MODULE 4

Assignment 4
Learning outcome:

LO8: Prepare financial statements for a business.

Name: Mabedle Livingstone Mashele

1. Instructions and guidelines (Read carefully)
Instructions
1. Insert your name and surname in the space provided above, as well as in the file name.
Save the file as: First name Surname Assignment 4 – e.g. Lilly Smith Assignment 4. NB:
Please ensure that you use the name that appears in your student profile on the Online
Campus.

2 Write all your answers in this document. There is an instruction that says, “Start writing
here” under each question. Please type your answer there.

3 Submit your assignment in Microsoft Word only. No other file types will be accepted.

4 Do not delete the plagiarism declaration or the assignment instructions and

guidelines. They must remain on your assignment when you submit.

PLEASE NOTE: Plagiarism cases will be penalised according to the Head Tutor’s and
GetSmarter's discretion.

IMPORTANT NOTICE: Please ensure that you have checked your course calendar for the due
date for this assignment.

Guidelines
1 There are eight pages and one question in this assignment.

2 Make sure that you have carefully read and fully understood the questions before
answering them. Answer the questions fully but concisely and as directly as possible.
Follow all specific instructions for individual questions (e. g. “list”, “in point form”).

3 Answer all questions in your own words. Do not copy any text from the notes, readings
or other sources. The assignment must be your own work only.

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 Plagiarism declaration:

1. I know that plagiarism is wrong. Plagiarism is to use another’s work and pretend
that it is one’s own.
2. This assignment is my own work.
3. I have not allowed, and will not allow, anyone to copy my work with the intention of
passing it off as his or her own work.
4. I acknowledge that copying someone else’s assignment (or part of it) is wrong, and
declare that my assignments are my own work.

2. Mark allocation
Each question receives a mark allocation. However, you will only receive a final percentage
mark and will not be given individual marks for each question. The mark allocation is there
to show you the weighting and length of each question.

Question 1: Preparing financial statements 50

TOTAL 50

Assignment instructions
Complete Question 1 in this document. Make sure you have read Modules 3 and 4 before
completing this assignment.

Note:

Make sure that you show all your workings within the assignment when calculations are
required.

Question 1
Your friend Tim runs his own retail business. At year-end, his accounting technician resigned
and after you told him about the course you are doing he has asked for your help in
completing his company’s financial statements for the year ended 31 December 2016.

Before the accounting technician resigned she had started preparing some of the financial
statements and left the following information behind for you to start with:

 The business is called Tim’s Trading and is a private company.

 The business’s accounting period is one year and runs from 1 January to 31
December each year.

 Tim accounts for inventory using the periodic method.

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  Tim has chosen to present all non-current at net carrying value on the face of the
Statement of Financial Position.

 Tim’s business prepares the Statement of Cash Flows using the direct method.

 The Statement of Cash Flows discloses Interest paid as a cash flow from financing
activities.

 Assume all sales and purchases are made on credit.

 In September Tim prepaid R87 000 rent. No other rent payments were made during
the year.

Before the accountant left she prepared the final post-closing trial balance for the year:

Post closing
DEBITS CREDITS
Balance sheet section
Fixed assets @ cost 1 200 000
Investments 300 000
Accumulated depreciation 840 000
Prepaid rent 21 000
Accounts receivable 88 000
Accrued service income 12 000
Inventory 90 000
Bank 289 480
Long term loan 250 000
SARS (Taxation liability) 92 000
Accrued expenses 4 200
Accounts payable 80 000
Share Capital 200 000
Retained income 534 280

Nominal accounts section

Telephone expense
Rent expense
Salaries expense
Depreciation expense
Interest expense
Taxation expense
Sales
Purchases
Bad debts expense
Service income
Consumables expense
2 000 480 2 000 480

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A small extract of the Statement of Financial Position as at 31 December 2015 is given
below:

Current assets 442 380

Prepaid rent 18 000
Accounts receivable 70 000
Accrued income 15 000
Inventory 75 000
Bank 264 380

Current liabilities 192 100

SARS (Taxation liability) 107 600
Accrued expenses 8 500
Accounts payable 76 000

In addition you have been provided with the Statement of Comprehensive Income for the
current year:

Statement of Comprehensive Income of Tim's Trading (Pty) Ltd as at 31 December 2016:

2016
Sales 760 000
Cost of sales (355 000)
Beginning inventory 75 000
Purchases 370 000
Closing inventory 90 000
Gross profit 405 000
Other income 30 000
Service income 30 000
Selling, admin & general expenses (336 000)
Salaries & wages expense (70 000)
Rent expense (84 000)
Consumables expense (15 000)
Depreciation (120 000)
Bad debts expense (30 000)
Telephone expense (17 000)
Profit before interest and tax 99 000
Interest expense (22 500)
Profit before tax 76 500
Tax expense (21 420)
Net profit 55 080
1.1 Prepare the Statement of Financial Position as at 31 December 2016 in the appropriate
format for Tim’s Trading (2015 is not required, only 2016). (Max. 25 lines)
(10 marks)

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 Start writing here:
Statement of financial position for Tim’s Trading as at 31 December 2016

Non-current assets 660 000

Equipment 660 000

Current assets 500 000

Prepaid rent 21 000
Accounts recievable 88 000
Accrued income 12 000
Inventory 90 000
Bank 289 000

Non-current liabilities 250 000

Long-term loan 250 000

Current liabilities 176 200

SARS (Taxation liability) 92 000
Accrued expenses 4 200
Account payable 80 000

Equity 734 280

Capital 200 000
Retained earnings 534 280

Total equity and liabilities 2 320 480

1.2 Prepare the following T-accounts for Tim’s Trading for the year ended 31 December
2016 using the information provided above. Use the templates provided below.
(15 marks)

Start writing here:

Accounts receivable
Beginning R70 000
balance
Sales on R760 000
credit
Service R30 000
Income
Bad Debt R30 000
exepnse
R860 000 R30 000
Balance: R830 000

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 Accounts payable
Beginning R76 000
Balance
Purchases R370 000
on credit

R0.00 R446 000

Balance: R446 000

Accrued income
Beginning R15 000
Balance
Service R30 000
Income

R45 000 R0.00

Balance: R45 000

SARS (Tax liability)

Beginning R107 600

Balance
R21 420
Tax Expense

R21 420 R107 600

Balance: R86 180

Accrued expenses (Liability)

Beginning
Balance R8500
Salaries &
wage R70 000
expens
Rent R84 000
Expense

Consumable R15 000

expenses

Telephone R17 000

expense

R0.00 R194 500

Balance: R194 500
1.3 Prepare the “Cash flows from operating activities” section of the Statement of Cash
Flows for the year ended 31 December 2016 for Tim’s Trading in the appropriate format
given below. Be sure to show all of your workings using the templates provided below.

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 (10 marks)

Start writing here:

Statement of Cash Flows of Tim's Trading (Pty) Ltd for the year ended December 31 2016:

Operating activities:
Receipts from customers
Payments to suppliers
Payments to employees
Income tax paid
Net cash flow from operating activities

Working 1: Receipts from customers:

Total

Working 2: Payments to suppliers:

Total

1.4 Would you expect the total “Cash flows from operating activities” to be different using
the direct method compared to the indirect method? Why or why not? (Max 2 lines)
(2 marks)

Start writing here:

1.5 Tim is interested in investing in some other companies. Advise him on the advantages
and disadvantages of purchasing preference shares versus ordinary shares in a company
from the perspective of an investor. List the advantages and disadvantages of investing
in preference shares.
(6 marks)

Complete your answer in the table provided below

Start writing here:

Advantages Disadvantages

Preference shareholders receive fixed There are no voting rights for

dividends well before ordinary shareholders prerence investors which means

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 receive money. preference shareholders can not
appoint the board of directors.

In the event of bankruptcy preference Higher cost than dept for issuing
shareholders have high claim on business company
aasets.

Add-on benefits for investors which gives

preference shaholders additioanal dividends
that are above fixed rate if the company meets
its predetermined profit targets.

1.6 Tim purchased some new computer equipment at the beginning of 2013 with a cost of
R40 000. The equipment has a residual value of R5 000, and Tim has elected to use the
declining balance (reducing balance) method for calculating the depreciation on the
equipment. The depreciation rate is 10% per year.

Furthermore, at the beginning of 2015 he purchased security equipment with a cost of

R80 000, a residual value of R10 000 and a useful life of 14 years.

What will the total carrying value of this equipment (computer and security) be at the
end of 2016? (Max. 8 lines)

(7 marks)

Start writing here:

Computer using Reducing balance method depreciation = (Operating balance caeeying

value) x Depreciation rate

Operating Rate Depreciation Closing

Carrying value Carrying

Year 1 (2013) R40000 X 10% (4000 -4000) R36000

Year 2 (2014) R36000 X 10% (36000-3600) R32400

Year 3 (2015) R32400 10% (32400-3240) R29160

Year 4 (2016) R29160 10% (29160-2916) R26244

Equipment using Straight line depreciation = (Cost -Residual value)/useful life

= (80000 – 10000)/14

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 = 5000

Therefore total carrying value for (computer and equipment) at end of 2016= R26244 +
R5000

= R31244

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