GRADE 12 ACCOUNTING EXAM STUDY GUIDE Pass VHA f*ACCOUNTING SOLUTIONSVIDYANTH BHOLA THE DIRECTOR AND TAX PROFESSIONAL, VHA ACCOUNTING SOLUTIONS INC +27 83 584 1807 Dear Readers Product Description: This up-to-date Study Guide for Grade 12 Accounting ‘exams contains several chapters of preparation that gives you everything you need in order to score to your full-potential. This Accounting Exam Study Guide Book is specifically formatted in a manner to help you outscore your competition and help you get the career you are after. It's super simple, easy and fast to prepare with. In fact, you get prepared with minimal effort, and time. The study guide has more questions from past papers. Every question is followed by a solution. We will continue improving this study guide every six months. WISH YOU SUCCESS IN YOUR EXAMSGRADE 12 ACCOUNTING EXAM DRILL BOOK What is Accounting? From CAPS document ‘Accounting focuses on measuring performance and processing and communicating financial information about economic sectors. The discipline ensures that principles such as ethical behaviour, transparency and accountability are adhered to. It deals with the logical, systematic and accurate selection and recording of financial information and transactions, as well as the compilation, analysis, interpretation and ‘communication of financial statements and managerial reports for use by interested parties. The subject encompasses accounting knowledge, skills and values the focus on the financial accounting, managerial accounting and auditing fields. These fields cover a broad spectrum of accounting concepts and skills to prepare learners for a variety of career opportunities. The purpose of Accounting From CAPS document ‘Accounting leamers will be able to: record, analyse and interpret financial and other relevant data in order to make informed decisions present and/or communicate financial information effectively by using Generally Accepted Accounting Practices (GAAP) in line with current developments and legistation develop and demonstrate an understanding of fundamental accounting concepts relate skills, knowledge and values to real-life situations in order to ensure the balance between theory and practice, in order to enter the world of work and/or to move to higher education, and to encourage self-development > organise and manage their own finances and activities responsibly and effectively > apply principles to solve problems in a judicious and systematic manner in familiar and unfamiliar situations, thus developing the ability to identify and solve problems in the context of the various fields of Accounting develop critical, logical and analytical abililies and thought processes to enable leamers to apply skills to current and new situations develop the following characteristics: ‘ethical behaviour sound judgement thoroughness orderliness accuracy neatness v v KAKA ANExai v v ation preparation tips Have a variety of at list 7 to 10 questions per topic which you attempt and answer correctly. If you achieve this on a given topic then know that you have become a genius in that topic. The questions must be from recommended texts and past examination papers. Source books and plain papers for your workings. Work on your speed in answering questions. A low and intelligent student becomes an average student because of lateness and delay in finishing work tasks. Examination time tips > v ¥ Do your business 1 or business 2 at least an hour before commencement of the examination. Visiting ablutions will be a waste of time Read instructions carefully and understand. Read the question paper carefully, it will give you an idea about how to start the answering the question Relax do not panic, panicking reduces your ability to think, confidence opens up your mind, Write the questions that are easier to you first and end with challenging questions. Put your small workings behind the final entry, you will recover some marks in case your itis wrong and workings makes it easier to review your work on time. Good handwriting and presentation matters. Write bold and clear letters and figures and avoid cursive writing Make sure your workings are based on correct figures. For the questions with notes, make sure you read the notes and do necessary adjustments,TABLE OF CONTENTS PAGE VAT - VALUE ADDED TAX VAT 6 INTERPRETATION OF FINANCIAL STATEMENTS. 12 FINANCIAL STATEMENTS 26 COST ACCOUNTING 48 INVENTORY VALUATION 58 CREDITORS & DEBTORS RECONCILIATION 75 BANK RECONCILIATION STATEMENT. 79 CASHFLOW STATEMENTS. 89 CORPORATE GOVERNANCE. 138VAT - VALUE ADDED TAX VAT - VALUE ADDED TAX VAT Value Added Tax VAT Value added tax is an indirect tax and is applied to all supplies of goods and services with the exception of goods and services which are zero rated or VAT exempt. Vendors are charged with the responsibility of levying VAT and paying it over to the State after deducting permissible VAT inputs. VAT is generally placed into three categories > Standard-rated: VAT at 15% > Zero-rated: VAT at 0% > Exempt: No VAT Standard rated goods These are supplies subject to VAT at the prescribed rate currently pegged at 15%. Zero rated supplies Zero rated supplies are supplies which attract VAT at 0%.Examples of zero rated supplies include Vat control account Bank SARS. 20 000 | March 4 | Balance bid | 10200 Mar2 | Debtors Control (Sales | 1100) Mar6 | Debtors Control | 9.000 Returns ) (Credit sales. Debtors (Bad debts) 500 Bank 1200 Debtors (Discounts 350 Bank (Cash 12400 Allowed) sales) Creditors (Purchases) | 18 150 Drawings 400 (Stocks) Bank (Cash purchases) | 2000 Creditors 75500 (Purchases returns Expenses VAT 2500 Debtors (Bad 300 Claimable expenses debts recovered) Balance cid 4400 [43.000 | I 49.000 Sources of VAT Control account entri VAT from payments in the bank account cash bookVAT from payments in the petty cash book VAT from invoices in the purchases day book VAT from credit notes in the purchases retums day book VAT from cash sales receipts in the cash book VAT from invoices in the sales day book VAT from credit notes in the sales retums day book VAT from irrecoverable debt written off in journal VAT from cash payments in the cash book Calculations VAT is 15 % a tax fraction is applied on the total invoice amount to get the VAT amount VAT = 15 and the tax fraction applied on the sales value is 15 400 1 ‘There is a relationship between VAT and its tax fraction on invoice value T= 15 and the tax fraction applied on the invoice value is 15 = 18 100 100+15 115 Purchases Sales | Cost input | Total Mark | Selling Price | Output | Selling Exe [VAT | inclusiveof [up |ExcVAT | VAT | Price Inc VAT | 45% | VAT VAT AL 3000[ 450 3450 | 60% 5520) 628, 6.348 B| 6000] 900 6 900 | 20% 82801242 9622 c{9000| 1360 10350 | 20% 12420/ 1863| 14283 D 60000 | 9.000 69.000 | 30% 89 700 | 13.455 | 103 155 We may look at the flow of calculations in line D. The business purchased goods from a supplier at R69 000 and the breakdown is as follows Cost 60 000, VAT 9 00 (60 000 X 0.15) and purchase price R69 000 (60 000 + 9 000) To get Selling price excluding VAT 30% mark up is added to the invoice value 69 000 + 60 000 x 30% = 60 000 + 20 700 = 89 700 Output VAT on is 13 455 (69 00x 15%).The total selling price is 103 155 (89 700 + 13 455) Application of the tax fraction on the selling price Tfyou are given the total selling price inclusive of VAT you apply the tax fraction 16/115 to that selling price to deduce the VAT amount. The selling price of 103 155 the VAT included in the amount is 13 455 calculated as follows 103 155x145 = 13.455 115 QUESTION 1 NOV 2019 : VAT AND RECONCILIATION (35 marks; 20 minutes) 4.1 CONCEPTS REQUIRED: Indicate whether the following statements are TRUE or FALSE. Write only ‘true’ or ‘false’ next to the question numbers (1.1.1 to 1.1.4) in the ANSWER BOOK. 1.1.1 Output VAT is collected by a business when goods are sold. 1.1.2. The calculation of salaries does not take VAT into account, 4.1.3. A credit balance on the Bank Statement indicates an unfavourable balance. 1.1.4 Recording bank charges separately from interest on an overdraft is an application of the materiality concept (4x1) (4) 4.2 VALUE-ADDED TAX (VAT) The information relates to Longhill Traders for the VAT period ended 30 April 2019. The VAT rate of 15% applies to all goods and services. REQUIRED: Calculate the amount receivable from or payable to SARS for VAT on INFORMATION: ‘A. Amount owed to SARS on 1 April 2019, R15 890 VAT transactions for April 2019:EXCLUDING VAT INCLUDING DETAILS ‘VAT ‘AMOUNT VAT (R) AR) (R) Relums by debtors 1470 Drawings by owner 3075 Debtors’ accounts writen off 8700 70 005 Total purchases (cash and credit) 224 000 Total sales: 396 750 SOLUTION 114 True 144 True TA2 False 113 True 1.2 VAT CONTROL VAT Control Returns by debtor 1.470 | Balance bid 15 890 Purchases ‘33 600 | Debtors written off 3.075 ‘Sales 51750 Balance old 36.950 | Drawings by owner 1305 72.020 72.020, or — 15 890 + 1 470 —3 075 - 1 305 + 33 600 — 51 750 = 36 950 QUESTION 1 NOV 2020 : VAT 4.1 VAT ‘Amahle Traders is registered for VAT. The standard VAT rate is 15%. REQUIRED: 4.1.1 Calculate the figures indicated by (a) to (d) in the table below. (9)1.1.2 The intemal auditor discovered that Amahle has been underpaying the amount due to SARS in respect of VAT, at each submission date. On enquiry, Amahle stated that she used the money to pay business expenses and adjusted the payments later. Comment on this practice and give Amahle advice. (3) INFORMATION: Excluding | Including | VAT VAT | VAT Amount Invoices received from suppliers. R78 000 R89 700, (a) | Discount received from suppliers R12 400 o)] Credit notes issued to customers @ R210 Invoices issued to customers R158 700" @) * This includes sales for R9 200 which should have been sold at zero rate. The bookkeeper incorrectly included VAT of R1 200 on these goods. This includes sales for R9 200 which should have been sold at zero rate. The bookkeeper incorrectly included VAT of R1 200 on these goods. SOLUTION Workings ‘Answer a) ‘89 700 — 78 000 11700 b) | 12400 x 15% or 15/100 ‘one mark for both figures only if all workings are correct and no other operations done & if there is no final answer 1.860 ©) | 210x 115/15 OR 1 400 + 210 ‘one mark for both figures only if all workings are correct and no other operations done & if there is no final answer 1610 @ | 149500 (158 700 9 200) x 15/115 ‘OR 20 700- 1 200 19.500 101A2 ‘Comment on this practice and provide Amahle advice ‘Comment ‘Advice > nethical fo use money not earned by the business to pay running / operational costs > The business is an agent of SARS. and must make payments timeously The business can be fined (penalties) for non-compliance / evasion / manipulation / deferring of payment of VAT It could result in a more extensive investigation for iregularities in the future > This is rolling over of cash / evasion; which could escalate to a serious problem, v v > Keep proper records / ensure that the funds are always available to make payments > Note submission dates and plan in advance, vv ‘Only use business funds to cover business commitments / work within the budgetINTERPRETATION OF FINANCIAL STATEMENTS. INTERPRETATION OF FINANCIAL STATEMENTS Interpretation of financial statements involves many processes like arrangement, analysis, establishing relationship between available facts and drawing conclusions on that basis. Financial statements are interpreted using ratios and comparisons of figures this is called ration analysis. 5 basic categories of financial analysis Profitability Solvency Liquidity Risk Return on shareholder vvy vv Ratio Formula Profitability Gross profit percentage to sales Gross profit_x 100 Sales 1 Gross proft x 100 Gross profit percentage to cost of sales Cost of sales 1 ‘Operating profit x 100 Operating profitto sales Sales 4 Operating expenses to sales Operating expenses x 100 Sales 1 Net profit before tax to sales Net profit before tax x 100 Sales 1 Net profit after2 tax to sales Net profit after tax x 100 Sales 41 Solvency Solvenc) Total assets : Total labiliies Net assets, Total assets — Total liabilities Liquidity Current ratio Current assets : Current fabiities ‘Acid test ratio (Current assets ~ Inventories) : Current Or quick ratio liabilities ‘Non-current labiiies : Shareholders” equity ‘Working capital Current assets — Current liabilities ‘Stock tumover rate Cost of sales ‘Average trading stock 2‘Stock holding period ‘Average trading stock x 365 Cost of sales 1 ‘Average debtors collection period ‘Average debtors x 365 Credit sales 1 ‘Average creditors payment period ‘Average creditors x 365 Cost of sales 1 Risk Debt to equity ratio Non current liabilties : Ordinary shareholders equity ROCE Given below Return on capital employed Net income before tax + Interest on loans x 100 ‘Average shareholders’ equity + Average non-current liabilities 1 Return to shareholders: Earnings per share Net income affer tax Number of issued shares Dividend per share Dividends for the year Number of issued shares Return on shareholders equity Net income after tax x 100 Average shareholders’ equity 1 Net assets Total assets — Total liabilities Net assets per share Shareholders'equity x 100 Number of issued shares “1 Profitability ratios Profitability ratios measures the financial performance and efficiency of an entity. > Gross profit percentage to sales Measure the amount of gross profit made per every Rand of sales v Gross profit percentage to cost of sales Measure the amount of gross profit made per every Rand of cost of sales > Operating profit to sales Measures the amount of profit generated per every Rand of sales, > Operating expenses to sales Measures the amount of operating expenses incurred per every Rand of sales. v Net profit before tax to sales Measures the amount of net profit generated per every Rand of sales. Profitability ratios may be influenced by Theft of stock and pilferage Incorrect pricing Low profit margin Large discounts offered to customers vvvySolvency Solvency indicators measures the firm's ability to meet its long term debt. A high solvency ratio is an indication of stability, while a low ratio signals financial weakness. > Total assets: Total liabilties > Net assets Liquidity Measures the ability of the business to meet its short term financial obligation. > Current ratio Current ratio is the most popular liquidity ratio. Itis calculated by dividing the current assets by the current liabilities. > Acid test ratio Or quick ratio Quick ratio (also called acid-test ratio) is a liquidity ratio that compares those current assets that can be quickly liquidated with current liabilities. Inventory value is ‘excluded from the calculation of the ratio. y Working capital Working capital is the amount of money a company has left over after subtracting current liabilities from current assets. Working capital is the amount of available capital that a company can readily use for day-to-day. It measures a company's liquidity, operational efficiency, and short-term financial health. Working capital Current assets ~ Current liabilities Ways to improve working capital Payment plans for debtors Improve stock tumover rate Competitive pricing. Negotiate better pricing with suppliers Give incentives to customers who pay on time Payment of business liabilities on time Reduce expenses and introduce cost cutting measures. Pakene v Stock turnover rate Stock tumover rate is considered to be a measure of sales performance; usually the higher the stock turnover rate, the better your stock/business is performing. Basically it's the rate at which the business has been buying and selling stocks. The stock turnover ratio determines how soon an enterprise sells its goods and products and replace its inventories in a set period Rate of stock tum is arrived at by dividing cost of goods sold” by “average inventory”. > Stock holding period A stock holding period is the amount of time the stock is held by the firm, or the period between the purchase and sale of the stock. You divide average stock by cost of sales and multiply by 365 days to arrive at the stockholding period. The shorter the days the more efficient the business. Longer days are associated with: “1. breakages, 2. cash tied up in stocks, 3. expiry of some products, Stock holding period may be enhanced by: 1. Purchasing more of fast-moving product line and less of slow moving products Advertising and product promotion Creating more branches over a large settlement or geographical area Reducing the price Better demand forecasting paep > Adebtor collection period It is the amount of time it takes to collect all rade debts. The smaller the period of time it takes to collect these debts, the more efficient a company will seem to be. A longer period indicates problematic trade debtors or less overall efficiency. We arrive at the debtors collection period by dividing average debtors by credit sales then multiply by 365 days. Debtors collection period may be improved by Vetting debtors before issuing goods Constant reminders Charging of interest Engaging lawyers for material troublesome debtors Use of stop order facilities, Taking insurance against bad debtors oP bepe > Average creditors payment period ‘Average payment period means the average period taken by the company in making payments to its creditors. Risk Risk ratios can be used to assess a company's capital structure and current risk levels, often in terms of a company's debt level and risk of default or bankruptcy. These ratios are used by investors when they are considering investing in a company. > Debt to equity ratio Measures the extent fo which a business is financed by debt. This ratio is also an indicator of a company's ability to meet outstanding debt obligations. A lower rate is a favourable rate signifying lower financial risk. v Interest Coverage Itis a debt and profitability ratio used to determine how easily a company can pay interest on its outstanding debt. A relatively lower coverage ratio indicates a greater debt service burden on the company and a correspondingly higher risk of default or financial insolvency, Interest Coverage = EBIT/Interest Expense. EBIT = Net profit before interest and tax, > ROCE - Return on capital employed 15Measures the return per Rand of capital employed. Worked Example The following information relates to Khumalo’s Café (Pty) Ltd Income statements for the year ended 31 December 2078 2017 Sale (80 % on credit) 12,000 000 | 10.000 000 Cost of sales 6000000 5800 000 Gross profi 6000000 4200 000 Operating expenses 2500 000| 2 600-000 Operating profit 3500.000| 1600 000 [Interest expense. 180000. 450.000] Net profit before tax 3350000 1150 000 Taxation 25 % 837 000 287 500 Net profit after tax 2512 500 ‘862 500 [ [ Balance sheet as at: 2018 2017 Non-current assets 25.000 000/23 000 000 Current assets 4005000) 5 594250 Inventories: 2050000 | 1980 000 Trade debtors 1 089 500 ‘970 000 Bank ‘850000 | 2.630.000 Cash 15 500 14 250 Total assets 29005 000 | 298 594 250 Equity 23075000 | 17 562 500 Ordinary shares of R200 each 20,000,000 | 15,000 000 Retained income 3075000] 2562500 Non current liabilities 3.000000 | 7 500 000 Mortgage loan 3000000] 7500 000 Current ies 2930000| 3.531750 Trade creditors 450 000 460 000 Other current labiities 2480000 | 3.071 750 Total equity and liabilities 29.005 000 | 28 594 250 Retained income 2018 2017] Balance at the beginning of the year 2562 500 3 200 000 Dividend paid and declared @ 000 000) | (1 500 000) Net profit after tax for the year 2512500 | 862 500(Balance at year end [3075000 2562500] Calculate any 14 ratios Profitability ratios Ratio Formula 2018_| 2017 workings 2018 2019 Profitability Gross profit Gross profit_x 100 50% (42% percentage to sales Sales 1 6.000 000_x 100 4200000 x 400 120000001 10 000 000 4 Gross prof Gross proft x 100 700% [72% percentage to cost of Costofsales 1 sales 6.000.000 x 100 4.200.000 x 100 60000001 5 800 000 4 ‘Operating profitto ‘Operating profit x 700 2% | 16% sales ‘Sales 1 3500000 x 100. 1.600.000 x 100 12000000 1 10000000 1 Operating expenses | Operating expenses x 100 2% | 26% to sales Sales 1 2500000 x 100 2.600000 x 100 120000001 10000000 1 Net profit before tax Net profit before tax x 100 2% | 11% to sales Sales 1 3350000 x 100 1150 000 x 100 12000000 1 10000000 1 Net profiafier 2tax | Nel profitafiertax x 100 2% [86% to sales Sales 1 2512500 x 100 862.500 x 100 12000000 1 100000001 Solvency ratios ‘Solvency ‘Solvency Total assets : Total liabilities 4.8951 2.59:1 29 005 000 : 5 930 000 28 594 250 : 11.034 750 Netassels Tolal assets — Total labiliies 23075000 | 17 662500 29 005 000 ~ 5 930 000 28 594 250 - 11 031 750 WLiquidity ratios Liquidity Current ratio Current assets : Current labilties Tart T5821 4005 000: 2 930 000 5 594.250 : 3531 750 ‘Acid test ratio. (Current assets — Inventories) : Current | 0.67: 1 T0224 Or quick ratio liabilities (4 005 000 ~ 2.050 000) ; 2930 000 (6.594 250 ~ 1.980000) : 3531750 Working capital Current assets - Current liabilities 1075000 | 3531 750 4.005 000 - 2930000 5 594 250 - 3531 750 ‘Stock tumover rate Cost of sales 2.98 times Average trading stock or 3 times 6.000 000 (2 050 000 + 1 980 000) x 0.5 ‘Stock holding ‘Average Wading stock x 365 122.58 days period Cost of sales 1, |Or 2.050 000 + 1 980 000)0.5 x 365 | 122 days days 14hrs 6.000 000 ‘Average deblors | Average debiors x 365 ob days collection period Credit sales 1 or 1.089 500 + 970 000) x 0.5 39 days 12 0.8 x 12 000 000) hrs ‘Average creditors | Average creditors x 365 27,68 days payment period Cost of sales 1 Or 27 days (450 000 + 460 000) x 0.5 ‘6hrs 6.000 000 18Risk ratios and indicators ‘Average shareholders’ equity + Average non-current liabilities 1 3.500 000 x 100 (40 637 000 + 10 500 500) x05 1 10,500,000 (3,000,000 + 7,500,000) 40,637,000 (23,075,000 + 17,562,500) Risk Debt to equity ratio | Non current liabiliies = Ordinary O1s:4 shareholders equity 3.000 000 : 23 075 000 7.500 000 : 17 562 500 ROCE Given below Return on capital employed Net income before tax + Interest on loans x 100 | 14% Return on shareholders Return to shareholders Eamings per share | Net income after tax Number of issued shares R25,12 | R115 pershare | per Number of issued shares 2.512 500 862 500, share 100 000 75.000 Dividend per share Dividends for the year R20 R20 2.000 000 1.500 00 100 000 75 000 Return on Net income after tax x 100 [12% shareholders equity | Average shareholders’ equity 1 2.512 500 x 700 (23 075 000 + 17 562 500) x 0.5 1 Net assets per ‘Shareholders equity x 100 23075 % [23417% share Number of issued shares “1 23075000x100 17 562.500 x 100 400 000 1 75 000 1 19Mark up and margin Mark up value. Margin Relationship between mark up and margin, Ifmark upis A B Margin is applied to the sales to obtain the profit per product. It represents profit on a product. Mark up is added to the cost of sales to obtain the sales Mark up = Margin = B D Then margin = A Then markup = © BHA Dc Mark up= 25 Margin = 30 100 100 Then margin= 25 = 25 Then markup = 30 = 30 100415 115 100-30 _70 Calculate the sales and cost of sale and gross profit given a mark up of 25 % for both years 2020 2019 | Sales 2 15.000 000 Cost of sales 000 000, 2 Gross profit 2 7 SOLUTION 2020 2019 Sales 10 000000 | 15 000000 Cost of sales 000 000 _| 10-000 000 2.000 000_[ 5 000 000 COGS X Mark up = Gross Profit 8 000 000 x 0.25 = 2.000 000 Sales x Margin = Gross Profit 2015 000 000 x 25/75 = 5 000 000 QUESTION 3 NOV 2020 P1 : INTERPRETATION OF FINANCIAL STATEMENTS (35 marks; 30 minutes) 3.1 Choose the question from COLUMN B that matches a category of financial indicators in COLUMN A. Write only the letter (AE) next to the question numbers (3.1.1 to 3.1.4) in the ANSWER BOOK. COLUMN A, COLUMN B 3.1.1 Liquidity ‘A_Is the business managing expenses effectively to increase profitability? 3.1.2 Risk and gearing B Is the investment in the company better 3.1.3 Retum to shareholders than investing in a fixed deposit? 3.1.4 Operating efficiency C Will the company be able to pay off its current debts? D_ Will the company be able to pay off all its debts using existing assets? E How is the company managing loans or borrowed capital? 3.2 SCI-FIGEEKS LTD The business trades in electronic equipment purchased from China. The information relates to the past two financial years, ended 31 March. The COVID-19 lockdown has negatively affected sales over the current financial year. REQUIRED: 3.2.4 Liquidity: The directors are satisfied with the improvement in the current ratio and the acid-test ratio. Explain why you would disagree with them, Quote TWO financial indicators in your response. (6) 3.22 idends: The directors changed the dividend policy for the current financial year. > Comment on the dividend per share over the two years. Quote figures. (2) > Explain the change in the dividend payout rate and give a reason for this change. Quote figures. (4)> A shareholder felt that they should be satisfied with the dividends they received, as itis better than last year. Explain why you agree with him. Quote figures. (3) 3.2.3 Comment on the risk and gearing for both years. Quote TWO financial indicators (with figures). (6) 3.2.4 Existing shareholders are dissatisfied that the new shares issued on 1 April 2020 were sold to the CEO, Ida Shark. Give TWO reasons why you consider their feelings to be justified. Quote figures. (6) 3.2.5 The Cash Flow Statement reflected a positive change of R980 000. Provide TWO points why this should still be a concem to directors. Quote figures. (4) INFORMATION: ‘A. Financial indicators and additional information: 2021 72020 ] Mark-up % achieved 60% 60% % net profit before tax on sales 13.9% 20.3% Current ratio 24:4 144 ‘Acid-test ratio 40:4 O44 Stockholding period 102 days | 32 days ‘Average debtors’ collection period 46 days [31 days ‘Average creditors’ payment period GOdays | 60 days Eamings per share 58 cents | 130 cents Dividends per share 72 cents | 90 cents Dividend payout rate 136,5% | 69% Debt-equity ratio 04:1 03:4 Relum on average shareholders’ equily 17.7% 31,6% Retum on total capital employed 23.2% 39% Net asset value per share 332 cents | 409 cents Markel price of shares on stock exchange 10 cents | 540 cents Interest rate on loans 13.5% 13.5% Interest rate on fixed deposits 6.8% 7.8% B. Share capital: > On 4 April 2020 the company issued an additional 250 000 shares. > On31 March 2021 there were 1 250 000 shares in issue. ©. Extract from the Cash Flow Statement on 31 March: 2021 2020 | Cash flows from operating activities (148.080) | 910.000_| Cash generated from operations 1281 620 | Interest paid (232 000) “Taxation paid (272700), Dividends paid (925 000)| Gash flows from investing activities 701 580 | (300 000) Cash flows from financing activities 1026 500 | (100 000) Sale of shares 375.000 0 Change in loan ‘651 500_| (100 000) Cash and cash equivalents: Net change 980.000 | 510 000 ‘Opening (330 000) | (640 000) Closing [650 ooo | (330 000) SOLUTION 34 344 c | 342 E | 3.43 B (4a [A 3.2 SCI-FI GEEKS LTD 3.2.1 The directors are satisfied with the improvement in the current ratio and the acid-test ratio. Explain why you would disagree with them. Quote TWO financial indicators in your response. > The stock holding period increased (from 32 days) to 102 days (or 70 days) > Average debtors’ collection period increased ([rom 31 days) to 46 days (15 days) > Current ratio increased (from 1,1 :1) to 2.4: 1 / by 13:1 > Acid-test ratio increased (from 0,4: 1) to 1: 1/ by 0,6: 1 Any ONE valid explanation; part marks for incomplete / unclear explanation > Too much liquid assets (cash) tied up in stock reflects that there is an over- investment in stock / the difference in current & acid-test rations reflects stock piling. High stock volumes create security problems Stock can easily become obsolete due to advancements in technology (can't be sold) ‘The business has relaxed / neglected its collection policies / lockdown during Covid-19 and this impacts on the debtors / stock / cash flow of the business. vy v 3.2.2 Comment on the dividend per share over the two years. Quote figures. ‘The DPS dropped from 90 cents to 72 cents / by 18 cents / by 20% 23Explain the change in the dividend payout rate. Quote figures. The dividend pay-out rate increased from 69% (90/130) to 136,5% or 72/58 (accept 124,1%) | or a 97,8% increase from the previous year Give a reason for this change. > Directors attempted to please the shareholders for the low profitability > Compensation for using funds retained in previous financial years. > No plans for growth / expansions (no need to retain additional funds) A shareholder felt that they should be satisfied with the dividends they received as it better than last year. Explain why you agree with him The drop in the market price from 540 cents to 410 cents (reflects a dividend yield DPS/MP of 17,7% this year compared to 16,7% last year) / If the policy was maintained at 69% of EPS, they would have received 40 cents. > EPS dropped from 130c to 58c (by 72 cents / 55%) but DPS dropped from 90c to 72¢ (by 18 cents / 20%) > The dividend pay-out rate increased from 69% (90/130) to 136,5% or 72/58 (accept 124.1%) / or a 97,8% increase from the previous year. > The dividend pay-out rate increased. 3.2.3 Comment on the risk and gearing for both years. Quote TWO financial indicators (with figures) Debtiequity ratis increased (from 0, £1) to 0,4: 1 (or by 0,1: 1) ROTCE decreased (from 39%) to 23,2% (or 15,8%) > Increased borrowing not effectively used to increase / improve profitability. > Although stil positively geared (ROTCE exceeds interest rate), the drop in profitability / downward trend is a concern. > Although there is low financial risk, the company is more reliant on own capital 3.2.4 Existing shareholders are dissatisfied that the new shares issued on 1 April 2020 were sold to the CEO, Ida Shark. Give TWO reasons why you consider their feelings to be justified. Quote figures. > Ethical reasons e.g. This is a very low price and the CEO is exercising undue influence ‘over the issue price / receiving preferential treatment / against the Companies Act or King Code / lack of transparency > Market-related reasons e.g. the company is losing out on additional funding as shares could have been sold at a price in that range, or on the stock exchange 24> ‘The selling price of these shares (250 000) is 150 cents each (R375 000 in total) / market price of 410c exceeds NAV of 332c. ive change in R980 000. Provide TWO ctors. Quote figures. Cash flow from operating activities is negative R148 080 Additional shares issued, R375 000 Financing activities increased by R1 026 500 Large increase in loan, R651 500 / high interest payment R232 000 Very high payment for dividends, R925 000 Cash from investing activities, R101 580 25FINANCIAL STATEMENT: FINANCIAL STATEMENTS Financial statements (or financlal reports) are formal records of the financial activities and position of a business, person, or other entity. Relevant financial information is presented in a structured manner and in a form which is easy to understand. They typically include four basic financial statements accompanied by a management discussion and analysis: 1. A balance sheet or statement of financial position, reports on a company's assets, liabilities, and owners equity at a given point in time. 2. An income statement—or profit and loss report, or statement of comprehensive income, or statement of revenue & expense—reporis on a company's income, expenses, and profits over a stated period. A profit and loss statement provides information on the ‘operation of the enterprise. These include sales and the various expenses incurred during the stated period ‘An Income statement is a financial report that provides a summary of a company's revenues, expenses, and profits/losses over a given period of time. An income statement shows a company’s ability to generate sales, manage expenses, and create profits. It is prepared based on accounting principles that include revenue recognition, matching, and accruals, 3. A statement of changes in equity or statement of equity, or statement of retained ‘eamings, reports on the changes in equity of the company over a stated period. 4. A cash flow statement reports on a company's cash flow activities, particularly its operating, Investing and financing activities over a stated period, It is prepared on cash basis. 5. Notes to the financial statement THE STATEMENT OF COMPREHENSIVE INCOME. ‘Statement of Comprehensive income for the year ended 28 February 2027 | Note | _R Sales (Sales less returns) 7280-000 Cost of sales 120 000 Gross Profit 160 000 ‘Other operating income 20 000 Rental income. 10.000 Provision for bad debis- decrease ‘500 26Discounts received 3 000 Profit on sale of fixed assets 7500 Dividend income from investments 000] Gross operating income 180.000 Operating expenses 99 800 Freight on sales 1500 | Audit fees 72.000 ‘Accounting fees 43 800, Directors fees 72.000] Salaries and wages 40 000 Stationery 500 Loss on sale of proper 7500 Provision for bad debt - increase 250 | Bad debts written off 350 Discounts allowed 7100 Depreciation 2450 Insurance 170 Motor vehicle running cost 400 Repairs and maintenance 5780 | ‘Operating profit 80 200 Interest expanse 5200] Profit before tax 75 00 Income tax 10250 Net profit after fax 64 750 The statement of financial position Statement of financial position as at 28 February 2021 Notes [R Assets Non current assets SOX. Fixed/Tangible assets 200K Financial assets (look for a Fixed deposit) 200K Current assets TORK. Inventories 200K ‘Trade and other payables 3000 Cash and cash equivalents 200 Total assets Equity and liabilities ‘Shareholders equity eK, Ordinary share capital OK Retained income XH Non current liabilities EX Ordinary share capital XK 7Retained income 3000 Current liabilities eK Current portion of mortgage loan. KK Trade and other payables 2K Total equity and liabilities The notes on financial statements 1 Interest income Thlerast received from bank accounts Interest on overdue debtors XXX Interest on fixed deposit account XXX 2K Interest expense Creditors overdue accounts 7x Interest on loan XXX Interest on overdraft 200. XXX Property plant and equipment Trade and other receivables 28 R R R R Carrying value at the beginning of the r00x | 2000 3000 | 90000 year Cost oH | 90000 non | 9600 “Accumulated depreciation (po00x) (Goon) | Goo) Movement ‘Additions at cost 00x | 9000 nox | 9000 Disposals al carrying value (o0ex) Goo.) | Poo) Depreciation for the year (0000x) (G00) T0000) Carrying value noo | 200K 200 | 20000 Cost 00K | 2000 200% | _200X Accumulated (oo) | o0ex) | o00x) Inventories Closing trading stock 3000 ‘Consumables on hand 3000 (ao