points excluding the abovementioned. Supply figures from the question to support your explanations. “Wages increase with 4% which seems unfair when compared _salnies increase with zk whch is much higher thane te inflaton — Bank anges decrease with 28 {> because of lower Cash Bales a Service charges on olepesits. rr —Tnsurence sient ith 20% due topurchase of 2eW vehicle. — Fixed i of R470000 matures ana interest of 3.000 Pt (5 lost. — Mah withdrawals effeds ability to pay for oper ating expelises, 3 i part of the 00000 loan 1s used to pay for oper weg — Vehide expenses of R4tod 15 very Aygh for anew vehicle. - Sundry expenses increase with Ryooo per month — investigate 234

EXERCISE 8.4 You are provided with the Cash budget of Park Merchants for the three months ended 28 February 2015. REQUIRED: 8.4.1 Explain why a business needs to prepare a Cash budget every year. 8.4.2 Calculate the figures indicated by A – E in the Cash budget. 8.4.3 The rent income was increased by 8% from 1 January 2015. Calculate the rent income figure for January 2015. 8.4.4 Refer to the salaries and wages in the Cash budget: x Calculate the percentage increase granted to the employees from 1 Januarie 2015. x In your opinion, will the employees be satisfied with this increase? Briefly explain. 8.4.5 As the internal auditor you discover that the actual motor vehicle expenses for December 2014 were R5 420. Provide TWO points that you would include in your internal auditors’ report. 8.4.6 A new vehicle will be purchased for R139 500 on 31 January 2015. The business will pay a deposit of 20% and the balance will be financed by ABSA bank. The business will repay ABSA in equal monthly instalments over three years from 28 February 2015. Interest will be paid to ABSA monthly on the balance outstanding at a rate of 11% p.a. x Calculate the interest payable to ABSA in February 2015. x Calculate the monthly repayments of the capital portion of the loan to ABSA. 8.4.7 Calculate the expected receipts from debtors for January 2015. INFORMATION: Note: Not all figures are shown below. Extract from Cash budget December 2014 January 2015 February 2015 Expected receipts 291 000 355 000 140 000 Cash sales (75% of total sales) 225 000 112 500 94 225 Debtors (30 days less 5%) 47 500 ? 35 625 Rent income 9 000 ? ? Interest on fixed deposit 400 400 Capital 150 000 Expected payments 240 000 310 000 390 000 Drawings 17 500 12 500 12 500 Motor vehicle expenses 4 000 4 000 4 000 Fixed deposit 60 000 Deposit on vehicle purchased ? Monthly repayments to ABSA ? Interest paid to ABSA ? Salaries and wages 105 000 109 200 109 200 Cash surplus/shortage 51 000 45 000 C Cash at the beginning of the month 72 000 A D Cash at the end of the month 123 000 B E 235

8.4.1 Explain why a business needs to prepare a Cash budget every year . Z A business heeds to plan for , bare. receipes ia PUYMCHES 0 ensure that they will have eneugh cash or that they will be able to oyely for a loan in good tie. 8.4.2 Calculate the figures indicated by A —E in the Cash budget. A &./23 000 B ZL. 68 000 c Ck. 250 700) D L163 000 E CR @2 000) 8.4.3 The rent income was increased by 8% from 1 January 2015. Calculate the rent income figure for January 2015. Jooo x 1,08 = RI7ZO 8.4.4 Refer to the salaries and wages in the Cash budget: e Calculate the percentage increase granted to the employees from 1 January 2015. TEE are = £h e Inyour opinion, will the empioyees be satisfied with this increase? Briefly explain. No, this mcrease of 4% 13 lower than Phe inflation rate of Ey 8.4.5 As the internal auditor you discover that the actual motor vehicle expenses for December 2014 were R5 420. Provide TWO points that you would include in your +» The acti expense 2 F740 exceeded the Kiygoo that dgeted, with &/420. + ane pee Bie should be investigated, bo enstite Bh ae use of the vehicles, icles to be serviced regular LO PUUWISE LNDENS CE. 8.4.6 Calculate the interest payable to ABSA in February 2015. | oe a ('39.500 x 88 X06 X72 = x / 023 a aE, Calculate the monthly repayments of the capital portion of the loan to ABSA. Rit 00 = 36 months = £23/00 per font, 8.4.7 Calculate the expected receipts from debtors for January 2015. Total sales = 225 000x422 = 50060 : Zz a. £300 000 x3Z- xB = £7250 236

EXERCISE 8.5 You are presented with an extract from the Cash budget of Park Gymnasium. Each member pays a once off admission fee of R1 000, and a membership fee of R500 per month to be a member of the gymnasium. The owner appointed Anton Nel to collect and control the fees. REQUIRED: 8.5.1 Calculate the insurance figure for November 2015 (Note that the premium has increased with 6% on 1 November 2015). 8.5.2 Calculate the percentage increase in Anton Nel’s salary for October 2015. 8.5.3 Calculate the percentage mark-up applicable to the selling of refreshments (Note that refreshments are only sold for cash and replaced in the month in which it is sold). 8.5.4 Calculate the amount invested in fixed deposit on 1 September 2015 (Note that the interest rate is 8% p.a. and part of the fixed deposit matures on 31 October 2015). 8.5.5 Calculate the interest on fixed deposit earned for November 2015. It is expected from you as the internal auditor to give feedback to the owner regarding the marketing strategy and collection of fees. 8.5.6 How many new members can the owner expect after the marketing stratey in September 2015? 8.5.7 Which TWO aspects of the marketing strategy can improve? Give figures to support your answer and make proposals how to improve each of them. INFORMATION: 1. Extract from the Cash budget for September 2015 to November 2015. Sept. Oct. Nov. Total Receipts Admission fees ? 0 0 ? Monthly membership fees 285 000 285 000 285 000 855 000 Selling of refreshments 21 600 27 360 27 360 76 320 Fixed deposit matures 0 30 000 0 30 000 Interest on fixed deposit (8% p.a.) 640 640 ? ? Payments Insurance 7 000 7 000 ? ? Commission paid 18 000 0 0 18 000 Transport allowance 6 000 0 0 6 000 Salary of Anton Nel 4 200 5 250 5 250 14 700 Purchase of refreshments 12 000 15 200 15 200 42 400 2. The gymnasium had 450 clients at the end of August 2015. The owner developed a new marketing strategy to increase the number of clients drastically. He intended to appoint three persons at the beginning of September 2015 to do marketing, and to recruit new clients. He would pay them commission of R150 for each new member recruited, as well as a transport allowance. The owner requested you as internal auditor, to analyse the work of the marketing team. Your analysis is as follows: Mpho Jan Gert Total Number of new members recruited 80 35 113 228 Commission earned R12 000 R5 250 R16 950 R34 200 Transport allowance paid R3 000 R3 000 R3 000 R9 000 Number of contracts cancelled on 2 0 38 40 1 November 2015 237

3. Actual fee income collected in comparison with the budget: Budgeted Actual September 2015 R285 000 R339 000 October 2015 R285 000 R323 000 November 2015 R285 000 R273 000 Total R855 000 R935 000 8.5.1 Calculate the insurance figure for November 2015. Raeco x 1,06 = R7g20, 8.5.2 Calculate the percentage increase in Anton Nel’s salary for October 2015. [0S0 (00 _ ° 4 200 ae Teli 25 4. 8.5.3 Calculate the mark-up applicable to the selling of refreshments. q 600 100 /2/60 (00 33920 00 12 000 ze | 1S 200 Ar G2 400 xT — F m_ 2 — = 804 = 30/7 = 80% 8.5.4 Calculate the amount invested in fixed deposit on 1 September 2015. byo x Bx = = RYbooo 8.5.5 Calculate the interest earned on the fixed deposit for November 2015. (16000 ~ 30000) x 2 xt = 6600 xB, 4 loo = Ryyo — 8.5.6 How many new members can the owner expect after the marketing strategy in September 2015? 28S 000 288000) _ so 000 sory - + >) et bE = 120 new members = 120 new members 8.5.7 Which TWO aspects of the marketing strategy can improve? Give figures to support your answer and make proposals how to improve each of them. + Marketers should be discreet whena person purchases a new Contract. yo Contracts were Cancelled. Commission should only be paid out after anew contract holdér has been a member tor She ype Seng » The transport allowance pad, of RYQoo0o exceeds the budaeted amountof R000 . The trarsport allowance Should be ak os Attordance to the number ot contracts recruited. All the marketers received R3 000, regardless ot Ge humber of contracts they Sold. 238

EXERCISE 8.6 The information given is in regard to Absolut Merchants. REQUIRED 8.6.1 State two possible ways in which the equipment bought could be funded. 8.6.2 Calculate the percentage of stock purchased in October that was paid for in cash. 8.6.3 Calculate the credit sales in October 2015 if 10% discount is allowed to clients who paid within thirty days. 8.6.4 Which percentage of debtors settles their account within thirty days? Use the figures for October 2015 to calculate your answer. 8.6.5 Use your answers from Question 8.6.2, 8.6.3 and 8.6.4 in order to determine if the receipts from debtors, payment to creditors and buying of stock are well managed. 8.6.6 Name two items which would be included in “fixed expenses”. 8.6.7 Identify two expenses that would feature in a projected income statement but not in a cash budget. 8.6.8 Are you of the opinion that it was a wise decision not to re-invest the fixed deposit? Quote figures to support your answer. INFORMATION 1. Creditors are paid two months after the month in which the transaction took place. Stock bought on credit in October will thus be paid for in December. 2. Cash budget for the time frame 1 October 2015 to 31 December 2015 October November December CASH RECEIPTS 452 400 781 000 515 600 Cash sales 330 000 360 000 270 000 Cash received from debtors 122 400 166 800 195 600 Fixed deposit (including interest for 6 - 74 200 - months @ 6% p.a.) Loan - 180 000 50 000 CASH PAYMENTS 300 000 571 500 616 917 Cash purchases of stock 55 000 60 000 45 000 Cash payments to creditors 120 000 160 000 220 000 Interest on loan - 1 500 1 917 Equipment bought - 225 000 225 000 Other fixed expenses 125 000 125 000 125 000 SURPLUS / DEFICIT 152 400 209 500 (101 317) BANK – Opening balance (7 500) 144 900 354 400 BANK- Closing balance 144 900 354 400 253 083 3. Debtors collection schedule Credit sales October November December August 36 000 0 0 September 86 400 48 000 0 October 0 118 800 66 000 November 0 0 129 600 239

8.6.1 State two possible ways in which the equipment bought could be funded. . ae Fixed deposit wae a es . taking Up an additional ioan- +Money that ts ava lable in the current bank accont can be used or they can make use of @ bank overdra€e . 8.6.2 Calculate the percentage of stock purchased in October that was paid for in cash. Total purchases = SS000 #220000 = 275 000 » 55000 [oo 9 ipso ee eee 8.6.3 Calculate the credit sales in October 2015 if 10% discount is allowed to clients who paid within thirty days. (118 800 x) + 66000 = /32 000 + 66000 = R198 000 8.6.4 Which percentage of debtors settles their account within thirty days? Use the figures for October 2015 to calculate your answer. 132.000 102 198000 ( = 66,67% OO 8.6.5 Use your answers from Question 8.6.2, 8.6.3 and 8.6.4 in order to determine if the receipts from debtors, payment to creditors and buying of stock are well managed. Yes » cash sales (332922 x 1) represent 62,S% of total Sales Where cash purchases only represent 207% of total purchases. - 6770 Of debtors Settle their accounts within 30 days. . creditors aré pad within 60 days. All the above show a healthy cash flow. 8.6.6 Name two items which would be included in “fixed expenses”. » Rent expense, Insurance, Salaries etc. 8.6.7 Identify two expenses that would feature in a projected income statement but not in a cash budget. - Depreciation, Discount allowed, Bad debts, Loss on sale of assets, Prsiigi for bad debts adjustment ekc. 8.6.8 Are you of the opinion that it was a wise decision not to re-invest the fixed deposit? Quote figures to support your answer. Trterest on (oan. /80 000 X75gx + =(S00 <<. (0f Yes, + the interest rate eamed on fixed depocits (5 bf, while the interest rate paid on loans 7s 10 fo. -jt would be better to use the funds trom the tixed deposit th order to pay back the lean and save on the interest pad : 240

CHAPTER 9: REVISION FOR FINAL EXAMINATION 9.1 INTRODUCTION AND METHOD OF APPROACH At this stage you should be able to answer any question on any topic in the Accounting syllabus. This Chapter therefore contains not only questions about topics discussed in the Grade 12 workbook, but also questions in respect of work done in previous years and which will definitely be examined in the matric final examination. This Chapter contains specific questions with the aim of preparing you thoroughly for the final examination, as well as a practise paper, which you have to complete in 3 hours in order to determine your skills level before the final examination. Memorandums of all the revision questions and the practise paper are at the back of the book – make sure that you understand each question 100%. Before starting with the revision chapter; make sure that you have learned all your work very well. The purpose of revision is precisely to indicate which sections you have not yet mastered and on which you have to spend more time. You will succeed in the final examination if you follow the following method of approach. Method of approach: x Before you start with the final revision for the examination, work through each chapter and every question in the book as well as your June- and Preliminary examination papers. x Determine what the specific topic of the revision question is, and then first revise that section of the work thoroughly before you start doing the question. x Approach each question as if it is an examination, in other words, look at the marks and time allocated to each question and try and stick to it. By doing this you can ensure that you do not battle to finish the questions in the final examination. x Do the practice paper two days before you write the final examination and only look at the memorandum after you have finished the paper. Refrain from paging immediately to the memorandum if you struggle to do something. x Good luck to you! 241

9.2 REVISION EXERCISES 1 TO 10: EXERCISE 1: (Bank reconciliation, Debtors and Creditors reconciliation; 62 marks, 37 minutes) 1.1 Bank reconciliation Johan is the bookkeeper for Park Stores, who sell African Art works to tourist. Park Stores sells for cash and on credit, giving their debtors 30 days in which to settle their accounts.. They have, however, managed to negotiate 60 days from the suppliers for all credit purchases. Johan was on leave during August 2015 and was replaced by a temporary bookkeeper, Wilhelm. Prior to his leave Johan had reconciled the bank account for July 2015 with the bank statement. Wilhelm completed the Bank reconciliation statement at the end of August, after receiving the August bank statement, but was not able to reconcile. He has presented you with his attempt at the bank reconciliation and ask for your assistance. 1. Bank reconciliation statement on 31 July 2015 (prepared by Johan) Dr. Cr. Dr. balance as per bank statement 5 500 Cr. deposit 12 000 Dr. outstanding cheques: no. 224 (dated 28 February 2015 ) 880 no. 456 (dated 10 August 2015) 1 950 Dr. balance as per the bank account 3 670 12 000 12 000 2. Cash receipts journal for August 20015 showed total cash receipts of R42 400. 3. Cash payments journal for August 2015 showed a bank total of R56 800. 4. Bank reconciliation statement on 30 August 2015 (prepared by Wilhelm) Dr. Cr. Dr. balance as per bank statement 5 500 Cr. outstanding deposit 8 000 Dr. outstanding cheque: no. 482 (dated 25 August 2015) 4 800 Cr. balance as per bank account 10 730 10 300 18 730 5. Additional information 5.1 Johan noticed that Wilhelm had processed some entries correctly but did not take into account the following entries on the bank statement received at the end of Augustus 2015 x The bank statement balance on 1 August 2015 was R5 500 (Dr.), but showed an unfavourable balance of R13 945 on the 31 August 2015. x Bank charges for R85 and a stop order for insurance, R3 100. x A deposit directly into the bank account for, R520, as interest on the fixed deposit. x Cheque no. 480 appeared on the bank statement as R1 640 but in the CPJ R1 460. The bank statement entry was correct. 5.2 Johan also noticed that Wilhelm did not consider last month’s reconciliation. The deposit of R12 000, however, did appear on the bank statement for August 2015. REQUIRED: 1. Calculate the correct bank account balance on 31 August 2015. (12) 2. Draw up a correct bank reconciliation statement on 31 August 2015. (8) 242

1.2 Creditors reconciliation Wilhelm also prepared the creditors list and creditors reconciliation while Johan was away. He again experienced problems that it did not reconcile. Creditors control balance on 31 August 2015 R54 200 Creditors list on 31 August 2015 R50 240 An investigation revealed the following problems in the creditors ledger: x Trading stock to the value of R4 200, returned to a creditor, was recorded as R6 200 in the respective creditor’s account. x Credit purchases of stationery for R520, was entered on the wrong side of the respective creditor’s account. x A payment of R2 100 was posted to the wrong creditor’s account. x Creditors with debit balances of R920 were transferred to the Debtors ledger. Wilhelm did not make the necessary entries in the respective creditors’ accounts. REQUIRED: 3. Calculate the correct balance according to the creditors list on 31 August 2015. (10) 1.3 Analysis of debtors and creditors The following figures were taken from the Trial balance of Park Stores on 31 August 2015, the end of the financial year. Rand Sales (80% on credit) 1 800 000 Cost of sales (60% on credit) 1 200 000 Trading stock (1 September 2014) 255 000 Trading stock (31 August 2015) 305 000 Debtors control (1 September 2014) 310 000 Debtors control (31 August 2015) 266 000 Creditors control (1 September 2014) 76 000 Creditors control (31 August 2015) 54 200 REQUIRED: 4. Calculate the following: 4.1 Average stock holding period for the year ended 31August 2015. 4.2 Average debtors collection period for the year ended 31 August 2015. 4.3 Average creditors payment period for the year ended 31 August 2015. (17) 5. Do you think that Park Stores has too much stock? Comment on your calculation bearing in mind that they sell African Art works to tourists and curio shops. (5) 6. Comment on the collection of Park Stores from debtors and payment to creditors periods. You are also to give them advice on how the situation can be improved (10) 243

1. Calculation of bank balance 3670 + 42 400-56 G00 — 85 - 3/00 + $20 — (807880 = (12 495) - 2. __ Bank reconciliation statement on 31 August 2015 Debit Credit br. balance es per ban. Statemelt| 13 Vb3 Cro, aeposit 8ad0 i i ei Ba | 78D ¥ M0. ¢G2 4800 | |G halance as per pant account L2 695. Z2O89S ZOBIS 3 Correct total of creditars list on 31 August 2015 SO 240 + 2000 + £20 F528 F920 4. Calculate: 4.1 Average stock holding period lor the year ending 31 August 2015 5 (256000 1 905000) y 2 = _280 000 ,, 365. 1200000 i 1200 000 Ty 2, 3 MentKS 4.2 es debtors collection period for the year ending 37 August 2015 £¢ ae 900 + 266000) » 365 _ 268000 , 365 80% of / goe 000 { ~ (440000 / = sgdays 4.3 Average creditors payment period for the year ended 31 August 201s 2 (76000 + 54200) | 365 _ 65/00 | 365 b0%o a 1 20000%"F * 774 59g XT — = 33 ays 3 Comments rs slock holding Yes or Neo. ore. hakdim ng 2,3 oNnths Stock which means @ fot 3 ed for stoha cop hn che Stack. vAll also mean gh, higher cas ads) SUP ONCE, Fi en ele, However, these /teus 6. Comments and advice on debtors colléciion and penis periods “a Binns a re tating ing €00 & to pa site oda 4at Paying v7) aa Creditors are bellig paid te pi Aad ven re Aut payjng in soda _ Result in cash Foy protjems for Lae BUSINESS. Advice: « Encourage debtors t pay earlier- give aliscounts, charge interest follow-up with outstanding sccuits etc. ° “Take the 60 days given to pay the creaytors, 244

EXERCISE 2: (Asset disposal and Note to Balance sheet; 45 marks, 27 minutes) The following incomplete Note to the Balance sheet of Park Stores was extracted on 28 February 2015. Note for property, plant and equipment on February 2015 Land and Vehicles Equipment buildings Carrying value at the beginning of the year 1 200 000 120 000 Cost price 880 000 450 000 Accumulated depreciation (180 000) Movements Additions Asset disposals (46 080) Depreciation Carrying value at the end of the year Cost price Accumulated depreciation ADDITIONAL INFORMATION: 1. During the year an invoice was received from Botha Builders for the following: x Construction of a new storeroom, R60 000 x Repairs, R6 000 2. A new vehicle was bought on credit for R150 000. The owner also paid for the installation of a sound system, R10 000 as well as for the license cost of the vehicle, R240. 3. Vehicles are depreciated by 15% p.a. on cost. 4. On 31 August 2014 equipment that was bought on 1 March 2012 for R80 000 was traded in at a loss of R6 080 on new equipment which cost R120 000. 5. Equipment is depreciated by 20% p.a. according to the diminishing balance method. REQUIRED: 2.1 Use the additional information to complete the Note for property, plant and equipment to the Balance sheet. (25) 2.2 Complete the entire Asset disposal account to show the trade in of the equipment on 31 August 2014. (12) 2.3 The owner is concerned about the fact that the equipment was exchanged at a loss, seeing that the market value is estimated at R55 000. Give TWO possible reasons as to why the loss was incurred and mention TWO possible measures that could have be taken to prevent further losses in future. (8) 245

2.1 Note for property, plant and equipment on 28 February 2015 Land and Vehicles Equipment buildings Carrying value at beginning of the year 1 200 000 120 000 Cost price / 200 e066 880 000 450 000 Accumulated depreciation (766 000) (180 000) Movements Additions 60 000 460 000 120 000 Asset disposal (46 080) Depreciation = (127 999)| (60 880) Carrying value at end of the year 1260 G00 152 Caf 283 040 Cost price 1260000| 1040000| ¥96 000 Accumulated depreciation - (887 979) (206 960) "2 ions: » ¢. ‘ Th a Calculations: 2 Lia; vehich a Depreciatin On bh ha CAC Oi Vehicles: 280000 52412 -x2 ocnl| Eqipmene_Erade- jn: 2 , 2 OH venices: ' 70072 * War. z012.- 28 Feb, 20/3 lootaeOhas g _ p, carrying value is Liz0 000 || iMar. z013- 29feb. 2014: (@0000-/b000«72 x | P2800 wei ly er tt > BE, New venice : a = : 2 Mov. 26 Feb, °° °° Xp xh =Rs00g E (456000 so 000) -Ligo 000-2800) i "|= 43760 : le ipm: 8 .— 2gFeb. . 117.999 + 8000 = Riz7 999 Ged 900 ~0) X32 x8 = D2 00b La a 2.2 General Ledger of Park Stores Asset disposal__ | Bi 31| Egujpment 0000 \#ib 31 Aecumu lated depre- | 33920 ciation on eguypmene * Creditors contral | 40000 Loss on Sakofasset | 6090 80000 80 000 ¥126@00 F500) 2.3 Reasons for loss and measures to prevent future losses Reasons: ‘The equipment 15 probably not maintained Pp and attchnded D; consequently equipment in bad condition. ‘ Depreciation perhaps net written-off corredly, Measures to prevent future losses: » Better maintenance and control of egupment rs required. Determine what the correct deprecratim rate shenld be. 246

EXERCISE 3: (Stock value, FIFO and Weighted average; 60 marks, 36 minutes) You are provided with information relating to Parkie Caps, a business which sells only one type of cap. The owner aims to continue with the business for another 3 years and thereafter he will start with a new business. The business uses the periodic inventory method. All the opening stock was bought at the same price of R20 per cap, but the cost price has increased regularly throughout the past year. REQUIRED: 3.1 Calculate the number of caps on hand on 28 February 2015. (4) 3.2 Value this stock: x Using the FIFO method x Using the weight average method (Calculations to be shown in rand and cents). (13) 3.3 Calculate the following using the FIFO method: x Gross profit x Mark-up percentage achieved i.e. gross profit shown as a percentage of cost of sales. (8) 3.4 Calculate the following using the weighted average method: x Gross profit x Mark-up percentage achieved i.e. gross profit as a percentage of cost of sales. (8) 3.5 The owner feels that it does not matter whether he uses the FIFO or weighted average method to value his stock of caps, because after 3 years this will have no difference on his overall profit. Do you agree? Explain your answer. (4) 3.6 What advice would you give to the owner with regard to the selling price of the caps for the next financial year? Explain your answer, quoting appropriate figures from the information. (4) 3.7 The owner feels it will be better for him to use the periodic inventory system for his business rather than the perpetual system. x Briefly explain the difference between these two systems x Do you agree with the owner’s opinion on using the periodic system? (8) 3.8 The manufacturer of the caps proposed that he employs labourers who are currently without jobs, at minimum wages, to reduce the cost price? If you were the owner, would you agree to this? Explain, providing TWO reasons . (4) 3.9 Parkie Caps deals only in cash. The owner says that he does not want to leave an “audit trail” which might provide proof to SARS that he must pay income tax on his profit. What would you say to the owner about this? (4) 3.10 The owner is also worried that he will get into trouble for not registering for VAT. What would you say to the owner about this? (3) INFORMATION Information of caps bought and sold for the Number of Unit price Total year ending 28 February 2015 caps Sales 580 R36 R20 880 Stock on hand on 1 March 2014 200 R20 4 000 Purchases during the year: 640 ? 16 410 April 2014 150 R22 3 300 July 2014 320 R25 8 000 November 2014 110 R29 3 190 February 2015 60 R32 1 920 247

3.1 Number of caps on hand on 28 February 2015. 20 t 640-580 = 260 caps 3.2 Value of stock using the FIFO method: bo units xR32Z = 1920 io units K R29 3/90 90 units X R25 2. 7360 _, Value of stock using the weighted average method: J ; W000 + 1b do. Weighted average cost price = ~~ z00r 640 -_z20 4/0 260 units X24,30 Rb3Ig., = #2450 per ume 3.3 Gross profit using the FIFO method: Cage of Sales = 4000 T 16Y10 - 7360 = 13050) -. Gross profit 20680 — 13 050 £7830 Calculate the mark-up % under the FIFO method: 7830 26 . won 3.4 Gross profit using the weighted average method: Loge et SaES. = ps +/6 4/0- 6319 = K/4O9UZ Gross profit = 20 880-9092 =f 67898 : Calculate the mark-up % using the weighted average method: 6783 roo =" (4092 a ae =_¢8/fo , Qo 3.5 The owner feels that it does not matter whether he uses the FIFO or weighted average method to value his the following year. After 3 years the total net prot will be stock of caps because after three years this will have no difference on his overall profit. Do you agree? Explain your answer. eS, the evaluated closing stock of the year, js the initial Stack a é ha ; Same, provided the Selling price remeng the Same, and all stack /5 sa 7. 3.6 What advice would you give to the owner with regard to the selling price of the caps for the next year? Explain your answer, quoting appropriate figures from the information. The Selling price must increase in correspondence with the cost price. ‘In the rang but Ehe iqst Eonsignm caps was sold at a@ mark-up o, a Mark-up of 80% (Ribonize) was seca gee only 12,570 (Ry on 30) 248

3.7 The owner feels it is better to use the periodic than the perpetual inventory system. Explain the difference between the two systems. Periadic: Value of stock ony cakulated at end of periad. (ost of Sales not Calculated per item gold Sold Perpetual: Cost: of sales calculated for each item t the value The trad stock accep Sgn Mp AED, el be Do yoy agree with the owner’s opinion on using the periodic system? yes, it Is a small business, and the owner can easily control the hutnber of capo on hand, fern system 1s cheaper and more simple. petual system offer better control hithough the system & mort Coipeate phe, owner can appoint someone to rin he “execute rol all the. 3.8 The manufacturer of the caps proposed that he employs labourers who are currently without jobs, at minimum wages, to reduce the cost price? If you were the owner would you agree to this? Explain. providing TWO reasons N the quale of the product cap eA Pot decrease with th result that ze toe the ustead being” shadowed. “1£ iS not ethical correct to exploit workers by paying the minimum wai -it can also lead to present. workers losing their jobs. Ay 3.9 Parkie Caps deals only in cash. The owner says that he does not want to leave an “audit trail” which might provide proof to SARS that he must pay income tax on his profit. What would you say to the owner about this? It is, unethical, The. business must run on sound business principles. -The business can get a pad repucation, and customers will not 54 hint *He can trouble with SARS which can contain penalties; even imprisonment, “Ab present the business dees pat earn much, and will therefore Pd have to pay to much tax, can ‘tertfre just as well operate decently and with) 3.10 The owner is also worried that he will get into trouble for not registering for VAT. What would you say to the owner about this? At this stage he does not have to wergy because 4s turn -over is much lower than the Rimilion determined hy SARS for the registration fer VAT. Je is in any case leyled with VAT by his suppher which he caunet claim back, because he is fa registered for VAT. ., 249

EXERCISE 4: (Cash flow, Analysis and interpretation; 113 marks, 68 minutes ) You are provided with information relating to Parkie Limited, a public company. REQUIRED: 4.1 Use the information provided to prepare: x Cash flow statement for the year ended 30 April 2015. (32) x Note for the reconciliation of net profit before tax and cash generated from operations. (12) 4.2 Prepare the Appropriation account for the year ending 30 April 2015. (12) 4.3 You are provided with the following financial indicators for the past two years. Calculate the missing indicators denoted (a) to (f). 2015 2014 Current capital ratio 1,1 : 1 1,6 : 1 Acid-test ratio (a) 0,6 : 1 Stock turnover rate (b) 2, 3 times Debtors collection period 24 days 43 days Creditors payment period 30 days 30 days Debt/equity ratio (c) 0,7 : 1 Net asset value per share (d) 80 cents Earnings per share 25,2 cents 15,5 cents Dividends per share (e) 15 cents Return on shareholders’ equity (f) 19,6% Return on total capital employed 29,8% 22,1% Interest rate on loans 14% 14% (23) 4.4 At what price were the new shares issued this year? Is this a reasonable price for the new shares? Explain, quoting an appropriate financial indicator from the information to support your answer. (8) 4.5 Comment on the dividends, earnings and returns earned by the shareholders. Will they be satisfied with these? Explain, quoting appropriate financial indicators from the information to support your answer. (8) 4.6 Comment on the liquidity of the company. Explain, quoting appropriate financial indicators from the information to support your answer. (12) 4.7 Comment on the financial gearing of the company. Explain, quoting appropriate financial indicators from the information to support your answer. (6) 250

INFORMATION: Parkie Limited Balance sheet on 30 April Assets 2015 2014 Non-current assets 2 205 100 1 659 400 Fixed assets 1 885 100 1 459 400 Investments 320 000 200 000 Current assets 854 300 999 600 Inventories (all stock) 575 000 650 000 Trade and other debtors (including SARS) 276 300 244 600 Cash and cash equivalents 3 000 105 000 Total assets 3 059 400 2 659 000 Equity and liabilities Shareholders’ equity 1 559 000 1 224 000 Ordinary share capital 1 229 200 898 000 Retained income 329 800 326 000 Non-current liabilities 740 000 800 000 Mortgage loan: ABSA 740 000 800 000 Current liabilities 760 400 635 000 Trade and other creditors 372 000 404 000 Shareholders for dividends 246 400 231 000 Bank overdraft 142 000 - Total equity and liabilities 3 059 400 2 659 000 ADDITIONAL INFORMATION: 1. The Income statement for the year ending 30 April 2015, reflects the following: Sales R3 500 000 Cost of sales 2 200 000 Interest expense 104 000 (all interest due has been paid) Depreciation 207 300 Income tax 151 200 Net income after tax 388 800 2. During the year equipment was sold at book value for R145 000. 3. For the past two years, the provisional tax payments exceeded the tax for the year. The amount owed by SARS is included in Trade and other debtors: x Owed by SARS on 30 April 2014, R11 600 x Owed by SARS on 30 April 2015, R7 300. 4. Another 470 000 new shares were issued on the last day of the financial year, bringing the total issued share capital to 2 000 000 issued shares. The newly issued shares did not qualify for any dividends in the 2015 financial year. 251

4.1 Parkie Limited Cash flow statement for the year ending 30 April 2015 Cash effects of operating activities 237 800 a ated From nperatlons 853 3m) Ln terest paid f (ey b00) Fe Dividends ‘pal (23/000-+ 385000 ~ 246 Yo) ( erba). Lncome tat bad (-ibb0 + 151200 + 7350) (le 700, Cash effects of investing activities Purchases of Fixed assets [1eeste-fiysqyoo— | (778 0c) Fraceeds oh Sales oF fied asetxP0? 200-148 0001T | 746 G00 Fited deposit (220008 — 200000) (120 000) Cash effects of financing activities Zl ZO Frac. om (ssue of Share capita{{t229 200 -8180c0) | 33/ Z00 Repayment of long-term !oan (aa0000- Fe 000) (60 000) Net change in cash and cash equivalents (244 p00) Cash and cash equivalents at beginning of the year f05 000 Cash and cash equivalents at the end of the year {-42 000+ 3.000 ) ( {3 9000) Reconciliation between net profit before tax and cash generated from activities 252 Aeé profit before taxation { 388800 + 151200) 540 000 : Adjustments in respect of SH KO ecdatlon 207300 terest OXperise od oo0 Overating profit before change in working typjla, 85/200 Ga AS OF ch é copigal 7000 : em ri on fe ron 75 000 |___ Eperease in debtors (269000 - 293000) | 136000) | HE 1 — BPE 000, (3z000) 459 300 14.2 — Apprepriation account _=— = x Tncome tat 151200 \3P bol Profit and lass acc. | 560 p00 Ordinare. share 335000 *| (3b8800 415/200) | dividends : of See Retained incame__ |_ 3.800 (324300 — 326000) T Si0 000 54.0000 + balancing figure [_ | I

4.3(a) Acid-test ratio: (854 300 - 575000) p F660 400 279300 : 760 Yoo (b) Stock turnover rate: 0,4 : / 2 200 000 = (S%500+650000 = &E Limes. (c) Debt/equity ratio: 740000 3 1559 200 2,473 1 (d) Net asset value per share: Se (55900. x [22 = ae eae 7 73 cents per share, (e) Dividends per share: 38500 100 —.X ms 7640 ocd 7 25 cents per Share, (f) Return on shareholders’ equity: 388 800 06 x— - 2 (1 5597 000+ /z24 600! 259k, 4.4 At what price were the new shares issued this year? Is this a reasonable price for the new shares? Explain, quoting an appropriate financial indicator from the information to support your answer. 231200 fee se New sharehot will think, tt 15 4 re rice because YbO 000 Shares 1 Pa toner rat net 4s$et value o cents per Shaye. ea ree Existing shareholders will Fre] thet the price 4.5 Comment on the dividends, earnings and returns earned by the shareholders. Will they be satisfied with these? Explain your answer. F Dividends per share mcreased from (scents bo ascents, -Earnings per share neheroed from 15,5 paecpebeis os - Retz AV EL G! us MMTER, ‘0, prs Merde. ott ng ail Bt rere bank Uivestmentges a) -Sharchilders should be sabisfred with the results, 4.6 Comment on the liquidity of the company. Explain ir answer. - Acid test Fatio weakened from 2,6i1 @ o431 : ‘Rate of inventory turnover improved frem 2,3 times to 3,6 times which means $ 8 Sole guider as (n the past. ‘Average debtors é fod irmproved from 473 daysto 24 days, -Arer deiiors cohen fp period epi the. same. ol Zodays. ey a P ted tf debtors da not Liquialty, problems can be expected if eter’ ae ne Pay 4.7 Comment on the financial gearing of the company. Explain your answer. The company Is ew geared and the delt/owmers equity ratlo red, — , has impro furthe? from 0,721 0 447: which mnercates there'is few risks. 6 te ag tpY, Se, uppher loans because shereeiire L2f GEA Pd

EXERCISE 5:(Production cost statement, Trading statement and Unit costs; 66 marks, 40 minutes) Parkie Manufacturers build generators to be sold to households and small businesses. The financial year ends on 28 February 2015. REQUIRED: 5.1 Prepare the Production cost statement for the year ending 28 February 2015 together with the Notes to calculate the Direct materials cost, Factory overheads cost and the Cost of finished goods sold. (47) 5.2 Prepare the Trading statement for the year ending 28 February 2015. (5) 5.3 Calculate the following: 5.3.1 The unit cost of each generator rounded off to the nearest rand. 5.3.2 The selling price of each generator. (8) 5.4 The owner of Parkie Manufacturers is not satisfied with the profit he is making. At present there is an enormous demand for generators in the country that the industry is not able to supply. The owner has found an alternative supplier of raw materials for the production of the generators. This supplier is much cheaper, but they are not approved by the SABS as the safety of the materials cannot be guaranteed. The owner has calculated that he will be able to cut his direct materials cost by about 40% using the alternative material. As the demand is so high and people will buy whatever they can get, he has decided to take this option. Do you agree with him? Discuss his decision and what the implications of this could be. (6) INFORMATION: Stock on 1 March 2014: Raw materials stock R120 000 Work-in-process stock 240 000 Finished goods stock 616 080 Consumable stores on hand 30 000 Transactions during the year: Consumable stores bought for cash 90 000 Raw materials purchased 420 000 Carriage on raw materials paid 39 000 Raw materials issued during the year 492 000 Factory wages per wages journal 396 000 Factory manager salary 120 000 Factory electricity paid 18 000 Maintenance on factory equipment paid 48 000 Medical aid contribution for factory workers 78 000 Rent paid 216 000 Depreciation on factory equipment 90 000 Administration salaries 80 000 Sales (for cash) 3 017 600 254

ADJUSTMENTS: 1, On 28 February 2015 the following stocks were on hand: € Work-in-process stock 82 000 & Finished goods stock 103 600 & Consumable stores on hand 12 000 & Raw materials stock ? The factory’s Wages journal for February 2015 has not yet been posted. Gross wages are R39 600, and the employers’ medical aid contribution to the Medical fund is, R7 200. An electricity account regarding the factory is still outstanding, R6 000. Rent must be divided between the factory and admin in the ratio 2:1. All rent has been paid for the year but the factory rent of R12 000 per month was increased by 10% on 1 January 2015. The bookkeeper has forgotten to process the increase for January and February A consignment of raw materials, which was imported from England, was delivered on the 28 February 2015 . However, no entry has been processed. The costs were as follows: (the exchange rate was 01 = R16,40) Cost of raw materials 05 000 Carriage on purchases 0 800 Import duties 10% of the raw material. Costs exclude carriage on the raw materials. Total units produced are 742 units. Total units sold are 820 units. Calculations: Direct labour costs: Factory wages + medical fund contribution + Wage, joumal nat yet = 396 000 ra 73000 + @ 7600 + 7200) = 520 900 Rent expenses: Factory %, of total + Increase of 10 hs for 2 months =(20000x3) + 2(/2000x4) =444YOO + 2400 = 146 $00, Imported raw materials: Cast price : ($000 X16,4) = Khaz 000 Carriage : (900 x 4) = R13/20 Limpert duties: (92000 x8 2.8200 100. n 255

5.1 Production cost statement for the year ending 28 February 2015 Direct costs 1012 B00 Raw material O| 49200 Direct labour (396 000+ 73 000+ 39L00t 7200) 520 B00 Factory overhead costs | 53640 Total manufacturing costs 1599 200 Work-in-process at the beginning of the year 24 000 Production costs of stock available to be sold 1789-200 Work-in-process at the end of the year (82 200) Cost of production of finished goods (7072060 Notes to the Production cost statement 1. Direct materials cost pening stock 120 200_| Purchases (420 000 + 22000) 50Z 200 Carriage on purchases (32000 + 13 120) 52 120 Lamport autres BZ00 E6Z 320 Closing Stok / Costaf- Law _matertal 4G2 000 2. Factory overhead costs Consumahles (30 p00 + 90000 -12 000) 108 200 lectrich + £000) 24 000 Maintendnce 4G. 200 Regt expense (216 000 Xs) +2400 bb Yb Lepreclation s 90.000 Manager Salary Z Factory overhéad costs S2BL0 | 3. Cost of finished goods sold Cpentng faleace of flushed GOOGS. | (6 080 ot fihiShed ‘Goods Aranypactzred FIP 2222580 | | Final ieee of (lis |_£103 £00) | | Cot of Fink 00s ZAG 6G0 256

5.2 Trading statement of Parkie Manufacturers for the year ending 28 February 2015 Sales 30/7600 Cost of sales 22/9 250) Crass profit T979Z0 5.3 Calculations: 5.3.1 Unit cost to manufacture each generator (rounded off to the nearest Rand): !707 Z00 742. = 2300, 8! = £230) , 5.3.2 Selling price of one generator: BOlM £00 820 = 2 3680 Hee 5.4 Discussion on purchase of the cheaper raw material: «Ethical it 1s not correck. The raw materide are rot guaranteed for safety reasons and nerf the SRBS has hot appr wed fo, ~Zt would be unettcal to Manufacture a product even if there 16 a high demand that could result in injuries or death of the CUSCOIMES. 257

EXERCISE 6: (Cash budget and Projected income statement; 89 marks, 53 minutes) You are provided with an incomplete cash budget and projected income statement of Parkie Stores for the period 1 November 2015 to 31 December 2015. REQUIRED: 6.1 Complete the cash budget and the debtors collection schedule in full. (31) 6.2 Complete the projected income statement. (25) 6.3 Answer the following questions: 6.3.1 The owner does not understand why the cash budget and projected income statement are showing different results. Explain to him the difference by focusing on the role of each document. (10) 6.3.2 Comment on the debtors collection policy and the creditors payment period and the effect of this on the cash position and the profit of the business. (6) 6.3.3 Do you think the owner has cause to worry about the cash position of the business? Discuss by referring to at least two different figures. (5) 6.3.4 The owner of Park Stores read an article in a financial magazine regarding the King Commission report that advocates that all businesses have to contribute to social upliftment and the environment. The owner is not sure what this means to his business and why he should adhere to the report as this will surely mean less profit to him. Explain to him what the report means and why you think it is essential that he should adhere to the requirements of the report. (6) 6.3.5 Parkie Stores supplies sporting equipment only to the local market and is not registered as a VAT vendor. Is this correct? Explain to the owner what the VAT regulations are and whether he should or should not register as a VAT vendor. (6) INFORMATION: 1. Cash budget of Parkie Stores for November and December 2015 November December Cash receipts Cash sales 300 000 Cash received from debtors Commission income 2 500 3 500 Total receipts Cash payments Cash purchases of stock 93 750 Payments to creditors 208 000 Wages and salaries Sundry expenses 50 000 50 000 Total payments Surplus/(deficit) Bank – opening balance 98 400 Bank – closing balance 2. Debtors collection schedule Month Credit sales November December September 200 000 90 000 October 250 000 November December TOTAL 258

3. Projected income statement of Parkie Stores for November and December 2015 November December Sales 500 000 Cost of sales (312 500) Gross profit 187 500 Other income Commission income 4 000 Operating expenses Wages and salaries Sundry expenses 50 000 50 000 Operating profit Interest expenses Net profit 4. ADDITIONAL INFORMATION: 4.1 Cash sales amount to 40% of all sales. 4.2 Debtors are given 30 days to settle their accounts. However, past trends have revealed the following collection schedule from debtors: x 50% pay in 30 days, i.e. the month following the sale. They receive a 10% discount. x 45% pay 60 days i.e. 2 months after the sale. x 5% is written off as irrecoverable after 60 days, i.e. two months after sales. 4.3 Parkie Stores works on a fixed mark up on cost at all times and a fixed stock base i.e. stock is replenished at the end of the month in which the sale took place. 4.4 20% of all purchases of stock are bought for cash. 4.5 All creditors are paid in full in 30 days i.e. the month in which the sale took place.. 4.6 Wages and salaries for October amounted to R120 000 and will remain the same for the budgeted period. Some of the staff members are going on leave in December and their wages and salaries of R40 000 for December are paid at the end of November. 4.7 Depreciation is to be written off on equipment at a rate of R1 200 per month. 4.8 Interest on the loan is capitalized and amounts to R800 per month. Loan repayments together with interest are made at the end of every second month. The next repayment of R5 600 will be on 31st December 2015. 4.9 Commission is received a month after it is earned i.e. commission earned in October will only be received at the end of November. 259

6.1 6.2 Cash budget of Parkie Stores for November and December 2015 November December Cash receipts Cash sales ‘200 000 300 000 Cash received from debtors Zo0zs00 Z2Y7500 Commission income 2 500 3 500 Total receipts YOE O00 55/200 Cash payments Cash purchases of stock @Z500 93 750 Payments to creditors 208 000 250 C00 Wages and salaries 460 000 90 000 Sundry expenses 50 000 50 000 Loan (includes interest) = 5600 Total payments YBO0520 YIP B50 Surplus/(deficit) (75500) 7/1 450 Bank-opening balance 98 400 ZZPO&O Bank-closing balance 229 FG SGO Debtors collection schedule Month Credit sales November December September 200 000 90 000 October 250 000 HZ500 HZ500 November 300 000 435.000 December 450 000 TOTAL 202500 297500 Projected incomste statement of Parkie Stores for Nov. and Dec. 2015 November December Sales 500 000 JS0T00 Cost of sales (312 500) ($63 750) Gross profit 187 500 23/250 Other income 3500 Y O00 Commission income 3500 4000 Operating expenses (193 700) (192700) Wages and salaries 4120000 /20 000 Sundry expenses 50 000 50 000 Discount allowed 12500 15000 Bad debts 16000 [2.500 Depreciation 1Z0o0 1200 Operating profit @700) $6550 Interest expense (a0) (Bc0) Net profit (3500) 85750 260

6.3 QUESTIONS: 6.3.1 The owner does not understand why the cash budget and projected Income statement are showing different results. Explain to him the difference by focusing on the role of each document. . hows Fucure INFLOWS and CUZ IOWS of CASH 30 THEE Pts Belay painter fe Vial stiolen can be eberined : Projected income statement shows all future expenses and incomes <2 that expected prof7t or 085 can fe caltelated. 6.3.2 Comment on the debtors collection policy and the creditors payment period and the effect of this on the cash position and the profit of the business. -Lebtors tale too oo - only 50% within Zode¢ys. - Creditors are PeeIy | “ays ~ pest the cash tes bee fecelved From the. creditors. - This situation can definitely pesult tn cashflow frien but will Wt affect the profit 6.3.3. Do you think the owner has cause to worry about the cash position of the business? Discuss by referring to at least two different figures. No. + November showed a deficte of f 25500. Lecempber sc 4 Surplus rally die te lncreased safes tu the. festive season which is het sustainable. | ‘Expenses are high comparing with the ste. ¢ debtors tallection petied puts pressure onthe cashflow MAMAN 6.3.4 The owner of Park Stores read an article in a financial magazine regarding the King Commission report that advocates that all businesses have to contribute to social upliftment and the environment. The owner is not sure what this means to his business and why he should adhere to the report as this will surely mean less profit to him. Explain to him what the report means and why you think it is essential that he should adhere to the requirements of the report. Social uplfttnent means that a business must contribute Part of Eheir profis to fatal communities or charities by getting involved, in environmental prgjects. ~The business (5 dependent on the comtmypity and Che environment and should therefore be putting back aswell as tating 6.3.5 Parkie Stores supplies sporting equipment only to the local market and is not registered as a VAT vendor. Is this correct? Explain to the owner what the VAT regulations are and whether he should or should not register as a VAT vendor. No, all businesses that have aturnoyer more than f1c00v0 hae te register as @ VAT vender. ‘In the 2 months (November and Lecember) the estimate, turnover fag already exceeded for million, they ust. there forg register for VAT" otherwise face. héay ‘fines [os andjor imprisonment. 261

EXERCISE 7: (VAT calculations, Ledger and Ethics; 47 marks, 28 minutes) KLM Stores is registered as a tax vendor with SARS. Their mark-up is 100% on cost. Most of the journal totals for June 2019 are provided. These totals have been verified as correct. REQUIRED: 7.1 What is the difference between VAT-output and VAT-input? (2) 7.2 Complete the missing details marked [1] to [8]. Round off calculations to the nearest Rand. (16) 7.3 Complete the opened accounts in the General ledger. Close off the accounts to the VAT control account on 30 June 2019. (18) 7.4 Calculate the amount owed to/by SARS. (3) 7.5 Give your opinion on each of the following scenarios: 7.5.1 According to the announcement by the Minister of Finance any business with an annual turnover of more than R1 000 000 per year must register for VAT. The annual turnover of AB Suppliers is R2½ million. The owner does not intend registering for VAT even though he charges his clients VAT. He feels that his costs would increase significantly because he will have to employ an accountant to maintain his records. (4) 7.5.2 GF Stores, a registered VAT vendor, sells for cash only. Yet they write off large amounts as bad debts and then claim this VAT from SARS. (4) INFORMATION: Totals of subsidiary journals on 30 June 2019: Cash receipts journal VAT Cost of sales Debtors control Sundry Bank output Sales Receipts Discount accounts [2] [1] 26 000 13 000 1 400 0 2 500* * Rent income Cash payments journal VAT Trading Consumables Creditors control Sundry Bank input stock Payments Discount accounts 13 820 [3] 4 500 200 [4] 0 2 100* * Equipment Petty cash journal Petty cash VAT input Trading stock Consumables Sundry accounts [6] 135 [5] 200 250* * Wages Debtors allowance journal Debtors control VAT output Sales Cost of sales 2 875 375 [7] [8] Debtors allowance journal Debtors control VAT output Debtors allowances Cost of sales 575 75 500 250 Creditors journal Creditors control VAT input Trading stock Consumables Equipment Sundry accounts 8 050 1 050 4 228 982 1 790 - Creditors allowance journal Creditors control VAT input Trading stock Consumables Equipment Sundry accounts 1 265 165 800 300 - - 262

7.1 What is the difference between VAT-output and VAT-input? p 4 | WAT input is paid-to Suppliers and Can be claimed back Troms. -VAToutput I's levied on sales of stock and must be par over to SARS 7.2 Complete the missing details marked [1] tot [8]. Round off calculations to the nearest Rand. | Number Answer is Calculation [1] 3 400 26000 Xj00 2] |33300 | 3900+ 26000 + |4.00 + 2500 8) | {020 | (4500+ 200+ 2100) X is 4] | 6000 | [3320—/020 — 4500 —200 —2100 [5] JOO (1/35 42) — 2.00 i) | [285 | (35 + Joo + 200 + 2.50 1 |2500/2a75 — <a [8] 1250 2500 x & 7.3 Complete the opened accounts in the General Ledger. General ledger of KLM Stores VAT output MeDtcontro| DAT 7S | sn wi Bank CRI] 3 400 VAT-Control G3|_4. 200 Dteotrol BT) 375 “215 21S VAT input F2 zol Rank _— CPT] | O20 | XO blCtcontrol AT 165 Pettycosh Pct! 135 VAT-contro| 632.040 Ctcontrol CS| | 050 2. 20S Lt 7.4 Calculate the amount owed to/by SARS. 4.200 —2040 = 2/60, 7.5 Give your opinion on each of the following scenarios. 7.5.1 AB Suppliers A “A business with a tumover ot Ri million per annum om) bound by law to register for VAT- . ‘This is @ tranggression of lawand is punishable by heavy penalties or even jail Sentence 7.5.2 GF Stores “This (S traud and tax evaToion and can lead to heavy penalties . ‘The accounitant is Fespons: ble to present honest and reliable Figures to SARS. 263

EXERCISE 8: (Inventory valuation; 45 marks, 25 minutes) You are provided with information relating to Park Golf shop, a business which sells golf clubs and golf balls. The periodic inventory system is used. REQUIRED: 8.1 Refer to Information 1. Briefly explain why it is appropriate for the owner to use the FIFO method for golf clubs, and the weighted average method for golf balls. (4) 8.2 Calculate the value of the closing stock for the two stock items. x Golf clubs (use FIFO method) x Golf balls (use weighted average method) (15) 8.3 Calculate the following for golf clubs: x Cost of sales (5) x Gross profit (3) x VAT charged to customers on golf clubs sold (3) x Mark-up % (3) 8.4 The owner suspects that the stock is not well controlled. x He suspects that the golf clubs he is selling, are not very popular with his customers. x He suspects that golf balls are being stolen. Quote information from the question which will confirm his suspicions. Provide an appropriate calculation in each case to support your answer. (6) 8.5 The owner has asked you to become a partner in the business. Explain THREE strategies that you would want to implement in this business were you to become a partner. Refer to specific information from the question for each strategy. (6) 264

INFORMATION: 1. Inventory valuations at the beginning and end of accounting period: Golf clubs Golf balls Number of Per unit Total value Number of Per unit Total value units units 1 March 2014 90 R800 R72 000 1 200 R9,60 R11 520 28 Feb. 2015 205 ? ? 550 ? ? 2. Carriage, exchange rates and import duties: 2.1 Golf clubs: These clubs are made in South Africa. Transport costs are R50 per golf club. A total of R15 000 was paid for transporting the 300 golf clubs purchased. Transport cost is included in the opening stock figure of R800. 2.2 Golf balls: These are imported from USA. Prices are quoted in US dollars ($). The exchange rate was R7,50 = $1,00 throughout the year. Import duties are levied at 20% of rand value of the purchases. Transport costs are paid by the manufacturer. Import duties cost is included in the opening stock figure of R9,60. 3. Purchases during the year: Golf clubs Golf balls Number Purchase price Total value Number Purchase price per unit Total of units per unit in rands of units in US dollar value in (excluding (excluding import US dollars transport) duties) 25 Apr. 2014 75 R750 R56 250 3 000 $1,00 $3 000 25 Jul. 2014 75 R800 R60 000 3 000 $1,20 $3 600 26 Oct. 2014 75 R900 R67 500 3 000 $1,20 $3 600 25 Jan. 2015 75 R900 R67 500 3 000 $1,60 $4 800 Total 300 - R251 250 12 000 - $15 000 4. Sales during the year (exclusive of VAT): x Golf clubs: 185 units at R1 200 each = R222 000 x Golf balls: 10 500 units at R19 each = R199 500 265

8.1 Refer to Information 1. Briefly explain why it is appropriate for the owner to use the FIFO method for golf clubs, and the weighted average method for golf balls » Golf clubs are expensive. items of which large numbers are not Solf -The prices can also ajfer quite alt between different purchases -It is albo easy to keep pace with movement of Stack, “Galt balls are sh items of which large numbers are sold, ‘Jt will abo be difficult to heap pace with which balls Were purchased and whith were sold, 8.2 Calculate the value of the closing stock for the two stock items. Golf clubs (use FIF method) 67500 + 67500 + (988X800) + 10250 = R 99250 Golf balls (use weight average method) 526 + 12500 +22600 = (46520 _ [2000 F 1ZOCe sane Fill, 10 per hal “. 550 x ky, Je0 = Lé 108, 8.3 Calculate the following for golf clubs: * — Cost of sales 7Z 000 + 25! 256 + 15000 —189256 > fi rz) 4199 000 * — Gross profit ZZZ000 ~— 149 600 R73 200 VAT charged to customers on golf clubs sold 22z 000 Kt%e 406 = kK 31 08¢ —____-_¥ * Mark-up % 73000 x 100 149000 / = 48,9 ho 266

8.4 The owner suspects that the stock is not well controlled. e He suspects that the golf clubs he is selling, are not very popular with his customers. Ge , 3) means only 4720 of available stack was sold ‘x =¢5) means that. stack on hand 1s for 404 days * He suspects that golf balls are being stolen. - 200 +/2000— 10509 = 2700 bal which should be on hand therefore. 2700-550 = 2150 bale are Wmisng. Thus, meaning a shortage or loss of 215K RU,/6 = f2 3 BES ee 8.5 Explain THREE strategies that you would want to implement in this business were you to become a partner. Refer to specific information from the question for each strategy. ‘Implement mere strictness regarding internal central measures tw combat th Sstocee eg cameras, Security StH Cont (nuous aden; bape! ete. Y Mt ‘Awid piling up of tock. Seeayg that Gell clubs are tanufacttted locally; it 1s easy to purchase when heeded -Consider to Change the Mar h- tp Policy on IG clabs, ‘The selling price at present may he higher than that of compet! tOrs, - Consider better marketing and adver LI GING 2D encourage larger turnover of golf Clubs, * Consider the possibility fo buy gor clubs lially at: a lower price "Consider to im gof libs, because (€ Seems that customers’ do nat slike the presene Lond. 267

EXERCISE 9: (Manufacturing; 30 marks, 20 minutes) You are provided with information relating to Park Manufacturers for the year ending 30 September 2015. The business manufactures two products: suitcases and sport bags. REQUIRED: 9.1 Identify ONE major cost-item of each of the following: x Factory overhead costs x Selling and distribution costs (2) 9.2 Calculate the following in respect of suitcases for 2015: x The unit cost of production (5) x The variable cost per unit (3) 9.3 Calculate the break-even point for suitcases in 2015. (5) 9.4 Identify TWO costs which have not been well controlled in respect of suitcases during this financial year. Quote appropriate figures to support your answer. In each case provide a possible solution to this trend. (8) 9.5 The owner is considering manufacturing only one line instead of the current two. Advise him on whether he should retain the manufacturing of suitcases or sports bags. Provide appropriate figures to support your answer. (7) INFORMATION: Sports bags (2015) Suitcases (2015) Suitcases (2014) Variable costs R520 000 R660 000 R470 000 Direct material cost R240 000 R330 000 R200 000 Direct labour cost R160 000 R264 000 R240 000 Selling and distribution cost R120 000 R66 000 R30 000 Fixed costs R280 000 R650 000 R430 000 Administration cost R60 000 R250 000 R220 000 Factory overhead cost R220 000 R400 000 R210 000 Break-even point 1 867 units ? 1 623 units Selling price per unit R280,00 R520,00 R500,00 Number of units produced 4 000 units 2 500 units 2 000 units Number of orders placed 4 000 units 1 800 units 2 000 units 268

9.1 Identify ONE major cost item of each of the following: |S pdirece: pe: <0 I /comstuma. he , > Hay exp. a HSE lo Lo LPAe Lrdjrect. fabour } &.9. rent, JRSUPQNE, Cee oh hie on ft 6 y P ven ectritty . Eateries of salesman - Hay expense ref. to sales : Coumiteion on sales ane aistribution of product. 9.2 Calculate the following in respect of suitcases for 2015: The unit cost of production: $f G00 Zo cv tty 0 +yjwwo . 7 4 20 Tr £397, £0 per SuitCas, The variable cost per unit: 460 coo Z500 = Kzoy LE GUueCASE , 9.3 Calculate the break-even point for the suitcases in 2015. tixee] COSES _ Yio + 250000 Selng, Price per ue - variable casts per ume 620 - 264 ; = GSC000 | = 2590 nts . 246 = 253%,16 9.4 Identify TWO costs which have not been well controlled in respect of suitcases during the financial year. Identified costs Solution Production increase with 207 Lnvestigate cheaper raw materials while airect material costs — |and prevent wasting of raw. increased with 65% (al by better training of personne. Factory overhead costs is almost Inyestigate facery expenses and double that of Lhe previous yer prevent wasting of €.9. electricity from R210 000 to K4y00000, telephone; repairs, bbe Selling end distri bution cost Latredute more strict Controf chin with 40% while sales |measures and restrict transport Came dowk uth 07. and enterlanmestt cost. 9.5 The owner is considering manufacturing only one line instead of the current two. Advise him on whether he should retain the manufacturing of suitcases or sports bags. Provide appropriate figures to support your answer. Sports bags: /Poduction of 4000 unt> are more thon double the break-even pout G (867 units ana all thems were Sold. Suitcases: roaduction of asco ants are fewer than the break-even point of 2540 units, and certain Costs were not: conttelled well. .. They must Continue t0 manufacture purtsbep and stop mandfacturing SUCCASES, 269

EXERCISES 10: (Debtors reconciliation and Internal control; 30 marks, 20 minutes) You are provided with information regarding Park Traders. The bookkeeper has made a few errors when reconciling the debtors control account with the debtors list. REQUIRED: 10.1 Park Traders requires their new customers to provide personal details, including proof of residence, before opening accounts. Briefly explain why this is necessary. Name TWO points. (4) 10.2 Prepare the correct debtors list on 31 August 2015 and show how you would adjust the debtors control account using the format provided. (26) INFORMATION: 1. The bookkeeper discovered that he had made a number of errors when preparing the debtors ledger accounts. 2. The debtors control account and the debtors list did not reconcile. The difference is R6 470. The following summary was prepared on 31 August 2015: Balance of the debtors control account R70 663 Total of debtors list R77 133 Springbok Traders 17 600 Wallaby Traders 55 473 All Black Suppliers 3 400 Jaguar Stores 660 Difference R6 470 3. Errors on the account of Springbok Traders: x Interest on the account was calculated incorrectly. Provide for additional interest, R165. x VAT at 14% was omitted on invoice 989 dated 31 July 2015. Total sales, excluding VAT, amounted to R16 500. 4. Errors on the account of Wallaby Traders: x A credit note of R3 080 was incorrectly reflected in the debtors ledger account as a debit entry. The General ledger is correct. x Wallaby Traders claim that they paid R13 200 the previous month, but that this is not reflected on their statement. Investigations revealed that Wallaby Traders’ payment was incorrectly posted to the account of another debtor, Springbok Traders x Wallaby Traders had issued a dishonoured cheque for R2 750 in settlement of an amount of R3 100. The CRJ and CPJ entries were correctly recorded. The cancellation of the discount was not reflected in the Debtors’ ledger account. The control account is correct. 5. Additional errors reflected on the debtors reconciliation statement: x Jaguar Stores’ debt of R660 has been written off as irrecoverable. The amount was posted to the debtors control account but not to the debtor’s personal account . x All Black Suppliers are reflected in the debtors ledger and the creditors ledger. Their credit balance of R2 124 in the creditors ledger is to be transferred to their account in the debtors ledger. 270

10.1 Park Traders requires their new customers to provide personal details, including proof of residence, before opening accounts. Briefly explain why this is necessary. Name TWO points. ‘Lt 1 important to have the addresses of debtors $0 that account statements can be pasted (2 good time bo assure debtors PY i” time -Lf Some debtors do no py their accounts, (t could be necessary for the business tate. legal action against them - in whith cases the addresses will be necessary t serve legal documents on the debtors "The National Creme Aet espns that. bustnesses Should make sure that possible de. can afford to buy en credit. The credit limit of debtors can be determned by their Mmenthiy LALOWE, 10.2 Prepare the correct debtors list on 31 August 2015 (show changes in brackets). Debtors list on 31 August 2015 (17 $00 + 165 + 23/a¢13200)| 33.275 [55 473 - (2080 1 3060) - /3200t0)| 36 463 Springbok Traders Wallaby Traders All Black Suppliers (3400 - 2124) 1276 Jaguar Stores ¢ 660 —66 re) == A7/014 Total List of adjustments to debtors control account Amount Account debited Account credited RICE bebtors Conttol Laterest -ycone R230 | hevtors contta VAT - out uit: R224 | Creastus wntral Debtors ‘contra. 271

9.3 FINAL PRACTICE PAPER TIME: 3 hours TOTAL: 300 marks INSTRUCTIONS AND INFORMATION 1. The paper comprises of 6 questions. Answer ALL the questions. 2. Use the formats provided for your answers. 3. All workings must be shown in order to achieve working marks. 4. It is recommended that you attempt to comply with the suggested time allocation. 5. Non-programmable calculators may be used. Proposed time allocation Question and subject Marks Time 1. Bank reconciliation and Internal control 40 marks 24 minutes 2. Companies, Financial statements, Analysis & interpretation 70 marks 42 minutes 3. Companies, Ledger and General reporting 70 marks 42 minutes 4. Inventory systems and VAT and Business ethics 45 marks 27 minutes 5. Manufacturing aspects 45 marks 27 minutes 6. Cash budget of a sole trader 30 marks 18 minutes Total 300 marks 180 minutes 272

Question 1 (Bank reconciliation and Internal control; 40 marks; 25 minutes) INFORMATION: You are provided with the bank reconciliation statements of Park Merchants for the last two months. Bank reconciliation statement of Park Merchants on 30 April 2016 Debit balance according to bank statement 26 650 Cheques not yet presented for payment: no. 123 (dated 25 November 2015) 285 no. 335 (dated 28 February 2016) 260 no. 438 (dated 15 April 2016) 775 no. 447 (dated 30 April 2016) 2 300 no. 448 (dated 25 June 2016) 5 000 Outstanding deposits 41 350 Credit amount incorrectly debited 250 Balance according to bank account ? Bank reconciliation statement of Park Merchants on 31 May 2016 Debit balance according to bank statement 23 270 Cheques not yet presented for payment: no. 335 (dated 28 February 2016) 260 no. 448 (dated 25 June 2016) 5 000 no. 473 (dated 22 May 2016) 3 300 Outstanding deposits 31 600 Credit balance according to bank account 230 REQUESTED: Refer to the bank reconciliation statements for April and May 2016 and answer the following questions: 1.1 Does the April 2016 bank statement of Park Merchants show a favourable bank balance or overdraft? Give a reason for your answer. (2) 1.2 Calculate the missing bank balance in the General ledger on 30 April 2016. Indicate whether it is a favourable or unfavourable balance. (6) 1.3 Cheque no. 123 does not appear on the May 2016 bank reconciliation statement. This cheque has not yet been deposited by the receiver. 1.3.1 Briefly explain what the problem is regarding cheque no. 123. (3) 1.3.2 What entry should the bookkeeper have made in May, regarding cheque no. 123? (2) 1.4 Which of the cheques indicated as outstanding on the April 2016 bank reconciliation statement appeared on the bank statement received for May 2016? (4) 1.5 The following item appeared on the Bank reconciliation statement of 30 April 2016: “Credit amount wrongly debited, R250”. 1.5.1 Was this mistake rectified by the bank during May 2016? Give a reason. (3) 1.5.2 Give an example of the type of mistake that the bank could have made? (3) 1.6 Explain why cheques 335 and 448 appear on both bank reconciliation statements for April and May. Give a different reason for each cheque. (4) SOLVING OF PROBLEM: 1.7 As the internal auditor of Park Merchants you have noticed that the bank reconciliation statements for April and May show big outstanding deposits. Your investigation indicated that most of the amounts have been received by the cashier before the date which appears on the bank statement. 1.7.1 What do you suspect the cashier does illegally which causes the deposits to be outstanding? (3) 1.7.2 Name any THREE internal control measures which can be implemented to prevent similar problems. (6) 1.7.3 Name TWO steps which can be taken against the cashier, should your suspicion regarding illegal activities be confirmed. (4) 273

QUESTION 2 (Companies, Financial statements, Analysis and interpretation; 70 marks; 45 minutes) Park Ltd. has an authorized share capital of 700 000 ordinary shares. On 28 February 2015, the end of the previous financial year, 450 000 shares were in issue. REQUESTED: Use the following information and indicate the following: 2.1 The Asset disposal account on op 30 November 2015. Refer to no. 7 of the given information. (9) 2.2 Answer the following questions: 2.2.1 Use the EPS (See no. 3) to calculate the number of shares issued on 1 March 2015. (5) 2.2.2 Calculate the dividend per share for the year ended 28 February 2016. (4) 2.2.3 Give ONE reason why shareholders: x Should be satisfied with the dividend policy of the company, and x be dissatisfied with the dividend policy of the company (Quote figures) (4) 2.3 The shares of Park Ltd on the stock exchange market, at present trade at R0,85 per share and the net value is R0,62 per share. The directors decided to issue the balance of the authorized shares at R0,75 per share. Would you be prepared to buy additional shares at this price? Confirm your answer by giving TWO reasons. (5) 2.4 Draw up the Cash flow statement, as well as the Note for cash effects of operating activities for the year ending 28 February 2016. Show calculations in brackets where notes are not required. (43) INFORMATION: 1. Figures from the Income statement of Menlo Ltd. on 28 February 2016. Depreciation on vehicles 22 392 Depreciation on equipment 5 728 Audit fees 38 000 Directors fees 90 000 Interest on loan (interest is capitalized) 12 000 Net income before tax 180 000 Net income after tax 126 000 2. New shares were issued on 1 March 2015 at an issue price of 70 cents per share. 3. Earnings per share (EPS) for the year ending 28 February 2016 were 20 cents per share. 4. An interim dividend of R50 400 was paid during the present financial year. 5. On 28 February 2015 Park Ltd. had a loan of R75 000. The balance of this loan was R132 000 on 28 February 2016. The loan agreement determines that interest should be capitalized and that an instalment of R1 200 per month is payable on the loan. The loan was also increased during the year. 6. Figures from the Balance sheet of Park Ltd. at the end of February: 2016 2015 Retained income R? 52 200 Book value of non-current assets 322 000 246 200 Creditors control 35 000 28 000 SARS (Income tax) 5 250 (dr.) 4 000 (cr.) Shareholders for dividends 88 200 40 000 Debtors control 63 000 66 000 Stock 116 150 86 200 Cash and cash equivalent R? 8 000 (cr.) 7. On 30 November 2015 Park Ltd. sold their only vehicle for cash at book value. The vehicle was originally bought on 1 March 2013 for R80 000. A new vehicle was bought on the same day as the old one was sold. All vehicles depreciate at 20% p.a. according to the cost price method. These transactions have been recorded. No other non-current assets were bought or sold during the year. 274

QUESTION 3 (Companies, Ledger and General reporting: 70 marks, 40 minutes) 3.1 PARK LIMITED You are provided with information concerning Park Limited, a public company listed on the JSE. REQUESTED: 3.1.1 Use the given information to prepare the Appropriation account as well as the Retained income account for the year ending 30 June 2016. (18) 3.1.2 Give comments upon the liquidity situation of the company in 2016 in comparison with 2015 by quoting THREE financial indicators in your answer. (6) 3.1.3 Make TWO recommendations to the directors to improve the liquidity situation. (4) 3.1.4 Prepare the Balance sheet on 30 June 2016. The Notes to the Balance Sheet are not required. Calculations must be shown in brackets in order to achieve part-marks. Note! Take the financial indicators into consideration. (23) INFORMATION: 1. On 1 July 2015 there were 50 000 shares in issue at an average issue price of R23,04 per share. On 1 October 2015 another 10 000 shares were issued at an issue price of R34,20 per share. On 1 May 2016 the company bought back 18 000 shares at a price of R32,90 per share. 2. An interim dividend van 35 cents per share was declared on 30 November 2015 and the final dividend was declared on 30 June 2016. 3. The Retained income account shows a credit balance of R274 100 on 1 July 2015. 4. Income tax for the year was R336 000. Tax rate is 28% of the net profit. 5. The following financial indicators calculated on 30 June, are: 2016 2015 Dividend per share (interim and final) 80 cents 90 cents Current ratio 1,3 : 1 1,9 : 1 Acid test ratio 0,7 : 1 1,1 : 1 Rate of stock turnover 4 times 5 times Debtors collection period 60 days 50 days Creditors settlement period 30 days 36 days 6. Balances taken from Pre-adjustment trial balance on 30 June 2016: Non-current/Fixed assets at carrying values 2 176 500 Fixed deposits: ABSA 270 000 Inventory 147 000 Creditors control 160 000 Bank overdraft ? Petty cash 3 000 Shareholders for dividends 18 900 SARS(Income tax) (credit) 15 000 Mortgage loan: Nedbank ? Debtors control 139 100 Prepaid expenses 9 400 6. The fixed deposit at ABSA consists of two investments: x R20 000 with due date, 31 October 2016 x R250 000 with due date 1 May 2018. 275

3.2 AUDITORS REPORT AND BUSINESS ETHICS REQUESTED: Refer to the following auditor’s report which was issued to Park Limited and answer the questions which follows: 3.2.1 Who is responsible to see that the financial statements are drawn up? (2) 3.2.2 To which main group of people should the auditors address their report and why is the report directed to them. (3) 3.2.3 The auditor’s report refers to the International Financial Reporting Standards (IFRS). Explain why auditors have to bring the IFRS into account when they give their opinion? (2) 3.2.4 Should the shareholders be satisfied with the auditor’s report? Give ONE reason for your answer. (3) 3.2.5 If the auditors neglect to fulfil their duties, it could have serious consequences for them. Discuss TWO advantages for the shareholders of Park Limited that all auditors should be members of a professional body. (4) 3.2.6 A. Verster, the auditor’s partner, who does the auditing at Park Limited, is going to marry T. Kemm, the financial director at Park Limited. x Would this influence the audit of Park Limited in any way? Give a reason for your answer x What advice will you give to A. Verster? (5) INFORMATION: INDEPENDENT AUDITORS REPORT, 20 MARCH 2016 AIM: We conduct our audit in accordance with the International Audit Standards. Those standards require that we plan and perform the audit to obtain reasonable assurance that the financial statements are free on material misstatement. These financial statements are the responsibility of the company’s directors. Our responsibility is to express an opinion on these financial statements based on the audit. AUDIT OPINION: According to us, the financial statements, in all material respects, fairly present the financial position of Park Ltd as at 30 June 2015, and the results of the financial operations and cash flows for the year then ended in accordance with International Financial Reporting Standards, and in the manner required by the Companies Act in South Africa. VERSTER & FRENZ Registered Accountants and Auditors Chartered Accountants (SA) P.O Box 2387 PRETORIA 0001 276

QUESTION 4 (Inventory systems, VAT and business ethics; 45 marks, 25 minutes) 4.1 INVENTORY SYSTEMS Park Merchants’ information for the year ending 28 February 2015 was presented to you. The business sells only TV’s. The periodic inventory system and the weighted average method are applied to determine the value of stock on hand. They buy all their stock from the same provider. REQUESTED: 4.1.1 Give TWO differences between the periodic and perpetual inventory systems. (4) 4.1.2 Use the weighted average method to calculate the following: x The value of the closing stock on 28 February 2016. (12) x Gross profit for the year ending 28 February 2016. (6) 4.1.3 Calculate what the value of the closing stock would be if the First-in-first-out method was used to determine the value of the closing stock. (5) INFORMATION: 1. Stock on 1 March 2015 consists of 100 TV’s with a total value of R55 600 which includes carriage on purchases. 2. Purchases during the year, 1 150 units with a total value of R747 500, composed as follows: May 2015 250 units at R630 each R157 500 October 2015 800 units at R650 each R520 000 January 2016 100 units at R700 each R70 000 3. Carriage on purchases levied during the year by the supplier, was at R25 per TV . 4. Ten defective TV sets bought during January 2016, were returned to the supplier. The supplier allowed a repayment in full, including the carriage on purchases. 5. A selling price of R1 095 was commonly maintained through the year. Total sales for the year amounted to R1 215 450. 6. On 28 February 2016 the physical stocktaking showed that 130 TV sets were on hand. 277

4.2 VAT AND BUSINESS ETHICS The following article appeared in a newspaper in a small rural town: ERASMUS PHARMACY IN TROUBLE AGAIN Erasmus Pharmacy recently reopened after a weeklong strike by six workers because of a dispute over poor wage increases. The owner and entrepreneur, S. Erasmus, now has a bigger problem with claims regarding unethical methods used determining the profit mark-up on the medicine sold by her. A worker recently dismissed, told the press that Erasmus has revaluate all the medical stock at the new replacement value, even if older stock was bought at lower cost.. “She then adds 100%-profit mark-up, as well as VAT on this value. She collects R100 000 per month from clients who are forced to buy medicine from her because there is no other pharmacy closer than 50 km.” the unsatisfied worker said. These accusations also drew the attention of SARS who has not yet received any VAT payments since she opened the pharmacy six months ago. Erasmus actually said herself that she is fed up with all the trouble that the pharmacy is causing her. “I am running various successful businesses and I can ask what I want for my goods. Besides the fast increase in the cost of stock my greatest expenses are business fuel and wages. I seriously think on closing this business. It is lot of nonsense.” she said. REQUIRED: 4.2.1 What is your reply to the commentary of Erasmus in the last sentence where she says that “it is a lot of nonsense” (3) 4.2.2 If you buy this business from Erasmus, what would you do different? Name TWO points and give ONE reason for each point. (6) 4.2.3 How much VAT output should Erasmus declare for the last six months to SARS with reference to the monthly amount which she receives according to the newspaper article? Show your calculations in order to achieve part-marks. (4) 4.2.4 Erasmus Pharmacy experiencing cash flow problems and has no money in cash to pay SARS. On 31 August 2016 the bank account had an overdraft balance of R183 860. You are the accountant of the Erasmus Pharmacy and the owner has requested you to decrease the amount of sales to such an extent that the VAT input exceeds the VAT output in order for the business to claim a repayment from SARS. Would you as accountant agree with this request? Motivate your answer by giving TWO reasons for your answer. (5) 278

QUESTION 5 (Manufacturing aspects; 45 marks, 25 minutes) 5.1 PARK MANUFACTURERS Park Manufacturers is making track-suits and sell it at a mark-up of 50% on cost price. REQUESTED: 5.1.1 Complete the given Production statement of Park Manufacturers for the year ending 31 August 2016. Only the Note for factory overhead cost is required. Where Notes are not required, calculations must be shown in brackets in order to achieve part-marks. (28) 5.1.2 The owner is of the opinion that the workers do not utilize the direct material (raw material) effectively or that the track-suits are stolen from the factory. Propose TWO control measures which the management can implement to solve this problem. (4) INFORMATION: PARK MANUFACTURERS Balances as at 1 September 2015: Factory equipment 260 000 Accumulated depreciation on factory equipment 84 000 Inventory on hand: Raw materials 14 700 Work-in-progress 3 400 Finished goods 4 200 Consumable stock 1 600 Transactions for the year ending 31 August 2016: Factory wages: Direct wages 156 000 Indirect wages 9 200 Purchases of raw materials 136 000 Factory equipment purchases (1 February 2016) 140 000 Rent of factory 24 000 Factory foreman’s salary 86 000 Carriage on raw materials bought 5 800 Insurance 5 600 Consumable stock bought on credit 5 900 Other manufacturing overhead cost 25 200 ADDITIONAL INFORMATION: 1. Inventory on hand on 31 August 20016 was as follows: x Raw materials R 6 000 x Finished goods 12 600 x Work-in-progress 10 870 x Consumable stock 2 100 2. The depreciation on the factory equipment is 15% p.a. on carrying value. 3. 80% of the consumable stock is used in the factory and the balance in the sales department. 4. The rent is allocated as follows: Factory 60% and the balance equal between the sales department and the administration department. 5. Insurance must be divided between the factory-, sales- and administration departments in the ratio to the floor area, presently in the ratio 4:2:1 respectively. 279

5.2 PARK SHOE FACTORY Park Shoe factory manufactures sport shoes. The factory has manufactured 36 000 pair of shoes during the year and all the pairs were sold at R249 each. There was no work-in-progress stock at the beginning or end of the year.. REQUIRED: 5.2.1 Calculate the cost of production per unit. (3) 5.2.2 Calculate the pairs of shoes to be manufactured and sold in order to break even. (10) Information from the Production cost statement for the year ending 28 February 2016 Direct material 1 980 000 Direct labour cost 2 592 000 Factory overheads 864 000 Total cost of production 5 436 000 Information from the Income statement for the year ending 28 February 2016 Sales (36 000 pairs at R249 each) 8 964 000 Cost of sales 5 436 000 Administration cost (only fixed cost) 540 000 Sales- and distribution cost (only variable cost) 792 000 Net profit for the year 2 196 000 280

QUESTION 6 (Cash budget of a sole trader, 30 marks; 20 minutes) The incomplete Cash budget and additional information of Park Fashions, a popular fashion store, is presented to you. The store is situated in a very busy shopping centre in Brooklyn. The owner is very worried about the decline in the sales over the past few months. REQUIRED: 6.1 Refer to the proposed Cash budget as well as the additional information given, to calculate the figures marked [a] to [e]. (18) 6.2 With reference to the item Fixed deposit (1 November), as shown in the Receipts-section of the Cash budget, explain what is going to happen regarding the fixed deposit on 1 November. (2) 6.3 Park Fashions is planning to buy equipment during the budget period. Study the Cash budget in order to calculate the expected total cost price of the equipment. (3) 6.4 The sales assistant complained about her proposed salary increase in November 2016. x Give ONE argument to support her opinion. x Give ONE argument to discard her opinion. (4) 6.5 At the end of October 2016 you have compared the actual figures of Advertising with the Cash budget’s figures and noticed the following difference. Give ONE point of advice to the owner, in this regard. October October Difference Budgeted Actual Advertising R 2 000 R 600 - R 1 400 (3) ADDITIONAL INFORMATION: 1. Actual and budgeted sales figures: Actual Budgeted Aug. Sept. Oct. Nov. Total sales 220 000 200 000 180 000 220 000 Cost of sales 176 000 160 000 144 000 176 000 x 20% of sales are sold on credit each month. x 65% of stock is bought on credit. x A fixed level of trading stock on hand was maintained right through the year by replacing it on a monthly base. 2. It is expected that debtors would pay their accounts as follow: x 70% in the month which follows the month of the sales. x 28% in the second month which follows the month of the sales. x 2% written off in the third month which follows the month of the sales. 3. To qualify for a discount of 5%, creditors are paid in full in the month which follows the month of purchases. 281

Cash budget of Park Fashions for October and November 2016 October November Receipts: Cash sales 144 000 [a] Debtors collections 40 320 [c] Fixed deposits (1 November) - 20 000 Interest on fix deposit (12% p.a.) 500 300 Other cash income ? ? Payments: Cash purchases and trading stock [b] 61 600 Payments to creditors [d] 88 920 Deposits – purchases of equipment 3 000 - Payment of instalments – equipment - 4 700 (4 equal instalments) Rent – expenses 16 000 17 440 Salary – store manager 12 000 13 680 Salary – sales assistant 5 000 5 125 Consumable goods 11 000 12 080 Advertising 2 000 2 000 Interest on bank overdraft 315 - Other cash operating expenses ? ? Surplus/(Deficit) for the month (21 995) 18 855 Bank balance at the beginning of the month 14 200 ? Bank balance at the end of the month (7 795) [e] 282

ANSWER SHEET QUESTION 1: 1.1 Does the April 2016 Bank statement of Park Merchants have a favourable bank balance or an overdraft balance? Give a reason for your answer. Over draft, 13 a debit balance according to the bang Statement which means it 13 GH 4. to the bank Menlo Merchants therefore owes money to the bank. 1.2 Calculate the missing bank balance in the General ledger on 30 April 2016. Indicate whether it is a favourable or unfavourable balance. 26650 ¢ (285 +260 +778 + 2300 4000) - YI350-250 = RO330 debit -/ Favourable balance. 1.3 Cheque no.123 does not appear on the May 2016 Bank Reconciliation statement. It has not yet been deposited by the receiver. 1.3.1 Explain briefly what the problem is with cheque no. 123. ‘ Cheguemi23 is 20W older than b months, ‘the Chey ue has matured ard 18 now stale, ‘The cheque canntt be honoured, 1.3.2 Which entry does the bookkeeper has to record during May 2016 with cheque no.123? ‘The stale chegue must be caucefed through @ contra entry in the CRI. 1.4 Which of the cheques shown as outstanding on the April 2016 Bank reconciliation statement, appears on the May 2016 Bank statement? No 438 and No. 447, otherwise lt has Go ypear oN the bank statement agan. 1.5 The item “Credit amount incorrectly debited, R250” appears on the Bank reconciliation statement of 30 April 2016. 1.5.1 Was this mistake corrected by the bank during May 2016? Give a reason. Yes, Tf it was not corrected it Should 4gain have to appear on the bank retoncihation statement for the month F May. 283

1.5.2 Give an example of the type of mistake that the bank could have made? “The bank Probably decreased our Gtcount with a chegue qawh py SOMCOME. iy pnb ge wr ipander was facoprectty edited ede. * Our account was incorrectly made fess by the bank. 1.6 Explain why does both cheques 335 and 448 appear on the April and May bank reconciliation statements. Give a different reason for each cheque. Cheque no.335: “the cheyue is merely not presented for payment by the payee and cay be #x changed tll 26 August before it becomes Cheque no. 448: Stale. "This Cheque 15 post-dated and Can only be presented MN 25 june 2cig to the. bank for payment. 1,7 As the internal auditor of Park Merchants you have noticed that both the April and May 2016 Bank Reconciliation statements rather big outstanding deposits. With your investigation you have found that most of the amounts were received by the cashier before the date on the Bank statement. 1,7.1 What do you expect the cashier doing illegally which shows that the deposits are outstanding? "Rolling of cash" — the cashier reduces the deposits and takes the amount of tMmeneg daring the. month fapersonal UuSe. The moncy is replaved at the end of the mouth when the. cashier receives’ his/her salary. 1.7.2 Name any THREE internal control measures to be taken to prevent similar problems. —Lepossts must be made dally. slag - Separate quties — the cashier must Hol receive Che MONEY and complete the deposit book. and tant the meney becatise Money. 3 sBocnal concer has to check. the method of depositing of cash used by the Cashier of ce jae of management must receive moneys and hard 1é to the cashicr to Pué ou record. 1.7.3 Name TWO steps which can be taken against the cashier, should your suspicion regarding the illegal activities be confirmed. +A letter reprimand has to he given. «2 disciplinary hearing where disciplinary steps are explained and where the cashier may Haye Legal ‘representa OW, must be heel If an investigation finas the cashier guilty, a criminal Charge can he lard at the pole SLALION, *The cashier can be aischarged if @ letter of reprimand was already given before. 284

QUESTION 2 2.1 General ledger of Park Ltd. Asset disposal 29o0|20 Vehicles | Boa00c0 |i Accumulated —\Qh 4y.000 deby. on vehicles Bank [AT 34000 80000 Gd 0 2.2.1 Use the EPS (See no.3) to calculate the number of shares issued on 1 March 2015. Nuwber of shares sssied = Net profit efter taxation y (eo. Earnings PL Share ! = /26000 x 0 20 7 = 630 200 Shares at end of the year ©. B30 000 — 450 000 = (80000 new Shares /5SUEa. . 2.2.2 Calculate the dividend per share for the year ended 28 February 2016. Zeatal dividends x 2 ~ 52 400_+ 88200 x 2 Mumber of SRArES / 630 000 / _ 138 00 x £00 630 000 ‘ = 22 cextS per Share 4. 2.2.3 Give ONE reason why shareholders: ¢ Should be satisfied with the dividend policy of the company 2 “Lnvestors who. want an income from ene investment jn shares will be satisfied, because the sie of ae ewe is were I US THO) ad Old =a a “pr nings of ge € Be year ig ¢ Unsatisfied with the dividend policy of the company (Quote figures). , ¢ of their - Long term investors who want to see that the yalu shares grow will ie unsatisfied that. retained income of the previous year & also paid aut. They would want to see that the directors retain profits for future aes ae 2.3 The shares of Park Ltd. are at present sold at RO,85 per share on the stock exchange and the net asset value per share is RO,62. The directors decided to issue the balance of the authorized shares at RO,75 per share. Would you be prepared to buy additional shares at this price? Confirm your answer by giving TWO reasons. Yes/Ne “The price of 75ceuts 1s lower thak the martct-vdlile of 85 cents. * = : . We The price of 75 Cents 1s higher than te net cassee- vol 285

2.4 Cash flow statement of Menlo Lid. for the year ending 28 February 2016 Cash effects of operating activities BY 320 Cash generated from operations [1] 200 170 Interest paid (a 2 000) Dividends paid (49700450 400 + 88 200 - 88200) (Fo 400) Income tax paid (4600 + 54000 + $250) 63 250) Cash flow from investing activities to (103 920) Purchases of Fixed assets Sr "282 — Bi (1/39 920 Proceeds of sale _of fired asset 36 000 Cash flow from financing activities . /8 3000 Proceeds from shares /ssued (190000 X0,7) 126 000 Tnerease in (oan [132 200 -(15000 +1z000 ~ (44.00)] 59 Yip - Repayment of Joan (14 400 - 12.000) (2 Yeo) Net change in cash and cash equivalents 1/13 600 Cash and cash equivalents at the beginning of the year (3 o0o) Cash and cash equivalents at the end of the ycar /0@ 600 Notes to the Cash flow statement: 1. Reconciliation of profit before tax_and_ cash from operations: Net profit before tax 180 000 Adjusted for: Yo 120 Depreciation (22 392+ 5728) 28 /20 Laterest on _/oan (Z 000 Profit before chanecs in working capital 220 120 Changes in working capital _ C19 950) Increase jn stock (1/6150 ~86 200) (29 G6a) Decrease in debtors (66000 - 63 000) 3 000 Increase in creajtors (35000 - 28006) 7000 Cash received from operations 200 /70 286

QUESTION 3 3.1.1 General ledger of Park Limited Appropriation account 5a BolIncome tax [&T| 326000) 428 zo] Profit and Issacs] | 200 900] Ordinary share |@3| 34 400 (336000 x FF dividends (2.1 000+18900) ra Retained incomel Gt| 824 /00 1200 000 1.200 000 Retained income Melt Bank (s0cxSea-udcr| (4% oools2h |: | Balance Md) 274 100 Sunkol Balance Cid | IS 4 200| 23% a Appropriation acc. lx] B24 100 1098 200 ae 1098 200 Tull] Balance bid] 9s% 200 3.1.2 Comment on the liquidity position of the company in 2016 in comparison with 2015 by quoting at least THREE financial indicators in your answer. » Current ratio decreased from 1,9:1 bo 1,3°1. “Acid-test ratio decreased from I,l:! Eo 0,7*1. . » Rate of stock turnover decreased from & times to & Limes . Papelera cit fection period decreased from SO days tp 60 days, “Creditors settlement period decreased from 36 days t 30 lays). —o The I wait s(tuation has weakened Considerably during the past year. 3.1.3 Make TWO recommendations to the directors to improve the liquidity position. «Less money must be locked up in trading stock — Lhere 1's too muth stocle on hana. ; ti + Sales must be increased through more effective marke tin which will increase turnover resul& iin bss Stock on hand. + Debtors must be encouraged to se thle ther accounts €arlier by offering them discount or by levying interesk. TS A lonaer settlement peried must be nego biated with creditors without them not ot fering discount or chargé interesé - 287

3.1.4 Park Limited Balance sheet on 30 June 2016 Assets Non-current assets 2 426 Soo Property, plant and equipment 2 176 S00 Financial assets Fixed deposits: ABSA_((2710 000 — 20 000) 250 000 Current assets 313 S00 Inventory {4,7 000 Trading- and other receivable amounts (139 (00 + 9 G00) (48 S00 Cash and cash equivalents ( 32000 + 20 000) 23 000 Totals assets 2 TS 000 Equity and liabilities Ordinary shareholders’ equity - " . | 2 000 000 Ordinary share capital ie = er ieee Ria { OLS B00 Retained income (274 100 +824. 100 — (1% 000x R8)) GS. 2.00 Non-current liabilities (2. 74S 000 — 2000 000 ~ 245000) 500 000 Mortgage loan: Nedbank S00 000 Current liabilities ( 319 S00 + 1,3) 2S 000 Trading and other payable amounts (/60 000 + 18900 41S: 000) 193 400 Bank overdraft __ (24S 000 ~ 193 400) Si 100 Total equity and liabilities Z TUS 000 3.2.1 Who is responsible to see that the financial statements are drawn up? * The directors of the company. 3.2.2 To which main group of people should the auditors address their report and why is the report directed to them? « Shareholders — they are the Owners of the and‘ are interested to see the recommendations made by the auditors. Company | 288

3.2.3 The auditor’s report refers to the International Financial Reporting Standards (IFRS). Explain why should the auditors bring the IFRS into account when giving their opinion? Zt 1s a requirment of audit standards and assure that the financial statements F 9 cmpany comply to inter aLonal Standards and can thus be Compared with her Countries 3.2.4 Should the shareholders be satisfied with the auditor’s report? Give ONE reason for your answer. es, it 16 said that the financial statements fairly present the financial position of che Cémpany Lt & therefore a unguali fred report. 3.2.5 If the auditors neglect to fulfil their duties, it could have serious consequences for them. Discuss TWO advantages for the shareholders of Park Limited, should all auditors be members of a professional body. - Conduct of auditors t correspond with ethical code, AU auditors are CA's and toma to the professional body SAICA ‘ : + SRICA guarantee a high standard of professienal auditors “SAICA guarantee @ igh level of competence exd integrity) 3.2.6 A. Verster, the auditor’s partner of the firm, who does the auditing at Park Limited is going to marry T. Kemn, the financial director at Park Limited. e Would this influence the audit at Park Limited in any way? Give a reason for your answer. yes,-There is a conflicé of interest -Tt caw bring the objectivity of the auat uhder SUSpICION. It can threaten the tadependency of the aadit. ¢ = =What advice will you give to A. Verster? ‘Pectare the conflict of mterest before the audit Starts, “Appoint someone else as hdependent audi tor. : To Kemm has Co change ae JS. 289

QUESTION 4 4.1.1 Give TWO differences between the periodic and perpetual inventory systems. : Stack movements are recorded on @ continual PASS ferp cl and shoréfals can easily be traced. dic: Physical stacktating determines amount of Stock ferjodic ” Vand and @ shortfall cannot be traced that CaS, 4.1.2 Use the weighted average cost method to calculate the following: ¢ The value of the final stock on 28 February 2016. ; = (55600 7 747500 +28 750 ~ 7000 - 266) + (100 + M50 ~10) =_ 824 600 12 YO = Roses per TV .. Rbb65x [30 = Keb Y56 * The Gross profit for the year ending 28 February 20] 6. bales — Cost F Sales. = [1215 450 — (824 600 -36 450)] = k 777 300 4 4.1.3 Calculate what the value of the final stock should be if the First-in-first-out method is used to determine the value of the closing stock. 90 units K (FeOot 2S) = 65 250 40 unfts xX (£56 +25) = 27000 9Z 250 , 4.2.1 What will your answer be to the comment by Erasmus where, the last sentence, she says that it is “‘a lot of nonsense”. Z was the only pharm and Wiuse serve the apres and Gok ea plort “ae ‘She $ legally obliged to pay VAT to SARS. 4.2.2 If you should buy this business from Erasmus, what would you do different? Name TWO points and give ONE reason for each point. -Obe -Y the low and pay VAT > Doprevent legal action si penalties ‘lise amore resbonsible method of stock evglaation > so Chat: Prices are ore fair and ph fo the goodvuil of tie ClStomel « Draw up a code of ethics > 50 that the relationships with Workers. custoluers and Conmtuumtty Can be. Lronoted, 4.2.3 How much VAT output should Erasmus declare to SARS for thé last 6 months according to the amount that she receives monthly as it appears in the newspaper article. Show the calculations. (jo0 060 xf) x bmonths = fe 73 684 ,2) 4.2.4 Would you as accountant agree with this request? Motivate your answer by giving TWO reasons for your decision. No, £15 @ C4X amamt which wil Le Crated by SRS when a VAT audit is done. » all Figures regataing VAT cuttul aud imput: shottld be backed y with QocUMmerntlacf/on, 290 cy

QUESTION 5 5.1.1 Park Manufacturers Production cost statement for the year ending 31 August 2016 Direct cost 306 $00 Direct material cost (14 700 + 6 000 + 5900-6000) 150 500 Direct labour cost 136 606 Factory overhead cost 186 970 Total production cost 287 $76 Work-in-progress stock at the beginning of the year 3 400 4IG BIO Work-in-progress stock at the end of the year (/6 870) Cost of production of finished goods 486 000 Notes to Financial statements Factory overhead cost Consumatle stock (1600 t 5706-200) Xf 4 326 Lndtrect labour 7 200 kent paid C2¢000x-#5) 14 OO Foremans salar BE 000 Zusurance ~ (5600 X) 3200 Other factory overhead Cows 25220 Depreciation (zhao t+ (2250) 38 650 L1g0 976 5.1.2 The owner thinks that the workers do not use the direct material(raw material) effectively or that tracksuits are stolen out of the factory. Recommend TWO control measures that management could implement to solve this -Gntrol the consamption of raw material by cutting the patterns correctly and cut down on the wasting of material Train” workers te use raw materials economicalty. | Supervisor control number of units cut and made Ble of raw materi Regular counting of rawmaterial Stack and goods finished. | pamer tack “hovks to be esol 5.2 Park Shoe Factory 5.2.1 Calculate the unit cost of production. Cost of sales - 5936000, _ Number of units = 36006 List pe wnt, ee ae, 5.2.2 Calculate the number of pair of shoes to be manufactured and sold in order to break even. Fixed costs _ 88¢ 000 +540 000 Selling price per unit - variable costs perume ~~ (2nq— 144) —~ +/¢ $04 coo ? (00 = [4 ogountts 291

QUESTION 6 6.1 Refer to the proposed Cash budget and additional information to calculate the figures marked [a] to [e] [a] Cash sales figure for November 2016: 220 Scax a = M7 oe, [b] Cash purchases of trading stock figure for October: (44 060 x 2 = K2e700 [c] Debtors collection figure for November 2016 io Zz; 0 Sept: 200 000 we xB = We Ze. 7 . ge200 Oct: 180 000 X75 XFU = K2e 730, [d] Payment of creditors figure for October 2016 : 6s GS _ Set, /€0 000 rrr peat = RIB B00 [e] Bank balance at the end of November 2016: 18855-7795 = Ru G60 6.2 Explain what is expected to happen regarding the fixed deposit on 1 November. ‘The fixed deposit 15.92!ng to mature and che money will be deposited th the current account. 6.3 Park Fashions is planning to buy equipment during the budget period. Study the Cash budget and calculate the total expected cost price of the equipment. Beposit + y tastalments = 3000 + “¢4700) = 2/800, 6.4 The sales assistant has complained about her proposed salary increase in November 2016. e Give ONE argument to support her opinion. ‘The increase expected in her salary is only 23 fo which 15 much lower than the iuflation “rate +E% fea_ - The Salary of the manaper increases with ty To (ESS xe. ¢ Give ONE argument to discard her opinion. * ‘Sales have decdined over recent months ana the busy eNperienceS prescure as 7 resulé of a wealcenng economy 6.5 Give ONE point of advice to the owner with reference to advertising: »Kz000 is budgeted byt only fb00 was Spent F Keep ts the budget fer adyeridsthg — 72 ts fitafathly the reason for the dedime 1 safes dating CALibe) 292 %)