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SECONDARY SCHOOL IMPROVEMENT PROGRAMME

(SSIP) 2021

GRADE 12

SUBJECT: ACCOUNTING

LEARNER NOTES

SESSION 30 - 33

( page 1 of 132 pages )

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TABLE OF CONTENTS

SESSION TOPIC PAGE

Breakdown of paper one and paper two topics 3

Revision activities

30 Companies Financial Statements 4 - 49

 Income Statement
 Balance Sheet

Companies Financial Statements

 Cash flow Statement
31  Analysis and Interpretation of financial statements 50 - 90
Corporate Governance
Audit Reports
Budgets

32  Notes to content: Cash Budgets 91 - 119

 Illustrative Activities
 Exam questions

Reconciliations

33  Creditors 120- 132

 Debtors
 Debtors Age Analysis

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SUMMARY OF ACCOUNTING CONTENT ACROSS TWO PAPERS

Grade 12 Implementation date: 2020
GRADE 12: PAPER 1 GRADE 12: PAPER 2

Recording, Reporting and Evaluation of Financial Information & Corporate Manufacturing, Forecasting & Internal Auditing and Control
Governance
12.1.1 Concepts relating to companies 12.2.1 Analysis & interpretation of reconciliations: bank, debtors, creditors, age-analysis
12.1.2 Concepts relating to GAAP & IFRS 12.2.2 Value Added Tax - Input, Output & calculations
12.1.3 Unique ledger accounts of companies & interpretation thereof 12.2.3 Manufacturing concepts
Manufacturing: Production Cost Statement & Notes; Abridged (short-form) Income
12.1.4 Accounting equation of companies 12.2.4
Statement & Notes
12.1.5 Adjustments & final accounts of companies; Trial balances 12.2.5 Analysis & interpretation of cost information, unit costs & break-even point
12.1.6 Income Statement (Statement of Comprehensive Income) of companies 12.2.6 Analysis & interpretation of Cash Budget for sole traders and companies
12.1.7 Balance Sheet (Statement of Financial Position) & Notes of companies 12.2.7 Analysis & interpretation of Projected Income Statement for sole traders and companies
12.2.8 Application of internal control & audit processes: cash, fixed assets, inventories, debtors,
12.1.8 Cash Flow Statement of companies
creditors, income & expenses (including salaries/wages) & including financial indicators #
12.1.9 Analysis and interpretation of financial statements of companies * 12.2.9 Recording & control of fixed assets including depreciation & asset disposal
Analysis and interpretation of published financial statements & audit report of
12.1.10 12.2.10 Perpetual and periodic stock systems; valuation and control of inventories
companies
Valuation of fixed assets for reporting purposes including additions, depreciation
12.1.11 12.2.11 Ethical behaviour in financial environments
& disposal
12.1.12 Ethical behaviour and corporate governance in financial environments
12.1.13 Inventory valuation for reporting purposes (FIFO, WA & Specific Identification)
12.1.14 Professional bodies & Code of conduct
12.1.15 Legislation governing companies (overview only)
12.1.16 Close corporations (not examinable)

* Financial Indicators for Financial Reporting (Grade 12 Paper 1) # Financial Indicators for Internal Control (Grade 12 Paper 2)
Gross profit on sales; Gross profit on cost of sales; Net profit on sales; Operating expenses Profitability - Gross profit on cost of sales; Net profit on sales; Operating expenses on sales;
on sales; Operating profit on sales; Current ratio; Acid test ratio; Stock turnover rate; Stock Operating profit on sales
holding period; Average debtors’ collection period; Average creditors’ payment period; Liquidity - Stock turnover rate; Stock holding period; Average debtors’ collection period; Average
Solvency ratio; Debt equity ratio (gearing); Return on shareholders’ equity; Return on total creditors’ payment period
capital employed; Net asset value per share; Dividends per share; Earnings per share;
Dividend pay-out rate

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COMPANIES FINANCIAL STATEMENTS

SESSION 30
ILLUSTRATION: COMPLETION OF INCOME STATEMENT

ADAPTED FROM NCS NOVEMBER 2020 P1

QUESTION 1

REQUIRED:
1.1 Refer to INFORMATION B for fixed assets.
1.1.1 Calculate the missing amounts denoted by (i) to (iii) on the Fixed (11)
Asset Note
1.1.2 Calculate the Profit/Loss on the sale of equipment on 1 October 2020 (2)
1.2 Refer to INFORMATION B(e) for trading stock.
Calculate the trading stock deficit (4)

1.3 Prepare the Statement of Comprehensive Income for the financial year (43)
ended 28 February 2021.

INFORMATION:

A. Extract from the Pre-adjustment Trial Balance on 28 February 2021:

R
Mortgage loan: Sufi Bank 1 005 500
Debtors' control 123 000
Trading stock ?
Provision for bad debts (1 March 2020) 7 030
Sales ?
Cost of sales 6 966 000
Salaries and wages 1 468 120
Directors' fees 3 330 000
Audit fees 91 000
Repairs 476 000
Rent income 173 000
Interest income 25 000
Interest on loan ?
Bad debts 19 200
Advertising 25 680
Sundry expenses 452 310
Ordinary share dividends 86 400

The purpose of this activity is to demonstrate how the given adjustments will affect Financial
Statements (Income Statement and Balance Sheet)

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B Adjustments and additional information:

Fixed Assets:
Vehicles:
 The business owns two vehicles on 28 February 2021. The second vehicle was
purchased on 1 November 2020
 Vehicles are depreciated at 15% p.a. on cost
Equipment
 Depreciation is 20% p.a. on the diminishing balance method
 Unused equipment was sold for R40 000 on 1 October 2020. Accumulated
depreciation on the equipment sold was R36 600 on 1 March 2020.

Extract of the Fixed Asset Note:

Vehicles Equipment
Cost (1 March 2020) 460 000 360 000
Accumulated depreciation (1 March 2020) (396 750) (187 595)
Carrying Value ( 1 March 2020) (i) 172 405
Additions (at cost) 510 000 0
Disposals (at carrying value) 0 (iii)
Depreciation (ii) (31 281)
Carrying Value (28 February 2021)
Cost (28 February 2021) 970 000 285 000
Accumulated depreciation (28 February 2021)

Adjustment : A Calculation Financial statements

(i) Income statement
Calculate the Cost – Accumulated Depreciation =
carrying value Carrying Value No entry
Vehicles
460 000 - 396 750 = 63 250
Adjustment :A Calculation Financial statements
When calculating depreciation use this
(ii) method : SON Income statement
Calculate S O N Operating expense
Depreciation on Sold Old New Depreciation ( 63 249 +25 500)
Vehicles Classify your calculations
A B
OLD = 460 000 x 15% = 69 000
Carrying value is R63 250, therefore,
depreciation will exceed the carrying
value and the residual value of R1
must be taken into account.

Depreciation can only be R63 250 – R1 =

63 249 A
4
NEW = 510 000 x 15% x 12 = R25 500 B

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Adjustment Calculation Financial statements

(iii) Depreciation: 20% at carrying value
Calculate Income statement
Disposal at STEP 1 - Determine the cost price of equipment Operating expense
carrying sold Depreciation
120 030
value 360 000 – 285 000 = 75 000 (63 249 + 25 500 + 31 281)
(Equipment) STEP 2- Calculate current depreciation at 20%
on carrying value
75 000 – 36 600 = 38 400 X 20% x 7/12 = 4 480

Depreciation for the year is given in note 3 is Income statement

R31 281 (this already include R4 480) Other operating income
Profit on sale of asset #6 080
Cost price – accumulated depreciation = carrying value

75 000 - 41 080 = 33 920

OR
75 000 – [38 400 + 4480] = 33 920
OR
75 000 –38 400 – 4480 = 33 920
ASSET DISPOSAL
Equip (360 000 – 285 0000) 75 000 Acc depr (36 600 + 4 480) 41 080
Profit on sale of asset # 6 080 Bank 40 000

81 080 81 080
Adjustment : B Calculation Financial statements

The business Calculate Sales and Gross profit Income statement

maintains a mark-up Sales 14 677 200
of 120% on cost. STEP 1 – use the UK method to Cost of sales (6 966 000)
Note that trade calculate the sales figure. Gross profit 7 711 200
discounts of
R648 000 were 𝒌𝒏𝒐𝒘𝒏
𝒖𝒏𝒌𝒏𝒐𝒘𝒏
x Known Figure = Unknown
granted to special
customers
Remember !!!
Cost = 100%
Mark Up = 120%
Selling Price = 220%
𝟐𝟐𝟎 𝟔 𝟗𝟔𝟔 𝟎𝟎𝟎 Sales – cost of sales =
x= = 15 325 200 Gross profit
𝟏𝟎𝟎
14 677 200 - 6 966 000 =
Sales amount before allowing trade 7 711 200
discount
STEP 2 : subtract trade discount
R15 325 200 - R648 000 =
14 677 200

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Adjustment : C Calculation Financial statements

The account of Income Statement

debtor B Melta, Operating Expenses
R800, must be A bad debt written off of R800 is added Bad debts (19 200 + 800) 20 000
written off in the Income Statement and deducted
in the Balance sheet.
Balance Sheet note
Trade and Other Receivable (Note 5)
Debtors control 122 200
(123 000 - 800 )

Adjustment : D Calculation Financial statements

Provision for bad When you provide for bade debts

debts must be always start from NOTE 5
adjusted to 5% of
Trade and Other Receivable Balance Sheet note
outstanding (Note 5) Trade and Other Receivable (Note 5)
debtors. Debtors control (123 000 – 800) 122 200
Debtors control 122 200
(123 000 – 800)
5 Provision for bad debts (6 110)
R122 200 x 100 = R6 110
Net Trade Debtors 116 090
In the Income statement record either
Income Statement
an increase or decrease Operating Operating Income
 Increase is an expense Provision for bad debts 920
 Decrease is income adjustments (7 030 – 6 110)

To determine increase or decrease

compare :
current year VS previous year

Current year = R6 110

Previous year = R7 030 ( from Trial Bal)
Decrease R 920
R920 is sclassified as operating income

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ADJUSTMENT (e) Information:

Trading stock is valued on the weighted-average method. The Ledger Account
and records reflect that 280 units should be on hand. However, the physical stock
count reflects only 262 units on hand.

The stock records are as follows:

UNITS UNIT PRICE TOTAL
Stock at beginning of year 200 R3 600 R720 000
Purchased during the year 1 840 R4 100 R7 544 000
Returns: damaged units 40 R4 100 R164 000
Available for sale 2 000 R8 100 000
Stock units per records 280 ? ?

Extract from Pre-adjustment Trial Balance on 28 February 2021:

Cost of sales R6 966 000

Adjustment : Calculation Financial statements

(e)
Calculate the trading stock deficit

STEP 1:
Calculate the average price:
Opening stock + purchases – returns =
Total purchases

720 000 + 7544 000 – 164 000 = 8 100 000

𝑅8 100 000
Income Statement
= R4 050 per unit Operating Expenses
2 000 𝑢𝑛𝑖𝑡𝑠
Trading stock deficit 72 900
200+1 840 - 40 = 2 000 units available for sale

STEP 2:
Calculate the number of units’ missing:
Stock according to records – stock
physically counted
280 – 262 =18 missing units

18 x R4 050 = 72 900

Average price Balance Sheet note 4

Trading Inventory
262 x R4 050 = R1 061 100 Trading stock 1 061 100

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Adjustment : (f) Calculation Financial statements

30% of the audit fees is still Use the UK method: Income Statement
outstanding. Operating Expenses
𝒌𝒏𝒐𝒘𝒏 130 000
x Known Figure = Unknown Audit fees
𝒖𝒏𝒌𝒏𝒐𝒘𝒏
TRIAL BALANCE (91 000 + 39 000)
Audit fees R91 000 30% = ?
70% = R91 000
100% = ? Balance Sheet note
Trade and other Payables
𝟑𝟎 𝟗𝟏 𝟎𝟎𝟎 (note 9)
𝟕𝟎
x= = R39 000
Creditors control xxxxx
(outstanding amount)
Accrued expense 39 000
OR
𝟏𝟎𝟎 𝟗𝟏 𝟎𝟎𝟎
𝟕𝟎
x= = R130 000 (full amount)

Adjustment : (g) Calculation Financial statements

The monthly rent income R173 000 + R9 000 = 182 000
did not change during the Income Statement
year. During February ADD the amount for repairs done by Other operating income
2021 the tenant paid the tenant. Rent income 130 000
R9 000 for repairs to the  Rent is paid in advance including (173 000 + 9 000 – 14 000)
premises and deducted March rent
this from his rent for  Total rent = 13 months Operating Expenses
Repairs 485 000
February 2021. Repairs (476 000+ 9 000)
𝟏𝟖𝟐 𝟎𝟎𝟎
are the responsibility of the 𝟏𝟑
= 14 000 rent per month
company, and this was not
recorded. The rent for NOTE: The amount for repairs (R9 000) paid
Balance Sheet note 9
March 2021 was received by the tenant is added to the rent income .
R9 000 will also be added under operating Trade and Other Payables
in advance expenses to balance th e transaction. Creditors control xxxxx
Income received in 14 000
Trial Balance advance
Rent income R173 000 The actual amount (cash )received by
+ the business is:
 (14000 x 12 ) + (14 000 – 9 000)
= 173 000
 9 000 is added because repairs are
the responsibility of the business.

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Adjustment : (h) Calculation Financial statements

The company has four 2x12 = 24 ( two directors have been in full)
directors earning the same 1 x 3 = 3 (One director has resigned) Income Statement
fee. One director resigned 1x 10=10 (One director is owed for 2 months) Operating expenses
on 31 May 2020 and 37 total number of months Directors fees 3 510 000
received his fees up to NOTE
date. Another director is (3 330 000 + 180 000)
 Number of fees is 37 000
still owed fees for January
and February 2021.  Total paid 3 330 000
 The company owes one director
for two months
Trial Balance
Directors fees 3 330 000 Monthly directors fee is:
3 330 000 Balance Sheet note
37
= R90 000 per month Trade and other payables
(NOTE 9)
90 000 x 2 = 180 000 Creditors control xxxxx
directors fees outstanding ( accrued expense) Accrued expense 180 000
OR

Use the UK method

𝟐
𝟑𝟕
x 3 330 000 = 180 000

OR

𝟑𝟗
x 3 330 000 = 3 510 000
𝟑𝟕

Adjustment : (i) Calculation Financial statements

Advertising consists of a 240 x 3 months ( Nov, Dec and Jan)
contract with a newspaper = R720 Income Statement
for the entire financial year Other operating income
Payments are monthly, 25 680 + 720 = 26 400 Advertising 27 840
however instalments were (25 680 + 2 160)
paid for 11 months only. 26 400
= 2 400
11
NOTE: The monthly rate
decreased by R240 from 1 Balance Sheet note 9
2400 - 240 = 2 160
November 2020. Trade and other payables
Creditors control xxxxx
reduced amount 2 160
Trial Balance Accrued expense
Advertising R25 680 R2 160 is accrued expense

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Adjustment : (i) Calculation Financial statements

The net profit after tax was
correctly calculated as Income Statement
R1 054 000. The income Net profit before tax =100% Net profit before tax 1 550 000
tax rate is at 32% Income tax = 32% Income tax (496 000)
Net profit after tax = 68% Net profit after tax 1 054 000
is R1 054 000

Use the UK method

Net profit before tax

100
68
x R1 054 000 = 1 550 000

Income tax
𝟑𝟐
𝟔𝟖
x R1 054 000 = 496 000

OR

Net profit before tax (1054 000)

Net profit after tax 1 550 000
Income tax 496 000

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1.3 STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED

28 FEBRUARY 2021

Sales 15 325 200  – 648 000 

14 677 200 *
6 966 000 x 2,2
Cost of sales (6 966 000)
Gross profit 6 966 000 x 1,2 – 648 000 5 7 711 200 
Other income 175 000 
Profit on sale of asset* (loss in operating expenses) 6 080 *
Provision for bad debts adj. 7 030 – 6 110 920 *
Rent income 173 000+ 9 000  – 14 000  168 000 *
182 000 two marks - 5 000 three marks
Gross operating profit 10 7 886 200 
Operating expenses (6 286 200) 
Salaries and wages 1 468 120
Depreciation 31 281 + 88 749  see 1.1 120 030 *
Trading stock deficit see 1.2 72 900 
Bad debts 19 200 + 800 one mark each 20 000 *
Audit fees 91 000  + 39 000  or ÷ 0,7 or x 100/70 130 000 *
Directors' fees 3 330 000 + 180 000  or 39/37 3 510 000 *
Repairs 476 000  + 9 000  485 000 
(2 400 – 240) two marks
Advertising 25 680  + 2 160  27 840 *
Sundry expenses 452 310
Operating profit 22 1 600 000 
Interest income 25 000 
Profit before interest expense 1 625 000 
Interest expense Profit before interest expense – NPBT (75 000) 
Net profit before tax 1 054 000 + Income tax 1 550 000 
Income tax for the year (496 000) 

Net profit after tax 6 1 054 000

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ACTIVITY 1 : NSC MAY/JUNE 2 2019

MVVS LTD
The information relates to the financial year ended 31 March 2019.
REQUIRED:
1.1 Complete the Statement of Comprehensive Income (Income Statement) for the year ended 31
March 2019.
1.2 Complete the following notes to the Balance Sheet:
 Fixed/Tangible Asset Note
 Ordinary share capital
INFORMATION:

Figures extracted from the Pre-adjustment Trial Balances on 31 March:

2019 2018
Ordinary share capital R 9 300 000 R 4 800 000
Mortgage loan: Sapphire Bank 1 430 200 1 658 000
Land and buildings 12 500 000 12 500 000
Vehicles 1 377 000 750 000
Equipment ? 398 000
Accumulated depreciation on vehicles ? 475 000
Accumulated depreciation on equipment ? 117 500
Provision for bad debts ? 30 100
Trading stock 364 200
Debtors' control 578 000
Sales 10 563 280
Cost of sales 6 236 000
Rent income 99 500
Directors' fees 1 262 100
Water and electricity 218 000
Telephone 75 600
Audit fees 104 000
Sundry expenses 61 001
Salaries and wages 1 280 000
Employer's contributions (medical, pension and UIF) 316 000
Bad debts 22 300
Consumable stores 53 200
Interest income ?
Insurance 79 500
Depreciation (on equipment sold) 1 750
Interest on loan ?
Bad debts recovered 6 000
Ordinary share dividends (interim) 375 000

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ADJUSTMENTS AND ADDITIONAL INFORMATION:

A. A credit invoice for R36 720 (after deducting a 10% trade discount) issued on 31 March
2019, was not recorded. Goods are marked up at 70% on cost.
The physical stock count on 31 March 2019 revealed the following on hand:
B.
 Trading stock, R334 500
 Consumable stores, R3 400

C. Debtor S Magnum was declared insolvent. His estate paid R2 000, which was 20% of his
debt. The difference must be written off as a bad debt.

R1 800 was received from a debtor, J Misting, whose debt had previously been written
D.
off. The bookkeeper incorrectly credited the amount to the Debtors' Control Account.
Correct the error.

E. Adjust the provision for bad debts to R28 500.

Insurance includes an annual premium of R51 000 paid for the period 1 January 2019 to
F.
31 December 2019.

An employee was left out of the Salaries Journal for March 2019. The following details
G.
are applicable:
 Net salary of the employee, R9 100
 The deductions by the employer totalled 30% of the gross salary
 Employer's contributions were R2 200

H. Interest on loan is capitalised. A fixed monthly repayment (including interest) of

R25 400 was paid for the financial year.

I. Fixed assets and depreciation:

(i) Vehicles:

 Details for the three vehicles are as follows:

Accumulated depreciation
Cost price Date purchased
31 March 2018
1 R350 000 R315 000 1 October 2013
2 R400 000 R160 000 1 April 2016
3 R627 000 30 November
2018

 Vehicles are depreciated at 20% p.a. on cost.

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(ii) Equipment:

 Equipment was sold for R9 600 cash on 31 August 2018. Only the following
entries in respect of this sale were processed:

Cost price 28 000

Accumulated depreciation at the date of disposal 21 500
Depreciation for the current financial year 1 750

 Depreciation on the remaining equipment is calculated at R92 500 after

taking all of the above into account.

J. Interest income is the missing figure in the Income Statement.

K. Income tax is calculated at 28% of the net profit. The net profit before tax was
R691 000.

L. Shares and dividends:

 The company has an authorised share capital of 8 000 000 shares.

 The company had 1 200 000 shares in issue on 1 April 2018.
 150 000 shares were repurchased on 30 November 2018. EFT payments totalling
R825 000 were made for these shares.
 850 000 additional shares were issued on 30 December 2018.

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ACTIVITY 1 : MVVS LTD

1.1 Statement of Comprehensive Income (Income Statement) for the year ended
31 March 2019

Sales
Cost of sales
Gross profit
Plus operating income
Rent Income 99 500

Gross operating income

Operating expenses
Directors fees 1 262 100
Water and electricity 208 000
Telephone 75 600
Audit fees 104 000
Sundry expenses 61 001

Operating profit
Plus Interest income
Profit before interest expenses
Minus Interest expenses
Net profit before taxation 691 000
Income tax
Net profit after taxation

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ACTIVITY 2 : FINANCIAL STATEMENTS : ADAPTED FROM FREE STATE PRELIM 2019

You are provided with information from the records of Moonlight Ltd for the financial year
ended 28 February 2019.

REQUIRED:
2.1 Refer to Information D

2.1.1 Calculate the profit or loss on disposal of the computer on 31 August 2019. (6)

2.1.2 Calculate the total depreciation for the year. (9)

2.1.3 Suggest ONE internal control measure that the internal auditor can perform
to verify the tangible assets figure in the Balance Sheet. (2)

2.2 Complete the Income Statement (Statement of Comprehensive Income) for the year
ended 28 February 2019. (40)

2.3 Prepare the Retained income note on 28 February 2019. (10)

INFORMATION:
A. The following balances/totals, amongst others, appeared in the books on 28 February 2019:

R
Retained income 765 000
Loan: Derby Bank 2 110 000
Vehicles 1 520 000
Equipment 660 000
Accumulated depreciation on vehicles (1 March 2018) 484 500
Accumulated depreciation on equipment (1 March 2018) 178 000
Trading stock 1 287 000
Provision for bad debts (1 March 2018) 10 200
Sales ?
Cost of sales 7 540 000
Rent income 158 200
Directors fees 932 400
Audit fees 64 000
Salaries and wages 320 000
Insurance 56 250
Commission income 31 580
Bad debts 2 779
Interest expenses ?
Interest income ?
Sundry expenses 187 640

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B. Adjustments and additional information

(i) Goods are sold at a mark-up of 60% on cost price.

(ii) A credit note for the return of merchandise sold for R12 480 was omitted from the
Debtors Allowances Journal on the
15 February 2019. The goods were taken into stock, but no entries were made.

(iii) Stock, costing R37 500 was stolen. The insurance company has agreed to pay out
an amount of R26 250 which is still receivable.

(iv) Stocktaking on 28 February 2019 reflected trading stock of R1 234 800 on

hand.

(v) An EFT for R10 150 was received from the trustee of a debtor who was declared
insolvent. This represented a dividend of 40 cents in the Rand. The balance must be
written off as bad debt.

(vi) Provision for bad debts must be decreased to R9 700.

(vii) The rent for February 2019 was still outstanding. The rent was increased by 10% on
1 November 2018.

(viii) Income tax is calculated at 25% of the net profit.

C. The loan statement received from Derby Bank on 28 February 2019 reflected the following:

R
Balance at the beginning of the financial year 2 620 000
Repayments during the year (including interest) 510 000
Interest capitalised ?
Balance at the end of the financial year 2 398 200

D. Fixed Assets

 Included in the vehicle account is R950 000 for a delivery van which was purchased on
the 1 December 2018.
Vehicles are depreciated at 20% p.a. on cost.

 On 31 August 2018, a computer was taken over by Paul Cluver one of the directors, for
personal use for R8 000 cash. The relevant page from the Fixed Asset Register is
provided below. No entries have been made in respect of the disposal of this asset.

Equipment is depreciated at 20% p.a. on the diminishing balance method.

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FIXED ASSET REGISTER

Page 22
Item: Aider computer
Date purchased: 1 June 2015 Cost price: R30 000
Depreciation policy: 20% on diminishing method
CURRENT ACCUMULATED
DATE
DEPRECIATION DEPRECIATION
28 February 2016 R4 500 R4 500
28 February 2017 R5 100 R9 600
28 February 2018 R4 080 R13 680
31 August 2018 ? ?

E. SHARE CAPITAL

On 28 February 2019 the company repurchased 125 000 shares at R0,50 above the average
share price. Shareholders qualify for final dividends.

The share capital after the share buy-back consisted of 1 375 000 ordinary shares.

An interim dividend of R982 500 was paid on 1 September 2018.

A final dividend of 80 cents per share was declared on 28 February 2019.

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ANSWER BOOK : ACTIVITY 2

2.1.1 Calculate the profit or loss on disposal of the computer on

31 August 2019.

2.1.2 Calculate the total depreciation for the year.

9
2.1.3 Suggest ONE internal control measure that the internal auditor can
perform to verify the tangible assets figure in the Balance Sheet.

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2.2 INCOME STATEMENT FOR THE YEAR ENDED 28 FEBRUARY 2019

Sale
Cost of sales
Gross profit
Other operating income
Commission income 31 580
Rent income 158 200

Gross operating profit

Operating expenses
Director's fees 932 400
Audit fees 64 000
Salaries and wages 320 000

Operating profit

Profit before interest expense

Net profit for the year 2 040 000

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CORRECTION OF NET PROFIT

EXAMPLE : Aapted from 2020 Gauteng Prelim paper one
1.2 TWO-WAY LIMITED
REQUIRED:
1.2.1 Refer to INFORMATION E AND Calculate the net profit after tax (12)
INFORMATION
The following figures were extracted from the accounting records at the end of
the financial year on 29 February 2020.

A The following figures were extracted from the accounting records at the end
of the financial year on 29 February 2020.

Ordinary share capital ?

Retained income (29 February 2020) 805 140
Fixed assets (at carrying value on 29 February 2020) 5 180 652
Loan: Canara Bank (29 February 2020) 622 800
Fixed deposit: Fargo Bank (1 March 2019) 504 000
Bank (Dr) ?
Creditors’ control ?
Debtors’ control 64 800
Inventory 757 800
Provision for bad debts 3 420
SARS: Income tax (Provisional tax payments) 524 520

D. The loan statement received from Canara bank showed the following:

Opening balance (01/03/19) R 846 000

Repayment during the year (interest included) 223 200
Closing balance (29/02/20) 709 200

 Provide for interest on loan.

 The capital repayment of the loan will remain the same as the previous financial year.

E. The net profit was R1 810 404 before the following adjustments were taken into
consideration.
1. Interest on fixed deposit is earned at 10% per annum and is not capitalised. No
interest has been received. 40% of the fixed deposit will mature on 30 June 2020.
2. Interest on the loan was also not taken into consideration. Interest on the loan is
capitalised.
3. Provision for bad debts must be adjusted to 5% of the outstanding debtors.
4. Rent income received amounted to R94 608. It included the rent for March and April
2020. The rent was increased by 15% on 1 January 2020.

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5. Trading stock, R25 200 was damaged by a storm during the year. The insurance
company accepted the claim and will cover 70% of the claim. The insurance claim
will be processed during May 2020.
6. Insurance included an annual policy of R15 120 paid on 1 August 2019.
7. Directors fees of R9 000 were still outstanding on 29 February 2020.
8. Income tax for the year amounted to R483 120

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CALCULATE THE CORRECT NET PROFIT AFTER TAX

Net profit as per profit and loss 1 810 404
Interest on fixed deposit 504 000 X 10% = 50 400.
50 400
This is interest income which has not yet been received - ADD
Provision for bad debts adjustments 64 800 x 5% = 3 240 (2020)
180
3 420 – 3 240 =180 provision reduced ADD difference ( income )
100 X 10 = 1000 𝟐𝟑𝟎
94 608 x 𝟏𝟒𝟔𝟎 = 14 904
Rent income (14 904) 115 X 4 = 460
1 460
70% will be covered by the Insurance company
Loss of stock (7 560) 30% loss to the company
25 200 x 30% = 7 560
𝟓
15 120 x 𝟏𝟐 = 6 300
Insurance 6 300 Prepaid expense included which had decreased the net profit therefore
we ADD it back
Directors’ fees (9 000) SUBTRACT Directors fees ,this expense was not deducted
Interest expense
(86 400) Check calculations below :
(709 200 + 223 200 – 846 000)
Taxation (483 120) SUBTRACT Taxation ,it is an expense
Correct net profit after tax 1 266 300

Opening – closing balance = loan repayment

846 000 – 709 200 = 136 800 Capital (loan ) repayment
223 200 -136 800 = 86 400 (Capital and interest repayment LESS capital repayment = Interest exense )

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ACTIVITY 1: CALCULATION OF CORRECT NET PROFIT AFTER TAX

ADAPTED FROM (KZN 2019 PRELIM)

WESTVILLE LTD

The following information relates to Westville Ltd. The financial year ended
28 February 2019.

REQUIRED:

1.2 Calculate the correct Net Profit after tax for the financial year ended
28 February 2019. (19)

INFORMATION:

A. The following items appeared in the Pre-Adjustment Trial Balance on

28 February 2019:
Ordinary share capital (180 000 shares) 28 February 2019 R 909 000
Retained income (4 December 2018) 130 000
Loan: M.G.M Bank 1 140 000
Fixed asset at carrying value ?
Fixed deposit 700 000
SARS: Income Tax (Provisional tax payment) (Dr) 267 000
Creditors control 43 000
Debtors control 44 800
Provision for bad debts 1 700
Trading stock 92 400
Consumable stores on hand (Packing material) 12 000
Bank overdraft 5 000
Petty cash 1 500

B. On 4 December 2018, the directors approved the repurchase of 20 000

shares at R9.00 each. This transaction was properly recorded.

C. The net profit before tax was incorrectly calculated as R1 449 200.

D. The following information was not taken into account:

(i) The director’s fees of R625 000 was paid to two directors.
One of the two directors requested his fees for March 2019 be paid
in February 2019, due to financial problems. All two directors
receive the same monthly salary.

(ii) 80% of the packing material were used during the financial year.

(iii) A debtor B. Zulu, who owes R1 200, has been declared insolvent
his estate paid R480. This amount was received and not recorded.
Write off the balance.

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(iv) Rent income of R177 600 was received for 14 months. The rent
was increased on 1 September 2018 by 10%.

(v) An interim dividend of R55 820 was paid on 1 September 2018, but
was debited incorrectly to the salaries account.

(vi) A debtor with a credit balance of R1 000 on 28 February 2019 must

be transferred to the Creditors ledger.

(vii) The loan statement from KZN Bank reflected the following:
Balance at beginning of financial year R 1 500 000
Repayment during the year (was recorded) ?
Interest capitalised 157 500
Balance at the end of financial year 1 140 000

The capital portion of the repayment of the loan for the next financial
year remains the same as the current financial year.

(viii) Outstanding EFT’s on the Bank Reconciliation Statement on

28 February 2019 included:

EFT No. Date of Name of Reason for Amount

EFT payee EFT
401 21 Feb 2019 BB Stores On R3 000
account

(ix) Income tax amount to R255 000 and is equal to 30% of the net profit
before tax.

(x) A final dividend of 75 cents per share was declared on 28 February

2019.

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ACTIVITY 1 : ANSWER BOOK

1.2 Net profit before tax 1 449 200

Operating profit before interest expense

Interest expense

Net profit before tax

Income tax

Net profit after tax 19

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ACTIVITY 2 : CALCULATION OF CORRECT NET PROFIT AFTER TAX

ADAPTED FROM NC PRELIM 2017

The information relates to ENG Limited for the financial year ended 30 June 2017.

REQUIRED:

2.1 Calculate the correct NET PROFIT AFTER TAX for the financial year
ended 30 June 2017. (12)

INFORMATION:

A The following items appeared in the Pre-adjustment Trial Balance on 30 June 2017:

R
Ordinary share capital ?
Retained income (4 January 2017) 126 100
Loan: TG Bank 72 400
Fixed Assets at carrying value ?
SARS (Income tax) Dr 108 000
SARS (PAYE) Cr 5 800
Creditors for salaries 13 000
Debtors’ Control 34 000
Provision for bad debts 1 900
Consumable Stores on hand (packing material) 12 000
Trading stock 98 000
Creditors' control 23 700
Bank overdraft 3 400
Petty cash 300

B The net profit before tax was incorrectly calculated as R324 000.
C The following information were not taken into account by the bookkeeper:
(i) The directors fees of R21 000 and audit fees of R5 000 for June 2017 were not paid
yet.
(ii) Stock to the value of R5 600 was destroyed in a fire. The insurance company
agreed to pay R4 800.
(iii) 80% of the packing material were used during the financial year
(iv) According to the loan agreement an instalment of R20 000 and interest, will be paid
annually to TG Bank. The bookkeeper correctly recorded the amount paid to TG
Bank on 30 June 2017 as follows:

Debit: Loan: TG Bank R37 600

Credit: Bank R37 600

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(v) Outstanding EFTs on the Bank Reconciliation Statement on 30 June 2017 include:
Name of Reason for
EFT no. Date of EFT Amount
payee EFT
362 24 June 2017 Eskom Electricity R2 400
375 25 July 2017 Waytons On account R1 500
(vi) An interim dividend of R30 000 was paid on 1 December 2016, but was debited
incorrectly to the salaries account.
(vii) Debtors with credit balances totalling R700 on 30 June 2017 must be transferred
to the Creditors’ Ledger.
(viii) Provide for income tax at 28% of the net profit.
(ix) SHARE CAPITAL : (all entries were recorded)
 The company is registered with an authorized share capital of 600 000 ordinary
shares.
 On 1 July 2016, 125 000 shares were in issue. The average share price at this
time was R4,00.
 On 25 September 2016, the company issued an additional 75 000 shares at
R6,80 each.
 On 4 January 2017, the directors approved the repurchase of 20 000 shares at
R9,00 each.
(x) FINAL DIVIDENDS:
 A final dividend of 75 cent per share was declared on 30 June 2017.
 Only shares in issue on 30 June 2017 qualified for these dividends.

ACTIVITY 2
2.1
Calculate the correct NET PROFIT AFTER TAX for the year ended
30 June 2017.
Incorrect profit before tax R324 000

12

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ILLUSTRATATIVE ACTIVITY ON THE BALANCE SHEET: Adapted NOV 2019 NSC

1.1
HOW TO START: EXPLANATIONS AND CALCULATIONS
 Complete the format of the Balance Sheet If you know the format of the Balance Sheet,
 Record the given figures on the Balance sheet then you know where to record the figures.
 Show all calculations for part marks

1.2 VISIV LTD

The financial year ended on 28 February 2021. Draw a time line

1 Mar 2020 28 Feb2021

REQUIRED: The timeline ensure that the entries for the

year are compliant to the matching concept

1.2.1 Calculate:

 Amounts for (i) and (ii) in the Fixed  Know your asset register format
Assets Register (5)
 Profit/Loss on sale of asset (2)  Know your asset disposal account
 Fixed assets carrying value on 28  Carrying value of all fixed assets is
February 2021 (4) recorded on the face of the balance sheet.

1.2.2 Calculate the correct net profit after tax for  Remember that the calculation is about the
the year ended 28 February 2021. Indicate correct net profit.[being a credit entry and
(+) for increase and (–) for decrease. (9) that will help you to indicate a (+) or (-)]

1.2.3 Refer to Information A–H. Prepare the

following on 28 February 2021:

 Retained Income Note  Format: RI +NP after tax- buy back-

(9)
dividends = RI at end
 Statement of Financial Position  Know that the balance sheet consists of
(Balance Sheet). (27) Or

A = OE + L
What you own = what you owe
NOTE:
What you have done Where did the money
Always show workings, with the money = come from?

certain figures are

sometimes provided on
the ANSWER BOOK.

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INFORMATION:
A. Fixed assets:
Know the DISPOSAL steps:
A delivery vehicle was sold on 31 October 2020 but no 1.Transfer cost price: R400 000
entries were made to record this transaction. 2. Additional depr for 8/12 at CV
3.Transfer total depreciation
Details of vehicle sold: 4.Record selling price R195 000
5.Calculate profit or the loss on sale

Delivery Vehicle X43 Year one: Feb 2019

Date purchased: 1 March 2018 400 000 – 0 = 400 0000 x 25%=100 000
Date sold: 31 October 2020
Year two: Feb 2020
Sold for: R195 000 (cash) 400 000-100 000=300 0000 x25%=75 000
Depreciation rate: 25% p.a. carrying
value/diminishing-balance method) Sold on 31 Oct (8 months)
DEPRECIATION CARRYING 400 000 -175 000=225 000
COST
VALUE 225 000 x 25% x 8/12=37 500
28 February 2019 R400 000 R100 000 R300 000 (ii) Asset disposal
28 February 2020 75 000 225 000 Vehicle 400 000 Acc depr 212 500
31 October 2020 (i) (ii) (175 000+37 500)
400 000 – 213 500 = 187 500 OR
225 000 – 37 500 =187 500
B. List of balances/totals on 28 February 2021 (before
taking into account all adjustments below):
 Record all these figures on the balance sheet
Ordinary share capital R8 152 000  (remember: when the trade and other
Retained income (1 March 2020) 865 300 payables is not required, record
Mortgage loan: Prati Bank 1 758 000 Shareholders for dividends and
Fixed assets (carrying value) 10 190 000 SARS(income tax) separately on the face of
Fixed deposit: Prati Bank (balancing figure) ? Balance sheet)
Trading stock 1 102 000
Net trade debtors 1 090 000
Bank (favourable) ?
SARS: Income tax (provisional tax payments) 155 000
Creditors' control 1 906 800

C. Net profit before tax, R822 700, was calculated before

correcting the following:

 Provision for bad debts must be increased by R65 000.  Will an expense increase or decrease the net
profit? If the provision increases, is the
difference, an expense or an income?

 R9 800 of an advertising contract applies to the next  Expenses prepaid is subtracted from Income
financial year. statement (operating expenses) of the
current year

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 A tenant paid rent of R334 000 for the period  One month rent received in advance is
1 March 2020 to 31 March 2021. Rent was increased deducted from Income statement
by R3 000 per month from 1 January 2021.
 And: Do we have an Income received in
1 2 3 4 5 6 7 8 9 10 11 12 13 advance amount/ deferred income?
m a m j j a s o n d j f m R334 000 – prepaid = original rent income amount
? ? ? ? ? ? ? ? ? ? +3000 +3000 +3000
for 13 months

334 000 –9000 = 325 000 for 13 months

325 000
13 𝑚𝑜𝑛𝑡ℎ𝑠
= 25 000 original rent before increase

Therefore: The income received in advance is

25 000 + 3 000 =28 000

 Depreciation and profit/loss on the vehicle sold must be Asset disposal

recorded. Vehicle 400 000 Acc depr 212 500
(175 000+37 500)
Profit? Bank 195 000
Or loss?

212 500+195 000 – 400 000 =7 500

 A further R43 000 is owed for income tax.  Does income tax increase or decrease
the net profit?

D. Ordinary shares:  Know your format of note 7:

 Opening b/d: 2 000 000 @ R7 600 000
DATE DETAILS 7 600 000
 Average price: 2 000 000 =R3,80
1 March 2020 2 000 000 shares in issue; total
book value R7 600 000  Buy back 360 000 @ R?
31 May 2020 360 000 shares repurchased at  [ R4,10 – 3,80 = will be paid from
R4,10 each Retained income]
1 October 2020 800 000 new shares issued  800 000 New shares issued @R?
28 February 2021 2 440 000 shares in issue  Closing b/d 2 440 000 @ R? see given
balances : R8 152 000

E. Dividends:
 Interim dividends were paid in September 2020, R295 Interim dividends: R295 200
200. Final dividends:
 Final dividends of 20c per share were declared on 2 440 000 shares x 0,20 = ?
28 February 2021.

F. A creditor with a debit balance of R7 600 must be transferred

to the Debtors' Ledger. + Debtors control - - Creditors control +
b/d b/d
1 090 000 1 906 800
7 600 7 600
+75 000

G. A cheque for R75 000, dated 30 April 2021, was issued to a Cheques are no longer in use and therefore
supplier in February. CHANGED TO ‘The balance of the this entry will be changed to keep the memo
creditors control was under cast by R75 000’ the same

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H. After processing all adjustments: Whenever ratios are given, it means that
figures are missing and you have to use the
 The current ratio is 0,8 : 1. ratio to find the missing figures.
 The current liabilities totalled R2 900 000.
 The current portion of the loan is the balancing figure. Current ratio: current asset : current liabilities
…. ? ….. :2 900 000
0,8 : 1
Calculation:
𝑢𝑛𝑘𝑛𝑜𝑤𝑛 𝑈
𝑘𝑛𝑜𝑤𝑛
abbreviated to 𝐾

0,8
2 900 000 x = 2 320 000 (Current assets)
1

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ILLUSTRATIVE ACTIVITY ON BALANCE SHEET Adapted NSC NOV 2019

ANSWER SHEET

1.2.1 (i) Calculate: Depreciation for the current year

Workings Answer

(ii) Calculate: Carrying value of vehicle sold

Workings Answer

5
Calculate: Profit/Loss on sale of asset
Workings Answer

2
Calculate: Fixed assets carrying value on 28 February 2021
Workings Answer

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1.2.2 Calculate the correct net profit after tax for the year ended
28 February 2021. Indicate (+) for increase and (–) for decrease.
Workings Answer

Incorrect net profit before tax 822 700

Correct net profit after tax 9

1.2.3 RETAINED INCOME NOTE:

Balance at beginning 865 300

- Ordinary share dividends

= Balance at end 9

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VISIV LTD:STATEMENT OF FINANCIAL POSITION (BALANCE SHEET)

ON 28 FEBRUARY 2021
ASSETS
Non-current assets

Fixed assets

Fixed deposit
0,8
Current assets 2 900 000 x =Current assets
1
Inventories 1 102 000

Cash and cash equivalents

TOTAL ASSETS

Ordinary shareholders' equity

Ordinary share capital 8 152 000

Non-current liabilities

Current liabilities 2 900 000

Current portion of loan

TOTAL EQUITY AND LIABILITIES 27

[13 of 27 marks are method marks.

Calculate all AMOUNTS to achieve the method marks]

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SOLUTION OF ILLUSTRATIVE ACTIVITY Adapted NOV NSC 2019

1.2 VISIV LTD

1.2.1 (i) Calculate: Depreciation for the current year

Workings Answer
One part correct
225 000  X 25% X 8/12 37 500 

(ii) Calculate: Carrying value of vehicle sold

Workings Answer
  Two marks
225 000 – 37 500 see (i) above 187 500
100 000 + 75 000 + 37 500
OR 400 000 – 212 500 = 187 500
5
Calculate: Profit/Loss on sale of asset
Workings Answer
  Two marks
195 000 – 187 500 see (ii) above 7 500

Asset disposal
Vehicle 400 000 Acc depr 212 500
(175 000+37 500)
Profit? 7 500 Bank 195 000
407 500 407 500
2
Calculate: Fixed assets carrying value on 28 February 2021
Workings Answer
Carrying value – add depr – disposal at carrying value
   One part correct
10 190 000 – 37 500 – 187 500 9 965 000 
Carrying value – (cost price – total depr +add depr)
Or: 10 190 000 – (400 000 – 212 500 + 37 500)
One mark one method mark one method

Fixed assets at carrying value

Vehicle@cv 10 190 000 Depreciation 37 500
Disposal @cv 187 500
c/d 9 965 000
10190 000 10 190 00
b/d 9 965 000 (at carrying value) 4

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1.2.2 Calculate the correct net profit after tax for the year ended
28 February 2021. Indicate (+) for increase and (–) for decrease.
Workings Answer
Incorrect net profit before tax 822 700

Provision for bad debts adjustment (65 000) 

Advertising

Advertising must be added back, it 9 800 

reduced profit before correction

Rent income [ (334 00 – 9 000) / 13]=25 000 + 3 000 (28 000) 

Additional depreciation see 1.2.1 (i) (37 500) 

Profit on sale of asset see 1.2.1 7500 

Income tax (155 000 + 43 000)
(198 000)  9
Remember, provisional tax payments are
amounts paid in advance towards the income
tax for the year and you still need to add R55
000

Correct net profit after tax 511 500 

1.2.3 RETAINED INCOME NOTE:

Balance at beginning 865 300

Net profit after tax see 1.2.2 511 500

Shares repurchased 360 000  x R0,30  ignore brackets (108 000) 
4,10 – 3,80

Ordinary share dividends ignore brackets (783 200) 

Interim 295 200

Final 2 440 000 x R0,20 488 000

Balance at end ignore brackets and check operation

485 600 
shares repurchased and share dividends must be subtracted 9

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VISIV LTD: STATEMENT OF FINANCIAL POSITION (BALANCE SHEET)

ON 28 FEBRUARY 2021
ASSETS
Bottom up: 12 944 000 – 2 320 000 =10 624 000

Non-current assets (TA – CA) 10 624 000 

Fixed assets see 4.2.1 9 965 000 

Fixed deposit balancing figure 3
659 000 
Missing figure: 10 624 000 – 9 965 000 = 659 000

Current assets CLx0,8 accuracy marks 2 320 000

Inventories 1 102 000

Trade and other receivables
Trade debtors- prov for bad debts +prepaid exp +transfer 1 042 400 
(1 090 000 - 65 000 + 9 800  + 7 600 )
Cash and cash equivalents balancing figure
175 600 
2 320 000 – 1102 000 – 1042 400 = 175 600

TOTAL ASSETS see total equity and liabilities 12 944 000 

EQUITY AND LIABILITIES

Ordinary shareholders' equity operation 8 637 600 

Ordinary share capital 8 152 000
Retained Income see 1.2.3 485 600 

Non-current liabilities 1 406 400

Mortgage loan (1 758 000 – 351 600 1 406 400 

2 900 000 – 2017400-43 000 -488 000 = 351 600

Current liabilities 2 900 000

Trade and other payables
Trade creditors +deferred income(rent) +transfer +undercast
2 017 400 
(1 906 800 + 28 000  + 7 600 + 75 000 )
Rent income see 1.2.2
SARS: Income tax may be part of R&OP see 1.2.3 43 000

Shareholders for dividends may be part of R&OP 488 000 

Current portion of loan balancing figure 10 351 600 

TOTAL EQUITY AND LIABILITIES 12 944 000  27

8637 600 + 2 900 000=12 944 000

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ACTIVITY 1 : DBE TRAINING MANUAL

You are provided with information relating to Mtombeni Ltd for the year ended 30 June 2017.
The business has an authorised share capital of 1 750 000 ordinary shares.
REQUIRED:
1.1 Prepare the following notes to the Balance Sheet:
1.1.1 Ordinary share capital (10)

1.1.2 Retained income (10)

1.1.3 Trade and other receivables (10)

1.2 Use the information below and complete the Balance Sheet on 30 June 2017.

Where notes are not required, show ALL workings in brackets. (25)
INFORMATION:

A. Issued share capital comprised 900 000 ordinary shares on 1 July 2016.

B. The following was extracted from the books on 30 June 2017:

Ordinary share capital (1 July 2016) 6 075 000
Retained income (1 July 2016) 345 900
Fixed/Tangible assets (carrying value) ?
Fixed deposit: Swan Bank 360 000
Debtors’ control 156 570
Provision for bad debt 10 380
Loan: Drake Bank 375 000
Creditors' control 196 700
SARS: Income tax (provisional payments) 435 900
Dividends on ordinary shares (interim dividends) 290 000

C. An additional 100 000 shares were issued on 1 December 2016 at R9,25 per share.
This was recorded properly.

On 1 May 2017, 120 000 shares were bought back at R8,10 per share. These
shareholders were not entitled to final dividends.

D. The following adjustments must be considered when preparing the Balance Sheet:

 A debtor with a credit balance of R10 500 must be transferred to the Creditors'
Ledger.

 The provision for bad debts must be increased by R5 610.

 The rent expense increased by R1 850 on 1 April 2017. Total rent of R163 400
was paid up to 31 July 2017.

 The bank reconciliation reflected a post-dated cheque for R35 000 dated 31
August 2017 issued to a creditor in settlement of the account.

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 The statement received from Drake Bank in respect of the loan reflected interest
capitalised of R44 600. Monthly repayments are R12 500 including interest.
These fixed monthly repayments will end in 2019.

 On 30 June 2017, a final dividend of 28 cents per share was declared.

E. Net profit after tax, after taking into account the adjustments above, was calculated
as R1 080 000. The income tax rate is 28% of net profit before tax.

F. The following financial indicators apply to the Balance Sheet

 Current ratio is 2,3:1
 Acid-test ratio is 1,7:1

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ANSWERBOOK

1.1.1 ORDINARY SHARE CAPITAL

AUTHORIZED
1 750 000 shares
ISSUED

10

1.1.2 RETAINED INCOME

Balance on 1 July 2016 345 900

Ordinary share dividends

Balance on 30 June 2017 10

1.1.3 TRADE AND OTHER RECEIVABLES

10

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1.2 MTOMBENI TRADERS LTD

BALANCE SHEET ON 30 JUNE 2017

ASSETS
NON-CURRENT ASSETS
Fixed/Tangible Assets

CURRENT ASSETS

TOTAL ASSETS

EQUITY AND LIABILITIES

SHAREHOLDERS' EQUITY
Ordinary share capital
Retained income

NON-CURRENT LIABILITIES
Loan: Drake Bank

CURRENT LIABILITIES
Trade and other payables

TOTAL EQUITY AND LIABILITIES

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ACTIVITY 2 DBE: TRAINING MANUAL

Information relating to Chuta Ltd for the financial year ended 28 February 2017 is provided.

2.1 Prepare the following notes to the Balance Sheet on 28 February 2017:
2.1.1 Retained income (10)
2.1.2 Fixed/Tangible assets (28)

2.2 Complete the Balance Sheet on 28 February 2017. (32)

REQUIRED:

INFORMATION:

A. Figures extracted from the accounting records on 28 February 2017:

R
Ordinary share capital ?
Retained income (1 March 2016) 372 140
Fixed deposit: Boris Bank 1 010 140
Mortgage loan: Mongomorry Bank ?
Fixed/Tangible assets ?
Debtors' control ?
Bank (Dr) 43 500
Petty cash and cash float 5 700
Inventory 490 000
Creditors' control ?
SARS: Income tax (provisional tax payments) 408 560

B. Shares Capital:

On 1 February 2017 the business repurchased 190 000 shares at R2,50 above the
average price per share. This has been recorded properly.

C. Dividends:
 Interim dividends of R140 000 were paid on 1 October 2016.

 Final dividends of R250 000 were declared on 15 February 2017.

D. There are two fixed deposits at the Boris Bank. One, valued at R235 000, matures on 1
September 2017. The other, matures on 31 December 2019.

E. The Income tax for the year amounts to, R450 000. It is 30% of the net profit before tax.

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F. Note to the Balance Sheet on 28 February 2017

FIXED/TANGIBLE ASSETS LAND AND EQUIPMENT VEHICLES

BUILDINGS
Carrying value in the beginning * *
R4 899 999
Cost 4 899 999 360 000 970 000
Accumulated depreciation (0) (340 000) (395 000)
Movements
Additions at cost * * 0
Disposal at carrying value (0) (0) *
Depreciation (0) * *
Carrying value at the end 5 540 399 * *
Cost 5 540 399 * *
Accumulated depreciation (0) * *

Details of fixed assets

 Land and buildings were bought during the year and are not depreciated.
 New equipment was bought for R180 000 on credit on 1 September 2016. This
transaction has been recorded.
 Provide for depreciation on equipment at 10% p.a. on the cost price method.
 A vehicle was sold for cash at carrying value on 30 November 2016. This has been
properly recorded. The details of the asset sold from the Fixed Asset Register were
as follows:
- Cost price, R240 000
- Accumulated depreciation at beginning of financial year, R192 000
- Depreciation rate of 20% p.a. on the diminishing-balance method

G. The loan statement received from Mongomorry Bank on 28 February 2017 indicated
the following:

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R
Balance at beginning of financial year 1 955 000
Repayments during financial year 745 000
Interest capitalised 234 600
Balance at end of financial year ?
10% of the outstanding loan matures on 1 August 2017.

H. The following financial indicators apply to the Balance Sheet

The current ratio is 1,4:1

Net asset value per share is 750 cent. The company issued 800 000 shares

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2.1.1 RETAINED INCOME

Ordinary share dividends

Balance on 28 February 2017 10

2.1.2 FIXED/TANGIBLE ASSETS Land and Equipment Vehicles

Buildings
Carrying value in beginning 4 899 999
Cost price 4 899 999 360 000 970 000
Accumulated depreciation In the beginning 0 (340 000) (395 000)

Movements
Additions at cost 0
Disposal at carrying value
(0) (0)
Depreciation
0

Carrying value at the end 5 540 399

Cost 5 540 399
Accumulated depreciation (0) 28

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CHUTA LTD
2.2 BALANCE SHEET ON 28 FEBUARY 2017
ASSETS
Non-current assets
Tangible assets
Fixed deposit at Boris Bank

Current assets

TOTAL ASSETS

EQUITY & LIABILITIES

Ordinary shareholders’ equity

Non-current liabilities
Mortgage loan: Mongomorry Bank

Current liabilities 980 000

Trade & other payables

TOTAL EQUITY & LIABILITIES

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How to earn easy marks when completing the Balance Sheet

Learners should know the FORMAT of the Balance Sheet

Always start with the PRE ADJUSTMENT FIGURES FROM TRIAL BALANCE or information
extracted when preparing the Balance Sheet
Start with BALANCE SHEET ACCOUNTS ITEMS
RECORD THE FIGURES in the BALANCE SHEET to earn part/free marks
START WITH ADJUSTMENTS –you will also have to consider amounts in the Nominal
Accounts Section. [More marks are allocated to adjustments

ALWAYS SHOW your WORKINGS IN BRACKETS to earn part marks

Ratios/Financial indicators that are important for balance sheet calculations

 If the CURRENT RATIO is 2:1, the figure of the current liabilities is R200 000 then the
missing figure of the current assets must be R200 000 x 2 = R400 000.
 ACID TEST RATIO can be used to calculate the stock figure.
 DEBT EQUITY RATIO can be used to calculate either the shareholders’ equity or the
loan figure.

Easy marks earned when preparing the balance sheet

ADDITION OF: Current Assets, Non - Current Assets , Total Assets ,Shareholders
equity, Current Liabilities , Total equity and liabilities [6 marks]
TRANSFERRING of correct OR incorrect amounts from notes :
Balance of Retained Income [From note 8]
Balance of Share Capital [from note 7]
Dividends Recommended [from note 8]
Method mark on final answer for Non-Current Liabilities

11 MARKS If the examiner test only the equity and liabilities section, NOTE -the marks
exclude the adjustments.

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SESSION TOPIC PAGE

Companies Financial Statements

 Cash flow Statement
31  Analysis and Interpretation of financial
statements 50- 90
Corporate Governance
Audit Reports

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CASH FLOW STATEMENT

SESSION 32
EXAMPLE : Adapted from the Eastern Cape prelim 2020 Paper 1 - Q.4
Required: Complete the note for CASH GENERATED FROM OPERATIONS.
INFORMATION:

A. Extract from the Income Statement on 29 February 2020.

Cost of Sales R 5 468 750
Depreciation 390 000
Interest Expense 452 000
Income tax 420 000
Net profit after tax 980 000

B. Extract from Balance Sheet on 29 February 2020

2020 2019
Fixed assets 12 750 13 995 000
000
Trade and other receivables (Note 1) 305 800 401 500
Shareholders’ Equity 11 161 13 168 000
200
Retained income 1 700 700 1 239 200
Ordinary share capital 9 460 500 11 925 000
Loan: J.J. Bank 3 850 000 3 080 000
Trade and other payables (Note 2) 640 800 1 173 000

Note 1:
Trade and other Receivables 2020 2019
Debtors control 292 400 332 200
SARS (Income Tax) - 69 300
Accrued Income 13 400 -
305 800 401 500
Note 2:
Trade and other payables 2020 2019
Creditors control 621 000 963 000
SARS (Income Tax) 19 800
Shareholders for dividends ? 210 000
640 800 1 173 000

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WORKED EXAMPLE

Note 1
Reconciliation between profit before taxation and cash
generated from operations Net profit before tax is:
Profit before taxation 1 400 000 Profit after tax + income tax
R980 000 + (420 000) = 1 400 000
Depreciation 390 000
Interest paid 452 000 ADD deprectiation
It does not affect Cash flow
Operating profit before changes in working
2 242 000 ADD Interest expense it is separately
capital
disclosed in the cash flow statement.
Changes in working capital
(1 230 700)
(26 400 – 915 100 – 342 000 )
If debtors reduce theres
(Increase) / decrease in inventories (915 100)
inflow of cash
(Increase) / decrease in Debtors 292 400 +13 400 = 305 800
(332 200 – 305 800) 26 400
Increase / (decrease) creditors Outflow of cash if creditors
(342 000)
(621 000 - 963 000) decrease
Cash generated from operations 1 011 300

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CASH FLOW STATEMENT (ADAPTED FROM GAUTENG PRELIM 2018)

ZUKA LIMITED
Zuka Ltd. provided you with extracts from their financial records for the financial year
ended 28 February 2018.
REQUIRED:
Complete the Cash Flow Statement for the year ended 28 February 2018. (18)

INFORMATION:
A Extract from the Income Statement on 28 February 2018.

Depreciation R 701 760

Interest expense 272 000
Net profit before tax 2 500 000
Income tax 7500

B Information extracted from the Balance Sheet:

28 Feb 2018 28 Feb 2017

Fixed/Tangible Assets 8 798 080 6 580 000

Financial Assets 800 000 1 100 000

Inventories 340 920 1 140 000

Trade and other receivables 452 000 680 000

Trade debtors 406 000 680 000
SARS: Income tax 46 000 -

Cash and cash equivalent 9 000 8 520

Shareholders’ Equity 7 019 320 5 216 320

Ordinary Share Capital 5 240 000 4 200 000
Retained Income 1 779 320 1 016 320

Non-current Liabilities 2 000 000 3 000 000

Current Liabilities 1 380 680 1 292 200
Trade creditors 841 680 340 000
SARS: Income tax - 120 000
Shareholders for dividends 539 000 268 000
Bank overdraft 0 5640

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C SHARE CAPITAL

 700 000 shares were in issue on 1 March 2017.

 On 31 March 2017, 60 000 shares were repurchased
from the estate of a deceased shareholder at R9,00
each.
 On 1 August 2017, 200 000 shares were issued at R7,00 each.

D FIXED ASSETS

 Unused vehicle was sold at book (carrying) value at

the end of the year for R110 160
 During the year, the business purchased a new property.

WORKED OUT SOLUTION

CASH FLOW FROM (2 619 840) FIXED ASSET ACCOUNT @CV

INVESTING ACTIVITIES
Purchase of fixed assets (3 030 000) b/d 6 580 000 Disposal 110 160
Bank 3 030 000 Depreciation 701 760
c/d 8 798 080
Proceeds from sale of assets 110 160 9 610 000 9 610 000
b/d 8 798 080
Investment matured 300 000
1 100 000 – 800 000

CASH FLOW FROM (140 000)

FINANCING ACTIVITIES The shares repurchased were bought back at
Proceeds from sale of shares 1 400 000 R9 per share

Share buy-back (540 000) 60 000 x R9 = R540 000

Repayment on loan (1 000 000)

3 000 000 – 2 000 000

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Net change in cash and cash equivalents 564 680

Cash and cash equivalents – beginning of year

(555 680)
(564 200 – 8 520)

Cash and cash equivalents – end of the year 9 000

Bank overdraft - 564 200 + 8 520 cash and

cash equivalents = - 555 680

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CASH FLOW STATEMENT (ADAPTED FROM GAUTENG PRELIM 2018)

ZUKA LIMITED
Zuka Ltd. provided you with extracts from their financial records for the financial year
ended 28 February 2018.
REQUIRED:
Complete the Cash Flow Statement for the year ended 28 February 2018. (18)

INFORMATION:

A.Extract from the Income Statement on 28 February 2018.

Depreciation R 701 760
Interest expense 272 000
Net profit before tax 2 500 000
Income tax 7510

B. Information extracted from the Balance Sheet:

28 Feb 2018 28 Feb 2017
Fixed/Tangible Assets 8 798 080 6 580 000

Financial Assets 800 000 1 100 000

Inventories 340 920 1 140 000

Trade and other receivables 452 000 680 000

Trade debtors 406 000 680 000
SARS: Income tax 46 000 -

Cash and cash equivalent 9 000 8 520

Shareholders’ Equity 7 019 320 5 216 320

Ordinary Share Capital 5 240 000 4 200 000
Retained Income 1 779 320 1 016 320

Non-current Liabilities 2 000 000 3 000 000

Current Liabilities 1 380 680 1 292 200
Trade creditors 841 680 340 000
SARS: Income tax - 120 000
Shareholders for dividends 539 000 268 000
Bank overdraft 0 5650

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C SHARE CAPITAL
 700 000 shares were in issue on 1 March 2017.
 On 31 March 2017, 60 000 shares were repurchased from
the estate of a deceased shareholder at R9, 00 each.
 On 1 August 2017, 200 000 shares were issued at R7, 00 each.
D FIXED ASSETS
 Unused vehicle was sold at book (carrying) value at the
end of the year for R110 160
 During the year, the business purchased a new property.

WORKED EXAMPLE

CASH FLOW FROM OPERATING ACTIVITIES 3 324 520

Cash generated from operations 5 048 520

Interest paid (272 000)

Dividends paid (536 000)

Taxation paid (916 000)
(120 000+ 750 000 + 46 000) or – 120 000 – 750 000 – 46 000

CASH FLOW FROM (2 619 840)

INVESTING ACTIVITIES FIXED ASSET ACCOUNT @CV
Purchase of fixed assets (3 030 000)
b/d 6 580 000 Disposal 110 160
Bank 3 030 000 Depreciation 701 760
Proceeds from sale of assets 110 160 c/d 8 798 080
Investment matured 300 000 9 610 000 9 610 000
1 100 000 – 800 000 b/d 8 798 080

CASH FLOW FROM FINANCING ACTIVITIES (140 000) The shares repurchased
were bought back at R9 per
Proceeds from sale of shares 1 400 000
share
Share buy-back (540 000) 60 000 x R9 = R540 000

Repayment on loan 3 000 000 – 2 000 000 (1 000 000)

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Net change in cash and cash equivalents 564 680

Cash and cash equivalents – beginning of year

(555 680)
(564 200 – 8 520)
Cash and cash equivalents – end of the year 9 000

Bank overdraft - 564 200 + 8 520 cash and cash

equivalents = - 555 680

Cash flow from operating activities 3 324 520

Cash flow from investing activities (2 619 840)
Cash flow from financing activities (140 000)
564 680

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QUESTION 1: CASH FLOW STATEMENT, NOTES AND INTERPRETATION

(45 marks; 40 minutes) FREESTATE 2020
1.1 CONCEPTS

REQUIRED:

Choose a term in COLUMN B that matches the description in COLUMN A. Write the
letter (A–E) next to the question numbers (2.1.1–2.1.5) in the ANSWER BOOK.

COLUMN B
COLUMN A (Term)
(Description)
1.1.1 The extent to which a company is A Solvency
financed by loan
1.1.2 An increase in creditors indicates B Liquidity
an … of cash
1.1.3 A decrease in creditors indicates C Inflow
an … of cash
1.1.4 Ability of the business to pay of all D Gearing
its debts
1.1.5 Ability of the business to pay off its E Outflow
short-term debts (5)

1.2 BOOTS & ALL LTD

You are provided with information relating to Boots & All Ltd for the financial
year ended 30 September 2020.

REQUIRED:

1.2.1 Calculate the amount for taxation paid for the Cash Flow Statement. (4)

1.2.2 Complete the following from the Cash Flow Statement:

 Cash flow from investing activities. (9)

1.2.3 Calculate the change in cash and cash equivalents according to the
Cash Flow Statement. (4)

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INFORMATION

A. SHARE CAPITAL
 R1 120 000 was received for the issue of shares on 1 July 2019.
 150 000 ordinary shares were repurchased on 31 December 2019 from a
shareholder. The shares were repurchased at a price of R2,60.
B. Extract from Income Statement for the year ended 30 June 2020:

R
Depreciation 186 000
Interest expense 32 000
Income tax 290 400
Net profit after tax 677 600

C. Extract from Balance Sheet on 30 June 2020:

2020 2019
R R
Fixed assets (Carrying value) 5 720 000 4 600 000
Fixed deposit 700 000 350 000
Current assets 571 000 846 000
Inventories 345 000 320 000
Trade and other receivables 198 000 * 210 000
Cash and cash equivalents 28 000 316 000
Non-current liabilities 350 000 150 000
Current liabilities 1 076 000 752 000
Trade and other payables ** 468 000 447 000
Shareholders for dividends 420 000 305 000
Bank overdraft 188 000 -

* Trade and other receivables on 30 June 2019 include a balance of

R25 000 owed by SARS.
** Trade and other payables on 30 June 2020 include a balance of
R54 000 owed to SARS.

D. Dividends

A total amount of R685 000 was paid for dividends for the financial year.

E. Fixed assets

 Land and buildings to the value of R1 800 000 was purchased during
the year.
 Some fixed assets were sold at carrying value during the financial year.

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QUESTION 1

1.1
1.1.1 1.1.4
1.1.2 1.1.5
1.1.3
5

1.2.1 Calculate the amount for taxation paid in the Cash Flow
Statement.

1.2.2 Cash flow from investing activities.

1.2.3 Calculate the change in cash and cash equivalents

according to the Cash Flow Statement.

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QUESTION 2 CASH FLOW STATEMENT (50 marks; 40 minutes)

2020 GP
2.1 Indicate whether the following statements are TRUE or FALSE. Write only ‘true’ or
‘false’ next to the question numbers (2.1.1 to 2.1.3) in the ANSWER BOOK. (3)

2.1.1 If the loan amount increases from the previous year it is an outflow of cash

2.1.2 Repurchase of shares amount decreases Cash Flow from financing

activities.

2.1.3 Increase in debtors does not form part of changes in working capital.

2.2 UHLAZO LTD

The information relates to UHLAZO Ltd for financial year ended on 30 April 2020.

REQUIRED:

2.2.1 Prepare the following notes to the Balance Sheet:

 Ordinary Share Capital (11)
 Retained Income (13)

2.2.2 Calculate the following figures for the Cash Flow Statement on
30 April 2020:
 Taxation paid (4)
 Dividends paid (3)
 Loan repayment amount (2)
 Net change in cash and cash equivalents (5)

2.2.3 Prepare the CASH FLOW OF INVESTING ACTIVITIES section of the Cash
Flow Statement on 30 April 2020. (9)

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INFORMATION:
A. Information extracted from the Income Statement on 30 April 2020:

Interest expenses 45 900

Depreciation 26 900
Income tax (30% of Net Profit) 360 000
B. Information extracted from the Balance Sheet on 30 April:
30 April 2020 30 April 2019
Fixed assets (carrying value) 5 890 000 5 328 000
Fixed Deposit 210 000 ?
Cash and cash equivalents 91 400 22 000
Shareholders’ equity 2 739 000 2 106 000
Ordinary share capital 1 815 000 1 500 000
Retained income 924 000 606 000
Loan: Ivory Bank 135 000 246 000
Bank overdraft 0 35 600
SARS: Income tax 12 800 (Cr) 22 600 (Cr)
Shareholders for dividends ? 220 500

C. Share capital information:

Authorized share capital of 1 200 000 ordinary shares

Issued share capital

 On 1 May 2019, there were 480 000 shares in issue.

 On 30 July 2019, additional shares were issued.
 On 31 January 2020, 50 000 shares were repurchased and an amount of R220 000 was paid.

D. An interim dividend of 21 cents per share was paid on 31 December 2019. The
new shareholders were entitled to the interim dividends.

A final dividend of 62 cents per share was declared on 30 April 2020. Only the
shareholders registered on 30 April 2020 qualified for the final dividend.

E. Net asset value per share after the above has been taken into account is 498
cents.

F. Additional fixed assets were purchased during the financial year.

An old vehicle was sold at book value during the financial year.

G. One third of the fixed deposit matured on the 31 December 2019.

50

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QUESTION 2: CASH FLOW STATEMENT (50 marks; 40 minutes)

2.1
2.1.1
2.1.2
3
2.1.3

2.2.1 Ordinary Share Capital Note

Authorised
1 200 000 ordinary shares

Issued

Shares in issue on 1 May 2019

Shares in issue on 30 April 2020

11

Retained Income Note

Balance at beginning of financial year

Dividends

Balance at end of financial year

13

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2.2.2 Calculate the income tax paid.

Calculate the dividends paid.

Calculate the loan repayment amount.

Calculate the net change in cash and cash equivalents.

Net change in cash and cash equivalents

Opening bank balance

Closing bank balance 5

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2.2.3 Cash effects on investing activities

Proceeds from asset sold 22 000

Marks

50

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Tips on how to calculate the payments disclosed in the Cash

flow Statement

Dividends paid Dividends OWING the previous year plus INTERIM dividends

Repurchase of Record the ACTUAL AMOUNT PAID for shares that are
Shares equivalent to the average value of shares plus the above average
value recorded in the Retained Income note.

Tangible Assets
 Use the Ledger ( Asset ) account to determine the asset
bought
bought
 Note 3 on Tangible Assets –BOTTOM-UP CALCULATIONS
are reliable for accurate figures and signs.

Cash and Cash If the business has the Bank overdraft and the favourable
Equivalents balance under assets (Petty cash, Cash float etc.) at the
beginning of the year, determine the difference of the two opening
balances BEFORE the calculation of the Net change in cash and
cash equivalents.

Repurchase of Shares
 Value of shares is recorded in the Ordinary Share Capital Note at average price

 Above Average Value is recorded in the Retained Income Note

 Average price and above average price are recorded in the Cash flow Statement under
Financing Activities

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QUESTION 1: INTERPRETATION OF COMPANY INFORMATION

(35 marks; 25 minutes) E Cape 2020

You are presented with financial information of two companies operating in the same industry and of similar
size, for the year ended 29 February 2020.

REQUIRED:

NOTE: Provide figures, financial indicators or calculations in EACH case to support your comments and
explanations.

1.1 Compare the liquidity position of both companies and comment on the company that is
managing the short term assets more effectively. (6)

1.2 Compare the dividend pay-out policy of each company. (4)

Provide TWO possible reasons why one company decided to change their policy. (4)

1.3 Lock Ltd decided to increase their loans during the current financial year, whilst Down Ltd
decided to maintain their existing loans.
Comment on the decisions of both companies. Make reference to the degree of risk and
gearing (8)

1.4 A shareholder of Down Ltd is concerned about the drop in the market price of the shares.
Explain why he feel this way. Provide TWO points. (4)
1.5 M. Mtolo owns 576 000 shares in Down Ltd, which represents 48% of the total issued
shares. He wants to purchase another 25 000 shares.
Do a calculation to show how this would change his % shareholding in the company. (5)
Provide TWO reasons why you think he is specifically interested in increasing his
shareholding in Down Ltd. (4)
INFORMATION:

LOCK LTD DOWN LTD

2020 2019 2020 2019
Current ratio 1,9 : 1 2,1 : 1 3,6 : 1 2,8 : 1
Acid test ratio 1,3 : 1 1,4 : 1 1,5 : 1 1,5 : 1
Dividends per share 45 cents 65 cents 60 cents 62 cents
Earnings per share 86 cents 80 cents 70 cents 72 cents
% return on average equity 13% 11% 11,6% 12%
% return on average capital employed 15% 12% 11,7% 13%
Debt/equity ratio 0,6 : 1 0,3 : 1 0,4 : 1 0,4 : 1
Net asset value per share 642 cents 630 cents 610 cents 618 cents
Market price per share 645 cents 622 cents 582 cents 615 cents
Interest rate on loans 13% 13%

35

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QUESTION 1: INTERPRETATION OF COMPANY INFORMATION

1.1 Compare the liquidity position of both companies and comment on the
company that is managing the short term assets more effectively.
LOCK LTD

DOWN LTD

COMMENT

1.2 Compare the dividend pay-out policy of each company.

LOCK LTD

DOWN LTD

Provide TWO possible reasons why one company decided to change

their policy.

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1.3 Lock Ltd decided to increase their loans during the current financial
year, whilst Down Ltd decided to maintain their existing loans.
Comment on the decisions of both companies. Make reference to the
degree of risk and gearing
LOCK LTD

DOWN LTD

1.4 A shareholder of Down Ltd is concerned about the drop in the market
price of the shares. Explain why they feel this way. Provide TWO points.

1.5 M. Mtolo owns 576 000 shares in Down Ltd, which represents 48% of the
total issued shares. He wants to purchase another 25 000 shares.
Do a calculation to show how this would change his % shareholding in
the company.

5
Provide TWO reasons why you think he is specifically interested in
increasing his shareholding in Down Ltd.

35

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QUESTION 2: CASH FLOW STATEMENT, NOTES AND INTERPRETATION

(45 marks; 40 minutes)
An extract from the Free State 2020 paper
2.1 BENCO LTD

You are provided with information relating to Benco Ltd for the financial year
ended 30 September 2020.

REQUIRED

2.1.1 From 2019 to 2020 the directors made a deliberate decision to change
the policy on the distribution of profit in the form of dividends. Explain
this change. Quote figures/calculations to support your answer. (4)

2.1.2 If the balance on the loan at the end of 2020 is R680 000, calculate the
shareholders' equity at the end of 2020. (2)

2.1.3 Comment on whether the shareholders should be satisfied with the

market price of their shares. Quote TWO relevant financial indicators
(actual figures/ratios/percentages) and their trend. Give an additional
comment to support your answer. (5)

INFORMATION

C. Financial indicators

2020 2019
Earnings per share (EPS) 60 cent 56 cent
Dividends per share (DPS) 33 cent 56 cent
Net asset value per share (NAV) 364,7 cent 315,6 cent
Debt/Equity ratio 0,5 : 1 0,1 : 1
Current ratio 1,6 : 1 1,5 : 1
Acid test ratio 0,6 :1 0,4 : 1
Market price per share 385 cent 310 cent

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2.2 METSI LTD

You are provided with the information of Metsi Limited. The company is
registered with an authorized share capital of 2 000 000 shares. The financial
year ended on 29 February 2020.

REQUIRED:

2.2.1 The CEO, Nikola Pelser, currently owns 40% of the issued shares.
The board of directors decided to issue 50% of the unissued shares in
July 2020.

 Calculate the minimum number of shares that Nikola must buy in

July 2020 to gain control of the company. (4)

 Nikola wants to purchase the additional shares, at R12 per share

without advertising the shares to the public. Give TWO reasons why
you would not approve of this arrangement.
(4)

2.2.2 New shares were issued at the beginning of the financial year at
R10,00 each. Explain why the existing shareholders would or would
not be happy with this issue price. Quote TWO financial indicators
(with figures) to explain their opinion. (4)

INFORMATION:

The following financial indicators were taken from the accounting

records of Metsi Limited for the years ended:

29 Feb.
28 Feb. 2019
2020
Shares issued 1 200 000 450 000
Net asset value per 1 600 cents 1 400 cents
share
Debt/equity ratio 0,1 : 1 1,3 : 1
Current ratio 1,4 : 1 0,9 : 1
Acid-test ratio 0,7 : 1 0,8 : 1
Rate of stock turnover 4 times p.a. 3 times p.a.
Debtors' collection period 28 days 35 days
Creditors' payment 20 days 40 days
period
Earnings per share 610 cents 590 cents
Dividends per share 125 cents 135 cents
Market price of shares 1 700 cents 1 600 cents
45

TOTAL: 150

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QUESTION 2

2.1.1 From 2019 to 2020 the directors made a deliberate decision to change
the policy on the distribution of profit in the form of dividends.
Explain this change. Quote figures/calculations to support your
answer.

2.1.2 If the balance on the loan at the end of 2020 is R680 000, calculate the
shareholders’ equity at the end of 2020.

2.1.3 Comment on whether the shareholders should be satisfied with the

market price of their shares. Quote TWO relevant financial indicators
(actual figures/ratios/percentages) and their trend. Give an additional
comment to support your answer.

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2.2.1 Calculate the minimum number of shares that Nikola must buy in
July 2020 to gain control of the company.

Nikola wants to purchase the additional shares, at R12 per share

without advertising the shares to the public. Give TWO reasons why
you would not approve of this arrangement.

2.2.2 New shares were issued at the beginning of the financial year at R10,00
each. Explain why the existing shareholders would or would not be
happy with this issue price. Quote TWO financial indicators (with
figures) to explain their opinion.

45

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QUESTION 3: INTERPRETATION OF FINANCIAL STATEMENTS

AND AUDIT REPORT (50 marks; 40 minutes)
An extract from the Gauteng Province prelim exam: GP 2020
3.1 AVIEE LTD

Information was extracted from the financial records of Aviee Limited. The
company is listed on the stock exchange.

REQUIRED:

3.1.1 Calculate the following financial indicators on 31 August 2020.

 Acid-test ratio (4)

 Debt-equity ratio (3)
 Return on average shareholders’ equity (5)

3.1.2 Comment on the dividend policy for 2020. Provide a calculation to support
your answer. (5)

3.1.3 The directors decided to change the dividend policy in 2020. Give TWO
reasons for this change. (4)

3.1.4 Comment on the gearing and degree of risk for 2020. Quote TWO relevant
indicators in your comment. (6)

3.1.5 The shareholders are dissatisfied with the repurchase price of shares.
Using the relevant indicators and figures, explain why they are dissatisfied. (3)

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INFORMATION:

Extract from the financial statements on 31 August 2019 and 2020:

2020 2019
R R
Fixed deposit: Sierra Bank 200 000 480 000
Loan: Max Bank 3 000 000 1 200 000
Current assets (including inventories) 2 273 400 2 492 800
Inventories 942 200 1 435 100
Current liabilities 1 024 000 1 511 000
Cash and cash equivalents 72 800 4 800
Bank overdraft 0 224 000
Shareholders’ equity 13 686 600 11 653 000
Shareholders for dividends 264 000 352 000
Net profit before tax 1 908 000
Income Tax 30%

Financial indicators on 31 August:

2020 2019
Current ratio 2,2 : 1 1,6 : 1
Acid-test ratio ? 0,7 : 1
Debt-equity ratio ? 0,1 : 1
Earnings per share 77 cents 87 cents
Dividends per share 40 cents 80 cents
Return on average shareholders’ equity ? 11,9%
(ROSHE)
Return on capital employed (ROTCE) 16,4% 15,3%
Net asset value 778 cents 728 cents
Interest rate on loans 13% 12%
Market value on JSE 780 cents 725 cents
Interest rate on fixed deposit 11% 11%
Number of shares 880 000 ?
Price at which shares were repurchased 800 cents

30

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Classification Financial Indicators Formulae Answer Integration

Gross profit on sales Gross profit x 100 %
Sales 1
Profitability Gross profit on cost of sales Gross profit x 100 %

Income Statement
Did the Cost of sales 1
business Operating profit on sales Operating profit x 100 %
operate Sales 1
Operating expenses on sales Operating expenses x 100 %
well and
Sales 1
make a Net profit on sales Net profit x 100 %
profit? Sales 1

Solvency Solvency ratio Total assets : Total liabilities Ratio B.Sheet

𝑥:1

Current ratio Current assets : Current liabilities Ratio B.Sheet

𝑥:1
Acid test ratio Current assets - inventories : Current liabilities Ratio B.Sheet
Liquidity 𝑥:1
Can the Stock turnover rate Cost of sales Times IS/BS
business Average Stock
pay its Stock holding period Average Stock x 365 Days / IS/BS
short term Cost of sales 1 months
Average debtors collection Average Debtors x 365 Days / IS/BS
debts?
period Credit Sales 1 months
Average creditors payment Average Creditors x 365 Days / IS/BS
period Credit Purchases 1 months

Return on Shareholders’ Net profit after tax x 100 % IS/BS

Return Equity (ROSHE) Shareholders’ Equity 1
What was Return on Capital Employed Net profit before tax + interest on loan x100 % IS/BS
the return (ROTCE) Average Capital Employed 1
on my Do I cover the financial cost of
the loan ? (interest % of loan) Capital Employed is:
investment
Aver Shareholders Equity + Average Loans
?
Earnings Per Share
What is my possible return on Net profit after tax x 100 Cents IS
my investment ? Number of issued shares issued 1
Return Dividends Per Share Interim +Final dividends x 100 Cents Note 8,RI
What was Number of issued shares issued 1
the return Net Asset value per share Shareholders’ Equity x 100 Cents B/S, Note 7
on my What is the real value of my Number of issued shares issued 1 and 8
shares
investment Dividend pay-out rate Dividends for the year x100 % I/S, Note 7
? Net profit after tax 1 Dividends per share
and 8
Earnings per share
Financial Debt -equity ratio (gearing) Non-current liabilities : Shareholders’ equity Ratio BS
risk/Gearing Is the business financed by own 𝑥:1
money or borrowed money?
B.Sheet/BS =Balance sheet I/S =Income statement RI=Retained Income

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SUMMARY OF ALL THE RATIOS NEEDED FOR ANALYSIS AND INTERPRETATION

The following is an explanation of all the financial indicators. Make sure that you
have insight and understanding. Focus on the reason why you are using that
specific financial indicator.
Figures and
percentages
PROFITABILITY RATIOS: Did the business operate well and make a profit?
are assumed
P
1 Gross profit on turnover= % 4 Operating profit on turnover = %

Gross profit x 100 = 60% Operating profit X 100 = 45 %

Turnover 1 Turnover 1

Explanation Explanation

 For every R1 sales, 60 cents become  For every R1 sales, 45 cents is operating
gross profit. Compare to previous results profit. Compare to previous results
 Compare to the Mark-up %  If the percentage is to low comparing to
previous year or competitors it means
expenses are high.
2 5
Gross profit on cost of sales (mark-up) = % Net profit after tax on turnover = %

Gross profit X 100 = 92 % Net profit after tax X 100 = 26 %

Cost of sales 1 Turnover 1

Explanation Explanation

 Did you achieve your mark –up %  For every R1 of sales, 26 cents is net profit
e.g. 100%? or earnings. It is better than what you can
 Goods sold at price lower than Mark-up. earn from a bank in interest (e.g. 12%)
Possible reasons for difference:  If the percentage is to low comparing to
 Seasonal sales /Cash discounts
previous year or competitors it means
expenses are high.
 Incorrect pricing/ trade discount
For
3 Total expenses on turnover = %

Total expenses X 100 = 17 %

Turnover 1

Explanation
 every R1 sales, 17 cents is spent to pay
expenses.
 If the percentage is lower comparing to
previous year it means expenses are well
controlled

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LIQUIDITY: Can the business pay its short term debt?

1 Current ratio = x : 1 4 Stock holding period ( in days)

Current assets : Current liabilities Average stock X 365 days = 91 days

1,5 : 1 Cost of sales 1

Explanation Explanation
 The business has R1, 50 for every R1 debt.  Stock was available for 91 days on the
The business can pay the debt within the shelves. This will guide you on when to
short term. place order of stock.
 Compare to previous results or competitors  The longer the period, the more working
capital is tied up and it means your money is
tied up in stock and its less liquid compared
to cash ,that will affect the ability to pay
NOTE: If the ratio is too high it means too your short term debts.
much cash, stock and debtors are tied up. NOTE: excessive stock will result to losses
theft, burglary etc.
2 5
Acid-test ratio = …: 1 Debtors average collection Period = days

Current assets minus stock : Current liabilities Average debtors x 365 = 45 days (or 12 )
0,7 : 1 Credit sales 1
Explanation
 The business has 70 cents for every R1 of Explanation
short term debt. The business cannot afford ( credit period = 30 days)
to pay short term debts. Compare to
previous results  Debtors do not honour their agreement.
 The reason for the above results could be They took 15 days longer than the agreed
that the business excessively invested in 30 days.
trading stock.  This will affect the ability of the business to
pay short term debts or creditors.
NOTE: Always compare this indicator to
creditors payment period.
3 6
Rate of stock turnover ( times ) Creditor average payment Period (days)

Cost of sales = replaced 4 times per year Average creditors x 365 = 72 days
Average stock Credit purchases 1

Explanation Explanation
 Stock is replaced 4 times per year. ( credit period 60 days)
 Quicker rate is more favourable
 It means your money is tied up in stock and  Took 72 days to pay instead of 60 days.
you will not be able to pay your short term (extra 13 days were taken)
debt.
 Low rate of stock turnover will result to:  Will be charged interest / negotiate 90 days
 Stockpiling - ageing, poor quality, (If the period is shorter than 60 days,
changing fashions negotiate discount)
This could have resulted from : NB: This indicator must be checked against
 Wrong purchase policy. /Poor sales policy/ the Debtors collection, the reason could be
Economic circumstances. that debtors are not paying on time, the
screening process might have been poor.

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RETURNS: What was the return on my investment?

Return on shareholders’ Equity = %
1 4 Net asset value per share ( NAV)

Net profit after tax x 100 = 35 % expressed in cents per share

Average shareholders’ equity 1
Ordinary shareholders’ equity x 100 = 300 cents
Number of ordinary shares issued 1
(Bank: 12% interest on investment )
Explanation
 The NAV .should be compared to the market
price of shares ( listed at JSE)
Explanation  Compare the value of your shares to other
public companies
 Return on investment was 35%. It is more  Compare NAV for current year to previous as
than what the bank can offer. Compare to well as the market price for current year to
previous results previous year
 Compare to alternative investments, such as  If NAV is above the market price it means the
return on a fixed deposit investors do not have confidence in the
NOTE : Average equity is : 2020 + 2021 business, this might negatively affect the
2 average price of shares.
2 Example
Dividends per share ( cents per share)
Transactions :
Interim + Final dividends x 100 o Declared and paid a dividend of 20 cents per
Number of issued shares issued 1 share.(during the year )
o Declared a dividend of 30 cents per share
50 cents per share (end of year )

Explanation Dr. Appropriation account [f3] Cr.

 Compare dividends for the current year to the Income tax 30 Profit and loss 100
previous year. Ord. Share dividends 50
 Compare to dividends offered by other (20 + 30)
companies ,if the information is provided Retained income 20
 Compare the dividends to earnings per share
100 100

(20 + 30 ) ÷100 shareholders = 50c per share

3
Earnings per share Dividend pay-out rate
Net income after tax x 100 = Dividends for the year x100 (Answer is %)
no. shares issued 1 Net profit after tax 1

70 cents per share  Compare the current rate to the previous year
Explanation Examination Questions on Earnings and Dividends
 Compare earnings for the current year to the You will be expected to comment on the dividend
previous year. policy :
NOTE: Net income after tax is regarded as
 Compare the earnings and dividends
EARNINGS .From the Appropriation Account
if you say: PROFIT (100) Less Income tax is  If earnings is MORE than dividends paid-the
equal to 70.The difference is your earnings. company has retained profits for future growth.

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LOANS? Take out more loans or will the bank SOLVENCY: credit worthiness of the business
agrees to a higher loan

Debt/Equity ratio (borrowed or own money? Solvency

Total assets: total liabilities = 1,8 : 1
Long term liabilities : Shareholders’ equity
0.5: 1
Explanation
Explanation  The business has R1.80 for every R1 owing
 This ratio tests the credit worthiness of the
 It explains the extent to which the business is business and indicates whether the business
financed by borrowed capital can meet its commitments.
 The financial risk is low ,financial institutions
can grant loans to the business

Return on capital employed = %

Net profit before tax and interest x 100 (answer %)

Average capital employed 1

(e.g. interest on loan: 15%)

Explanation
 Compare the ROTCE with previous results
 Compare it with interest on loan (% rate)
 If it’s bigger than the rate of interest it means the business is lowly geared, favourably geared.

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GRADE 12 ACCOUNTING FINANCIAL INDICATOR FORMULA SHEET

Gross profit x 100 Gross profit x 100

Sales 1 Cost of sales 1

Net profit before tax x 100 Net profit after tax x 100
Sales 1 Sales 1

Operating expenses x 100 Operating profit x 100

Sales 1 Sales 1

Total assets : Total liabilities Current assets : Current liabilities

(Current assets – Inventories) : Current liabilities Non-current liabilities : Shareholders' equity

(Trade & other receivables + Cash & cash equivalents) : Current liabilities

Average trading stock x 365 Cost of sales

Cost of sales 1 Average trading stock

Average debtors x 365 Average creditors x 365

Credit sales 1 Cost of sales 1
Net income after tax x 100
Net income after tax x 100 Number of issued shares 1
Average shareholders' equity 1
(*See note below)
Net income before tax + Interest on loans x 100
Average shareholders' equity + Average non-current liabilities 1

Shareholders' equity x 100 Dividends for the year x 100

Number of issued shares 1 Number of issued shares 1

Interim dividends x 100 Final dividends x 100

Number of issued shares 1 Number of issued shares 1

Dividends per share x 100 Dividends for the year x 100

Earnings per share 1 Net income after tax 1

Total fixed costs

Selling price per unit – Variable costs per unit
Note:
* In this case, if there is a change in the number of issued shares during a financial year, the
weighted average number of shares is used in practice.

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NSC NOVEMBER 2020 EXAM

CORPORATE GOVERNANCE (15 marks; 10 minutes)

Shareholders and employees associated with a company will be particularly

interested in whether the company is well governed and managed by the
directors.
At the AGM, the shareholders will elect two types of directors:
 Executive directors: they attend board meetings and work at the company
on a full-time basis.
 Non-executive directors: they attend meetings and do NOT work at the
company.
You are provided with four aspects of corporate governance that will be of
concern to the stakeholders.

REQUIRED:

1.1 Audit report:

Explain why a qualified audit report is not a good reflection of a company. (4)
Provide TWO points
1.2 The board of directors
Explain why it is important for a company to include non-executive as well as (
executive directors on the Board of Director 4
)
1.3 The Remunerations Committee
According to the Companies Act, 2008 (Act 11 of 2008), a company must have a (3)
Remunerations Committee
Explain the role or responsibility of this committee and give a reason why this
committee is necessary
1.4 Directors engage with clients on a regular basis in an effort to negotiate contracts
and to increase sales and services.
Explain why there should be a company policy that directors must declare to the (4)
Board all gifts, donations or favours received by them from clients. Provide TWO
points

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SOLUTION

1.1 Explain why a qualified audit report is not a good reflection of a company.
Provide TWO points
 Certain information on the financial statements is missing or not clear
 There is insufficient audit evidence for significant items / auditors cannot verify certain
information
 Lack of internal controls , possible negligence or colluding
 Existing shareholders might decide to sell their shares

1.2 Explain why it is important for a company to include non-executive as well as

executive directors on the Board of Director
 Executive directors are involved with internal functioning (operations) of the company, they
are hands on.
 Non-executive directors have a wider perspective of the business environment and act in
the best interest of the company
 The non-executive directors would exercise a watchdog role, keeping executive directors in
check
 More regular inputs than an internal auditor or other directors
 Their inputs would be unbiased and independent

1.3 According to the Companies Act, 2008 (Act 11 of 2008), a company must have a
Remunerations Committee
Explain the role or responsibility of this committee and give a reason why this
committee is necessary

Explanation
To prevent directors from paying themselves very high salaries
They must approve and give advice on the proposals such as fees and bonuses
Reason
 To ensure transparency and fairness in the payment of salaries and fees
 To prevent fraud, corruption and wastage
 Detect mismanagement or fraudulent activities
 They can compare remunerations against financial information of other companies in the
industry.

1.4 Explain why there should be a company policy that directors must declare to the
Board all gifts, donations or favours received by them from clients. Provide TWO
points
 Transparency in awarding contracts , tenders or appointing service providers
 Policy would prevent colluding with service providers
 This could be viewed as bribery for contracts
 This could be viewed as nepotism
 To protect the image of the business
 Conflict of interests which could be corrupt and fraudulent

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ACTIVITY 1 – AUDIT REPORT

2019 NOV NSC EXAM

1. AUDIT REPORT FOR YEAR-END 28 FEBRUARY 2019
The financial statements of Visiv Ltd (see QUESTION below) were audited.
You are provided with extracts from the audit report.
Extracts from the audit report:
Basis for audit report
Point 1 We were unable to obtain sufficient audit evidence to support the
amounts provided for certain income and expense items ...
Point 2 Furthermore, the repurchase of shares on 31 May 2018 is not in
accordance with provisions of the Companies Act, 1973 (Act 71 of
2008), as the liquidity of the company has been compromised …
Opinion
Point 3 Because of the significance of the matters described above, we do
not express an opinion …
REQUIRED:
1.1 Refer to Point 3.
What type of audit report did the company receive? (1)
1.2 Refer to Point 1.
Give TWO examples of audit evidence that the auditors would have
required regarding this problem. (2)
1.3. Refer to Point 2.
 Apart from the current ratio, identify and calculate ONE other
financial indicator that the auditors would have used in deciding on
this opinion.
( Refer to information below) (4)
 Explain what the directors could have done to prevent this comment
by the auditors. Provide TWO points. (2)
INFORMATION
Extract from Balance Sheet
Trading stock 1 102 000
Net trade debtors 1 090 000

After processing all adjustments:

 The current liabilities totalled R2 900 000
 The current ratio is 0.8: 1.

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WORKSHEET 1
1. AUDIT REPORT

1.1 What type of audit report did the company receive?

1.2 Give TWO examples of audit evidence that the auditors would have
required regarding this problem.

Example 1

Example 2
2

1.3 Apart from the current ratio, identify and calculate ONE other financial
indicator that the auditors would have used in deciding on this opinion.

Identify ONE other financial indicator:

Calculate the financial indicator:

Explain what the directors could have done to prevent this comment by
the auditors. Provide TWO points.

Point 1

Point 2
2

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ACTIVITY 2 NSC NOV 2018

2. AUDIT REPORT 13 Marks

Extracts from the audit report of Tembiso Ltd are provided.

INFORMATION:

To Shareholders

We have audited the financial statements set out on pages 8 to

52 ...

Opinion

Point 1 In our opinion the financial statements present fairly, in all material
respects, the financial position of the company as at 28 February 2018
…

Point 2 … in accordance with International Financial Reporting Standards

(IFRS) and the requirements of the Companies Act (Act 71 of 2008) of
South Africa.

Basis for Opinion

Point 3 We are independent of the company ...

Point 4 We have fulfilled our ethical responsibilities, which are consistent with
international standards …

Point 5 … and the audit evidence obtained is sufficient and appropriate to

provide a basis for our opinion.

REQUIRED:

2.1 Refer to points 1 to 3.

\Why did the auditors mention these points? Give ONE explanation
for EACH point. (5)

2.2 Refer to points 4 and 5.

Explain TWO examples of:

 Ethical responsibilities
 Audit evidence (8)

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WORKSHEET 2

2 AUDIT REPORT
2.1
Point 1 Opinion

Point 2 IFRS and Companies Act

Point 3 Independent

2.2
Point 4 TWO examples of ethical responsibilities:

Example 1:

Example 2:

Point 5 TWO examples of audit evidence:

Example 1:

Example 2:

13 MARKS

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ACTIVITY 3 NSC FEB 2018

AUDIT REPORT: DF ENTERPRISES LTD

REQUIRED:

3.1 Choose the correct word(s) from those given in brackets. Write only
the word(s) next to the question number (3.1(a)–3.1(b)) in the
ANSWER BOOK.

(a) The audit report is completed by the (internal/external) auditor. (1)

(b) The (directors/shareholders/auditors) are responsible for the

preparation of the financial statements. (1)

3.2 Refer to the audit report below.

(a) The audit report below indicates a/an (qualified/unqualified)

opinion. (1)

(b) Explain why the shareholders should be concerned about this

audit report. State TWO points. (4)

INFORMATION:

EXTRACT FROM THE AUDIT REPORT OF DF ENTERPRISES LTD

Basis for Qualification of Opinion

Source documents for expenditure amounting to R550 000 could not be
traced.

Audit Opinion
In our opinion, except for the effects of the unsubstantiated expenditure
described in the Basis for Qualification of Opinion paragraph, the financial
statements fairly represent the financial position of the company on 30 June
2017 and the results of their operations and cash flows for the year ended,
in accordance with the International Financial Reporting Standards, and in
the manner required by the Companies Act (Act 61 of 1973) of South Africa.

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WORKSHEET 3

3 AUDIT REPORT: DF ENTERPRISES LTD

3.1
(a)
2
(b)

3.2 (a) The audit report below indicates a/an (qualified/unqualified) opinion.

1
(b) Explain why the shareholders should be concerned about this audit
report. State TWO points.

7 MARKS

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SESSION TOPIC PAGE

32 Inventory Valuation
Cost Accounting 91 - 119

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SESSION 32
EXAM QUESTIONS
ACTIVITY 1: INVENTORY VALUATION (FREE STATE PRELIM 2019)
1.1 JOSE LADIES HANDBAGS

You are provided with information relating to Jose Ladies Bags. The store is situated
in Welkom and is owned by Josephine Heyns. The business trades in handbags.
Handbags are valued using the first-in-first-out method and periodic inventory system.
REQUIRED:

1.1.1 Calculate the following:

 Value of the closing stock on 31 December 2019. (5)

 Gross profit for the year ended 31 December 2019. (8)

1.1.2 Josephine suspects that some handbags have been stolen despite the
cameras installed in the store.
 Calculate the number of handbags that are missing. (6)

 Explain to Josephine why she only discovered the loss at the end of
the year. (2)
 Suggest ONE additional measure that she can implement to
address the problem of missing items.
(2)
INFORMATION
A. Stock of handbags:

Cost price TOTAL

DATE UNITS
per unit (including transport)
1 January 2019 180 R1 200 R237 600
31 December 2019 220 ? ?

B. Purchases during the year:

Cost price per TOTAL

DATE UNITS
unit (including transport)
February 2019 250 R1 230 R338 250
June 2019 370 R1 250 R508 750
September 2019 200 R1 275 R280 500
820 R1 127 500

Note: Carriage on purchases is charged at 10% of the cost price.

C. Returns:
20 units from September 2019 purchases were returned to suppliers. They only covered
the cost of the units returned, excluding transport costs.
D. Sales:
740 units were sold at R1 750 each, R1 295 000.

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WORKSHEET

1.1.1 Calculate the value of the closing stock on 31 December 2019.

Calculate the Gross profit for the year ended

31 December 2019.

1.1.2 Calculate the number of handbags that are missing.

Explain to Josephine why she only discovered the loss at the end of the
year.

Suggest ONE additional measure that she can implement to address the
problem of missing items.

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ACTIVITY 2: INVENTORY VALUATION

2.1 INVENTORY VALUATION (FREE STATE 2020 NPRELIM)

Battery Specialist, owned by Thabo Lefo, sells two types of AA 6-pack

unit batteries, Longlast and Petcell. The business uses the periodic
inventory system to record their stock.

 FIFO method is used for Longlast

 Weighted average method is used for Petcell

REQUIRED:

2.1.1 Calculate the following for Longlast AA 6-pack units:

 The value of the closing stock on 31 October 2019. (6)

2.1.2  Calculate the average stock-holding period. Note that the

cost of sales amounted to R483 750 for the year ended
31 October 2019.
 Comment on your findings above. (6)

2.1.3 The owner is concerned about the sales of Petcell AA 6-pack

units and is considering to discontinue this product line.

Calculate the following for Petcell AA 6-pack units for the year
ended 31 October 2019:

 The value of the closing stock. (5)

 The cost of sales of the Petcell AA 6-pack units. (3)
 The stock turnover rate for the year. (5)

2.1.4 Give TWO reasons why the owner must discontinue the sales
of Petcell AA 6-pack units. (4)

INFORMATION:

A. Stock valuation methods:

 FIFO method for Longlast AA 6-pack units

 Weighted average method for Petcell AA 6-pack units

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B. Stock records showed the following balances:

Longlast AA 6-pack units Petcell AA 6-pack units

Number Price per Total Number of Price

Date Total value
of units unit value units per unit
1 Nov 2018 2 000 R20 R40 000 800 R35 R28 000

31 Oct 2019 ? ? ? 1 850 ? ?

C. The following purchases and returns were reflected during the year:

Longlast AA 6-pack units Petcell AA 6-pack units

Number
Price per Total Number of Price per
N of Total value
unit value units unit
units

TOTALS: 35 000 756 000 3 000 120 200

Nov 2018 (1 000) R20 (20 000) 500 R35 R17 500
Jan 2019 17 000 R20 R340 000 - -
March 2019 7 000 R22,50 R157 500 1 000 R39, 70 R39 700
June 2019 9 000 R23 R207 000 - - -
June 2019 (2 000) R23 (R46 000) 1 500 R42 R63 000
Sept 2019 5 000 R23,50 R117 500 - - -

D. Sales for the year were reflected as follows:

Longlast AA 6-pack units Petcell AA 6-pack units

Number of Selling price Total value Number of Selling Price Total value
Units units
23 500 R35 R822 500 1 950 R75 R146 250

E. Due to good internal control measures, there were no missing items.

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WORKSHEET

INVENTORY VALUATION:

Calculate the value of the closing stock of Longlast AA 6-pack

units on 31 October 2019.

Calculate the average stock-holding period, given the cost of

sales amounted to R483 750 for the year ended
31 October 2019.

Comment on your findings above:

The owner is concerned about the sales of Petcell AA 6-pack units, and
considers to discontinue this product line:

Calculate the value of the closing stock of Petcell AA 6-pack

units.

Calculate the cost of sales of the Petcell AA 6-pack units.

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Calculate the stock turnover rate for the year.

Give TWO reasons why the owner must discontinue the sales
of Petcell AA 6-pack units.

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INVENTORIES: Calculations expected in exams

 Number of Opening stock + Purchases – Returns –Sales –Donations – Drawings -Closing stock
items stolen

 Number of Opening Stock + Purchases +Carriage on Purchases + Import duties – Returns – Closing Stock –
items on hand Donations – Drawings

 Value of stock Specific Identification/FIFO/Weighted Average Method –Check the slide below:
on hand

 Cost of sales USE Periodic/Perpetual inventory system [Periodic –check the slide three ]
 Gross profit Sales – Cost of Sales = Gross profit OR
OR T Account
[(C.stock +Sales ) - (O.Stock+Purchases+Carriage+Custom Duty )]
 Mark-up Gross Profit x 100
achieved Cost of
sales

 Calculate the Opening stock + purchases – returns +carriage +custom duty The formula is used to calculate the
unit price units of opening stock +purchases -returns value of closing stock when using
weighted average method
 Calculate how Average inventory x 365 days
long (in days) it Cost of sales
is expected to OR
sell the closing
Units of stock on hand x 365 days
stock Units sold
OR OR
Stock Holding
period Closing stock x 365 days
OP stock + Purchases - Returns – Closing Stock Cost of sales
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SESSION 32 : COST ACCOUNTING

EXAMPLE : MANUFACTURING
Sihle Sangweni owns two separate factories that manufacture products according to
orders received. There is no work-in-progress stock. The year-end is 28 February.

1.1 Indicate whether the following statements are TRUE or FALSE. Write only 'true'
or 'false' next to the question numbers (1.1.1 to 1.1.3) in the ANSWER BOOK.

1.1.1 Wages of factory cleaners is a direct labour cost.

1.1.2 Delivery costs of finished goods to retailers are a selling and distribution
cost.

1.1.3 Depreciation on office equipment is an administration cost. (3 x 1) (3)

1.2 DESKS FACTORY

REQUIRED:

1.2.1 Complete the Factory Overhead Cost Note. (8)

1.2.2 Calculate the total cost of production of finished goods. (5)
1.2.3 Sihle wants to produce an additional 1 500 desks, while maintaining the
selling price and costs.

Calculate the additional profit he can expect. (4)

1.3 CHAIRS FACTORY

REQUIRED:

1.3.1 Provide a calculation to confirm the break-even point for 2019. (4)

1.3.2 Comment on the break-even point and the production level achieved.
Quote figures. (4)

1.3.3 Raw material consists of wood only. In 2019 the cost is R120 per square
metre (m2) and 1,2 m2 of wood is needed to make one chair.

During the year, 22 000 m2 wood was dispatched to the factory. Sihle feels
that the wood raw material was not well controlled.

 Provide a calculation to support his opinion. (4)

 Identify TWO possible causes of this problem. Provide a solution for
EACH. (4)

1.3.4 Give TWO reasons for the increase in direct labour cost. Provide a
solution for EACH. Note that wages and salaries increased by 5% in the
current financial year. (4)

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INFORMATION:
A. DESKS FACTORY
Extract of pre-adjustment amounts on 28 February 2019
R
Indirect labour 296 500
Depreciation of factory plant 166 000
Advertising 24 500
Water and electricity 248 000
Rent expense 345 600
Insurance allocated to sales department 12 600
Factory sundry expenses 107 700

Adjustments to factory overheads for desks:

 Water and electricity for February 2019, R18 000, must be taken into
account. 80% is allocated to the factory. The balance is an administration
cost.
 Rent must be allocated according to floor area:
Factory: 810 m2 Office: 180 m2 Sales department: 90 m2
 75% of insurance must be allocated to the factory. The balance applies
to the sales department.

B. INFORMATION FOR BOTH FACTORIES

DESKS CHAIRS
COSTS 2019 (Unit costs)
Amount Per unit 2019 2018
Direct material R3 060 000 R340 R165 R124
Direct labour ? R160 R90 R70
Variable
Selling and distribution R720 000 R80 R50 R60
Total variable costs R580 R305 R250
Factory overheads R76 R75
Fixed
Administration R360 000 R40 R20 R18

SELLING PRICES
Per unit R750 R390 R370

UNITS
Produced and sold 9 000 16 000 15 000
Break-even point 8 471 18 071 12 400

40

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ILLUSTRATIVE ACTIVITY ONE EXPECTED ANSWER

[NSC NOVEMBER 2019]
1.1 1.1.1 False 

1.1.2 True 

1.1.3 True  3

1.2 DESKS FACTORY

1.2.1 Factory Overhead Cost Note

Indirect labour R 296 500

Depreciation on factory plant 166 000

Water and electricity (248 000 + 18 000) x80% OR-53 200 212 800

198 400 + 14 400
Factory rent (345 600 x 810/1080) or 83 200 259 200 

Insurance (12 600 x 75/25) or x3 or 50 400 – 12 600 37 800 

Factory sundry expenses 107 700 

-1 for foreign item (advertising ) *one part correct 1 080 000 * 8

1.2.2 Calculate the total cost of production of finished goods.

Workings Answer

Direct material + direct labour + fact o/heads + 0 – 0 =

[9 000 units x R160 p unit] R5 580 000

3 060 000 + 1 440 000 + 1080 000 = 5 580 000
one part correct
   see 1.2.1
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1.2.3 Sihle wants to produce an additional 1 500 desks.

Calculate the additional profit he can expect.
Workings Answer
Possible 1 500 units
Selling price = 750
Cost: 340 + 160 + 40 =( 580 )cost price
R170 profit per unit Correct operation
& one part correct

1 500 possible units x R170 profit per unit = R255 000 R255 000
4
(There are different methods to calculated the answer of R255 000)

1.3 CHAIRS FACTORY

1.3.1 Provide a calculation to confirm the break-even point for 2021.

Workings Answer
Fixed costs: 16 000units x fixed cost per unit 15 071 units
must be
16 000 units x [R76 + R20per unit] = total fixed cost
produced
16 000 units x R96 per unit = R1 536 000 fixed cost before a profit
can be made.
Total Fixed Costs
Selling Price − Variable Cost per Unit

R1 536 000
R390p. u − R305p. u

R1 536 000
= 18 070,58 (18 071) units to be produced and
R85 p.u
sold before a profit can be generated.
OR
Units to cover the cost of the manufactured
products before a profit can be made. 4

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1.3.2 Comment on the Break-Even Point and the production level achieved.
Quote figures.

Comment on BEP  Figures  Comment on production  Figures 

Responses for four marks
 Produced 16 000 units but BEP is 18 071 (or see 1.3.1) units so they
will make a loss
 Produced 2 071 less than BEP so they will make a loss
 Production increased from 15 000 to 16 000 units (by 1 000) and BEP
increased from 12 400 to 18 071 units ( by 5 671)
4
 In 2018 they made a profit on 2 600 units

1.3.3 Sihle feels that wood raw material was not well controlled.
Provide a calculation to support his opinion.
METRES Actual issue: 22 000 m  Budget 16 000  x 1,2 = 19 200 m
Or: wastage = 2 800m four marks choose one line 4
OR Expected: 22 000 one mark / 1,2 one mark = 18 344 one mark Actual: 16 000
UNITS one mark
OR 2 334 fewer chairs made four marks choose one line
OR 22 000 one mark x 120 16 000 one mark x 1,2 one mark x 120 one mark
TOTAL
Expected: R2 640 000 Actual = R2 304 000
COSTS
OR Extra cost = R336 000 four marks choose one line
OR UNIT Expected: 1,2 one mark x R120 one mark = R144 one mark Actual = R165
COSTS one mark
OR Extra unit cost = R21 per unit extra four marks choose one line
OR DMC increased by 33% (R165 - R124,41 ÷ 124) two marks
% PROD Units produced increased by 7% (1 000 ÷ 15 000) two marks

Identify TWO possible causes of this problem.

Provide a solution for EACH.
POSSIBLE CAUSES SOLUTION FOR EACH
  Wastage / unskilled Train workers; supervise regularly Use 4
TWO valid workers technology (stencils / templates)
& different Damage ( fire / water) Secure storage / check deliveries
causes
Internal controls / stock counts / supervision/
with Theft of wood
buy in smaller quantities/ install cameras
solutions
  Poor quality wood Source other suppliers / check deliveries

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1.3.4 Give TWO reasons for the increase in direct labour cost.
Provide a solution for EACH.

REASONS SOLUTION FOR EACH

Load shedding Generator or solar power

Workers dissatisfied
Engagement / communicate with union
with increase / Protests
 
TWO valid &
different Inflation / wage
Improve productivity
reasons with increase / bonus
solutions
  Restrict overtime / more workers (avoid
Overtime
overtime)

Pay per unit produced / improve

Inefficient / slow
monitoring procedures / training
workers 4
programme

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SESSION 32: MANUFACTURING

ACTIVITY 1 MANUFACTURING (40 marks; 30
minutes)
Extract and adapted Free State Prelim 2019
1.1 SANDY MANUFACTURERS
The business manufacturer’s security gates. The financial year ended 28 February 2021.

REQUIRED

1.1.1 Calculate the following for the year ended 28 February 2021:
(i) Direct Material Cost (6)

(ii) Direct Labour Cost (7)

1.1.2 Prepare the Factory Overhead Cost Note (12)

INFORMATION:

A. Stock balances
28 February 2021 1 March 2020
Raw material stock R 780 000 R 480 000
Work-in-process stock 450 000 660 000
Factory Indirect material 24 000 7 500

B. Summary of transactions:
Raw material purchased R 2 160 000
Raw materials returned to suppliers 28 000
Carriage on raw materials 20 000
Water and electricity 55 200
Factory indirect materials purchased 80 000
Factory sundry expenses 105 600
Rent expenses paid 45 000
Insurance ?
Commission to sales staff 37 000

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C. Additional information and adjustments

(i) Salaries and wages:

 Eight employees working directly on the production process earn a
monthly salary of R12 000 each. All workers receive a 13 th
cheque bonus in December, equal to 90% of their monthly salary during
December 2020. Bonuses are not subjected to pension deductions or
pension contributions.
 Factory foreman earns an annual basic salary of R150 000.

 The administration staff earns R13 000 per month in total.

 All employees contribute 5% of basic pay towards pension fund and the
employer's contribution is 7%.

(ii) Water and electricity:

 The sales and administration office uses 20% of the water and
electricity and the factory uses the rest.

(iii) Repairs and Maintenance:

 Factory maintenance paid for the year amounted to R36 500.

A further R12 350 was owed for repairs to factory machinery.

(iv) Rent expenses

Rent is allocated according to floor area as follows:
Factory 600m², administration 120m², and sales department 180m².

(v) Depreciation: Provide as follows

 Factory plant, R29 600
 Office equipment, R8 880
 Delivery vehicle, R32 350

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1.2 PERFECT WOOL MANUFACTURERS

You are provided with information relating to Perfect Wool Manufacturers for the
year ended 28 February 2021. The business produces school jerseys for local
schools in Bethlehem.

1.2.1 Calculate the break-even point for 2021. (4)

1.2.2 Explain whether Jeffreyson the owner, should not be concerned about
the break-even point for 2021. Quote relevant figures. (3)

1.2.3 Direct material cost per unit and direct labour cost per unit have shown
significant changes. Provide TWO different reasons regarding the
change in unit cost for each item on the table provided. (8)

INFORMATION

TOTAL 2021 2020

FIXED COSTS R3 161 070 R42 R42
VARIABLE COSTS 6 525 000 R87 R57
Direct material 2 250 000 R30 R36
Direct labour 3 375 000 R45 R33
Selling and distribution 900 000 R12 R6
Number of units produced and 75 000 67 500
sold
Selling price per unit R180 R140
Break-even units (number) ? 34 157

40

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SESSION 32: MANUFACTURING

MANUFACTURING (40 marks; 30 minutes)

ACTIVITY 1 [Free State Prelim 2019]

1.1 Complete the following for the year ended 28 February 2018:

1.1.1 Direct material cost

1.1.2 Direct labour cost

1.1.3 Factory Overhead Costs for the year ended 28 February

2021
Sundry Expenses 105 600

504 320 12

1.2.1 Calculate the break-even point in 2021.

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1.2.2 Explain whether Jeffreyson the owner, should not be concerned

about the break-even point for 2021. Quote relevant figures.

1.2.3 Direct material cost per unit and direct labour cost per unit have
shown significant changes. Provide TWO different reasons regarding
the change in unit cost for each item on the table provided.

Direct material cost per unit Direct labour cost per unit

TOTAL MARKS

40

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SESSION 32: MANUFACTURING

ACTIVITY 2 (35 marks; 20 minutes)

Extract and adapted GP Prelim 2019

2.1 KLEMISH MANUFACTURERS

The business produces study desks.

REQUIRED:

Prepare the following for the financial year ended 28 February 2021:

2.1.1 Production cost statement (13)

2.1.2 Abridged Income Statement (11)

INFORMATION:

A Stock on hand:
28 February 2021 28 February 2020
Work-in-progress ? R500 800
Finished goods R18 000 R672 000

B  10 800 tables were produced at a unit cost of R495 each.

 Sales of 16 000 tables amounted to R8 160 000.

C Prime cost: R4 600 000 (after adjustments)

D The bookkeeper calculated the following costs before taking into account the
adjustments below:
Administration R296 800
Factory overheads R974 400
Direct materials R3 100 000
Direct labour ?
Selling and distribution R844 000

 An amount of R204 000 for raw materials, purchased on credit, was not
taken into account.
 Stationery valued at R1 000, purchased for the Administration
department was incorrectly allocated to the Selling and Distribution
department.
 Rent Expense, R252 000, was shared between the Factory and Selling
and Distribution department in the ratio of 2:1.
85% should have been allocated to the Factory. Correct the error.

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2.2 DAMARA’S JEWELLERY

Damara owns a jewellery business.

REQUIRED:

2.2.1 Break-even point:

(a) Calculate the break-even point for February 2021. (4)

(b) Damara is satisfied with the results. Explain ONE reason with
figures to support Damara’s satisfaction. (3)

2.2.2 Refer to the unit costs.

(a) Explain why the fixed costs per unit decreased. (2)
(b) Provide ONE possible reason for the change in Direct Material
Costs. (2)

INFORMATION:

February 2021 February 2020

Total units produced and sold 18 000 units 15 000 units
Break-even point in units ? 13 500 units
Selling price per unit R407,00 R330,00

TOTAL VARIABLE COSTS R4 410 000 R3 510 000

VARIABLE COSTS PER UNIT R245,00 R234,00
Direct material cost per unit R128,00 R135,00
Direct labour cost per unit R80,00 R62,00
Selling and distribution cost per unit R37,00 R37,00
TOTAL FIXED COSTS R1 296 000 R1 296 000
FIXED COST PER UNIT R72,00 R86,40
Factory overhead cost per unit R52,00 R62,40
Administration cost per unit R20,00 R24,00

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MANUFACTURING
ACTIVITY 2 MANUFACTURING (35 marks; 20 minutes)
GP Prelim 2019
2.1 KLEMISH MANUFACTURERS

2.1.1 PRODUCTION COST STATEMENT FOR THE YEAR ENDED

28 FEBRUARY 2021

Direct material cost

Direct labour cost
Prime cost
Factory overhead cost

Total cost of production

13

2.1.2 ABRIDGED INCOME STATEMENT FOR THE YEAR ENDED

28 FEBRUARY 2021

Sales 8 160 000

Cost of Sales

11

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2.2 DAMARA’S JEWELLERY

2.2.1 Break-even point:

(a) Calculate the break-even point for February 2021.

(b) Damara is satisfied with the results. Explain ONE reason with
figures to support Damara’s satisfaction.

3
2.2.2 Refer to the unit costs.

(a) Explain why the fixed costs per unit decreased.

2
(b) Provide ONE possible reason for the change in Direct Material
Costs.

TOTAL MARKS

35

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ACTIVITY 3 : MANUFACTURING

(50 marks; 30 minutes) Extract and adapted NW Prelim 2019

3.1 Identify ONE cost account for each of the descriptions from the list below. Write only
the answer next to the question numbers (3.1.1 to 3.1.5) in the ANSWER BOOK.

variable cost; factory overhead cost; direct labour cost; indirect labour
cost; direct material cost; indirect material cost; selling and distribution
cost; fixed cost; administration cost

3.1.1 This cost stays the same, even when the number of items manufactured
changes.

3.1.2 The cost of raw materials that are not directly involved in manufacturing
products.

3.1.3 Bad debts for the accounting period.

3.1.4 Selling and distribution cost as well as direct material cost and direct labour
cost are also referred to as …

3.1.5 Rent expenses of the office for the accounting period. (5)

3.2 N’SYNC MANUFACTURERS

You are provided with information relating to N’Sync Manufacturers, a business

manufacturing heart rate monitors for athletes. The financial year ends on 28
February 2021.

REQUIRED:

3.2.1 Calculate the value of the raw material on hand on 28 February 2021, using
the weighted-average method. (4)

3.2.2 Calculate the value of the direct material issued for production. (3)

3.2.3 Prepare the note for Factory overhead cost. (12)

3.2.4 Prepare the Production Cost Statement for the year ended 28 February 2021.
Show all calculations in brackets. (14)

INFORMATION:

A. 28 February 2021 28 February 2020

Stock on hand
R R
Indirect material cost 2 730 4 500
Work-in-progress ? 65 050
Finished goods 80 500 101 450

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B. Direct material:
Total
Units
Amount
Stock on hand 1 March 2020 500 55 000
Purchases: 9 020 1 135 000
Jun 2018 1 250 137 500
Sept 2018 4 560 592 800
Dec 2018 3 210 404 700
Total available for production 9 520 1 190 000
Stock on hand 28 February 2021 560 ?

C. Other costs:
R
Direct labour cost 467 720
Factory overhead cost 616 280
Selling and distribution cost 16% of sales
Administration cost 92 500
Sales 6 282 375
Cost of finished goods sold 2 512 950

D. The following items must still be taken into account:

 Indirect material

Indirect material bought during the year was R260 000.

At the end of the year it was discovered that indirect material in the
factory costing R1 750 had been stolen. The material is insured and the
insurance will pay out R1 130 in March 2021. No entries have been
made to record this theft. The net loss on the theft must be treated as
an Administration cost.

Indirect material used is divided between the factory, administration and

selling and distribution departments in the ratio of 1 : 1 : 3.

 The monthly insurance premium increased by 10% on1 January 2021.

Insurance paid for the year amounted to R124 992 and this included
insurance paid in advance for March and April 2021. Insurance of
R59 520 was allocated to selling and distribution, and R7 440 to
administration.
 Salary and wage expenses were incurred:

Gross Contributions
Direct salaries Medical aid UIF
Deductions
Labour and
wages
Factory 312 850 15 750 7 002 2 428

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3.3 CRAFTY WOOD

Crafty Wood is a small manufacturing business that produces laser craft wood
products.

REQUIRED:

3.3.1 Calculate the break-even point for the year ended 1 October 2021. (6)

3.3.2 Calculate the units produced and sold for 2021. (2)

3.3.3 Explain whether you think the owner, Jenny, should or should not be
concerned about the profitability and production level of her business.
Provide TWO reasons and justify your answer by providing supporting
figures. (4)

INFORMATION:

A. Every year all the goods produced, are sold.

B. Information taken from the financial records of Crafty Wood:

31 October 2021
Total cost Unit cost
Direct material cost 607 750 R5,50
Direct labour cost 508 300 R4,60
Selling and distribution cost 182 325 R1,65
Factory overhead cost 548 410
Administration cost 247 500

31 October 2021 31 October 2020

Selling price per unit R18,85 R15
Units produced and sold ? 98 000
Break-even point ? 78 000

50

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ACTIVITY 3: MANUFACTURING

(50 marks; 30 minutes) NW Prelim 2019

3.1
3.1.1
3.1.2
3.1.3
3.1.4

3.1.5
5

3.2 N’SYNC MANUFACTURERS

3.2.1 Calculate the value of the raw material on hand on 28 February 2021, using
the weighted-average method.
Calculation Answer

3.2.2 Calculate the value of the direct material issued for production.
Calculation Answer

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3.2.3 Prepare the note for Factory overhead cost.

R
Factory overhead cost 616 280
Indirect material

Insurance

12

3.2.4 PRODUCTION COST STATEMENT ON 28 FEBRUARY 2021

R
Direct material cost
Direct labour cost
Prime cost
Factory overhead cost

Manufacturing cost
Work-in-progress: Beginning
65 050

Work-in-progress: End

Total cost of production

14

3.3 CRAFTY WOOD

3.3.1 Calculate the break-even point for 2021.

Calculation Answer

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3.3.2 Calculate the units produced and sold for 2021.

Calculation Answer

3.3.3 Explain whether you think the owner, Jenny, should or should not be
concerned about the profitability and sustainability of her business.
Provide TWO reasons and justify your answer by providing
supporting figures.

TOTAL
MARKS

50

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SESSION TOPIC PAGE

Reconciliations
33  Creditors
120 - 132
 Debtors
 Debtors Age Analysis

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SESSION 33
ACTIVITY 1 : RECONCILIATIONS (9 marks; 6 minutes)

Extract and adapted GP Prelim 2019

The information relates to Kirsten Traders for August 2021. Kirsten Traders
buys goods on credit from Amla Suppliers.
REQUIRED:
Use the table provided to indicate the changes that must be made:
 In the Creditors' Ledger Account in the books of Kirsten Traders
 In the Creditors' Reconciliation Statement on 31 August 2021 (9)
INFORMATION:
The following differences were discovered when comparing the account in the
Creditors' Ledger with the statement received from Amla Suppliers:
A An invoice for R14 800 was recorded incorrectly as R1 480 on the
statement received from the creditor.
B The bookkeeper of Kirsten Traders recorded an invoice for R1 350 as a
credit note.
C The discount of R850 was in error, overstated by R350 in the Creditors’
Ledger.
D An EFT payment for R7 200 issued by Kirsten Traders did not appear on
the statement due to the statement been processed early.
E Goods for R2 700, returned by Kirsten Traders, was not recorded.

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CREDITORS RECONCILIATION

Creditors' Reconciliation
Creditors' Ledger
Statement

Balance 28 370 25 300

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ACTIVITY 2 CREDITORS RECONCILIATIONS (14 marks; 8 minutes)

Extract and adapted FS Prelim 2019

2.1.1 CREDITORS' RECONCILIATION

MZN Traders buys goods on credit from Styles Suppliers.

REQUIRED:

Use the table on the ANSWER sheet to indicate how the balances given, will change
when preparing the creditors' reconciliation. Indicate the figure as well as a + for increase
and a – for decrease. (14)

INFORMATION:
Balance due to Styles Suppliers on 31 July 2021 as per
12 160 (Cr)
Creditors’ Ledger account in the books of MZN Traders
Balance due by MZN Traders on 28 July 2020 as per
41 380 (Dr)
statement of account received from Styles Suppliers

ERRORS AND OMISSIONS:

A A payment of R8 700 by MZN Traders was not recorded in the Creditors' ledger account
and appear not on the statement as well.

B A discount of R950 for early payment was correctly recorded by MZN Traders. This was not
reflected on the statement.

C MZN Traders recorded a debit note of R1 540 in the Creditors’ ledger account of Styles
Suppliers in error. This was for goods returned to another supplier.

D An invoice for R28 600 received from Styles Suppliers was recorded correctly in the
Creditors’ Ledger account. The statement of account reflected this invoice as R26 800.

E The statement of account showed an invoice for goods purchased, R5 930. This
transaction was not recorded in the books of MZN Traders.

F An invoice of R4 700 was incorrectly recorded as a payment by MZN Traders.

G A debit balance of R2 925 for repairs to a photocopier was transferred from the account of
Styles Suppliers in the Debtors Ledger to their account in the Creditors Ledger. This
transaction was not recorded by Styles Suppliers.

H A payment of R10 275 made on the 29 July 2020 by MZN Traders was not reflected in the
statement.

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RECONCILIATIONS

FS PRELIM 2019
2.1.1. CREDITORS RECONCILIATIONS

Creditors' Ledger Account of Statement of account received

Styles Suppliers from Styles Suppliers

Balance before
errors/omissions 12 160 41 380

Balance after
errors/omissions 14

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RECONCILIATIONS

ACTIVITY 3 DEBTORS RECONCILIATIONS (16 marks; 10 minutes)

EXTRACT AND ADAPTED FS PRELIM 2018

3.1 DEBTORS' RECONCILIATION

The information below relates to Donovan Traders for March 2021.

REQUIRED:

3.1.1 Provide ONE reason why the balance of the Debtors’ Control Account and the
total of the Debtors' List should be the same. (2)

3.1.2 Calculate the correct Debtors' Control Account balance after taking into account
the relevant errors and omissions. (6)

3.1.3 Calculate the correct balances for debtors B Tom and C Dick by taking into
account the errors and omissions. (8)

INFORMATION:

Balance and totals on 31 March 2021 (before errors and omissions).

Debtors' control account in the General Ledger R111 000

Debtor's list: (before errors and omissions)
B Tom R51 300
C Dick R55 120

Errors and omissions

A. The Debtors' Journal was incorrectly totalled as R34 320 instead of R29 140.

B. An invoice issued to debtor B Tom for R900 has not yet been recorded in the
books of Donovan Trader.

C. A debtor, C Dick was refunded R7 500 when he returned goods and his account
was already fully settled at that time.. This transaction was not recorded.

D. The bookkeeper posted an invoice for R1 500 to the wrong side of a debtor B
Tom's account. Posting to the General Ledger was correct.

E. Goods sold on credit to debtor C Dick for R5 900 were correctly recorded in the
Debtors' Journal but incorrectly posted to her account in the Debtors' Ledger as
R9 500.

40

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ACTIVITY 3: DEBTORS RECONCILIATIONS (16 marks; 10 minutes)

FS Prelim 2018

3.1.1 Provide ONE reason why the balance of the Debtors' Control Account and the
total of the Debtors' List should be the same.

3.1.2 Calculate the correct Debtors' Control Account balance after taking into account
the relevant errors and omissions.

111 000

OR:

DEBTORS CONTROL
Balance 111 000 Bank and discount
Sales Debtors allowances

Bank (refunded) 6

3.1.3 Debtors list

Debtor Workings Balance
B Tom 51 300

C Dick 55 120
8

Total of debtors’ list

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ACTIVITY 4 DEBTORS AGE-ANALYSIS (15 marks; 9 minutes)

Extract and adapted EC Prelim 2018

4.1 DEBTORS AGE-ANALYSIS

The owner of Jumbo Traders, Sumi, approached you for assistance in connection with
managing the debtors.

REQUIRED:

4.1.1 Explain how the Debtors’ Age Analysis can assist with the control over debtors.
Provide ONE point. (2)

4.1.2 Calculate the average debtors’ collection period (in days) for the financial year ended
31 August 2019. (5)
 Comment on whether the business should be satisfied with this. (2)

4.1.3 Refer to Information C:

Identify TWO different problems revealed by the Debtors’ Age Analysis. Quote
evidence and/or figures. In each case, provide advice to improve the internal control
relating to the problem identified. (6)

INFORMATION:

A. The balance of the debtors’ control was R19 800 on 1 September 2020

B. Total sales for the year amounted to R750 000.

40% of sales are for cash and the rest on credit.

C. DEBTORS’ AGE ANALYSIS ON 31 AUGUST 2021

Credit Policy: Debtors are granted 30 days in which to settle their debts.
NAME CREDIT TOTAL CURRENT 30 DAYS 60 DAYS 60 DAYS+
LIMIT MONTH
B. Botha R 8 000 R 6 000 R 6 000
C. Coma 30 000 32 000 11 574 R 3 000 R 3 710 R13 716
P. Pule 20 000 18 600 - 8 000 10 600
R. Rome 18 600 19 600 3 000 4 240 12 360
76 200 20 574 15 240 26 670 13 716
27% 20% 35% 18%

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ACTIVITY 4 DEBTORS AGE-ANALYSIS (15 marks; 9 minutes)

FS Prelim 2018
4.1 DEBTORS AGE-ANALYSIS

4.1.1 Explain how the Debtors’ Age Analysis can assist with the control over
debtors. Provide ONE point.

4.1.2 Calculate the average debtors’ collection period (in days) for the financial year
ended 31 August 2021.
Workings Answer

Comment whether the business should be satisfied with this.

4.1.3 Identify TWO different problems revealed by the Debtors’ Age Analysis. Quote
evidence and/or figures. In each case, provide advice to improve the internal
control relating to the problem identified.

Problem Advice on internal

Evidence/figures control

Problem 1

Problem 2

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ACTIVITY 5 DEBTORS RECONCILIATION AND DEBTORS AGE-ANALYSIS

(28 marks; 17 minutes) Extract and adapted KZN Prelim 2019
5.1 Birdswood Traders, owned By Stanley Mazibuko, sells building material for cash and on
credit. Their credit terms are 30 days, but they are budgeting that 80% of their debtors will
adhere to the credit terms.

REQUIRED:

5.1.1 Briefly explain why the balance of the debtors control account should correspond
with the total of the list of debtors. (2)

5.1.2 Calculate the correct closing balance of the debtors control account as at 30 June
2021 (5)

5.1.3 Prepare a correct list of debtors of Birdswood Traders on

30 June 2019. Show all calculations. (14)

5.1.4 Study information A and C below then answer the following questions:

 Does Birdswood Traders have effective control over their debtors? Explain by
quoting figures to motivate your answer. (3)

 State TWO actions that Birdswood Traders could take in order to encourage debtors
to settle their accounts according to the credit terms. (4)
INFORMATION:

A. Debtors age analysis schedule for June 2021:

TOTAL CURRENT 30 DAYS 60 DAYS 90 DAYS

R187 500 R33 700 R26 300 R72 600 R54 900

B. Balance of the debtor’s control on 30 June 2021, amounted to R175 700.

C. Balance according to the debtor’s ledger on 30 June 2021.

Debtors Amount due Credit limits

S.M Mazibuko 46 500 30 000
T,G Nyembe 31 800 35 000
T.M Msweli 27 000 30 000
J.P Botha 63 200 40 000
P.S Pillay 8 600 10 000
177 100

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D. The following errors and omissions were discovered and must be corrected:

(i) The debtors Journal was overcast by R4 100.

(ii) Goods sold on credit to P.S Pillay were incorrectly posted to the account of
T.G Nyembe, R7 600.

(iii) An allowance on damaged goods delivered to S.M Mazibuko, R1 400, was

posted to the wrong side of his account.

(iv) An invoice issued to T.M Msweli for, R2 300 was not entered in the books of
Birdswood Traders.

(v) An over payment for R8 700 was received from P.S Pillay and he requested
to be refunded. The discount allowed of R300 must be reversed and be
cancelled. An internet payment was done to Pillay but no entry was made of
this or the discount .

(vi) Goods sold on credit to J.P Botha for R4 700, was correctly entered in the
debtors Journal, but was posted to her account in the debtors’ ledger as R7
400.

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ACTIVITY 5 DEBTORS RECONCILIATION AND DEBTORS AGE-ANALYSIS

(28 marks; 17 minutes)
Extract and adapted KZN Prelim 2019

5.1.1 Briefly explain why the balance of the debtors control account should
correspond with the total of the list of debtors.

5.1.2 Calculate the correct closing balance of the debtors control account as at 30
June 2021

175 700 5

5.1.3 List of debtors of Birdswood Traders on 30 June 2021.

S. M Mazibuko (46 500

T.G Nyembe (31 800

T.M Msweli (27 000

J.P Botha (63 200

P.S Pillay (8 600

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5.1.4 Does Birdswood Traders have effective control over their debtors? Explain
by quoting figures to motivate your answer.

State TWO actions that Birdswood could take in order to encourage debtors
to settle their accounts according to the terms.

© Gauteng Department of Education