accounting learner guide july 2011

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Accounting Exam Revision Learners GuideWinter School July 2011

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Introduction:

Have you heard about Mindset? Mindset Network, a South African non-profitorganisation, was founded in 2002. We develop and distribute quality andcontextually relevant educational resources for use in the schooling, health and

vocational sectors. We distribute our materials through various technology platformslike TV broadcasts, the Internet (www.mindset.co.za/learn) and on DVDs. Thematerials are made available in video, print and in computer-based multimediaformats.

At Mindset we are committed to innovation. In the last two years, we successfully rana series of broadcast events leading up to and in support of the NSC examinations

Now we are proud to announce our 2011 edition of Matric Exam Revision, which willbegin with our Winter School in July. Weve expanded the broadcast to support youin seven subjects - Mathematics, Physical Sciences, Life Sciences, MathematicalLiteracy, English 1st Additional Language, Accounting and Geography.

During our Winter School, you will get Exam overviews, study tips on each of thetopics we cover, detailed solutions to selected questions from previous examinationpapers, short question and answer sessions so you can check you are on track andlive phone in programmes so you can work through more exam questions with anexperienced teacher.

Getting the most from Winter SchoolBefore you watch the broadcast of a topic, read through the questions for the topic

and try to answer them without looking up the solutions. If you get stuck and cantcomplete the answer dont panic. Make a note of any questions you have. Whenwatching the Topic session, compare the approach you took to what the teacherdoes. Dont just copy the answers down but take note of the method used.

Make sure you keep this booklet for after Winter School. You can re-do the examquestions you did not get totally correct and mark your own work by looking up thesolutions at the back of the booklet.

Remember that exam preparation also requires motivation and discipline, so try tostay positive, even when the work appears to be difficult. Every little bit of studying,

revision and exam practice will pay off. You may benefit from working with a friend ora small study group, as long as everyone is as committed as you are. Mindsetbelieves that the 2011 Winter School programme will help you achieve the resultsyou want.

If you find Winter School a useful way to revise and prepare for your exams,remember that we will be running Spring School from the 3rd to 7th October andExam School from 19th October to 22nd November as well.
http://www.mindset.co.za/learnhttp://www.mindset.co.za/learnhttp://www.mindset.co.za/learnhttp://www.mindset.co.za/learn


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Programme Outline

The Mindset Winter School is designed to focus on two subjects each day. For eachsubject you will find the following sessions:

Examination Overview

This is a 15 minute session that gives details of what you can expect in eachexamination paper. Practical guidelines are also given on how to prepare for theday of the exam.

Topics Tips

In this session you will be given a 15 minutes summary of the key ideas you needto know, common errors and study hints to help you prepare for your exams.

Topic Session

An expert teacher will work through specially selected questions from previousexam papers.

Interactive Q & A

After every topic you will get the chance to test yourself.

Live Phone-in

This is your chance to ask your own questions. So submit your question to theHelp Desk and we might call you back to help you live on TV. All questions yousubmit will be answered within 48 hours as normal.

Winter Broadcast School Schedule


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TOPIC 1: CASH FLOW STATEMENTS AND INTERPRETATION OF RATIOS

QUESTION 1 75 marks 45 minutes (Adapted from Nov 2009)

CASH FLOW AND INTERPRETATION OF INFORMATION

You are provided with information relating to Koola Limited for the financial year ended31 August 2009.

REQUIRED:

1.1 Refer to the Note for Fixed/Tangible assets below.

1.1.1 Calculate the fixed/tangible assets purchased. (2)1.1.2 Calculate the depreciation on vehicles. (3)1.1.3 Calculate proceeds of fixed/tangible assets sold. (4)

1.2 Prepare the Cash Flow Statement for the year ended 31 August 2009.Notes are not required. Show workings in brackets. (23)

1.3 The Cash Flow Statement reflects some important decisions that havebeen taken by the directors.

Name TWO of these decisions, quote figures to support your answerand explain how each decision benefits the company. (6)

1.4 Calculate the following financial indicators on 31 August 2009:

1.4.1 Debt : Equity ratio (5)1.4.2 Net asset value per share (4)1.4.3 Acid-test ratio (6)1.4.4 Earnings per share (4)

1.5 The directors feel that the liquidity position of the company hasgenerally improved. Quote THREE financial indicators to support theiropinion. Briefly explain. (6)

1.6 One of the directors feels that the company should make more use of

loans. Quote TWO financial indicators to support his opinion. Brieflyexplain. (4)

1.7 The market price of the shares on the Johannesburg SecuritiesExchange (JSE) was 1 750 cents on 31 August 2009.

As a major shareholder, you are very satisfied with the performance ofthe company. Explain, by quoting financial indicators to support youropinion. Comment on share price, returns, earnings and dividends. (8)


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INFORMATION:

1. NOTES FROM THE FINANCIAL STATEMENTS

FIXED/TANGIBLE ASSETS Land and

Buildings

Equipment Vehicles

Carrying value at the end of theprevious year

818 200 52 800 ?

Cost 818 200 120 000 382 800

Accumulated depreciation 0 (67 200) (146 800)

MOVEMENTS ? (7 920) ?

Additions at cost ? 0 0

Disposals at carrying value 0 0 ?

Depreciation 0 (7 920) ?

Carrying value at the end of thecurrent year

2 273 300 44 880 ?

Cost 2 273 300 120 000 172 800

Accumulated depreciation 0 (75 120) (83 000)

2.

Extracted from the Post Closing Trial Balance:2009

R

2008

R

Ordinary share capital (R10 par value) 1 200 000 432 000

Share premium (on new shares issued on 1 Sept.2008)

54 000 -

Retained income 781 380 205 200

Non-current liability: Loan from Uno Bank (15% p.a.) 580 000 820 000

Fixed/Tangible assets ? ?

Inventories (all Trading Stock) 276 800 261 800

Debtors' Control 70 200 84 000

Creditors' Control 69 000 53 400

Shareholders for dividends 78 000 58 320

SARS Income tax 66 600 Cr 29 200 Dr

Cash and cash equivalents 74 000 Dr 86 920 Dr

NOTE:

A vehicle was sold at carrying value on the last day of the financial period.

Depreciation on vehicles is provided at 20% on the diminishing balancemethod.

No equipment was purchased or sold during the year.

Extensions to land and buildings were made during the year.


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3.

Extracted from notes to the financialstatements:

2009

R

Depreciation on vehicles ?

Depreciation on equipment 7 920

Interest on loan (all capitalised and paid) 120 450

Net profit before tax 1 037 400

Income tax for the year 311 220

Net profit after tax 726 180

Dividends for the year 150 000

4

.

The following financial indicators were calculated for the past two years:

2009 2008

Return on average shareholders' equity 54,3% 37,3%

Return on total capital employed (after tax) 41,6% 35%

Net asset value per share ? 1 400 cents

Debt/equity ratio ? 1,3 : 1

Current ratio 2 : 1 4,1 : 1

Acid-test ratio ? 1,8 : 1

Rate of stock turnover 3,5 times p.a. 3 times p.a.

Debtors' collection period 28 days 30 days

Creditors' payment period 60 days 40 days

Earnings per share ? 590 cents

Dividends per share 125 cents 135 cents

TOTAL MARKS: 75


CASH-FLOW STATEMENT AND RATIO ANALYSIS

The information given below was extracted from the financial statements of

Manchester Ltd, distributors of exquisite perfumes.

REQUIRED:

2.1 Prepare the following:

2.1.1

2.1.2

Complete the note for reconciliation between profit before taxationand cash generated from operations.

Prepare the Cash-Flow Statement for the year ended28 February 2009.

(8)

(28)

All workings must be shown in brackets to earn part-marks.


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2.2 Calculate the following for 2009:

2.2.12.2.22.2.3

2.2.4

Current ratioAcid-test ratioNet asset value per share

Debt/Equity ratio (Gearing ratio)

(3)(4)(4)

(3)

2.3

2.4

2.5

2.6

Explain why the directors decided to reduce the long-term loansignificantly during the current financial year. In your opinion, was this awise decision? Explain, quoting evidence (figures/financial indicators)from the question.

Comment on the return on shareholders' equity, earnings and dividendsearned by the shareholders. Quote evidence (figures/financial indicators)from the question.

Calculate the premium at which the new shares were issued.

The existing shareholders are unhappy with the price at which theadditional shares were sold. Discuss, quoting ONE figure or financialindicator to support your answer.

(6)

(6)

(5)

(3)

INFORMATION:1. Extract from the Income Statement R

Depreciation 33 500Interest expense 164 450Net profit before tax 844 300

Income tax (rate 30% of net profit) ?

2. BALANCE SHEET28 February

200928 February

2008ASSETSNon-current assets 3 490 885 3 017 500

Fixed/Tangible assets at carrying value 3 440 885 2 967 500Fixed deposit at PDV Bank 50 000 50 000

Current assets 320 000 231 250

Inventories 251 250 110 250

Trade debtors 60 000 76 000Cash and cash equivalents 1 250 45 000SARS Income tax 7 500 0

TOTAL ASSETS 3 810 885 3 248 750

EQUITY AND LIABILITIESCapital and reserves 3 120 000 1 443 000

Ordinary share capital (par value R5) 2 085 000 1 050 500Share premium 268 970 0Retained income 766 030 392 500


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Non-current liabilities 300 000 1 525 000

Loan: Enid Bank at 15% p.a. 300 000 1 525 000

Current liabilities 390 885 280 750

Trade creditors 209 945 220 475Bank overdraft 47 500 0Shareholders for dividends 133 440 52 525SARS Income tax 0 7 750

TOTAL EQUITY AND LIABILITIES 3 810 885 3 248 750

3. ADDITIONAL INFORMATION:

A. Additional new shares were issued at a premium halfway through theyear on 31 August 2008. These shares did not qualify for interimdividends.

B. Fixed assets were sold for R100 000 cash at carrying value.

C. Earnings and dividends per share were as follows:

2009 2008Earnings per share 189 cents per share 135 cents per shareTotal dividends 72 cents per share 105 cents per share

Interim dividends 40 cents per share 80 cents per share

Final dividends 32 cents per share 25 cents per share

D. You are also provided with the following financial indicators:

2009 2008% return on shareholders' equity 26% 21%% return on capital employed (after tax) 24% 10%Net asset value per share ? 687 cents

E. The price of the shares on the Johannesburg Securities Exchange(JSE) has fluctuated between 680 cents and 780 cents over the past

year. [70]


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TOPIC 2: FINANCIAL STATEMENTS 5th July & 12th July


FINANCIAL STATEMENTS AND AUDIT

1.1 SIMPHIWE LIMITED

You are provided with the Pre-Adjustment Trial Balance of Simphiwe Limited.The company buys and sells uniforms and they also repair uniforms for theircustomers, for which they charge a fee. These fees are credited to theFee Income Account in the General Ledger.

REQUIRED:

1.1.1

1.1.2

Refer to Information 2J below.Calculate the profit or loss on disposal of the computer. Showworkings. You may prepare an Asset Disposal Account to identify thefigure.

Complete the Income Statement for the year ended30 September 2009. The notes to the financial statements are NOTrequired.

(8)

(47)

INFORMATION:

1. SIMPHIWE LTDPRE-ADJUSTMENT TRIAL BALANCE AS AT 30 SEPTEMBER 2009

DEBIT CREDITBalance Sheet Accounts Section R ROrdinary share capital 1 300 000Share premium 170 730Retained income (1 October 2008) 170 000Loan from Stay Bank 90 000Land and buildings at cost 1 628 520Vehicles at cost 220 000

Equipment at cost 190 000Accumulated depreciation on vehicles (1

October 2008)

41 000

Accumulated depreciation on equipment (1October 2008)

37 000

Debtors' control 36 600Creditors' control 17 960Trading stock 479 000Bank 13 500Petty cash 2 200SARS Income tax 83 500Provision for bad debts 1 440


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Nominal Accounts Section R RSales 2 720 000Cost of sales 1 310 000Debtors' allowances 6 200

Salaries and wages 162 000Discount allowed 905Fee income 104 750Rent income 56 000Insurance 11 000Sundry expenses 39 250Directors' fees 390 000Audit fees 53 705Consumable stores 24 000Interest income 2 500

Ordinary share dividends 88 0002. ADJUSTMENTS

A. Prepaid expenses in respect of sundry expenses at the year- end, R3 200,have not been taken into account.

B. On 30 September 2009, R580 was received from A Ethic, whose account hadpreviously been written off as irrecoverable. The amount was entered in theDebtors' Control column in the Cash Journal.

C. The provision for bad debts must be adjusted to R1 830.

D. There were two directors at the start of the accounting period. Directors' feeshave been paid for the first half of the accounting period. On 1 April 2009, athird director was appointed. All three directors earn the same monthly fee.Provide for the outstanding fees owed to the directors.

E. Rent has been received for 14 months.

F. The following credit note was left out of the Debtors' Allowances Journal forSeptember in error. The mark-up on goods sold was 50% on cost.

SIMPHIWE LTD CREDIT NOTE 4533

28 Sept. 2009

Credit: Supaclean Ltd

PO Box 340,Westmead, 3610 Unit price Total

24 Uniforms returned R400 R9 600

Reduction on feecharged for repair ofuniforms

R 750

R10 350


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G. A physical stock count on 30 September 2009 reflected the stock of uniformson hand as R490 000.

H. The loan statement from Stay Bank reflected the following:

Balance at beginning of financial year R 150 000

Repayments during the year R 78 000Interest capitalised R ?Balance at end of financial year R 90 000

I. Depreciation on vehicles is calculated at 20% p.a. on the diminishing-balancemethod.

J. Depreciation on equipment is calculated at 10% p.a. on the cost price. Notethat an item of equipment was taken over by one of the directors, Ivor Steele,on 30 June 2009 for personal use for R800 cash. The relevant page from theFixed Asset Register is provided below. No entries have been made inrespect of the disposal of this asset.

FIXED ASSET REGISTER Page 12

Item: VYE Computer Ledger Account: Equipment

Date Purchased: 1 April 2006 Cost Price: R22 000

Depreciation Policy: 10% p.a. on cost price

Date Depreciationcalculations

CurrentDepreciation

AccumulatedDepreciation

2006

30 September

R22 000 x 10% x

6/12

R1 100 R1 100

200730 September

R22 000 x 10% x12/12

R2 200 R3 300

200830 September

R22 000 x 10% x12/12

R2 200 R5 500

200930 June

? R ? R ?

K. Income tax for the year amounts to R63 280.


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BALANCE SHEET AND AUDIT REPORT

You are provided with information relating to Qwando Limited for the financial year

ended 30 June 2009.

REQUIRED:

2.1 Prepare the Notes to the Balance Sheet for:

Ordinary share capital

Retained income (14)

2.2 Prepare the Balance Sheet on 30 June 2009.Where notes are not required, show workings in brackets to earnpart-marks. (38)

2.3 Answer the questions that follow.

INFORMATION:

1. The following figures were identified from the accounting records at the end ofthe financial year on 30 June 2009.

ROrdinary share capital (see Information 2 below) 2 400 000Share premium 248 000Retained income (on 1 July 2008) 490 000Shareholders for dividends (see Information 4 below) ?Fixed deposit at Supa Bank (see Information 5 below) 60 000Mortgage loan from Supa Bank (see Information 7 below) ?Fixed/Tangible assets 4 021 000Debtors' control 45 000Creditors' control 85 200Creditors for salaries 12 300Provision for bad debts (see Information 6 below) ?SARS (Income tax provisional tax payments) 400 000SARS (PAYE) 6 650

Expenses payable (accrued) 7 200Income receivable (accrued) 7 950Bank (favourable balance) 28 450Trading stock 129 600Consumable stores on hand 5 600

2. The authorised share capital comprises 1 000 000 ordinary shares of R3 parvalue.

On 1 January 2009, 100 000 ordinary shares were issued to the public at a

premium of 80 cents each. This has been properly recorded and is included inthe figures above.


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3. The net profit before tax for the year ended 30 June 2009 was calculated to beR1 250 000. No entry has been made for income tax at the rate of 30% of the netprofit.

4. Dividends were as follows:

Interim dividends of 20 cents per share were paid on 31 December 2008.

Final dividends of 35 cents per share were declared on 30 June 2009.

5. One third of the fixed deposit matures on 31 August 2009.

6. Provision for bad debts is maintained at 5% of debtors.

7. The loan statement from Supa Bank on 30 June 2009 reflects the following:

SUPA BANKLOAN STATEMENT ON 30 JUNE 2009

Balance on 1 July 2008 R384 000

Interest charged 57 600

Monthly payments in terms of the loan agreement (12 x R8800)(These monthly payments include interest and capitalrepayments of the loan)

105 600

Balance on 30 June 2009 R336 000

The monthly capital repayments of the loan will remain constant untilthe loan is fully repaid on 30 June 2017.

8. You are provided with an extract from the report of the independent

auditors:Audit opinion To the shareholders:

We have examined the financial statements set out on pages 8 to20.

In our opinion, the financial statements fairly present, in all materialrespects, the financial position of the company at 30 June 2009 andthe results of their operations and cash flows for the year ended, inaccordance with International Financial Reporting Standards (IFRS),and in the manner required by the Companies Act in South Africa.

Barlow & BokweChartered Accountants (SA)Registered Accountants and AuditorsCape Town 6 September 2009

2.3.1 State whether the shareholders would be satisfied orunsatisfied with this audit report. Give a reason for youranswer. (3)

2.3.2 Explain why the auditors found it necessary to stipulate thepage numbers (that is 8 to 20) in this report. (2)

2.3.3 Explain why the Companies Act makes it a requirement forpublic companies to be audited by an independent auditor. (2)


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2.3.4 Explain TWO major consequences for Barlow and Bokweshould they be negligent in performing their duties. (4)

2.3.5 What actions would Barlow and Bokwe have to perform toverify the Fixed/Tangible Assets figure in the Balance Sheet?

Provide THREE points. (3)2.3.6 Quinton Qwando, the major shareholder and managing

director, has informed the auditors that he intends to buy theunissued shares himself next year without advertising the newissue to the other shareholders or the public. What adviceshould the auditors give to Quinton? Briefly explain. (4)

TOTAL MARKS: 70

TOPIC 3: MANUFACTURING ACCOUNTS 12th July


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MANUFACTURING

1.1 PD Pencils Manufacturers

The business produces one type of mechanical pencil.

INFORMATION:

The following information was extracted from the financial records of PD PencilsManufacturers on 31 October 2009, the end of the financial year.

R

Administration cost 810 000

Direct/Raw material cost 1 770 000

Factory overhead cost 827 000Selling and distribution cost 603 000

Direct labour cost ?

Prime cost 2 745 000

Total cost of production of finished goods 3 525 000

Work-in-process (1 November 2008) 37 600

Work-in-process (31 October 2009) ?

Sales 6 390 000

Cost of sales 3 337 000

REQUIRED:

1.1.1 Prepare the Production Cost Statement. (10)

1.1.2 750 000 pencils were produced during the financial period.Calculate the cost of production per unit. (3)

1.1.3 Calculate the net profit. (5)

1.2 Garden Manufacturers

The business produced 4 100 garden spades for the year ended31 October 2009. The following information was extracted from theirbooks:

INFORMATION:

Total Per unit

Sales R615 000 R150

Variable costs R287 000 R70

Fixed costs R348 500 R85


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1.2.1 Calculate the break-even point for the year ended31 October 2009. (5)

1.2.2 Should the business be satisfied with the number of unitsthat are currently produced? Explain. (3)

1.2.3 Despite the fact that there was an increase in the price ofraw materials, the direct/raw materials cost per unitdecreased from R32 to R27. Give a valid reason for thedecrease. (2)

1.2.4 Despite the fact that there was no increase in wagesduring the year, the direct labour cost per unit increasedfrom R20 to R28. Give a valid reason for the increase. (2)

TOTAL MARKS: 30


MANUFACTURING

2.1 BAKONA BIN MANUFACTURERS

You are provided with information relating to Bakona Bin Manufacturers forthe year ended 28 February 2009.

The business makes and sells only one type of product, namely plasticrubbish bins.

REQUIRED:

2.1.1

2.1.2

2.1.3

Prepare the following notes to the Production CostStatement:

Direct/Raw material cost

Direct labour cost

Factory overhead cost

Prepare the Production Cost Statement.

Calculate the unit cost of production per plastic bincompleted.

(7)(7)(16)

(10)

(3)

INFORMATION:

1. Units produced:

58 000 bins were completed during the financial year.

2. Stock balances:

1 March 2008 28 February 2009

Direct/Raw material stock R57 900 R34 200Work-in-process stock 169 500 120 600Factory indirect material stock 8 100 7 400


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3. Transactions for the year:

RRaw material purchased for cash and on credit 1 622 700Defective raw material returned to suppliers 23 100Carriage on raw materials purchased 28 800Salaries:

Factory foreman 241 000

Office workers 270 000

Wages:

Office workers 48 000

Factory workers in the production process (see Information 4below)

?

UIF contributions (to be allocated to each specific cost account):

Factory workers in the production process 11 520

Factory foreman 2 410

Office workers 2 700Factory indirect material purchased 125 900Sales of finished goods (R120 per unit) 7 800 000Commission to salespersons (10% of sales) ?Advertising 145 000Factory maintenance 85 000Bad debts 8 400Rent to be allocated in proportion to floor space (see Information 5below)

133 000

Bins stolen (rand value) 960

Water and electricity (see Information 6 below) 36 000Depreciation on factory equipment 52 000Sundry administration expenses 150 800Sundry factory expenses 25 000

4. Factory workers in the production process:

Number of factory employees working directly onthe bins (unchanged throughout the year)

12 employees

Number of normal hours worked by each factoryworker during the year

1 600 hours

Number of overtime hours worked by each factory

worker during the year240 hours

Wage rate (normal) R 60 per hourWage rate (overtime) R100 per hour

5. Floor space:

Factory Office Sales dept.Square metres 1 200 sq. metres 600 sq. metres 600 sq. metres

6. Water and electricity:

15% of the amount is allocated to the office and 25% to the sales department.The rest applies to the factory.


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2.2 KOOL MANUFACTURERS

This business makes plastic vuvuzelas.

The information below relates to the year ended 30 June 2009.

Number of vuvuzelas produced 12 000

Sales for the year (all manufactured units were sold) R480 000

Total fixed costs R210 000

Total variable costs R300 000

2.2.1

2.2.2

2.2.3

2.2.4

Give ONE example of a fixed cost and ONE example of a variablecost.

Explain why it is important to calculate the expected break-even

point for a business before the start of a financial year.

Use the figures above to calculate the break-even point.

Comment on your calculation in QUESTION 3.2.3. What advicewould you offer Kool Manufacturers? Briefly explain.

(2)

(2)

(5)

(3)[55]


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SOLUTIONS TO TOPIC 1: CASH FLOW STATEMENTS AND INTERPRETATIONOF RATIOS

QUESTION 1

*Inspection

1.1.1 Calculate fixed / tangible assets purchased.

R2 273 300 818 200 = R1 455 100 [2]

1.1.2 Calculate the depreciation on vehicles.

R382 800 R146 800 = R236 000 X 20 % = R47 200 *[3]

1.1.3 Calculate proceeds of fixed/tangible assets sold.

382 800 146 800 = 236 000172 800 83 000 = 89 800236 000 89 800 47 200 = 99 000 *

[4]

1.2 KOOLA LIMITED *InspectionCASH FLOW STATEMENT FOR THE YEAR ENDED 31 AUGUST 2009

R

Cash effects of operating activities * 761 180

Cash generated from operations 1 227 370

Interest paid (120 450)Dividends paid (58 320 + 150 000 - 78 000 ) (130 320)

Income tax paid (311 220 29 200 -66 600 ) (215 420)

Cash effects of investing activities * (1 356 100)

Purchase of tangible assets (2 273 300 818 200) See 4.1.1 (1 455 100)

Proceeds from the sale of tangible assets* See 4.1.3 99 000

Cash effects of financing activities * 582 000Proceeds from shares issued(1 200 000 - 432 000 = 768 000 + 54 000 ) 822 000

Repayment of long-term loans(820 000 - 580 000) (240 000)

Net change in cash and cash equivalents * (12 920)

Cash and cash equivalents at beginning of year 86 920

Cash and cash equivalents at end of year 74 000

TOTAL MARKS: 23


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1.3 Two valid decisions listed Figures quoted Explanation

Repayment of loan to reduce interest. Loan decreased by

R240 000. Shares were issued in order to fund the purchase of Land &

Buildings. R822 000 were generated through the issue ofshares. This was a better option than borrowing funds.

Tangible assets (Land & Buildings) were acquired to thevalue of R1 455 100. This will save the company rentexpenditure, the company has acquired assets that increasein value.

A vehicle was sold for R99 000. This could have been anobsolete / unused vehicle which resulted in unnecessarymaintenance expenses.

[6]

1.4.1 Debt : Equity ratio

Non-current liabilities: Shareholders Equity

R580 000 : R1 200 000+54 000+781 380

= R580 000 : R2 035 380 If any one part correct

= 0,28: 1 or 0.3:1[5]

1.4.2 Net asset value per share

Shareholders equity x 100No. of shares issued 1

See 4.4.1= R2 035 380 x 100

120 000 1

= 1 696,2 cents OR 1 696,15 OR R16,96[4]

1.4.3 Acid-test ratio

Trade and other receivables + cash and cash equivalents : Currentliabilities

(70 200 + 74 000) : 69 000 + 78 000 + 66 600

= 144 200 : 213 600 if any one part correct

= 0,7 : 1 OR 0,68 : 1[6]


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1.4.4 Earnings per share

Net profit after tax x 100 centsNo. of shares issued

= 726 180 x 100 cents120 000 See 4.4.2

= 605,2 cents OR 605,15 OR R6,05[4]

1.5 Three financial indicators

Possible answers:

Current ratio: Dropped from 4,14 : 1 to 2,02 : 1. (although itdropped it is still satisfactory as your current assets are double

the current liabilities) Acid-test ratio: Dropped from 1,8 : 1 to 0,7 : 1 (below but the

company is operating efficiently)

Debtors' collection period: Collection period improved from 30 to28 days.

Creditors' payment period: increased from 40 to 60 days

Stock turnover rate: Stock is turning over at a faster rate from 3to 3,5 times p.a. [6]

1.6 Valid explanation Financial indicators

The debt : equity ratio decreased from 1,3:1 to 0,3:1

Return on capital employed increased from 35% to 41,6%

Shareholders equity (R2 035 380) far exceeds the debt of thiscompany (R580 000).

The interest rate is 15% p.a. and the return on capital employedis 41,6% in 2009 thus the returns are geared upwards. [4]

1.7 Valid explanation Financial indicator

The market price is 1 750 cents per share. This is higher than thenet asset value as calculated at 1 696,5 cents per share

Return on shareholders equity increased from 37,3% to 54,3%

Earnings per share increased from 712,3 cents to 830 cents Dividends per share decreased from 135 cents to 125 cents Dividend payout rate has dropped. Retaining more income [8]

TOTAL MARKS: 75


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QUESTION 2

2.1.1 Reconciliation between profit before taxation andcash generated from operations

Net profit before tax 844 300

Adjustments i.r.o.

Depreciation 33 500

Interest on borrowed funds 164 450

Operating profit before changes in workingcapital

1 042 250

Changes in working capital Check operation (135 530)

Inventory Figure

Operation

(141 000)

Debtors Figure Operation

16 000

Creditors Figure Operation

(10 530)

Cash generated from operations Check operation 906 720

[8]

2.1.2 MANCHESTER LIMITEDCASH FLOW STATEMENT FOR THE YEAR ENDED 28 FEBRUARY 2009

CASH FLOW FROM OPERATING ACTIVITIES Checkoperation

337 165

Cash generated from operations See 5.1.1 906 720

Interest paid Figure must

be correct &outflow

(164 450)

Dividends paid Mark entire line or T-account

52 525 + 217 480 133 440

OR 52 525 217 480 + 133 440

OR 52 525 1 mark + 84 040 2 marks

If one partcorrect,figure mustbe outflow

(136 565)

Taxation paid Mark entire line or T-account7 750 + 253 290 + 7 500

OR 7 750 253 290 7 500

If one partcorrect,figure mustbe outflow

(268 540)


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CASH FLOW FROM INVESTING ACTIVITIES Checkoperationfigure mustshowcorrect flow

(506 885)

Purchase of fixed assets

Mark entire line or T-account (see below)3 440 885 [2 967 500 100 000 33

500 ]

OR 3 440 885 2 967 500 + 100 000 + 33 500

OR3 440 885 + 2 967 500 100 000 33 500

If one partcorrect,figure mustbe -ve

(606 885)

Proceeds from the sale of fixed assets 100 000

CASH FLOW FROM FINANCING ACTIVITIES Checkoperation

78 470

Proceeds of shares issued 1 034 500 + 268970

OR 2 085 000 (1 mark) 1 050 500 (1 mark) + 268970 (1 mark)

OR 2 353 970 (2 marks) 1 050 000 (1 mark)

1 303 470

Repayment of long term loans Figure

Outflow

(1 225 000)

Net change in cash and cash equivalents Checkoperation, donot accept46250 or47500 or 1250

(91 250)

Cash and cash equivalents at the beginning of theyear

Must be +ve 45 000

Cash and cash equivalents at the end of the year Figure must

be -ve

(46 250)

Fixed Assets T-account

2 967500606885

100 00033 5003 440

885 [28]


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2.2 Calculate the following for 2009:

2.2.1 Current ratio proper method & one part correct

320 000 : 390 885 = 0,8 : 1 (accept 0,82: 1)

Must be in correct order and must be in the format x:1 [3]2.2.2 Acid-test ratio

proper method & one part correct68 750 : 390 885 = 0,2 : 1 (Accept 0,18 : 1)

Must be in correct order and must be in the format x:1 [4]

2.2.3 Net asset value per share proper method & one part correct

R3 120 000 / 417 000 shares = 748,2 cents or R7,48Must be in correct order and must be in cents or rands [4]

2.2.4 Debt/Equity ratio (Gearing ratio)

proper method & one part correct300 000 : 3 120 000 = 0,1 : 1 or 0,096 : 1

Must be in correct order and must be in the format x:1 [3]

2.3 Be aware of differing structures to the answer by learners. The followingcomponents should be covered:

Explanation of directors decision:May award part marks for unclear or incomplete answersAny one reason:

The sale of extra shares has brought about an inflow of cash

In the previous year the ROTCE (10%) was lower than theinterest rates (15%).

In the previous year the company was highly geared with a veryhigh debt/equity ratio (> 1 : 1)

Opinion: Yes or No

Explanation: Evidence:May award part marks for unclear or incomplete answersAny one explanation for Yes:

The debt/equity ratio is now very low (0,1 : 1) which indicates a

low-risk situation The saving on interest has increased the profits as indicated by

EPS from 135c to 189c or ROSHE from 21% to 26%

The company is now in a positive gearing situation with ROTCEof 24% which is much higher than the interest rates.

Any one explanation for No:

The directors have over-reacted because the evidence showsthat they should now consider taking out more loans (ROTCE of24% exceeds interest rates) and debt/equity ratio of 0,1:1 is low,indicating low risk

The short-term liquidity is now a problem as the acid-test ratio isnow 0,2:1 and the current ratio is 0,8:1 [6]


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The net change in cash was a negative of R91 250 which hascaused short-term liquidity concerns.

2.4 Returns on shareholders equity

Quote financial indicator Any valid specific commentrelated to the indicator, e.g.

ROSHE has increased from 21% to26%OR: ROSHE is now 26%OR: ROSHE increased by 5% pointsOR: ROSHE increased by 23,8%

This exceeds the returns onalternative investments

Earnings

EPS has improved from 135c to 189cOR: EPS is now 189cOR: EPS increased by 54c or 40%

This compares well to thevalue of the share

Dividends

Quote financial indicator Any valid specific commentrelated to the indicator, e.g.

DPS has declined from 105c to 72cOR: DPS is now 72c

OR: DPS decreased by 33c or 31,4%

The company is retainingmore of its profits

OR: This increases the NAVOR: The dividend payout ratedropped to less than 50% ofprofitsOR: Increases theinfrastructure of the company [6]

2.5 Calculate the premium at which the new shares were issued.

Number of shares issued = (2 085 000 1 050 500)/R5 = 206 900 shares

268 970 / 206 900 Note: the 3 marks on the R268 970 is to compensate for possibleambiguity in question

= R1,30 Any one part correct, must be in cents or rands[5]


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2.6 Quoting of figures / financial indicator Comment Part-marks may be awarded for unclear, partial orincomplete comments

Expected responses:

The shares were issued at a price of R6,30 which is lower thanthe NAV (R6,87 or R7,48) which means that the existingshareholders are being disadvantaged

The shares were issued at a price of R6,30 which is lower thanthe market price (R6,80 to R7,80) which means that the existingshareholders are being disadvantaged

[3]

TOTAL MARKS: 70


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SOLUTION TO TOPIC 2: FINANCIAL STATEMENTS

QUESTION 1

1.1.1 Calculate the profit or loss on disposal of the computer:

No part marks

22 000 5 500 1650 800 = R14 050

OR

22 000 (5 500 + 1650) 800 = R14 050

OR

Cost price 22 000

Accu depr (5 500 + 1 650 ) 7 150Carrying value 14 850Disposal/Bank 800

Loss on sale of asset 14 050

Asset disposal

Equipment 22 000 Accu depr (5 500 +1 650 )

7 150

Ignore details here Bank 800

Loss on sale of asset 14 050

22 000 22 000 [8]


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1.1.2 SIMPHIWE LTDINCOME STATEMENT FOR THE YEAR ENDED 30 SEPTEMBER 2009

Sales (2 720 000 6 200 9 600 )R15 800: 2

marks 2 704 200

Cost of Sales (1 310 000 6 400 ) Mark figures only (1 303 600)

8 Gross Profit Check operation, COS must be deducted 1 400 600

Other operating income Check operation 157 180

Fee income (104 750 750 ) 104 000

Rent income (56 000 8 000 ) 48 000

Bad debts recovered 580

12 Trading stock surplus (490 000 [479 000 + 6 400])

Ignore workings,1 method mark for any figure 4 600

Gross operating income 1 557 780

Operating Expense Check operation, mark figure only (1 331 350)

Salaries and wages 162 000

Discount allowed 905

Insurance 11 000

Sundry expenses (39 250 3 200 ) 36 050

585 000

Directors fees (390 000 + 390 000 + 195 000 ) 975 000

Audit fees 53 705

Consumable stores 24 000

Provision for bad debts adjustment No part marks 390

Depreciation (1 650 + 16 800 + 35 800 )

See 4.1.1 @Any figure@ 54 250

22 Loss on sale of asset See 4.1.1 14 050

Operating profit 226 430

Interest Income 2 500

Profit before interest expense/finance cost 228 930Interest expense / Finance cost

If no brackets accept the figure (18 000)

Profit before tax 210 930

Income Tax If no brackets accept the figure (63 280)

5 Net Profit after tax Check operation, tax and interestexpense must be deducted

147 650

TOTAL: 47Foreign items1 each (max2); Ignore Trading Stock & Prov for Bad Debts as

foreign items. If interest income / interest expense in two places, treat as foreign itemIf interest income / interest expense misplaced, -1 each time (-2 max)


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1.2.1 Any one valid reason, e.g. Can award part-marks for partial, unclear or incomplete answers

So that readers of financial statements can have confidencein his opinion

Assurance to the public that he/she is well trained on an on-going basis

Disciplinary actions if negligent in performing duties Aware of latest trends e.g. IFRS, Companies Act, King Code Act in ethical manner (integrity, observe code of conduct) To benchmark quality of work [2]

1.2.2 Any one valid reason, e.g. Can award part-marks for partial, unclear or incomplete answers

The auditor expresses an opinion, he/she does not preparethe financial statements

If the auditor has anything to do with preparing the financialstatements, he will not be able to express his opinion (conflictof interests, he would be biased)

The auditor only checks on a test basis the directors areresponsible for the figures

The directors work in the company on a daily basis theymust be held liable for errors or fraud

The directors cannot delegate their responsibilities for thepreparation of the financial statements. [2]

1.2.3 (a)

Any valid proof of entries in the books or values in the books orfinancial statements concerning cash, fixed assets, loans, stock e.g.bank statements, stock sheets counts, invoices (source documentsand supporting vouchers), fixed asset register

(b)

One principle provided e.g.

Explanation of reason: e.g.

Stock valuation method Could lead to differences inprofit

Valuation of fixed assets(historical cost &depreciation)

Could lead to differences inprofit or net asset value

Matching principle Income & expenses must bematched in correct accountingperiod

Prudence principle Results must beconservatively reported

Going-concern principle Affects valuation of assetsAny other valid principles and reasons acceptable accepttransparency, even though its a King Code principle [5]


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1.2.4 Any valid response Part-marks can be awarded for unclear or incompleteanswersPossible responses, e.g.

The auditors have stated that they are satisfied with allaspects of the financial reporting by thedirectors/company

This is a standard report cannot expect better (fairlypresented)

No negative comments reported if the auditor hadbeen dissatisfied about anything he would have statedit here

Complies with IFRS and Companies Act

The auditors have not stated the report is qualified orwithheld. [2]

1.2.5 (a) Give one opinion to support SamAny one valid opinion Part-marks can be awarded for unclear or incomplete

answers Ivor is benefiting from a very low charge on an asset

that is worth a lot more to the company and hence theshareholders are losing as a result of this transaction(a large loss was made on this disposal).

This sets a bad precedent for the company / misuse ofhis position as director; other employees might feel

entitled to similar benefits. The directors do not own the company; the

shareholders are the owners of the company. There is also tax implications the director should be

paying tax on this perk. The transaction was not transparent no discussion /

disclosure on the disposal in advance. The asset was still of use to the company; the director

has no right to take it.

(b) Give one opinion to support Ivor.Any one valid opinion Part-marks can be awarded for unclear or incomplete

answers The computer is already more than three years old,

and computers have a relatively short life span. The computer is out-dated; it will probably not be

upgradeable. The depreciation at 10% on cost price for computers is

unrealistic and should therefore have had a lowercarrying value.

NB: Do not accept that directors are owners. [4]TOTAL MARKS: 70


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QUESTION 2 *Inspection

2.1 QWANDO LIMITEDNOTES TO THE BALANCE SHEET

ORDINARY SHARE CAPITAL RAuthorised

1 000 000 ordinary shares of R3 each 3 000 000

Issued

* 700 000 ordinary shares of R3 each on the last dayof previous year *

2 100 000

100 000 ordinary shares of R3 each issued during the

year

300 000

800 000 ordinary shares of R3 each on the last day ofcurrent year

2 400 000

RETAINED INCOME R

Balance on the last day of previous year 490 000

Net profit after tax for the period (1 250 000 - 30%) 875 000

Ordinary share dividends (420 000)

Paid If 0,20 x opening number of shares 140 000

Recommended If 0,35 x closing number of shares 280 000

Balance on the last day of current year 945 000

TOTAL: 14


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2.2 QWANDO LIMITED *InspectionBALANCE SHEET ON 30 JUNE 2009

ASSETS

NON CURRENT ASSETS * 4 061 000Fixed / Tangible assets 4 021 000

Financial Assets

Fixed deposit: Supra Bank

(60 000 - 20 000 ) 40 000

CURRENT ASSETS * 259 350Inventories

(129 600 + 5 600 ) 135 200

Trade and other receivables

(45 000 2 250 + 25 000 + 7 950 )

75 700

Cash and Cash equivalents

(20 000 see FD + 28 450 )* 48 450

TOTAL ASSETS * 4 320 350

EQUITY AND LIABILITIES

CAPITAL AND RESERVES * 3 593 000Ordinary share capital See 3.1 2 400 000

Share premium 248 000

Retained income See 3.1 945 000

NON-CURRENT LIABILITIES * 288 000Mortgage loan: Supa Bank

(336 000 - 48 000 )288 000

CURRENT LIABILITIES * 439 350Trade and other Payables

(85 200 + 7 200 + 12 300 + 6 650 ) 111 350

Shareholders for dividends See 3.1 280 000

Current portion of loan (12 X 4 000) See loan 48 000

TOTAL EQUITY AND LIABILITIES * 4 320 350TOTAL: 38


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2.3.1 Satisfied Any valid reason

Possible responses

The financial statements are fairly presented - this is apositive report

This is an unqualified report

Auditors did not mention any irregularities [3]

2.3.2 They are only responsible for the pages that have been stipulated inthe auditors' report

[2]

2.3.3 The shareholders of a company need to have confidence in thecompanys ability to look after the investment

[2]

2.3.4 Any two valid consequences

Possible responses

Can be sued

Not be re-appointed as auditors

Face disciplinary procedures by the professional body [4]

2.3.5 Three actions

Possible responses

Examine the financial records of the business - external audit

Assess the internal control of the business

Assess the accounting principles used by the business

Inspect the fixed asset register [3]

2.3.6 Advice: This is unethical and the issue of new shares should beadvertised to all according to the Memorandum and Articles ofAssociation, as this is a public company.

Explanation: The other shareholders will be disadvantaged, asQuinton will be increasing his shareholding percentage, which willeffectively reduce the returns and dividends that the others areearning. By offering the shares on the open market the companycould raise more money than if they sold at an agreed price to onebuyer.

Any valid explanation.[4]

TOTAL MARKS: 70


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SOLUTION TO TOPIC 3: MANUFACTURING

QUESTION 1*Inspection

1.1.1 PRODUCTION COST STATEMENT OF PD PENCILSMANUFACTURERS ON 31 OCTOBER 2009

TOTAL

Direct/Raw materials cost 1 770 000

Direct labour cost 975 000

Prime cost 2 745 000

Factory overhead cost 827 000

Total cost of production 3 572 000 *

Work-in-process stock on 1 November2008

37 600

3 609 600

Work-in-process on 31 October 2009 (84 600) *

Cost of production of finished goods 3 525 000

[3]1.1.2 Cost of production

No. of units manufactured

= R3 525 000 750 000

= R4,70 *[3]

1.1.3 *R6 390 000 3 337 000 810 000 603 000 = R1 640 000

[5]

1.2.1 Total fixed costsSelling price per unit Variable cost per unit

= R348 500 .R150 R70

= R348 500 R80

= 4 356 or 4 357 units * [5]

1.2.2 Answer depends on units calculated in 2.2.1.

No - they are producing 256 units less than what is required tobreak even (4 356 units). They will make a net loss. [3]


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1.2.3 Any valid reason

Greater care or efficiency in the use of raw materials

Tighter control over the use of raw materials

Better quality of raw materials less wastage

Better training of workers Raw materials obtained at a cheaper price

[2]

1.2.4 Any valid reason

More overtime

Decrease in productivity working slower, demotivated orlazy workers

Unproductive workers due to power cuts, etc. [2]

TOTAL: 30

QUESTION 2

PRODUCTION COST STATEMENT

2.1.1 BAKONA BIN MANUFACTURERSNOTES TO THE FINANCIAL STATEMENTS

DIRECT/RAW MATERIAL COST R

Opening stock 57 900

Purchases (1 622 700 23 100 ) 1 599 600

Carriage on purchases 28 800

1 686 300

Closing stock If no brackets accept the R34 200 (34 200)

*Check operation, closing stock must be deducted * 1 652 100

[7]If the candidate does a ledger account instead of anote, mark the figures and subtract 2 for format

DIRECT LABOUR COST RFactory wages 1 152 000 + 288 000

No part marks No part marks

(12 x R60 x 1600) + (12 x R240 x 100)

Basic wage and overtime may by split over twolines

1 440 000

UIF contribution Could be include in wages line 11 520

*Check operation, at least one aspect correct * 1 451 520

[7]If the candidate does a ledger account instead of anote, mark the figures and subtract 2 for format


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FACTORY OVERHEAD COST R

Indirect materials (8 100 + 125 900 7 400 ) 126 600

Indirect labour (241 000 + 2 410 ) May be

split

243 410

Factory maintenance 85 000

Rent expense (133 000 x ) No part-marks 66 500

Water and electricity (36 000 x 60%) No part-marks 21 600

Depreciation 52 000

Sundry expenses 25 000

[16]

*Check operation, at least one aspect correct * 620 110

If the candidate does a ledger account instead of anote, mark the figures and subtract 4 for format

Foreign items (e.g. Advertising): 1 in any note (max 3 in total)

2.1.2 PRODUCTION COST STATEMENT OF BAKONA BIN MANUFACTURERSFOR THE YEAR ENDED 28 FEBRUARY 2009

TOTAL

Direct/Raw materials cost #See 3.1.1 # 1 652 100

Direct labour cost Details #See 3.1.1 # 1 451 520

Direct/Prime cost Check operation 3 103 620

Factory overhead cost Details #See 3.1.1 # 620 110

Total cost of production Check operation 3 723 730

Work-in-process on 1 March 2008

R169 500 must be +ve 169 500

3 893 230


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Work-in-process on 28 February 2009

R120 600 must be -ve check the operation if no bracket

2.1.3 3 772 630 See 3.1.2 Must be the numerator58 000 Must be the denominator

= R65,05 Check method & operation, one part correct (120600)

[10]

Cost of production of finished goods

Check operation

3 772630

2.2 Kool Manufacturers

2.2.1 One example of a fixed cost:

Any one valid example, e.g. Rent expense, Salaries, Indirect wages, Interest etc(Accept Administration costs and Factory overhead costs or any partsthereof due to assumptions included in previous papers)

One example of a variable cost:

Any one valid example, e.g. Direct/Raw materials, Direct labour / Direct wages, Advertising, Sellingand distribution, Commission on salesAccept Water & electricity if it has not been indicated by the candidate

as a fixed cost [2]

2.2.2 Good explanation = 2 marks; Satisfactory = 1 mark; Incorrect = 0 marksTwo marks:

So that any potential problems of low production can be foreseen To start corrective action promptly before losses occur No profits are made until break-even is reached Determine the minimum number of units to produce to prevent

losses To produce enough products to set the production level to cover

all costs To identify whether efficiency needs to be improved to produce

the required number of units to make a profit To provide information to compile the budget to ensure that

profits are achievableOne mark:

To produce enough products Prevent low profits / prevent a loss Improve efficiency To compile a budget [2]


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2.2.3 Calculate the break-even point.No part marks No part marks

Any one part correctR210 000 / R15 = 14 000 units

Must be numerator Must be denominator

OR R210 000 / [R40 (R300 000 / 12 000)] = 14 000 units

OR Let BEP = x; then 15 x 210 000 = 0; and x = 14 000 units

2.2.4 Give credit if responses are based on an incorrect calculation above (see3.2.3)

Comment: Compare BEP to the 12 000 units produced e.g., The business is not producing enough units they are below the BEPwhich means that the business will be making a loss.

Advice: Explanation = 2 marks; Point provided without explanation = 1mark; Incorrect = 0 marksTwo marks:

Look at ways of economising on fixed / variable costs to reducecosts so that the BEP decreases

Find a cheaper supplier of raw materials to reduce unit costs Avoid overtime to reduce labour costs Train direct workers to work more efficiently to increase productivity Avoid wastage of raw materials to reduce unit costs Increase selling price provided it does not lead to a reduction in

sales volumes Spend more on advertising to increase sales volumes

One mark: Increase selling price Advertise Change supplier of raw materials Increase production

TOTAL MARKS: 55

accounting learner guide july 2011

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