Accounting Leaners Manual Companies

ACCOUNTING
COMPANIES
LEARNERS MANUAL GRADE 12:
TERM ONE
Topic 1 Topic 2
Companies Ledger accounts Financial statements Notes to

Balance sheet
Topic 3 Topic 4
Company Financial statement: Company Financial statement:

Income Balance sheet
Topic 5
Company Financial statement: Cash
Topic 6
Flow Statement
Company Financial statement: Cash
Flow Statement
Topic 7
Cash flow Statement
JENN TRAINING: GRADE 12 ACCOUNTING COMPANIES TERM ONE 1

CONTENTS PAGE
TOPIC 1: Companies Ledger accounts
➢ Examination guideline 3
3
➢ Outcomes
4
➢ Concepts 5- 13
➢ Activities
TOPIC 2: Financial statements Notes to Balance sheet
➢ Notes to balance sheet 14

15-23
➢ Activities
23-25
➢ Summative assessment
TOPIC 3: Company Financial statement: Income
➢ Activities 27-30
31-33
➢ Worked example
34-62
➢ Activities
TOPIC 4: Company Financial statement: Balance sheet
➢ Activities
63-76
➢ Summative assessment 1
77-83
➢ Worked Example 90-107
➢ Summative assessment 2 108-115
TOPIC 5: Company Financial statement: Cash Flow Statement
➢ Worked Example 116-124

125-130
➢ Activities
130-136
➢ Summative assessment 2
TOPIC 6 : Company Financial statement: Cash Flow Statement
➢ Concepts 136
➢ Formulae 137
➢ Summative Assessment 154-159
TOPIC 7 : Cash flow Statement
Bibliography 196
2
JENN TRAINING; GRADE 12 ACCOUNTING COMPANIES TERM ONE
ICON DESCRIPTION
MIND MAP EXAMINATION CONTENTS ACTIVITIES

GUIDELINE
BIBLIOGRAPHY WORKED EXAMPLES STEPS

TERMINOLOGY
3
Examination Guidelines
EXAMINABLE CONTENT FOR GRADE 12 ACCOUNTING
GRADE 12: PAPER 2
Financial Reporting and Evaluation
• Concepts relating to companies Issuing of shares at issue price (no par
Includes: Concepts relating to GAAP value, no share premium); buying back of
& IFR shares
• Unique Ledger Accounts of Includes: fixed asset valuation
companies & interpretation thereof
• Accounting equation of companies
• Adjustments, final accounts & trial
balances of companies
• Income Statement (Statement of
Comprehensive Income) of
companies Includes: fixed asset valuation and inventory
• Balance Sheet (Statement of valuation
Financial Position) & Notes of
companies
• Cash Flow Statement of companies
Includes all financial statements.
• Analysis & interpretation of financial
statements of companies.
• Analysis & interpretation of published
financial statements & audit report of
Includes: additions, depreciation & disposal
companies.
• Valuation of fixed assets for reporting Integrates valuation methods: FIFO;
in financial statements weighted average & specific identification.
• Inventory valuation for reporting in Role of independent auditors
financial statements
• Professional bodies & Code of
conduct Companies Act (general overview only)
• Ethical behavior & corporate
governance in financial environments
• Legislation governing companies
(overview only)
Outcomes
At the end of this topic learners should be able to:
• Know the concepts related to companies
• Understand financial statements and accounting equation of companies
• Explain the Balance sheet
• Interpret shares issue price and buying back of shares
• Understand fixed asset valuation and inventory valuation
• Know the Professional bodies and Code of conduct
• Explain ethical behavior and governance in the financial environment
• Know legislation about governing companies
4
TOPIC 1 : Company Ledger Accounts
1.1 Concepts:
Concepts Explanation
Authorized shares The maximum number of shares a company is allowed to sell
in order to raise capital.
Issued shares The number of shares a company has already sold in order to
raise capital.
Ordinary share capital Capital raised through the issue of ordinary shares.
The portion of companies profit declared by directors to be
given to shareholder the dividends are always declared as a
number of cents per share.
Dividends • Interim dividends: Dividends declared during the year.
• Final dividends: Dividends declared at the end of the
financial year.
Income tax Portion of the net income payable to SARS as tax for the year.
Provisional tax Payment of an estimated amount of tax during the year to
SARS.
Directors fees Fees paid to directors for services rendered. This is an
expense for the company.
Audit fees Fees paid to auditors for services rendered. This is an expense
for the company.
Issue price The price at which shares are issued to the public.
Buy back shares Issued shares that have been repurchased by the company
and are retired or cancelled.
Retained Income A portion of the profits after tax that are not paid out to the
shareholders in dividends but retained for future growth of the
company.
5
Activity 1
You are provided with information relating to Clifton Ltd for the year ended 31 August
2012.
Required:
Use the following information to prepare:
1.1 Calculate the following:

▪ average share price on 1 September 2011
1.2 The entry in the Cash Payments Journal on 31 August 2012.
1.3 The following accounts in the general ledger:

▪ Ordinary share capital
▪ Retained income
▪ Bank
1.4 Calculate the following:

▪ average share price on 1 September 2012 (after the buy-back)
Information:
On 1 September 2011, Clifton Ltd had the following balances in their ledger:
▪ Ordinary share capital (600 000 shares), R3 834 000
▪ Retained income, R3 150 000.
The issued shares were made up as follows:

▪ 320 000 shares issued at R4,50 each
▪ 280 000 shares issued at R8,55 each.
On 31 August 2012 the directors decided to buy back 50 000 shares from four
shareholders at a price of R11,65 per share. The shareholders agreed to these terms and
direct electronic transfers were made to them from the bank account.
6
Activity 1: Answer Book
1.1 Calculate the average share price on 1 September 2011
1.2 CASH PAYMENTS JOURNAL OF CLIFTON LTD – AUGUST 2012

CPJ8
Sundry accounts
Doc D Details Fol Bank
Amount Fol Details
1.3 GENERAL LEDGER OF CLIFTON LTD

ORDINARY SHARE CAPITAL
RETAINED INCOME
BANK
1.4 Calculate the average share price on 1 September 2012 (after the buy-
back)
7
Activity 2 (48 marks; 28 minutes)
2.1 Concepts are listed in COLUMN A and explanations are listed in COLUMN B. Choose
an explanation from COLUMN B that matches a concept in COLUMN A. Write only the
letter (A – G) next to the question number. (10)
COLUMN A COLUMN B
2.1.1 Memorandum of A Shares are issued at issue price and the entire
Incorporation proceeds are credited to the Ordinary Share Capital
account
2.1.2 Limited liability B Profits not distributed to shareholders but held
back for future expansion
2.1.3 Retired shares C A company’s issued share that has subsequently
been repurchased by the company and cancelled.
2.1.4 Issued share capital D The owners of a company cannot be held responsible
for the debts incurred by the company.
2.1.5 Retained income E This company may not issue shares to the general
public
F A document that sets out the rights, duties and
responsibilities of shareholders, directors and others
within a company.
G The number of shares that have actually been issued
2.2 COMPANY LEDGER ACCOUNTS
The information outlined below was extracted from the accounting records of Venus
Limited on 30 June 2012.
REQUIRED:
2.2 Complete the following ledger accounts for the year ended 30 June 2011:
2.2.1 Retained Income (9)
2.2.2 SARS: Income Tax (12)
2.2.3 Dividends on ordinary shares (9)
2.2.4 Appropriation (8)
Note:
The accounts must be properly balanced/closed off on 30 June 2012, the last day of the
financial year.
8
INFORMATION
On 1 July 2011 the following balances, appeared amongst others in the books of Venus
Limited:
`````````````
Ordinary Share Capital (600 000 shares) R1 860 000
Retained Income 1 400 000
SARS: Income Tax 96 000

(Cr)
Shareholders for dividends 120 000
Information relating to the financial year ending 30 June 2013
2011
July 8 The income tax and dividends due in respect of the previous year were
paid.
Dec. 31 The provisional income tax liability of the company was estimated at R300
000.
A cheque for this amount was issued to SARS.
2012
Jan. 27 An interim dividend of 35 cent per share was declared and paid by the
directors of the company.
Febr 28 The company’s board of directors authorized the buy back of 85 000 shares
at R7.80 each. Made electronic payments to shareholders.
June 27 The total provisional income tax liability of the company was estimated at
R675 000. A cheque for the second provisional tax of the company, for the
year was issued to SARS.
30 The net profit for the year amounted to R2 300 000.
The company is taxed at the rate of 30% of the net profit.
The directors declared a final dividend of 60 cents per share on all shares in
issue to date.
48
9
2.1
Choose an explanation from COLUMN B that matches a concept in COLUMN A.
2.1.1
2.1.2
2.1.3
2.1.4
2.1.5
08
GENERAL LEDGER OF VENUS LIMITED

2.1.1 RETAINED INCOME
2.1.2 SARS – INCOME TAX
10
2.1.3 DIVIDENDS ON ORDINARY SHARES
2.1.4 APPROPRIATION ACCOUNT
TOTAL MARKS
46
11
Activity 3
You are provided with the information relating to Mofokeng Traders for the year ended 30
June 2013.
REQUIRED:
1. Prepare the following ledger accounts:
3.1 Ordinary Share Capital

3.2 Retained Income
3.3 Dividends on ordinary shares
3.4 SARS (Income Tax)
3.5 Appropriation
The following balances appeared in the ledger on 1 July 2012:
Ordinary Share Capital (500 000 shares) R2 500 000

Retained Income R 950 000
Bank R1 500 000
SARS (Income tax) R 17 000 (cr)
Shareholders for Dividends R 125 000
1 July 2012 The company issued a further 200 000 ordinary shares at R6.40 each. All the
monies were received and banked.
30 July 2012 SARS and Shareholders for dividends were paid the amounts due to them.
31 Dec 2012 The company paid provisional tax of R270 000 and interim dividends of 20
cents per share. This was applicable to all shareholders.
30 June 2013 At the end of the accounting period, the company made a second
provisional tax payment of R250 000
30 June 2013 The directors decided to buy 60 000 shares from a shareholder at R7.00 per
share. A cheque was issued to him.
30 June 2013 The directors declared a final dividend of 60 cents per share. This was
applicable to all shareholders including new shares issued and repurchased
shares.
30 June 2013 The net income before tax for the year was calculated at R1 700 000.
Income tax is calculated at 30% of net profit before tax.
The authorized share capital consists of 800 000 ordinary shares.
12
GENERAL LEDGER OF VENUS LIMITED

RETAINED INCOME
ORDINARY SHARE DIVIDENDS
SARS – INCOME TAX
13
APPROPRIATION ACCOUNT
14
TOPIC 2 : Company Financial Statement: Notes to Balance sheet
Ordinary share capital – Capital raised through the issue of ordinary shares.
Structure:
Ordinary Share capital
AUTHORISED
xxxx ordinary shares
ISSUED
xxxx shares issued at beginning of the year xxxx
xxxx shares at Rx each issued during the financial year xxxx
(xxxx) repurchased/ bought back x Average price (xxxx)
xxxx shares on closing date xxxx
N.B- The repurchase or buyback can happen in different times during the year so calculations
of average price will always differ based on given information.
Retained income - A portion of the profits after tax that are not paid out to the shareholders
in dividends but retained for future growth of the company.
Structure:
Retained Income
Balance on the last day of previous year xxx
Net profit after tax for the year / period xxx
Repurchase of shares (xxx)
Ordinary dividends (xxx)
Paid (interim) (xx)
Recommended (final) (xx)
Balance on the last day of the current year xxxx
15
Activity 1
NOTES TO BALANCE SHEET – HAROLD LTD.
The following information was taken from the records of Harold Ltd. The financial
year ends on 28 February 2018.
REQUIRED:
Prepare the following notes to the financial statements for the

year ended 28 February 2018.
• Ordinary
( Share Capital (9)
• Retained
( Income (10)
)
INFORMATION
A. Balances taken from the records on 28 February 2018. R
Ordinary share capital (see Information B) 13 702 000
Retained income (1 March 2017) 1 704 000
Loan from director 1 346 000
Fixed deposit: Rush Bank ?
Fixed assets at carrying value (1 March 2017) 11 428 400
Trading stock ?
Net Debtors (after Provision for bad debts was subtracted) 289 000
Creditors Control 495 000
Provision for bad debts 15 550
Bank (favourable) ?
Shareholders for dividends ?
Prepaid expenses 6 400
Accrued expenses 12 000
Depreciation for the year 990 000
B. Share capital:
• Harold Ltd is authorised to sell 7 500 000 shares.
• 3 400 000 shares were already issued on 1 March 2017 to the value
of R7 972 000.
• 1 200 000 new shares were issued on 1 November 2017.
• On 16 December 2017, 180 000 shares were repurchased from a
disgruntled shareholder at R2,30 more than the average share
price. The transaction was recorded.
16
HAROLD LTD
Notes to the financial statements on 28 February 2018
Ordinary share capital
13 702 000 9
Retained income
Balance beginning of the year 1 704 000
Ordinary share dividends
10
17
Activity 2
BASO48 LTD.
You are provided with information relating to Baso48 Ltd. for the financial year ended 28
February 2017.
REQUIRED:
Prepare the following notes to the financial statements for the year ended 28 February
2017:
• Ordinary Share capital (7)
• Retained income (6)
A. INFORMATION EXTRACTED FROM THE INCOME STATEMENT ON 28

FEBRUARY 2017
Gross profit 5 300 000

Net profit after tax 3 250 800
Income tax 1 393 200
Depreciation ?
Interest expense 45 000
B. EXTRACT FROM THE BALANCE SHEET ON 28 FEBRUARY:
Equity & Liabilities

Shareholders' equity ? ?
Share capital 24 510 000 ?
Retained income ? 1 370 000
Current liabilities
SARS (Income tax) 200 000 0
Shareholders for dividends ? 2 137 500
B. SHARES AND DIVIDENDS
• Additional shares were issued on 30 August 2016.
• Shares were repurchased from certain shareholders at R9,00 per share during
October 2016.
• An interim dividend was paid on 31 July 2016.
• A final dividend of 50 cents per share was declared on
28 February 2017. Only shareholders on the current share register are entitled to
final dividends.
18
AUTHORISED
5 000 000 Ordinary shares
ISSUED
3 000 000 Ordinary shares in issue at the
beginning of the year @ R6.00
(1 290 000)
3 800 000 Ordinary shares at the end of the year
24 510 000 7
RETAINED INCOME
Balance at the beginning of the year 1 370 000
Dividends
Paid 1 200 000
6
Balance at the end of the year
19
Activity 3
ALWAYS LIMITED
The information below relates to Always Ltd. for the financial year ended 28 February 2018.
REQUIRED:
1. Prepare the Ordinary share capital.

2. Prepare the Retained Income note on 28 February 2018.
INFORMATION:
A. Balances extracted from the accounting records on 28 February

2018, unless otherwise stated.
R
Ordinary share capital ?
Retained income (28 February 2018) 1 207 000
Loan: Direct Lenders (See Information E.) ?
Fixed deposit: Gonow Bank ?
Trading stock 1 361 000
Creditors' control 428 950
Debtors' control 556 000
Provision for bad debts (1 March 2017) 16 000
Bank (favourable) ?
Accrued expenses (expenses payable) 13 550
SARS: Income tax (provisional tax payments) 506 000
B. Share capital:
• Always Ltd. is authorised to sell 3 000 000 ordinary shares.
• 1 500 000 shares were in issue on 1 March 2017, the beginning of

the financial year.
• 500 000 new shares were issued on 1 December 2017 at R3,00

per share.
• 100 000 shares were repurchased on 20 February 2018 from a

shareholder who was relocating to another country at R1,10 above
the average price. This transaction was properly recorded.
C. Net profit before tax:

20
• After taking into account all relevant information, the net profit before tax
was accurately calculated to be R1 900 000.
• Income tax at the rate of 28% must still be brought into account.
D. Dividends:
• An interim dividend of R420 000 was paid on 28 August 2017.

28 February 2018. All shares (including the shares repurchased on
20 February 2018) qualify for final dividends, which will be paid on
31 March 2018.

AUTHORISED
ISSUED
Retained Income
Balance at beginning of year
Interim 420 000
Final
Balance at end of year
21
Activity 4
AMARA LIMITED
The following information relates to Amara Limited. The financial year ended on 28
February 2017.
REQUIRED:
Prepare the following notes to the Balance Sheet (Statement of Financial

Position) for the year ended 28 February 2017.
• Ordinary Share Capital (9)
• Retained Income (10)
INFORMATION:
A. Extract of a list of Balances/Totals on 28 February 2017
Balance Sheet Accounts Section R

Retained income (1 March 2016) 540 000
Land and Buildings 5 002 000
Equipment (1 March 2016) 700 000
Accumulated depreciation on equipment (1 March 2016) 263 750
Fixed Deposit: GP Bank 260 000
Trade and other receivables 696 000
Cash float 12 000
Loan: GP Bank 1 140 000
Creditors’ Control 294 600
Bank Overdraft 52 000
Nominal Accounts Section
Rent income 177 600
Dividends on ordinary shares 96 000
B. Net Profit for the year

The profit after tax amounted to R720 000, the Income Tax for the year is calculated at
28% of net profit before tax.
C. Shares and Dividends
(i) Authorised share capital comprises 400 000 ordinary shares.
(ii) On 1 March 2016: 160 000 shares for R4 000 000 were in issue.
(iii) On 31 August 2016: The directors decided to buy back 50 000 shares from the
family of a deceased shareholder, at R30 per share. These shares are NOT
entitled to final dividends.
(iv) On 1 January 2017: 100 000 shares were issued at R17,50 each.
(v) The directors declared a final dividend of 80 cents per share on 28 February
2017.
22

AUTHORISED
Number of authorised ordinary shares: 400 000 shares
ISSUED R
160 000 Ordinary shares at the beginning of the year 4 000 000
RETAINED INCOME R
Balance at the beginning of the year 540 000
10
Balance at the end of the year
23
Summative Assessment
SO-FINE LTD
The given information relates to So-Fine Ltd for the financial year ended 31 August
2017.
REQUIRED:
Prepare the following notes to the Balance Sheet on 31 August 2017:
• Ordinary share capital (7)

INFORMATION:
A. Information from the Income Statement for the financial year ended 31 August 2017:
Sales R8 652 000

Operating expenses 1 760 000
Depreciation 320 000
Operating profit 697 000
Income tax 187 770
Net profit after income tax 438 130
B. Information from the Balance Sheet on 31 August:
2017 2016
(R) (R)
Fixed assets (carrying value) 6 177 000 4 975 000
Fixed deposits 220 000 300 000
Loan: Dolphin Bank 985 000 450 000
Current assets 619 600 663 300
Current liabilities 490 000 614 300
Ordinary share capital 5 292 000 ?
Retained income ? 147 370
Cash and cash equivalents 23 400 2 500
Bank overdraft - 65 100
Shareholders for dividends 168 000 120 000
SARS: Income tax 11 800 (Cr) 2 400 (Dr)
24
C. Share capital and dividends
• The authorised share capital comprises 1 200 000 ordinary shares.
• 900 000 ordinary shares were in issue on 1 September 2016.
• The company issued 150 000 ordinary shares at R6,30 per share on 1 May 2017.
• 70 000 ordinary shares were repurchased from shareholders on

30 August 2017. A cheque for R437 500 was issued for these shares. These
shareholders qualify for final dividends.
• An interim dividend of 12 cents per share was paid on

1 February 2017.
• A final dividend was declared on 30 August 2017.
25
Summative Assessment: Answer Book
SO-FINE LTD
AUTHORISED SHARE CAPITAL

1 200 000 ordinary shares
ISSUED SHARE CAPITAL

900 000 Ordinary shares on 1 September 2016
Ordinary shares on 31 August 2017 5 292 000 7
RETAINED INCOME
Balance on 1 September 2016 147 370
Balance on 31 August 2017 9
26
TOPIC 3: Company Financial Statement: Income Statement
Challenging Adjustments
Activity 1
1.1 Directors Fees

a) Directors Fees R497 800
The company has three directors who earn same fee. One director was paid two
months in advance.
b) Directors Fees R736 000
The company has two directors. Each director receives the same monthly
remuneration. One of the directors did not received his director’s fee for one
month.
1.2 Bad debts

a) Bad debts R13 700
A debtor who owed R15 000 was declared bankrupt. His estate paid 60 c for
every rand owed. This was recorded. The balance of his account must be
written off as irrecoverable.
b) Bad debt R17 600
The insolvent estate of a debtor, J Mohlahli, paid out 45 c in the rand and made
a direct deposit of R2 025 on the 31 December 2018. The outstanding balance
must be written off. No entries were made to record the direct deposit and the
amount written off.
1.3 Interest on fixed deposit.

a) Fixed deposit: Nadia Bank R150 000
The interest on fixed deposit amounts to R5 250. The fixed deposit was invested
on 1 July 2018 at Nadia Bank at 7% interest pa. The financial year end on the 28
February 2019.
b)Fixed deposit (8,5% pa interests) R220 000
Interest on fixed deposit R9 350
Outstanding interest on fixed deposit must be taken into account. The fixed
deposit was invested on 1 June 2015. Interest on fixed deposit is not capitalised.
1.4 Interest on loan

a) Mortgage Loan: Thola Bank (interest rate 18% pa) R 1 200 000
Interest on loan R90 000
Provide for outstanding interest on loan. A payment of R300 000 was made
towards the loan on the 30 June 2018 and this was properly recorded. Financial
year ends 28 February 2019.
b) The interest on the mortgage loan has not been entered for the current financial
year. This interest is capitalised. At the start of the year, the balance on the loan
account was R874 000. Monthly repayments of R11 000 were all made on due
date. The loan statement from the bank reflects a balance of R835 000 at
30 June 2013.
27
c) Interest on the loan was capitalised. The loan statement from Nosi Bank on
30 June 2012 reflects the following:
NOSI BANK
Loan statement on 30 June 2012
Balance on 1 July 2011 R341 800
Interest charged ?
Monthly payments to Nosi Bank in terms of the loan
R 54 000
agreement (12 months x R4 500)
Balance on 30 June 2012 R322 000
The interest expense for the year has not yet been entered in the books.
1.5 Sales/ Cost of sales

a) Sales is R3 640 000
Cost of sales R2 730 000
Debtors Allowances R20 000
• An invoice issued to a debtor for credit sales of R40 000 upon which a trade
discount of 20% was granted. These goods were sold at cost plus 331/3%
mark-up.
• A credit note issued to a debtor for merchandise returned, R65 000.The cost
price of this goods was R48 750. The goods were put back into stock.
N.B No entries were made for these.
b) Sales is R5 590 000
The business used the mark up percentage of 30% on cost. This was maintained for the
current financial period.
Goods with the cost price of R30 000 sold on credit was not recorded. 15% trade
discount was allowed on this sale.
A debtor returned goods valued at R2 600. These goods were sent back to the supplier.
a) Sales R?
Cost of Sales R14 974 000
Selling price are determined by using a mark-up of 40% on cost. However, trade
discount of R53 600 were allowed to special customers during the financial year.
b) Sales R?
Goods are sold at the mark-up of 60% on cost. The company held discounted
cash sales during the year to clear excess stock. The total of trade discount given
to customers was R702 000.
1.6 Insurance
a) Insurance R58 000
The insurance amounts includes an annual premium of R24 000 covering the period 1
October 2017 until 30 September 2018 for insurance taken on delivery vehicle. The
financial year ends 28 February 2018.
b) Insurance R21 000

28
Insurance premium were paid until 31 May 2017. Take into account the premium
was decreased by R250 per month from 1 February 2017
c) Insurance R53 800
The insurance premium on company vehicle were paid for eleven month.
Note that after the annual review of the policy, the premium was reduced by 8% on
1 November 2018
1.7 Rent Income

a) Pre-Adjustment Trial balance 28 February 2018
Rent Income R12 420
Adjustment
An office has been let to Fin-house Consultants since 01 April 2017. The business
received a monthly rent of R1 380 from them.
b) Pre-Adjustment trial balance 30 June 2018

Rent Income R105 000
Adjustment
The tenant paid the July and August rent in June 2018. The rent has increased by
R700 per month on 01 January 2018
c) Pre-Adjustment trial balance 29 February 2018

Adjustment
Rent income was increased by 10% on 1 November 2017. The February 2018 rent
is still outstanding.
d) Pre-Adjustment trial balance 30 June 2018

Rent Income R69 160
Adjustment
Rent income for July 2018 has already been received. The monthly rent was
increased by 10% on 1 May 2018.
e) Pre-Adjustment trial balance 30 June 2018
Adjustment
The tenant paid the rent for July and August 2018 in advance. Due to the poor
economic conditions it was agreed to reduce the rent by 10% on 01 January 2018.
29
Calculations/ Workings
30
Worked Example
You are provided with the Pre-Adjustment Trial Balance of a company,

Dunhill Ltd. on 28 February 2014.
REQUIRED:
Prepare the Income Statement for the year ended 28 February 2014.
PRE-ADJUSTMENT TRIAL BALANCE ON 28 FEBRUARY 2014

Ordinary share capital (2 240 000 shares) ?
Retained income 1 525 000
Vehicles at cost 880 000
Accumulated depreciation on vehicles 164 000
Equipment 760 000
Accumulated depreciation on equipment 650 000
Debtors control 521 300
Creditors control 786 800
Loan: Spark Bank 450 000
Bank (Dr) 129 400
SARS: Income tax (Dr) 150 000
SARS: PAYE 44 800
Pensionfund 15 800
Fixed Deposit: Shark Bank 450 000

Sales 5 970 000
Cost of sales 3 200 000
Salaries and wages 821 000
Directors’ fees 840 000
Audit fees 88 000
Employers’ contributions to pension and medical aid 81 000
Debtors allowances 70 000
Bank charges 28 000
Sundry Expenses 89 730
Bad debts 12 100
Rent income 234 950
Interest on fixed deposit 27 000
Repairs and maintenance 125 600
Consumable stores 39 500
Dividends on ordinary shares (interim) 55 000
31
ADJUSTMENTS AND ADDITIONAL INFORMATION:
1 The authorised share capital comprises 3 000 000 ordinary shares.
• There were 2 000 000 ordinary shares for R5 225 000 issue at
the beginning of the financial year.
• A futher 250 000 new ordinary shares were issued on
10 March 2013 at 250 cent each. These shares have been
properly recorded.
• The directors decided to buy back 10 000 shares from Ernie at
R3,10 per share. An electronic transfer was made on
28 February 2014. He is still entitled to dividends during the
current financial year.
2 A debtor returned defective stock with a selling price of R15 000 (mark-
up 50%). The stock was then returned to the suppliers, but no entries
have been made.
3 A debtor, M Spark was declared insolvent. His estate paid 40c in the
rand. R450 was already received and recorded. Write the rest off as
irrecoverable.
4 On 28 February 2014, R2 400 was received from J Jones, whose
account had previously been written off as irrecoverable. The amount
was entered in the Debtors’ control column in die CRJ.
5 The provision for bad debts must be adjusted to 4% of good book debts.
6 A physical stock count on 28 February 2014 reflected:
• Trading stock on hand R1 531 000.
• Consumable stores used R39 000.
7 Depreciation is calculated as follows:
• Vehicles is calculated at 20% p.a. on the diminishing balance
method. A new vehicle was purchased on 31 December 2013 for
R300 000. This has been properly recorded.
• Equipment is calculated at 15% p.a. on the cost price. This
equipment is very old and will be replaced in the near future.
8 The auditors, Froome are owed an extra R12 000 in fees.
9 An employee was omitted from the salaries journal. He has not been
paid. His details are as follows:
Deductions Employer’s contribution Net salary

PAYE Pension Pension
R2 880 R1 950 R3 900 10 538
10 The rent has been paid three month in advance.

NOTE:The monthly rent increased by R1 250 on 1 November 2013.
11 The loan statement from Spark Bank reflected the following:

Balance at beginning of financial year
Repayments during the year
Interest capitalised
Balance at end of financial year
12. R17 000 still owed to SARS for Income tax.
13. Final dividends of 15 cents per share were declared.
32
Worked Example: Solution
INCOME STATEMENT FOR THE YEAR ENDING 28 FEBRUARY 2014
Sales 5 970 000✓ – 70 000✓ – 15 000✓  5 885 000
Cost of Sales 3 200 000✓ – 10 000✓✓  3 190 000
Gross profit  2 695 000
Other operating income  187 539
Rent income 232 450✓ – 48 990✓✓  183 460
Provision for bad debts adjustment ✓ 2 400
Bad debts recovered ✓ 1 679
16
Operating income 2 882 539
Operating expenses  (2 362 572)
Bank charges 28 000
Sundry expenses 89 730
Salaries and wages 821 000✓+ 15 368✓  836 3688
Audit fees 88 000✓ + 12 000✓ ✓ 100 000
Employers contribution pension and medical aid  84 900
81 000✓ + 3 900✓
Bad Debts 12 100✓ + 675✓  12 775
Consumable stores 39 500✓ - 500✓ ✓ 39 000
93 200
 203 199
Depreciation 83200✓ + 10 000✓ + 109 999✓✓
Trading stock deficit 1 534 000 - 1 531 000 ✓ 3 000
22
Operating profit  519 967
Interest income 27 000
Profit before interest expense  546 967
Interest expense ✓ (75 000)
Profit before tax 471 967
Income tax ✓ ✓ (167 000)
Net profit for the year 6  304 967 44
33
Activity 2
INCOME STATEMENT, NOTE TO THE BALANCE SHEET AND
AUDIT REPORT (65 marks; 40minutes)
2.1 Prepare the Income Statement. (50)
2.2 Prepare the Note to the Balance Sheet for Trade and Other Receivables. (10)
INFORMATION:
Extract from Pre-adjustment Trial Balance on 31 December 2015:
Balance Sheet Accounts Section Debit Credit

Ordinary share capital 3 000 000
Retained income (1 January 2015) 628 000
Loan from Paris Bank 540 800
Trading stock 376 000
SARS: Income tax 315 000
Sales 8 412 000
Debtors'allowances 112 000
Bank charges 41 905
Audit fees 75 600
Packing materials 15 400
Commission income 64 140
Directors' fees 736 000
Salaries and wages 1 020 000
Employer's contributions 156 000
Interest on current bank account 3 000
Bad debts 17 600
Rent income 87 720
Dividends on ordinary shares 360 000
34
Adjustments and additional information:
A. Provide for R278 200 depreciation for the financial year.
B. On 27 December 2015 P Maine, a debtor, returned merchandise.A

credit note for R1 600was issued to her. (The cost price was R900.)No
entries were made for the return of the merchandise. These items were
returned to stock.
C. The insolvent estate of a debtor, J Jabaroo, paid out 45 cents in the rand
and made a direct deposit of R2 025 on 31 December 2015. The
outstanding balance must be written off. No entries were made to record
the direct deposit and the amount written off.
D. The provision for bad debts must be increased to R8 000.
E. The stock count on 31 December 2015 revealed:

• Trading stock R369 100
• Packing material R2 400
F. The company has two directors. Each director receives the same
monthly remuneration. One of the directors did not receive his directors'
fee for December 2015.
G. Interest on the loan from Paris Bank has not been entered yet. Interest
is capitalised. The loan statement received from Paris Bank reflected the
following:
Balance on 1 January 2015 R601 600

Repayments made during the year R100 800
Balance on 31 December 2015 R540 800
H. There was no change in the monthly rent during the financial year.The
tenant paid R6 000 for repairs to the premises. As Musica Limited is
responsible for all repairs, the tenant deducted this amount from the
rent, which he paid for November 2015. The repairs have not been
recorded, and the rent for December 2015 has not been received yet.
I. An employee was left out of the Salaries Journal.

His details are:
Net salary R12 150

Deductions R6 350
Employer's contributions R5 050
J. Income tax for the year was correctly calculated at R300 300.
35
2.3 AUDIT REPORT
You are provided with an extract from the independent audit report of
Sumba Ltd.
EXTRACT FROM THE AUDIT REPORT OF SUMBA LTD.
We found that internal control procedures were not adhered to and

documentation did not exist for a significant portion of the transactions tested.
Because of the significance of the matter described in the previous paragraph,

we have not been able to obtain sufficient audit evidence to provide a basis for
an audit opinion. Accordingly, we do not express an opinion on the financial
statements for the year ended 28 February 2014.
REQUIRED:
2.3.1 The audit report is an example of a/an (qualified/unqualified/disclaimer

of opinion) audit report. (1)
2.3.2 Who is the audit report addressed to? Give a reason for your answer. (2)
2.3.3 Explain why it is likely that this audit report will have a negative effect on
the value of the shares of this company on the JSE. (2)
65
36
2.1 MUSICA LIMITED

INCOME STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2015
Sales (8 412 000
Cost of sales (4 595 000
Gross profit
Other income
Gross income
Operating expenses
Bank charges 41 905
Audit fees 75 600
Operating profit
Profit before interest expense
Interest expense
Net profit before tax
Income tax (300 300)
Net profit after tax
50
37
2.2 TRADE AND OTHER RECEIVABLES
2.3 AUDIT REPORT
2.3.1 The audit report is an example of a/an (qualified/unqualified/disclaimer

of opinion) audit report.
2.3.2 Who is the audit report addressed to? Give a reason for your answer.
2.3.3 Explain why it is likely that this audit report will have a negative effect
on the value of the shares of this company on the JSE.
TOTAL MARKS
65
38
Activity 3: INCOME STATEMENT, NOTES TO FINANCIAL
STATEMENTS AND AUDIT REPORT
(75 marks; 45 minutes)
3.1 CONCEPTS
Choose the correct word from those given in brackets. Write only the word next to
the question number (3.1.1–3.1.4) in the ANSWER BOOK.
3.1.1 In the event of bankruptcy, the shareholders are not responsible for the
debts of the business. This is because of (limited/unlimited) liability. (1)
3.1.2 In the financial statements, debtors will be shown as trade and other
(equity/receivables/payables). (1)
3.1.3 The portion of a loan that will have to be repaid within a year is a current
(liability/asset). (1)
3.1.4 The (internal/external) auditor is employed by the company to set up and

audit internal control processes. (1)
3.2 PIXIE LTD
The information below was extracted from the accounting records of Pixie Ltd on
28 February 2018.
REQUIRED:
3.2.1 Prepare the following notes to the Financial Statements for the year
ended 28 February 2018:
• Ordinary Share Capital (8)
• Retained Income (10)
3.2.2 Complete the Income statement for the year ended 28 February 2018. (43)
39
Adjustments and additional information that need to be taken into
account:
1. The company aims to achieve a mark-up percentage on cost of 90%,
but this year has only achieved an actual mark-up of 80%.
2. Pixie Ltd has rented out their unused storeroom since 1 March 2014.
The rent at the beginning of the current financial year (1 March 2017)
was R1 750 per month. The lease agreement stipulates an annual
increase of 10% effective from 1 January each year. The rent for
March 2018 has already been received.
3. Consumable stores used for the financial year amounted to R2 750.
4. Merchandise to the value of R38 000 was damaged because of a

pipe burst during February 2018. After the claim, Elvis Insurance
agreed to pay R34 000 in March 2018.
5. The inventory records reflect a trading stock deficit of R23 400 on

28 February 2018.
6. The loan statement received from West Bank reflects the following:
• Balance on 1 March 2017 R76 500
• Repayments during the year, including interest 12 500
• Balance on 28 February 2018 73 180
Interest on loan is capitalised and has not been recorded yet.
7. The employer’s contribution of R2 700 to the Rosa Medical Aid was

omitted from the Salary Journal. The amount will be paid in
March 2018. Contributions are recorded in the Salaries and wages
account.
8. If the annual sales exceed R1 500 000, the two directors are each
rewarded a bonus of 10% of the amount exceeding R1 500 000. This
must still be recorded.
9. Pixie Ltd paid a 40% deposit on their audit fees for the year. The
outstanding balance will be settled on 7 June 2018.
10. Included in the advertising cost for the year is a 12 month campaign
that was launched on 1 December 2017 on a local billboard at a cost
of R43 200. Advertisements will appear every second month starting
in December 2017.
11. A debtor, C Mawela, with an outstanding balance of R600, has left the
country. His account must be written off as irrecoverable.
12. The provision for bad debts must be decreased by R360.
13. Operating profit on sales was 22% for the year.
14. Sundry expenses is the missing figure in the Income Statement.
40
3.3 AUDIT REPORT
You are provided with an extract from the audit report of Steinfeld Ltd. Read the
report and answer the questions that follow.
3.3.1 What is the main role of the independent auditor? (2)
3.3.2 What type of audit report did Steinfeld Ltd receive: qualified, unqualified or
disclaimer of opinion? (2)
3.3.3 If the debtors are adjusted, it will have a negative effect on the financial
results and position of the business. Because of the fact that the debt is
not written off, the asset value in the books is higher than it should be.
• List TWO liquidity ratios/figures that will be affected by the decision not
to write off the debt. (2)
• The CEO argues that the debtor should rightfully remain in the books
until the lawsuit has been concluded. However, the auditor believes
that the amount should have been written off. Give TWO reasons why
the auditor feels this way. (4)
INFORMATION:
Extract from the Independent Auditor’s Report
The directors neglected to disclose the following. Included in the Trade Debtors shown on
the Balance Sheet of 31 October 2018 and 31 October 2017 is an amount of R800 000
which is the subject of a lawsuit and against which no provision for bad debts has been
made. In our opinion, full provision of R800 000 should have been made in the year
ended 31 October 2017 and the amount written off as a bad debt in 2018.
Audit opinion
In our opinion, the financial statements fairly present the financial position of the
company at 31 October 2018, except for the financial effect of not making the provision
referred to in the previous paragraph.
75
41
3.1 CONCEPTS
3.1.1
3.1.2
3.1.3
3.1.4
4
3.2 PIXIE LTD
3.2.1 NOTES TO THE FINANCIAL STATEMENTS ON 28 FEBRUARY 2018

AUTHORISED
400 000 ordinary shares
ISSUED
300 000 Ordinary shares in issue on 1 March 2017 1 275 000
Ordinary shares in issue on 28 February 2018

8
RETAINED INCOME
Balance on 1 March 2017 28 900
Dividends on ordinary shares
Balance on 28 February 2018

10
42
3.2.2 PIXIE LTD
INCOME STATEMENT FOR THE YEAR ENDED 28 FEBRUARY 2018
Sales 1 800 000
Cost of sales
Gross profit
Other operating income
Gross operating income

Operating expenses
Operating profit
Net profit before interest expense
Net profit after tax
43
43
3.3 AUDIT REPORT
3.3.1 What is the main role of the independent auditor?
3.3.2 What type of audit report did Steinfeld Ltd receive: qualified, unqualified or
disclaimer of opinion?
3.3.3 • List TWO liquidity ratios that will be affected by the decision not to write
off the debt.
• The CEO argues that the debtor should rightfully remain in the books
until the lawsuit has been concluded. However, the auditor believes that
the amount should have been written off. Give TWO reasons why the
auditor feels this way.
TOTAL MARKS
75
44
Activity 4: INCOME STATEMENT, NOTES TO FINANCIAL
STATEMENTS AND ANALYSIS AND INTERPRETATION
4.1 CONCEPTS
REQUIRED:
4.1.1 What purpose does the Income Statement serve in the books of the
business enterprise? (1)
4.1.2 The Companies Act makes it compulsory for Public Companies to

publish their financial statements. Give ONE reason. (1)
4.1.3 Briefly describe the matching principle of GAAP. (1)
4.1.4 Explain the difference between a receipt and an income. (2)
4.2 PJF LTD.
The following information was taken from the books of PJF Ltd.
on 28 February 2014, the end of the financial year.
REQUIRED:
4.2.1 Prepare the Income Statement for the year ended

28 February 2014. (42)
4.2.2 Complete the trade and other receivables notes to the financial
statements on 28 February 2014. (11)
4.2.3 Calculate the following on 28 February 2014:
• The rate at which depreciation on equipment is written off.

(5)
• The value of trading stock as per physical stock count.

(You may draw a Trading stock account.) (6)
4.2.4 Refer to Information C and comment on the operating efficiency of

PJF Ltd. Quote and explain TWO relevant financial indicators with
figures to support your opinion. (6)
45
INFORMATION:
A The following balances and totals were extracted from the Pre-adjustment Trial
Balance of PJF Ltd. on 28 February 2014.
Balance Sheet Accounts Section

Mortgage Loan: TVM Bank (interest rate: 18% p.a.) 1 200 000
Vehicles ?
Equipment 950 000
Accumulated depreciation on vehicles (1 March 2013) 1 350 000
Accumulated depreciation on equipment (1 March 2013) 450 000
Fixed Deposit: TVM Bank (interest rate: 12% p.a.) 900 000
Debtors Control 458 500
Bank 45 200
Pension fund 45 400
SARS (PAYE) 64 100
SARS (Income tax) 100 000
Sales 3 640 000
Insurance 53 800
Rent income 168 000
Interest on loan 90 000
Packing material 52 000
Bad debts 14 000
Pension fund contributions 36 200
Bad debts recovered 3 400
B Additional information and adjustments:
1. The internal auditor discovered, among others, that entries in relation to the
following were never made:
• An invoice issued to a debtor for credit sales of R40 000 upon which a
trade discount of 20% was granted. These goods were sold at cost plus
33⅓ % mark-up.
• A credit note issued to a debtor for merchandise returned, R65 000.

The cost price of these goods was R48 750. The goods were put back
into stock.
46
2. JJ Makhaluza, a debtor who owed R12 000, was declared insolvent. From his
insolvent estate, the company received 60 cents in a rand and the balance was
written off as irrecoverable. No entries were made of these transactions.
3. A Brandt whose account of R1 800 was written off as irrecoverable

subsequently settled the debt in full. The accountant has made the following
entry in this respect: Dr Bad Debts and Cr Debtors Control. Rectify the error.
4. Adjust the provision for bad debts to R20 765.
5. Packing material bought for R3 000 was erroneously posted to the trading
stock account. This must be corrected.
6. R40 000 worth of packing material was used during the financial year.
7. Trading stock deficit of R48 500 was uncovered after the physical stock count.
8. The insurance premiums on company vehicles were paid for 11 months. Note
that after the annual review of the policy, the premium was reduced by 8% on1
November 2013.
9. Included in the rent income amount is R48 000 annual rent for the period
1 June 2013 to 31 May 2014.
10. The secretary to the general manager went on leave on 15 February 2014 and
was paid her March 2014 salary on that date. Her salary slip details are as
follows:
Gross salary: R18 000

PAYE: Deductions 2 160
Pension fund: Deductions 1 440
The employer contributes R2 for every rand deducted from the employee
towards pension fund.
11. Provide for outstanding interest on loan. A payment of R300 000 was made
towards the loan on 30 June 2013 and this was properly recorded.
12. Depreciation on fixed assets for the current financial year must be provided as
follows:
On vehicles R100 000

On equipment R50 000 (on the diminishing balance method)
13. Income tax for the financial year ended 28 February 2014 amounted to
R96 885. This must still be brought into account.
47
C Financial Indicators on 28 February:
2014 2013
Gross profit percentage on turnover/sales 24.4% 26.5%
Net profit before tax on turnover/sales 9% 11%
Operating expenses percentage on 16.4% 14.8%
turnover/sales
Acid test ratio 0,9 : 1 0,7 : 1
Current ratio 1,9 : 1 1,6 : 1
Earnings per share (EPS) 100 cents 120 cents
% return on average shareholders’ equity 19% 17%
Debt-equity ratio 0,49 : 1 0,31 : 1
75
48
4.1 CONCEPTS
4.1.1
4.1.2
4.1.3
4.1.4
49
4.2 PJF LTD.
4.2.1 INCOME STATEMENT FOR THE YEAR ENDED 28 FEBRUARY 2014
Sales (3 640 000
Gross profit
Other income
Rent income (168 000
Bad debts recovered (3 400
Gross operating income
Operating expenses
Insurance (53 800
Salaries and wages (260 000
Packing material (52 000
Bad debts (14 000
Pension fund contributions (36 200

Depreciation
Trading stock deficit
Operating income
Interest expense
Profit before income tax
Income tax
Net profit for the year
42
50
NOTES TO FINANCIAL STATEMENTS
4.2.2 TRADE AND OTHER RECEIVABLES
Net trade debtors

Debtors control (458 500
11
4.2.3 CALCULATE THE FOLLOWING ON 28 FEBRUARY 2014.
The rate at which depreciation on equipment is written off
5
The value of trading stock on hand as per physical stock count
(You may draw up a Trading stock account)
51
4.2.4 Refer to Information C and comment on the profitability and/or
operating efficiency of PJF Ltd. Quote and explain TWO relevant
financial indicators with figures to support your opinion.
TOTAL MARKS
75
52
Activity 5: INCOME STATEMENT AND FIXED ASSETS
5.1 Choose a description from COLUMN B that matches the term in COLUMN A.
Write only the letter (A–D) next to the question number (5.1.1–5.1.4) in the
ANSWER BOOK, for example 5.1.1 E.
COLUMN A COLUMN B
5.1.1 Income Statement A reflects the source of funds and
how they were used
5.1.2 Balance Sheet
B reflects the opinion on the reliability
5.1.3 Cash Flow Statement of the financial statements
5.1.4 Independent Audit Report C reflects the financial position of a

business on a particular date
D reflects profit or loss for a financial

period
(4 x 1) (4)
5.2 MTOMBENI LTD

The information relates to Mtombeni Limited for the financial year ended
28 February 2017.
REQUIRED:
5.2.1 Refer to Information A and B and calculate:
• Carrying value of the vehicle sold on 30 November 2016 (5)
• Total depreciation on equipment on 28 February 2017 (7)
5.2.2 Prepare the Income Statement (Statement of Comprehensive Income)

for the year ended 28 February 2017. (54)
53
INFORMATION:
Information extracted from the Pre-adjustment Trial Balance on
28 February 2017:
Land and buildings 1 600 000
Vehicles ?
Equipment 250 000
Accumulated depreciation on equipment (01/03/2016) 85 000
Mortgage loan: Quick Bank 1 056 000

Sales 5 500 000
Debtors' allowances 32 500
Audit fees 54 000
Bad debts 13 600
Rent income 169 500
Interest on loan ?
Insurance 19 220
Bank charges 7 760
Interest income ?

A. No entries were made for a vehicle sold on 30 November 2016 for
R97 700 cash. Details of the vehicle:
• Cost price, R190 000
• Accumulated depreciation (1 March 2016), R72 000
• Depreciation rate: 20% p.a. on cost
B. Provide for depreciation as follows:
• On remaining vehicles – R138 000 for the financial year
• On equipment at 10% p.a. on the diminishing-balance method
NOTE: New equipment costing R32 000 was purchased and
recorded on 1 September 2016.
C. Goods sold on credit to debtor, J Gander, for R15 000 were not
recorded. The mark-up is 60% on cost price.
D. A physical stocktaking on 28 February 2017 reflected trading stock of
R374 000.
E. Consumable stores used during the financial year amounted to R61 700.
54
F. The account of debtor, L Maseko, must be written off as irrecoverable,
R1 900.
G. Entries on the February 2017 Bank Statement not yet recorded in the
books of the company:
• Bank charges, R870

• Debit order payment for the monthly insurance premium, R1 780
H. Provision for bad debts must be adjusted to R4 030.
I. Loan statement received reflected the following:
Balance: 1 March 2016 1 356 000

Interest ?
Repayment during the financial year 300 000
Balance: 28 February 2017 1 200 000
J. An employee, H Brooks, who commenced work on 1 February 2017,

was omitted from the Salaries Journal. Details of his salary for
February 2017 are:
DEDUCTIONS CONTRIBUTIONS
GROSS
PENSION PENSION
SALARY PAYE UIF UIF
FUND FUND
13 500 2 190 1 080 135 1 620 135
NOTE: All contributions are recorded as part of salaries and wages.
K. The rent income was increased by R1 500 per month from

1 November 2016. The tenant has not paid the rent for February 2017
yet.
L. Interest income is the missing figure in the Income Statement.
M. Income tax is calculated at 28% of net profit.
N. Net profit after tax amounted to R864 000.
70
55
5.1
5.1.1
5.1.2
5.1.3
5.1.4
4
5.2 MTOMBENI LTD
5.2.1 Calculate: Carrying value of the vehicle sold on 30 November 2016
5
Calculate: Total depreciation on equipment on 28 February 2017
56
5.2.2 MTOMBENI LTD
Income Statement (Statement of Comprehensive Income) for the year
ended 28 February 2017:
Sales (5 500 000
Operating expenses
Audit fees 54 000
Operating profit
Interest income
Net profit after interest income

Income tax
Net profit after tax 864 000
54
TOTAL MARKS
70
57
Activity 6: INCOME STATEMENT, NOTES, RATIO ANALYSIS AND AUDIT
REPORT (75 marks; 45 minutes)
6.1 WONGALETHU LTD
You are provided with information from the books of Wongalethu Ltd. The
financial year ended on 30 June 2017.
REQUIRED:
6.1.1 Prepare the Income Statement for the year ended

30 June 2017. (48)
6.1.2 Prepare the Trade and Other Receivables note. (10)
6.1.3 Calculate the following financial indicators on 30 June 2017:
• Percentage net profit on turnover (3)
• Debt-equity ratio (4)

6.1.4 The board of directors wants to acquire an additional loan to fund
expansions within the company. Comment on why you think this is a
good idea or not. Quote TWO financial indicators (with figures) to
support your opinion. (4)
58
INFORMATION:
Extract from the Pre-adjustment Trial Balance on 30 June 2017:
R
Retained income 540 300
Mortgage Loan: BB Bank (10,5%) 2 651 460
Fixed assets ?
Fixed deposit: BB Bank 1 600 000
SARS (income tax) 255 700
Sales 5 590 000
Rates and taxes 69 800
Bad debts 13 700
Insurance 21 000
Rent income 414 000
Sundry expenses ?
Additional information and adjustments:
The business used a mark-up percentage of 30% on cost. This was maintained
for the current financial period.
A. Rates and taxes for June 2017 is outstanding, R11 800.

B. Goods with a cost price of R30 000 sold on credit was not recorded. A
15% trade discount was allowed on this sale.
C. A debtor returned goods valued at R2 600. These goods were sent back
to the supplier.
D. A debtor who owed R15 000 was declared bankrupt. His estate paid 60
cents for every Rand owed. This was recorded. The balance of his
account must still be written off as irrecoverable.
E. A cheque for R4 350 received from a debtor whose account was
previously written off as irrecoverable was not recorded.
F. Provision for bad debts must be adjusted to 5% of outstanding debtors.
59
G. Trading stock on hand as per a physical stock count on
30 June 2017 amounted to R251 500. Note that an invoice for
R45 000 received from TPH Traders for goods purchased on credit must
still be recorded
H. Insurance premiums were paid until 31 May 2017. Take into account that
the premium was decreased by R250 per month from
1 February 2017.
I. Rent income included rent for July 2017. Note that rent was increased by
10% from 1 December 2016.
J. The fixed deposit was increased by R800 000 on 1 January 2017, at the
same rate of 6.5% p.a. Provide for outstanding interest. Interest is not
capitalized.
K. Income tax for the year amounted to R270 000.
L. FINANCIAL INDICATORS CALCULATED ON 30 JUNE:
2017 2016
Net profit percentage on turnover ? 10,9%
Debt-equity ratio ? 0,4:1
% return on total capital employed 23,1% 18,9%
6.2 AUDIT REPORT
The following audit report appeared in a local newspaper.
REQUIRED:
Explain each audit opinion underlined in the extract below. (6)
Gauteng Provincial Government Audit Report 2015/16
The Gauteng Department of Health received another qualified opinion

from the Auditor-General. All other departments received unqualified
opinions. The province's agencies also received unqualified opinions,
except G Fleet, which received a disclaimer.
eNCA 1 September 2015
75
60
WONGALETHU LTD.
6.1.1 INCOME STATEMENT FOR THE YEAR ENDED 30 JUNE 2017
Sales (5 590 000

Gross profit
Other income
Rent income
Operating expenses
Operating profit
Interest income
Interest expense (251 460)
Profit before income tax

Income tax
Net profit for the year 630 000
48
61
6.1.2 Trade and other receivables
Debtors (174 250
10

Net profit percentage on turnover
Debt-equity ratio
6.1.4 The board of directors wants to acquire an additional loan to fund

expansions within the company. Comment on why you think this is a
good idea or not. Quote TWO financial indicators (with figures) to
support your opinion.
62
6.2 Explain each audit opinion underlined in the extract below.
Audit report Description (audit opinion)
Qualified
Unqualified
Disclaimer
TOTAL MARKS
75
63
TOPIC 3: Company Financial Statement: Notes to Balance Sheet &
Balance Sheet
Activity 1
1.Fixed Assets
A. MAFUSA LTD
The information presented relates to the financial year ended 30 April 2016.
REQUIRED:
1. Refer to Information C.
Calculate the missing amounts denoted by (a) to (d) for equipment in
the Fixed Asset Note. Show all workings. (16)
Fixed assets:
Fixed assets comprise land and buildings and equipment.
Extract from the Fixed Asset Note:

EQUIPMENT
Cost (1 May 2015) 3 640 000
Accumulated depreciation (1 May 2015) (a)
Carrying value (1 May 2015) 2 002 000
Movements:
Additions 900 000
Disposals (b)
Depreciation (c)
Carrying value (30 April 2016)
Cost (30 April 2016) (d)
Accumulated depreciation (30 April 2016)
• Equipment is depreciated at 15% p.a. on cost.

• On 31 August 2015 old equipment costing R750 000 was sold for
cash at its carrying value. The accumulated depreciation on this
equipment was R491 750 on 1 May 2015.
• On 1 December 2015 new equipment valued at R900 000 was
purchased.
• There were no other movements.
64
Answer Book
MAFUSA LTD
(a)
(b)
(c)
(d)
16
B) AMALINDA LTD
The following information appeared in the accounting records of Amalinda
LTD for the financial year ended 28 February 2015.
The authorised share capital of the business is 700 000 ordinary shares.
REQUIRED:
Complete the following notes to the balance sheet on 28 February 2015.
(a) Fixed (tangible) Assets (15)
INFORMATION:
Balances and totals (amongst others):

28 February 2015 1 March 2014
Land and buildings 2 500 000 0
Vehicles (cost) 562 500 ?
Accumulated depreciation on vehicles ? 450 000
Equipment (cost) 400 300 375 500
Accumulated depreciation on equipment 189 540 141 500
Ordinary share capital ? 2 924 000
Creditors control 203 900 149 600
Mortgage bond: Buck Bank 2 340 500 0
Shareholders for dividends ? 186 600
SARS: Income tax 25 500 (Cr) 18 140 (Cr)
Accrued income 13 460
Income tax 281 400
Ordinary share dividends (interim dividends) 252 000
65
Fixed Assets:
• On 1 April 2014, the business acquired a mortgage bond of
R2 500 000 to purchase the new buildings.
• On 1 March 2014, the vehicles account comprised of four delivery

vehicles acquired on 1 March 2010, each for the same cost price.
• On 1 November 2014, one of the vehicles was sold on credit at a loss

of R4 200.
• On 1 December 2014, additional equipment was bought.
• Vehicles are depreciated at 15% p.a. on cost and equipment is

depreciated at 20% p.a. on carrying value.
Answer Book
FIXED ASSETS
BUILDING VEHICLES EQUIPMENT
Cost (1/3/2014) 375 500

Accumulated Depreciation
(1/3/2014) (450 000) (141 500)
CARRYING VALUE (1/3/2014)

MOVEMENTS:
Additions -
Disposals
Depreciation (103 125)
CARRYING VALUE (28/2/2015) 2 500 000
Cost (28/2/2015) 2 500 000 562 500 400 300
Accumulated depreciation
(28/2/2015) (189 540) 15
66
C) FIXED ASSETS
The following information relates to the fixed/tangible assets of

Jabulani Hypermarket for the year ended 28 February 2015.
REQUIRED:
1. Refer to Information A, B and C. Calculate the amounts indicated

by (i)–(iii). Show the workings in the space provided in the
ANSWER BOOK. (7)
2. Refer to Information D. Prepare the Asset Disposal Account for the

computer sold on 30 November 2014. (13)
3. Refer to Information E. You are the internal auditor of

Jabulani Hypermarket. The owner has asked you to investigate the
control of trolleys and baskets used in the business.
(a) Explain how the Fixed Assets Register will assist you in your
duties as internal auditor. Provide ONE point. (2)
(b) The stock of trolleys and baskets is classified as a fixed asset.

Give ONE suitable reason for this. (2)
(c) The owner has received numerous complaints from his

customers about the trolleys and baskets. On a busy day the
business often has up to 420 customers in the shop at the
same time.
Identify and explain THREE major problems (with figures)

relating to the control of the trolleys and baskets. In EACH
case, provide a valid,practical solution to improve the control
over these assets. (9)
INFORMATION:
A. Information from the financial statements for the year ended

28 February 2015:
LAND AND EQUIPME

FIXED/TANGIBLE ASSETS VEHICLES
BUILDINGS NT
Carrying value on 1 March 2014 2 500 000 264 600 (i)
Cost 2 500 000 552 000 900 000
Accumulated depreciation 0 (287 400) (224 000)
Movement
Additions (ii) 0 470 000
Disposals at carrying value 0 0
Depreciation 0 (iii)
Carrying value on 28 February 2015 3 200 000
Cost 3 200 000
Accumulated depreciation 0
67
B. The business has two vehicles. The following details appeared in the
Fixed Assets Register:
Vehicle1 Vehicle 2
Cost 240 000 312 000
Accumulated depreciation on 1 March 2014 (225 000) (62 400)
Carrying value on 1 March 2014 15 000 249 600
NOTE: Vehicle 1 is old and is reaching the end of its useful life.
C. The business provides for depreciation on its fixed assets as follows:

• On vehicles at 25% p.a. on cost
• On equipment at 20% p.a. on the diminishing-balance method.
Equipment comprises shopping baskets, trolleys, computers, fridges
and other general shop equipment.
D. A computer was sold for cash to Mash Crusaders on

30 November 2014. A loss of R250 was incurred as the computer was
slightly damaged. According to the Fixed Assets Register, the computer
was originally purchased for R9 200. Accumulated depreciation on this
item was R6 400 on 1 March 2014.
E. The following information refers to the trolleys and baskets of the

business:
TROLLEYS BASKETS
Number of units on hand on 1 March 2014 148 120
Additional units purchased during the
financial year at R2 000 each for the trolleys 112 35
and R250 each for the baskets
Number of damaged units written off during
14 60
the financial year
Number of units on hand as per physical
210 95
count on 28 February 2015
Repair and maintenance cost for units during
R1 800 R16 000
the financial year
68
Answer Book
1. NO. CALCULATIONS AMOUNT

(i)
(ii)
(iii)
2. ASSET DISPOSAL
13
3. (a) Explain how the Fixed Assets Register will assist you in your
duties as internal auditor. Provide ONE point.
(b) The stock of trolleys and baskets is classified as a fixed asset.

Give ONE suitable reason for this.
69
(c) Identify and explain THREE major problems (with figures)
relating to the control of the trolleys and baskets. In EACH case,
provide a valid, practical solution to improve the control over
these assets.
PROBLEM WITH PRACTICAL SOLUTION TO

FIGURES IMPROVE INTERNAL CONTROL
Problem 1
Problem 2
Problem 3
70
D) MTOMBENI LTD
The information relates to Mtombeni Limited for the financial year ended 28 February
2017.
REQUIRED:
Refer to Information A and B and calculate:
• Carrying value of the vehicle sold on 30 November 2016 (5)
• Total depreciation on equipment on 28 February 2017 (7)
INFORMATION:
Information extracted from the Pre-adjustment Trial Balance on
28 February 2017:
Land and buildings 1 600 000
Vehicles ?
Equipment 250 000
Mortgage loan: Quick Bank 1 056 000

Sales 5 500 000
Audit fees 54 000
Bad debts 13 600
Rent income 169 500
Interest on loan ?
Insurance 19 220
Bank charges 7 760
Interest income ?
A. No entries were made for a vehicle sold on 30 November 2016 for
R97 700 cash. Details of the vehicle:
• Cost price, R190 000
• Accumulated depreciation (1 March 2016), R72 000
• Depreciation rate: 20% p.a. on cost
B. Provide for depreciation as follows:
• On remaining vehicles – R138 000 for the financial year
• On equipment at 10% p.a. on the diminishing-balance method
NOTE: New equipment costing R32 000 was purchased and
recorded on 1 September 2016.
71
Answer Book
MTOMBENI LTD
Calculate: Carrying value of the vehicle sold on 30 November 2016
5
Calculate: Total depreciation on equipment on 28 February 2017
72
E) RITCHIE TRADERS LIMITED
The following information was taken from the accounting records of Ritchie
Traders Limited. The company has an authorized share capital of 2 000 000
shares.
REQUIRED:
Prepare the note for fixed asset on 28 February 2015. (20)

INFORMATION:
1. The following balances appeared in the General Ledger of Ritchie

Traders Limited on 28 February 2015.
Ordinary share capital (400 000 shares) 2 400 000

Retained income (28 February 2015) ?
Land and Buildings 1 500 000
Equipment 450 000
Vehicles 765 000
Accumulated depreciation on vehicles ?
Fixed deposit: Kay Bank ?
Incomplete Fixed Asset Note
Land & Vehicles Equipment

Buildings
Carrying value at the 1 100 000 ? ?
beginning of the year
Cost 1 100 000 ? 390 000
Accumulated depreciation (0) ? (156 000)
Movements
Additions ? 240 000 120 000
Disposals (0) (0) ?
Depreciation (0) ?
Carrying value at the end of 1 500 000 ? ?
the year
Cost 1 500 000 740 000 450 000
Accumulated depreciation (0) ? ?
73
Fixed Assets
Land and buildings
A new store was build during the financial year.
Vehicles
With the exception of the vehicle bought for R240 000 on 31 October 2014,
the business bought the other vehicles on 1 March 2011. No vehicles were
sold during the year.
Depreciation on vehicles is written off at 10% p.a. on the diminishing balance

method. This rate has been maintained over the years since the business
came into operation.
Equipment
Old equipment bought on 1 March 2011 for R60 000 was sold for cash on
31 August 2014 for R34 000. New equipment were bought for R120 000 was
bought on 1 September 2014 and was recorded properly.
Depreciation on equipment is written off at 10% p.a. on the cost price method.
74
Answer Book
Fixed Asset Note

Buildings
Carrying value at the 1 100 000
Cost 1 100 000 390 000
Accumulated depreciation (0) (156 000)
Movements
Additions 240 000 120 000
Disposals (0) (0)

Depreciation (0)
Carrying value at the end of 1 500 000
the year
Cost 1 500 000 740 000 450 000
Summative Assessment 1
75
Refer to the Fixed Asset Note and Information D.
Prepare the Asset Disposal Account on 28 February 2014. (8)
Complete the Fixed Asset Note. (16)
Incomplete Fixed Asset Note

Buildings
Carrying value at the 2 000 000 410 000
Cost 2 000 000 800 000
Movements
Additions 1315 000 500 000 100 000
Disposals 0 0
Depreciation 0
Carrying value at the end of 3 315 000
the year
Cost 3 315 000 810 000
Fixed Assets
Vehicles
With the exception of the delivery truck bought for R500 000 on 31 October
2013, the business has had all other vehicles for four years (including this
year). No vehicles were sold during the year.
Depreciation on vehicles is written off at 15% p.a. on the cost price method
and this rate has been maintained over the years since the business came
into operation.
Equipment
An old printer bought on 1 June 2011 for R? was sold for cash on 31 August
2013 at carrying value and in its place a new printer for R100 000 was bought
on 1 September 2013.
Depreciation on equipment is written off at 20% p.a. on the diminishing

balance method.
Answer Book
76
ASSET DISPOSAL
2013 2013
31 31
Aug Aug
8
FIXED ASSET NOTE
Land and
Vehicles Equipment
Buildings
Carrying value at the beginning of
2 000 000 410 000
the year
Cost 2 000 000 800 000
Movements
Additions (at cost) 1 315 000 500 000 100 000
Disposals (at carrying value) 0 0
Depreciation 0
Carrying value at the end of the
3 315 000
year
Cost price 3 315 000 810 000
16
77
Activity 2: Trade & Other receivables
A) Adjustments and additional information:
Prepare the Note to the Balance Sheet for Trade and Other Receivables. (10)
INFORMATION:
Balance Sheet Accounts Section Debit Credit

Retained income (1 January 2015) 628 000
Loan from Paris Bank 540 800
SARS: Income tax 315 000
Sales 8 412 000
Interest on current bank account 3 000
Bad debts 17 600
Rent income 87 720
On 27 December 2015 P Maine, a debtor, returned merchandise. A credit note for

R1 600was issued to her. (The cost price was R900.) No entries were made for the return
of the merchandise. These items were returned to stock.
The insolvent estate of a debtor, J Jabaroo, paid out 45 cents in the rand and made a
direct deposit of R2 025 on 31 December 2015. The outstanding balance must be written
off. No entries were made to record the direct deposit and the amount written off.
The provision for bad debts must be increased to R8 000.
There was no change in the monthly rent during the financial year. The tenant paid
R6 000 for repairs to the premises. As Musica Limited is responsible for all repairs, the
tenant deducted this amount from the rent, which he paid for November 2015. The repairs
have not been recorded, and the rent for December 2015 has not been received yet.
Income tax for the year was correctly calculated at R300 300.
78
Answer Book
TRADE AND OTHER RECEIVABLES
10
B) Bargain Traders Ltd is a public company listed on the JSE. The
business has an authorized share capital of 1 000 000 ordinary shares.
REQUIRED:
Prepare the following notes to the Balance Sheet:
(a) Trade and other receivables (10)

INFORMATION:
A. The following was extracted from the books on 30 June 2014:

Fixed/Tangible assets (carrying value) ?
Fixed deposit: Swan Bank 120 000
Retained income (1 July 2013) 181 900
Bank 351 200
Loan: Drake Bank 295 000
Net trade debtors (after deducting provision for bad debts) 118 370
SARS: Income tax (provisional payments) 320 900
Dividends on ordinary shares (interim dividends) 315 000
B. The following adjustments have not yet been taken into account:
• Insurance included an annual policy of R29 832 paid for on 1 December 2013.
• The provision for bad debts must be increased by R6 100.
• Unused packing material amounted to R9 500.
• A debtor with a credit balance of R11 700 is to be transferred to the Creditors'
Ledger.
• The bank reconciliation reflected a post-dated cheque for R33 000 dated 31
August 2014.
• The statement received from Drake Bank in respect of the loan reflected
interest capitalized of R31 200. Monthly repayments are R10 800 including
interest. These repayments will end in 2017.
• On 30 June 2014, a final dividend of 40 cents per share was declared.
C. Net profit after tax, after taking into account the adjustments above, was
calculated as R813 600. The income tax rate is 28% of net profit before tax.
79
Answer Book

Net trade debtors
10
C) Thevarani Ltd is a public company with an authorized share capital of 750

000 ordinary shares. The information relates to the financial year ended
28 February 2014.
REQUIRED:
Complete the following notes to the Balance Sheet:

Show the workings in brackets.
Trade and other receivables. (7)
INFORMATION:
1. Extract of the Pre-Adjustment Trial Balance on 28 February 2014.
DEBITS CREDITS
Retained income (1 March 2013) 234 000
Loan: Sentry Bank 160 000
Fixed assets (carrying value) 2 258 000
Trading Stock 162 220
Fixed deposit: Oxford Bank (7,5% pa) 125 750
Bank 190 650
SARS : Income tax(provisional payments) 170 000
Insurance 11 760
Rent income 17 300
Total other/operating income 55 000
Ordinary share dividends (paid: 31 August 2013) 120 000
• Income tax for the year was calculated to be R162 800. This must be taken into
account.
• The rent for February 2014 was not yet received. The vacant storage space was
rented out since 1 December 2013.
• An additional insurance policy on plant and equipment was taken out on 1 October
2013. The annual premium of R6 720 was paid.
• The provision for bad debts was adjusted to 3% of the debtors control.
• Audit fees of R4 500 were still outstanding on 28 February 2014.
80
Answer Book
Trade and other receivables.
Debtors control 63 000
D) WONGALETHU LTD
You are provided with information from the books of Wongalethu Ltd. The
financial year ended on 30 June 2017.
REQUIRED:
Prepare the Trade and Other Receivables note. (10)
INFORMATION:
Extract from the Pre-adjustment Trial Balance on 30 June 2017:
R
Fixed deposit: BB Bank 1 600 000
SARS (income tax) 385 700
Rates and taxes 69 800
Bad debts 13 700
Insurance 21 000
Rent income 414 000
Sundry expenses ?
Additional information and adjustments:
The business used a mark-up percentage of 30% on cost. This was maintained for the
81
current financial period.
A. Rates and taxes for June 2017 is outstanding, R11 800.

B. Goods costing R30 000 sold on credit was not recorded. A 15% trade discount was
allowed on this sale.
C. A debtor returned goods valued at R2 600. These goods were sent back to the
supplier.
D. A debtor who owed R15 000 was declared bankrupt. His estate paid 60 cents for
every Rand owed. This was recorded. The balance of his account must still be
written off as irrecoverable.
E. A cheque for R4 350 received from a debtor whose account was previously written
off as irrecoverable was not recorded.
F. Provision for bad debts must be adjusted to 5% of outstanding debtors.
G. Trading stock on hand as per a physical stock count on

30 June 2017 amounted to R251 500. Note that an invoice for
R45 000 received from TPH Traders for goods purchased on credit must still
be recorded
H. Insurance premiums were paid until 31 May 2017. Take into account that the
premium was decreased by R250 per month from
1 February 2017.
I. Rent income included rent for July 2017. Note that rent was increased by 10%
from 1 December 2016.
J. The fixed deposit was increased by R800 000 on 1 January 2017, at the same
rate of 6.5% p.a. Provide for outstanding interest. Interest is not capitalized.
K. Income tax for the year amounted to R270 000.
Answer Book
Trade and other receivables
82
Debtors (174 250
10
Activity 3: Loan
A) INFORMATION:
1. Extract from Income Statement for the year ended 31 August 2014

Interest on loan (capitalised) 60 000
Income tax 300 000
Profit before tax 1 000 000
2. Information extracted from the Post closing trial balance on

31 August 2014
2014 2013
Ordinary shareholders equity 3 849 600 1 730 000
Ordinary share capital 3 231 000 1 292 000
Retained income 618 600 438 000
Long-term liabilities (15% p.a) 100 000 760 000
Fixed assets/ Tangible assets 3 164 420 1 078 840
Trading stock 206 900 126 700
SARS (income tax CR 5 220 CR 8 280
B) Long-term loan: Oka Lenders R235 200
Financial Year end: 28 February 2017

Adjustment: The loan from Oka Lenders was originally received on 1 September
2015. The loan is to be repaid in equal monthly instalments over 5 years. The first
instalment was paid on 30 September 2015.
C) Loan: William Bank R 482 600
Financial Year end: 28 February 2017
Adjustment: The loan statement from William Bank received on 28 February 2014
reflected interest capitalized at R81 400. This was not recorded in the books.
The business expects to settle 20% of the outstanding balance in the next financial
year.
83
D)
Balances/Totals on 28 February:
2018 2017
Loan: LSO Bank ? 1 725 500
Loan: LSO Bank

• Fixed monthly repayments, including interest, are R31 600.
• Capitalised interest amounted to R242 500 for the year ended 28 February 2018.
• Interest for the next financial year is expected to be R162 000.
• Part of the loan will be repaid within the next financial year.
Calculations:
Activity 4: Trade and other payables

84
A) AMALINDA LTD
The following information appeared in the accounting records of Amalinda
LTD for the financial year ended 28 February 2015.
REQUIRED:
(a) Trade and other payables.

Note: All items in the Current Liabilities section of the Balance Sheet must be
included under Trade And Other Payables (except Bank Overdraft). (8)
Creditors control 203 900 149 600
Mortgage bond: Buck Bank 2 340 500 0
SARS: Income tax 25 500 (Cr) 18 140 (Cr)
Accrued income 13 460
Income tax 281 400
Ordinary share dividends (interim dividends) 2520
Dividends:

27 February 2015. All shareholders (including the shareholders of the
shares bought back) qualified for final dividends.
Answer Book
TRADE AND OTHER PAYABLES
B) You are provided with the Pre-Adjustment Trial Balance of a company, Dunhill
Ltd. on 28 February 2014.
REQUIRED:
85
Prepare the following notes to the Balance sheet:
• Trade and other payables (16)
PRE-ADJUSTMENT TRIAL BALANCE ON 28 FEBRUARY 2014

Loan: Spark Bank 450 000
Bank (Dr) 129 400
SARS: Income tax (Dr) 150 000
SARS: PAYE 44 800
Pensionfund 15 800
Audit fees 88 000
Employers’ contributions to pension and medical aid 81 000
Bank charges 28 000
Sundry Expenses 89 730
Bad debts 12 100
Rent income 234 950
Dividends on ordinary shares (interim) 55 000
• The auditors, Froome are owed an extra R12 000 in fees.
• An employee was omitted from the salaries journal. He has not
been paid. His details are as follows:
Employer’s Net
Deductions
contribution salary
R2 880 R1 950 R3 900 10 538
• The rent has been paid three month in advance.

NOTE:The monthly rent increased by R1 250 on 1 November
2013.
• The loan statement from Spark Bank reflected the following:
Balance at beginning of financial year R948 000

Repayments during the year R423 000
Interest capitalised ?
Balance at end of financial year R600 000
• R17 000 still owed to SARS for Income tax.

• Final dividends of 15 cents per share were declared.
Answer Book
86
16
C) You are provided with information relating to Nongweleza Limited for the financial
year ended 30 June 2016.
REQUIRED:
Complete the following note:
Trade and other payables. (16)
The following balances and totals were extracted from the Pre-
adjustment Trial Balance of Nongweleza Ltd on 30 June 2016:

Mortgage Loan: MM Bank 1 200 000
87
Pension fund 45 400
SARS: PAYE 64 100
Audit fees 33 800
Insurance 20 000
Bad debts 14 000
Directors fees 260 000
Rent income 128 800
Salaries and wages 1 220 000
Pension fund contributions 36 200
Packing material 21 000
Bank charges 3 200
Ordinary share dividends 180 000
The directors’ fees for June 2016, R260 000 is still outstanding.
An employee’s details were omitted from the Salaries Journal. He has not been
paid. His details are as follows:
Deductions Employer’s contribution
Net salary
2 880 1 950 3 900 10 538
The rent has been received three months in advance. The monthly rent
increased by 10% on 1 November 2015.
Final dividends were declared at 8 cents per share. 2 100 000 ordinary shares
were in issue on 30 June 2016.
Income tax of R198 016 was calculated at 28% of the net profit. This must still
be brought into account.
Answer Book

88
16
Worked Example:
Bargain Traders Ltd is a public company listed on the JSE. The business has an
authorized share capital of 1 000 000 ordinary shares.
Required:
89
1. Prepare the following notes to the balance sheet:
a) Ordinary share capital (7)
b) Retained income (10)
c) Trade and other receivables (10)
2. Complete the balance sheet on the 30 June 2019. Where notes are not required
show all the workings in brackets to earn part marks.
INFORMATION:
A. Issued share capital comprised 850 000 ordinary shares on 1 July 2018.
B. The following was extracted from the books on 30 June 2019:

Fixed/Tangible assets (carrying value) ?
Fixed deposit: Mokhu Bank 120 000
Retained income (1 July 2018) 181 900
Bank 351 200
Loan: Drake Bank 295 000
Net trade debtors (after deducting provision for bad debts) 118 370
SARS: Income tax (provisional payments) 320 900
Dividends on ordinary shares (interim dividends) 315 000
C. No entries have been made for the repurchase of shares. On 1 October 2018 the
business bought back 150 000 ordinary shares from certain shareholders. Although the
market price of the shares was R9,25, they accepted R7,40 for each share. These
shareholders were not entitled to interim dividends.
D. The following adjustments have not yet been taken into account:
• Insurance included an annual policy of R29 832 paid for on 1 December 2018.
• The provision for bad debts must be increased by R6 100.
• Unused packing material amounted to R9 500.
• A debtor with a credit balance of R11 700 is to be transferred to the Creditors'
Ledger.
• The bank reconciliation reflected a post-dated cheque for R33 000 dated 31 August
2019.
• The statement received from Sejane Bank in respect of the loan reflected interest
capitalized of R31 200. Monthly repayments are R10 800 including interest. These
repayments will end in 2020.
• On 30 June 2019, a final dividend of 40 cents per share was declared.
E. Net profit after tax, after taking into account the adjustments above, was calculated as
R813 600. The income tax rate is 28% of net profit before tax.
SOLUTION
1. ORDINARY SHARE CAPITAL

850 000  ordinary shares in issue at beginning of
5 737 500 
year
90
150 000 shares repurchased during the year 7
(1 012 500) 
(150 000  x R6,75 ) operation, one part correct
700 000  ordinary shares in issue at end of year 4 725 000 

operation, one part correct
RETAINED INCOME
Balance on 1 July 2018 181 900 
Net profit after income tax 813 600 
Shares repurchased (150 000  x 0,65 ) (97 500) 
Ordinary share dividends operation, one part correct (595 000) 

Interim (paid) 315 000 
Final (recommended) (700 000 x 40 cents) 280 000 
Balance on 30 June 2019 operation, one part correct 303 000  10

Net trade debtors (118 370  – 6 100  + 11 700 ) 123 970 
SARS: Income tax (320 900  – 316 400 ) (813 600 x 28/72) 4 500 
Prepaid expenses 12 430 

TOTAL operation, one part correct 140 900  10
91
2. BARGAIN TRADERS LTD
BALANCE SHEET ON 30 JUNE 2019
ASSETS
NON-CURRENT ASSETS operation 4 985 600 
or 6 096 500
Fixed/Tangible Assets balancing figure 4 865 600 
or 5 976 500
Fixed deposit 3 120 000 
CURRENT ASSETS operation 890 300 

or 506 100
Inventory (355 700 + 9 500 ) 9 500 could be T&OR 365 200 
Trade and other receivables see 3.2 140 900 
Cash and cash equivalents 384 200 or 0 
(351 200 + 33 000  - 1 110 000 = - 725 800 + 725 800)
TOTAL ASSETS see Total Equity and Liabilities 9 5 875 900 

or 6 601 700
EQUITY AND LIABILITIES
SHAREHOLDERS' EQUITY operation 5 028 000 

Ordinary share capital see 3.2 4 725 000 
Retained income see 3.2 3 303 000 
NON-CURRENT LIABILITIES 227 800

Loan: Mokhu Bank 5 227 800

(295 000  + 31 200  – 98 400 ) one part correct
CURRENT LIABILITIES operation 620 100 

or 1 345 900
Trade and other payables 241 700 
(197 000  + 11 700  + 33 000 )
Shareholders for dividends see 3.2 280 000 
Current portion of loan see loan 98 400 
Bank overdraft 725 800
TOTAL EQUITY AND LIABILITIES operation 8 5 875 900 

or 6 601 700 28
92
Activity 1 BALANCE SHEET, INTERPRETATION AND ETHICS
You are presented with information from the records of Vijay Limited. The financial
year-end is 28 February 2014.
REQUIRED:
1.1 Prepare the following notes to the Balance Sheet:
1.1.1 Share capital (9)

1.1.2 Retained income (11)
1.2 Prepare the Balance Sheet (Statement of Financial Position) on

28 February 2014. Where notes are not required, show ALL workings in
brackets. (26)
1.3 Calculate the return on average shareholders' equity for 2014. (5)
1.4 From 2013 to 2014 the directors made a deliberate decision to change the
policy on the distribution of profits in the form of dividends. Comment on this
change. Quote financial indicators or figures to support your answer. (4)
1.5 Comment on whether the shareholders should be satisfied with the

percentage return and the market price of their shares. Quote TWO relevant
financial indicators (actual figures/ratios/percentages) and their trends. Give
an additional comment in each case. (6)
1.6 The external auditors, Hassan and Jacob, have employed Janet to work on
the audit of Vijay Ltd. Janet owns 10 000 shares in Vijay Ltd.
Explain why this is a problem and give a valid solution. (4)
INFORMATION:
A. The authorised share capital consists of 750 000 ordinary shares.
On 1 March 2013, only 60% of the shares were in issue.
B. The following amounts were extracted from the records:
28 Feb. 2014 28 Feb. 2013
Total ordinary shareholders' equity ? 3 537 500
Fixed assets (carrying value) ?
Fixed deposit: Sam Bank 650 000
Loan: William Bank 482 600
Inventories 275 400
Debtors' Control 243 500
Creditors' Control 62 460
Cash in the bank and petty cash 336 600
Income received in advance (Rent) 12 120
Prepaid expenses (Insurance) 7 600
Provisional income tax payments 299 980
Interim dividends 270 000
93
C. On 1 November 2013, the company issued a further 80 000 shares at R9,50
per share.
D. On 28 February 2014, the directors decided to repurchase 75 000 ordinary

shares from the estate of a shareholder who had died. This shareholder had
originally purchased his shares on the JSE at various times and at different
prices. A repurchase price of R10,40 was accepted as being a fair price.
E. On 27 February 2014, a final dividend of 40 cents per share was declared.

All shares, including the new shares issued and repurchased, qualify for final
dividends.
F. The loan statement from William Bank received on 28 February 2014 reflected
interest capitalised at R81 400. This was not recorded in the books.
The business expects to settle 20% of the outstanding balance in the next
financial year.
G. After all the above adjustments were taken into account the net profit before
tax was calculated to be R1 161 000. The income tax is calculated at 30% of
net income before tax.
H. Financial indicators on 28 February: 2014 2013

Dividends per share (DPS) 100 cents 82 cents
Net asset value (NAV) 846 cents 786 cents
Return on shareholders' equity (ROSHE) ? 18,3%
I. Additional information: 2014 2013

Market price of Vijay Ltd shares on JSE 1 032 cents 1 060 cents
Interest rate on alternative investments 9% 9%
94
1.1 1.1.1 SHARE CAPITAL
750 000 ordinary shares
Ordinary shares in issue on

________
1 March 2013
Ordinary shares issued during the
80 000
year
Ordinary shares re-purchased
(75 000)
(average price of _______)
Ordinary shares in issue on
________ 9
28 February 2014
1.1.2 RETAINED INCOME
Balance on 1 March 2013 322 500
Balance on 28 February 2014 11
95
1.2 VIJAY LIMITED
BALANCE SHEET (STATEMENT OF FINANCIAL POSITION) ON
28 FEBRUARY 2014
ASSETS
Non-current assets
Financial asset: Fixed deposit 650 000
Current assets
Inventories 275 400
Trade and other receivables
Cash and cash equivalents 336 600
TOTAL ASSETS

Shareholders' equity
Non-current liabilities
Current liabilities
TOTAL EQUITY AND LIABILITIES
26
96
Activity 2: BALANCE SHEET AND AUDIT REPORT
You are presented with information from the records of Phasile Limited. The
financial year-end is 28 February 2017.
REQUIRED:
Prepare the Balance Sheet on 28 February 2017. (Where notes are not
required, show workings in brackets). (45)
INFORMATION:
A. List of balances extracted from the accounting records on 28 February 2017,

unless otherwise stated.
BALANCE SHEET ACCOUNTS SECTION R

Retained income 512 400
Loan from director 470 400
Creditors’ Control 185 600
Bank – debit 627 220
Cash float 7 500
Fixed deposit: BNB Bank (R60 000 matures on 30 June 160 000
2017)
SARS: Income tax (provisional income tax payments) 190 000
B. Details of Fixed assets

• An old computer with a carrying value of R3 750 was sold.
• Fixed assets totalling R350 000 were purchased.
• Depreciation on fixed assets, R110 000.
C. Share capital and dividends

• Phasile Ltd is authorised to sell 2 000 000 ordinary shares.
• 970 000 shares were in issue on 28 February 2017.
• Interim dividends paid on 31 August 2016, R160 000.
• A final dividend of 20 cents per share was declared on 28 February 2017.
D. Loan from director

• The loan from director was originally received on 1 September 2015.
• The loan is to be repaid in equal monthly instalments over 5 years. The
first instalment was paid on 30 September 2015.
• Interest on loan is paid monthly and all payments are up to date. Interest is
not capitalised.
97
E. Other information:
• Provision for bad debts must be increased by R 200.
• Insurance included an annual premium of R8 640 paid for the period ended
30 June 2017.
• The total of the Rent income account was R203 000 which includes the rent
for March and April 2017. Rent was increased by R1 800 per month from
1 October 2016.
F. Net profit and income tax

• After taking into account all relevant information, the net profit after tax was
accurately calculated to be R481 600.
• The income tax rate is 30% of net income before tax.
G. Total capital employed amounted to R2 866 000
98
PHASILE LIMITED
BALANCE SHEET AS AT 28 FEBRUARY 2017
ASSETS
Non-current assets
Current assets
Inventories 129 600
TOTAL ASSETS

Shareholders' equity
Current liabilities
TOTAL EQUITY AND LIABILITIES 45
99
Activity 3: COMPANY FINANCIAL STATEMENTS: BALANCE SHEET
70 marks; 45 minutes)
CONCEPTS
REQUIRED:
3.1 Choose the correct word(s) from those given in brackets. Write only the
word(s) next to the question number (3.1.1–3.1.3) in the ANSWER BOOK.
3.1.1 In our opinion, the annual financial statements present fairly, in all
material respects, the financial position of Zolani Ltd. as at 29
February 2016.
(Qualified audit report/Unqualified audit report/Disclaimer report) (1)
3.1.2 We have not been able to obtain sufficient audit evidence to

provide for an audit opinion. Accordingly, we cannot express an
opinion on the financial statements of Donald Ltd for the year
ended 29 February 2016.
(Qualified audit report/Unqualified audit report/ Disclaimer report) (1)
3.1.3 In our opinion, except for the effect of the unauthorised interest-
free loan to the Chief Operations Officer, the annual financial
statements present fairly, in all material respects, the financial
position of Van Rensburg Ltd.
(Qualified audit report/ Unqualified audit report/ Disclaimer report) (1)
3.2 Kassie Ltd.

You are provided with information taken from the financial records of
Kassie Ltd. at the end of the financial year, 29 February 2016.
REQUIRED:
3.2.1 Prepare the following notes to financial statements on
29 February 2016:
A. Share capital (7)
B. Retained Income (9)
3.2.2 Prepare the Balance Sheet on 29 February 2016.
(Where applicable, show workings for part-marks) (30)
100
3.2.3 Calculate the following financial indicators on 29 February 2016:
• Net asset value per share (3)
• Percentage return on average shareholders' equity (5)
3.2.4 From 2015 to 2016 the directors made a deliberate decision to change the
policy on the distribution of profits in the form of dividends. Explain this
change. Quote figures to support your answer. (4)
3.2.5 The shareholders should be satisfied with the returns and earnings on their
shares. Quote and explain TWO financial indicators with figures to support
this opinion. (4)
3.2.6 The company needs to raise funds by securing additional loans or issuing
new shares.
You are approached for advice. In providing advice, quote TWO relevant
financial indicators with figures to support your advice. (5)
INFORMATION:
A. Share Capital
• The company's authorised share capital consists of 1 000 000 ordinary shares.
• Six hundred thousand (600 000) of these shares were issued at 650 cents per
share by the end of the 2015 financial year.
• Seventy-five percent (75%) of the remaining shares were issued on 1 September
2015 at 800 cents a share.
• Fifty thousand (50 000) shares were bought back on
31 January 2016 for 950 cents each.
B The following balances and totals were extracted from the records on 29 February
.
2016:
2016 2015
Share capital ? 3 900 000
Shareholders' equity ? 4 750 000
Fixed/Tangible assets ? 5 944 000
Fixed deposit: BB Bank (6% per annum) 600 000 ?
Inventory ?
Trade and other receivables 358 000
Trade and other payables 75 900
Bank 343 800
SARS (Income tax) (Dr) 535 000
Loan: CC Lenders (18% per annum) 1 080 000
Accrued expense 1 620
101
C Financial Indicators for the year ended 29 February 2016:
.
2016 2015
Debt/equity ratio 0,18:1 0,33:1
Current ratio 1,5:1 2,0:1
Acid test ratio ? 0,8:1
Net asset value per share ? 680 cents
% return on average shareholders' equity ? 15,2%
Market share price 650 cents 600 cents
D Dividends
.
• An interim dividend of 50 cents per share was paid on
31 August 2015.
• A final dividend of 80 cents per share was recommended on
29 February 2016. Shares repurchased on 31 January 2016 do
not qualify for final dividends.
E. Fixed Deposit
• Interest on a fixed deposit is not capitalised and is calculated

at 6% p.a. and was earned for the first nine months only.
Outstanding interest must still be provided for.
• 30 % of the investment will mature on 30 November 2016. No
entry was made of this.
F. Loan from CC Lenders
• The company successfully negotiated a loan from
CC Lenders on 1 March 2014. Interest is not capitalised.
• The loan is repayable in five equal annual instalments at
the end of February each year. The February 2016
instalment has already been paid and recorded.
G. Debtors
• A debtor's debit balance of R2 000 in the Debtors' Ledger
must still be transferred to his account in the Creditors'
Ledger.
H. Net profit before tax after the above mentioned information have
been taken into account amount to R1 700 000.
I. Other information:
• Income tax equals 30% of the net profit.
• The current ratio is 1,5 : 1.
70
102
3.1 Choose the correct word(s) from those given in brackets.
3.1.1
3.1.2
3
3.1.3
3.2.1 Notes to financial statements
3.2.1 (a) SHARE CAPITAL

Authorized Share Capital
7
Issued Share Capital
600 000 Ordinary shares in issue at the beginning
of the year for 650 cents a share 3 900 000
(50 000)
3.2.1 (b) RETAINED INCOME 9

Balance at the beginning of the year 850 000
103
3.2 KASSIE LTD.
3.2.2 BALANCE SHEET ON 28 FEBRUARY 2016

ASSETS
NON-CURRENT ASSETS
Fixed assets
Fixed Deposit: BB Bank (600 000
CURRENT ASSETS
TOTAL ASSETS

CAPITAL AND RESERVES
NON-CURRENT LIABILITIES
Loan from CC Lenders (1 080 000
CURRENT LIABILITIES
30
104
3.2.3 Calculate the net asset value per share
3
Calculate the percentage return on average shareholders' equity.
3.2.4 From 2015 to 2016 the directors made a deliberate decision to

change the policy on the distribution of profits in the form of
dividends. Explain this change. Quote figures to support your
answer.
3.2.5 The shareholders should be satisfied with the returns and earnings
on their shares. Quote and explain TWO financial indicators with
figures to support this opinion.
105
3.2.6 The company needs to raise funds by securing additional loans or
issuing new shares.
You are approached for advice. In providing advice, quote TWO

relevant financial indicators with figures to support your advice.
70
106
Summative Assessment : CONCEPTS, BALANCE SHEET, AUDIT REPORT AND
FIXED ASSETS (70 marks; 40 minutes)
2.1 CONCEPTS
Choose ONE concept from the list provided for each example below. Write
only the concept next to the question number (2.1.1–2.1.4) in the
ANSWER BOOK.
Non-current liability, current liability, current asset, financial asset
2.1.1 A fixed deposit that matures at the end of 3 years period. (1)
2.1.2 Consumable stores not used at the end of the financial year. (1)
2.1.3 Amount due to SARS in respect of income tax. (1)
2.1.4 Mortgage bond to finance the purchase of new property. (1)
2.2 ALWAYS LIMITED
The information below relates to Always Ltd. for the financial year ended
28 February 2018.
REQUIRED:
2.2.1 Prepare the Retained Income note on 28 February 2018. (10)
2.2.2 Prepare the Balance Sheet (Statement of Financial Position) on

28 February 2018. Show ALL workings. (35)
INFORMATION:
A. Balances extracted from the accounting records on 28 February

2018, unless otherwise stated.
R
Retained income (20 February 2018) 1 207 000
Loan: Direct Lenders (See Information E.) ?
Fixed deposit: Gonow Bank ?
Bank (favourable) ?
Accrued expenses (expenses payable) 13 550
107
B. Share capital:
• Always Ltd. is authorized to sell 3 000 000 ordinary shares.
• 1 500 000 shares were in issue on 1 March 2017, the beginning of the
financial year.
• 500 000 new shares were issued on 1 December 2017 at R3,00 per
share.
• 100 000 shares were repurchased on 20 February 2018 from a

shareholder who was relocating to another country at R1,10 above the
average price. This transaction was properly recorded.
C. Net profit before tax:
• After taking into account all relevant information, the net profit before tax was
accurately calculated to be R1 900 000.
• Income tax at the rate of 28% must still be brought into account.
D. Dividends:
• An interim dividend of R420 000 was paid on 28 August 2017.

28 February 2018. All shares (including the shares repurchased on 20
February 2018) qualify for final dividends, which will be paid on
31 March 2018.
E. Loan: Direct Lenders
Balance on 1 March 2017 R 2 813 500
Repayment during the year (including interest) 259 500
Interest capitalised 223 500
Balance on 28 February 2018 2 777 500
• 20% of the loan balance will be paid in the next financial year.
F. Provision for bad debts:

The provision for bad debts is maintained at 5% of the outstanding debtors.
G. Packing material to the value of R15 900 was on hand on
28 February 2018.
H. Fixed assets and depreciation:
No fixed assets were purchased or sold during the financial year.
Depreciation for the financial year ended 28 February 2018 was R275 000.
108
I. After all adjustments were taken into account on 28 February 2018 the
following ratio existed:
Debt-equity ratio 0,4: 1

Current ratio 2.1: 1
2.3 AUDIT REPORT
You are provided with an extract from the audit report of Nooitgedacht Ltd.
INFORMATION:
Extract from the audit report:
Audit Opinion
Because of the significance of the matter described above, we have not
been able to obtain sufficient audit evidence to provide a basis for an audit
opinion. Accordingly, we do not express an opinion on the financial
statements of Nooitgedacht Limited for the year ended 28 February 2018.
Promise Oliphant, Chartered Accountants (CA)
REQUIRED:
2.3.1 Choose the correct option indicated in brackets and provide a

reason for your choice. Nooitgedacht Ltd. received a/an
(qualified/unqualified/disclaimer of opinion) audit report. (3)
2.3.2 Provide TWO possible consequences of this audit report on the
market price of the shares. (4)
2.3.3 The managing director Billy Lindell, requested that his directors'
fees of R1,4 million be reflected under 'Salaries and wages' in the
Income Statement. As internal auditor, would you agree to his
request? Explain your answer. (3)
109
2.4 FIXED ASSETS
The following information relates to the fixed/tangible assets of MJV
Traders for the year ended 31 July 2017.
REQUIRED:
Calculate the amounts indicated by (i)–(iv). Show the workings. (16)
INFORMATION:
A. Information from the financial statements for the year ended
31 July 2017:
LAND AND
FIXED/TANGIBLE ASSETS VEHICLES EQUIPMENT
BUILDINGS
Carrying value on 1 August 2016 2 500 000 264 600 (iii)
Cost price 2 500 000 552 000 900 000
Movement
Additions (i) 0 0
Disposals at carrying value 0 0 (iv)
Depreciation 0 (ii)
Carrying value on 31 July 2017 3 200 000
Cost price 3 200 000 890 800
B. Land and buildings

• Extensions to the buildings were done during the current financial year.
C. Vehicles
The business owns two vehicles. Details from the asset register is as
follows:
NISSAN FORD
Cost 240 000 312 000
Accumulated depreciation on 1/8/2016 (225 000) (62 400)
Carrying value on 1/8/2016 15 000 249 600
• No vehicles were bought or sold during the year.
• Depreciation is written off on vehicles at 25% p.a. on the cost price method.
D. Equipment
A photocopier was sold for cash to Zibu Internet Shop on
30 April 2017. The photocopier was sold at a loss of R250 due to
damages. According to the Fixed Assets Register, the photocopier
was originally purchased for R9 200. Accumulated depreciation on
this item was R6 400 on 1 August 2016.
Depreciation on equipment is written off at 20% p.a. on the
diminishing balance method.
75
110
Summative Assessment 2: Answer Book
2.1 CONCEPTS
2.1.1
2.1.2
2.1.3
2.1.4
4
2.2.1 Retained Income

Balance at beginning of year
Interim 420 000
Final
10
Balance at end of year
111
2.2.2 BALANCE SHEET (STATEMENT OF FINANCIAL POSITION) ON
28 FEBRUARY 2018
ASSETS
NON-CURRENT ASSETS
Fixed assets
Fixed deposit: Gonow Bank
CURRENT ASSETS
TOTAL ASSETS
ORDINARY SHAREHOLDERS' EQUITY
Ordinary share capital
NON-CURRENT LIABILITIES
CURRENT LIABILITIES 1 904 000

Trade and other payables
35
112
2.3.1 Nooitgedacht Ltd received a/an (qualified/unqualified/disclaimer
of opinion) audit report.
Choice :
Reason:
2.3.2 Provide TWO possible consequences of this audit report on the

market price of the shares.
2.3.3 The managing director Bibi Lindell, requested that his directors'
fees of R1,4 million be reflected under 'Salaries and wages' in the
Income Statement. As internal auditor, would you agree to his
request? Explain.
Would you agree?
Reason:
113
2.4
NO. CALCULATIONS AMOUNT
(i)
(ii)
(iii)
(iv)
16
TOTAL MARKS
75
114
TOPIC 5: Company Financial Statement: Cash Flow Statement
Worked Example
CASH FLOW STATEMENT (31 marks; 20 minutes)
You are provided with information extracted from the records of Maxie Ltd for the
financial year ended 28 February 2015. When financial indicators are required to
support answers, you must provide the name of the financial indicator and the actual
figure, ratio or percentage.
REQUIRED:
1.1 Complete the note for Cash Generated from Operations for the year ended
28 February 2015. (10)
1.2 Complete the Cash Flow Statement for the year ended 28 February 2015.
Some of the figures are entered in the ANSWER BOOK.

Where notes are not required, show ALL workings. (21)
INFORMATION:
A. Extract from the Income Statement for the year ended 28 February 2015
R
Income tax 93 520
B. Figures obtained from the Balance Sheet and notes on 28 February
2015 2014
R R
Financial assets (fixed deposit) 150 000 230 000
Inventories 194 600 262 000
Trade debtors 214 000 198 000
SARS: Income tax - 2 110
Shareholders' equity 2 392 480 1 848 000
Retained income 376 480 328000
Non-current liabilities 500 000 800 000
Current liabilities 239 850 253200
Trade creditors 124 800 165 200
SARS: Income tax 6 300 -
Bank overdraft 12 750 -
115
C. Share capital
• The business has an authorised share capital of 800 000 ordinary shares.
• 400 000 shares were issued before 28 February 2014.

• On 1 March 2014 an additional 200 000 shares were issued at R5,00 each.
• On 1 September 2014 the company repurchased 120 000 shares from a
dissatisfied shareholder at R4,50 each.
• After the above transactions there were 480 000 shares in issue.
D. Fixed assets
Extensions to the existing buildings were undertaken during July 2014.

There were no other movements of fixed assets during the financial year.
E. Dividends
An interim dividend of R60 000 was paid on 30 September 2014.

The final dividend was declared on 28 February 2015.
116
Worked Example: Solution
1.1 CASH GENERATED FROM OPERATIONS
Net profit before income tax (240 480 + 93 520) 334 000 
Operating profit before changes in working capital 564 000
Cash effects of changes in working capital 11 000 
Change in inventories (262 000 – 194 600) 67 400 
Change in receivables (214 000 – 198 000) (16 000) 
Change in payables (165 200 – 124 800) (40 400) 
Cash generated from operations 575 000  10
1.2 MAXIE LTD

CASH FLOW STATEMENT FOR THE YEAR ENDED 28 FEBRUARY 2015
CASH EFFECTS OF OPERATING ACTIVITIES 289 890 
Cash generated from operations 575 000 
Interest paid (52 000) 
Income tax paid (93 520  – 2 110  – 6 300 ) (85 110) 
Dividends paid (88 000  + 60 000 ) (148 000) 
CASH EFFECTS OF INVESTING ACTIVITIES (492 340) 
Purchase of fixed assets
(572 340) 
(2 568 730  + 178 000  – 2 174 390 )
Investments matured (230 000 – 150 000) 80 000 
CASH EFFECTS OF FINANCING ACTIVITIES 160 000
Proceeds of shares issued 1 000 000
Share repurchased (540 000)
Repayment of loan (300 000)
NET CHANGE IN CASH AND CASH EQUIVALENTS (42 450) 

Cash and cash equivalents (1 March 2014) 34 700 
Cash and cash equivalents (28 February 2015) (7 750)  21
117
1.Reconciliation between profit before tax and cash generated from operations.
A) The information below was extracted from the books of Gadaffi Ltd. Study the
information and answer the questions that follow. The financial year ends on
28 February each year.
REQUIRED:
1. Complete the note to the Cash Flow Statement for reconciliation between profit
before taxation and cash generated from operations. (10)
A. Extract from the Income Statement:
28 February 2015
Sales 3 512 000
Net profit before tax 1 250 000
Income tax 30%
B. Information extracted from the Balance Sheet:

28 February 2015 28 February 2014
Tangible/ Fixed Assets (carrying
4 399 040 3 290 000
value)
Financial Assets (15%) 400 000 550 000
Trade and other receivables (Note 1) 226 000 340 000
Cash and cash equivalent 4 500 4 260
Shareholders’ equity 3 509 660 2 608 160
Ordinary Share Capital 2 710 000 2 100 000
Non-current liabilities 1 000 000 1 500 000
Trade and other payables (Note 2) 690 340 364 000
Trade and other receivables:

SARS : Income tax 23 000 -
226 000 340 000
Trade and other payables:

690 340 364 000
118
Answer Book
RECONCILIATION BETWEEN PROFIT BEFORE TAX AND CASH

GENERATE BY OPERATION
10
B) The following information relates to Hartenbos Ltd. The company has an Authorized
Share Capital of 1 500 000 ordinary shares, and the financial year ends on 31
October each year.
REQUIRED:
Prepare the following note to the Cash Flow Statement:
Cash generated from operating activities. (15)
Extract from the Income Statement for the year ended

31 October 2016:
Depreciation R156 800
Income tax 292 710
Net profit before tax 975 700
119
Extract from the Balance Sheet of Hartenbos Ltd. on 31 October 2016.
2016 2015
Fixed assets at carrying value R1 734 190 R1 201 500
Trade and other receivables: 128 000 158 000
Expenses prepaid 56 000
Cash and cash equivalent 136 000 3 400
Long- term liabilities
Loan 400 000 480 000
Trade and other payables: 233 600 265 800
Income received in advance 9 600
Answer Book
Prepare the following note to the Cash Flow Statement
Adjustment for :
Profit before changes in working capital
Changes in Working capital
15
Cash generated from operating activities
120
BASO48 LTD.
C) You are provided with information relating to Baso48 Ltd. for the financial year
ended 28 February 2017.
Complete the CASH GENERATED FROM OPERATIONS
NOTE on 28 February 2017. (9)
INFORMATION EXTRACTED FROM THE INCOME STATEMENT ON 28 FEBRUARY
2017

Income tax 1 393 200
Depreciation ?
EXTRACT FROM THE BALANCE SHEET ON 28 FEBRUARY:
Assets 2017 2016

Non-current assets
Fixed assets ? ?
Fixed deposit 1 000 000 1 800 000
Current Assets
Accrued income 0 2 400
Cash and cash equivalents ? 642 100
Equity & Liabilities
Share capital 24 510 000 ?
Retained income ? 1 370 000
Mortgage loan 800 000 2 400 000
Current liabilities
Trade and other payables 122 300 321 700
Shareholders for dividends ? 2 137 500
INVENTORIES
• No entries were made of defective goods amounting to
R4 560 returned to the supplier on 28 February 2017.
121
Answer Book
CASH GENERATED FROM OPERATIONS

Gross operating profit before changes in working
capital 6 127 160
CHANGES IN WORKING CAPITAL
Change in inventory (170 100)
D) Information is from the books of Booysendal Ltd, a public company listed on the
Johannesburg Securities Exchange (JSE). The financial year ends on 31 August
2017.
Prepare the following notes to the financial statements:
• Reconciliation between profit before taxation and cash generated from (12)
operations.
Extract from the Income Statement on 31 August 2017:
Sales R16 600 000

Directors remuneration 1 400 000
Audit fees 690 000
Income tax (28%) 672 000
Extract from the Balance Sheets on 31 August 2017:
2017 2016
R R
Fixed assets 3 552 000 2 532 000
Inventories 1 094 000 1 462 000
Trade and other receivables 348 290 364 680
Loan (interest capitalised) 350 000 750 000
Trade and other payables 1 251 710 1 462 000
122
NOTES TO THE FINANCIAL STATEMENTS
2017 2016
1. TRADE AND OTHER RECEIVABLES

Income receivable/Accrued income 15 290 12 680
2. TRADE AND OTHER PAYABLES
Trade creditors 447 630 1 016 000
Deferred income/Income received in advance 21 000 14 000
Answer Book
NOTE 1 TO THE CASH FLOW STATEMENT

Reconciliation between profit before taxation and cash generated from
operations
Cash generated from operations 2 663 340

12
123
2.Operating Activities (Dividends & Taxation paid)
A) The following information relates to Hartenbos Ltd. The company has an Authorised
October each year.
Calculate the amount that would appear on the Cash Flow Statement for:
Taxation paid (4)
Dividends paid. (4)
SHARE CAPITAL AND DIVIDENDS:

• The issued share capital on 1 November 2015 consisted of 460 000 shares
of R2,20 each.
• 160 000 Additional shares were issued on 1 November 2015 for R383 000.
• 10 000 shares were bought back from a shareholder on
31 October 2016 at a price of R0,25 above average price. These shares do
qualify for the final dividend.
• Dividends paid:
Interim dividend paid on 31 May 2015 R72 000

31 October 2016:
Income tax 292 710

2016 2015
Trade and other receivables: 128 000 158 000
Trade and other payables: 233 600 265 800
124
Answer Book
Taxation Paid
Dividends Paid
B) The information provided below was taken from the books of Bergman Ltd., a public
company with an authorized share capital of 900 000 ordinary shares.
Calculate the following as they would appear in the Cash Flow Statement for the
year ended 28 February 2014. (Indicate whether it is an inflow or outflow.)
1.Dividends paid (4)
2.Taxation paid (4)
2014 2013
Accrued income 18 050 0
Mortgage loan (18% p.a.: TVM Bank) 1 400 000 920 000
Trade and other payables ? 509 300
Income received in advance 12 900 10 000
Extract from the Income Statement for the year ended 28 February 2014.
Net profit before tax ?

Income tax 475 500
Net profit after tax ?
125
Shares and Share capital
• The company’s authorised share capital consists of 900 000 ordinary

shares only.
• A total of 600 000 was issued for R10 a share in 2010 while 40% of the
remaining shares were issued for R13 each on 1 September 2013.
• Five percent (5%) of all shares previously issued at various times was
bought back for R15 each from the shareholders who left the company
on 28 February 2014.
Dividends
• An interim dividend of 60 cents per share was paid on 30 June 2013.
• A final dividend of 90 cents per share was recommended on
25 February 2014. The shares bought back will also qualify for the final
dividend.
Income Tax
Income tax is 30% of the net profit.
Answer Book
Taxation Paid
Dividends Paid
126
C) Calculate the following amounts to be used in the Cash Flow Statement:
Use brackets to indicate amounts that represent an outflow of cash.
• Dividends paid (4)
• Income tax paid (4)
A. Extracts from the Income Statement on 30 June 2017:

R
Net profit before income tax 1 048 000
Income tax 314 400
B. Extracts from the Balance Sheet on 30 June:

30 JUNE 2017 30 JUNE 2016
SARS: Income tax 22 300 (Cr) 31 000 (Dr)
C. Share Capital:
The Authorised Share Capital comprises 1 200 000 shares.
1 July 2016 Issued share capital comprised 800 000 ordinary shares
1 October 2016 Additional shares issued at R9,80 per share
31 March 2017 120 000 shares repurchased at R10,00 per share
30 June 2017 Closing balance comprised 880 000 ordinary shares
D. Dividends:
• Total dividends for the year amounted to R514 000.
• An interim dividend was paid on 1 December 2016 and a final dividend
was declared on 30 June 2017. Only shareholders on the share register
were entitled to dividends.
Answer Book
Taxation Paid
Dividends Paid
127
D) Calculate the following figures that will appear on the Cash Flow Statement:
Information extracted from the Income Statement on 30 June 2018:

Extract from the Balance Sheet on 30 June:

2018 2017
SARS : income tax Cr 12 400 Dr 8 900
Shares:
• Authorized share capital is 2 000 000 ordinary shares.
• On 30 June 2017, 1 200 000 ordinary shares had been issued.
• On 1 January 2018, 40 000 shares were repurchased at R4.10. (These
shares do not qualify for final dividends.)
• On 30 June 2018, all shares that were un-issued as at 30 June 2017 were
issued.
Dividends:
• Interim dividends of 40 cents per share was declared and paid on
31 December 2017.
• Final dividend of 55 cents per share was declared.
Answer Book
Taxation Paid
Dividends Paid
128
E) You are provided with information relating to Snowhite Ltd. for the financial year
ended 31 March 2018. The business has an authorized share capital of 800 000
ordinary shares.
Calculate the following amounts that will appear in the Cash Flow Statement on 31
March 2018:
• Tax paid (4)
Extract from the Income Statement for the year ended 31 March 2018:
Income tax 125 000

Extract from the Balance Sheet on 31 March:
2018 2017
R R
Share Capital:
DATE DETAILS
31 March 2017 50% of the authorised shares were issued
1 April 2017 Additional 200 000 shares were issued at R6,05 each
1 October 2017 120 000 shares at R1,15 above the average share price
31 March 2018 480 000 shares in issue
Dividends for the financial year:

Interim dividends was paid on 30 October 2017 R84 000
Final dividends declared on 31 March 2018 156 000
Answer Book
Taxation Paid
Dividends Paid
129
3. Investing Activities (Fixed Assets Purchased and Sold)
A) The following information relates to Hartenbos Ltd. The company has an Authorized
October each year.
Calculate the amount of fixed assets sold.
FIXED ASSETS :
Equipment was disposed at carrying value during the year.
New fixed assets were purchased for R720 000 during the year.

31 October 2016:

2016 2015
Fixed assets at carrying value R1 734 190 R1 201 500
Answer Book
B) You are provided with information relating to Phumlani LTD for the financial year
ended 30 June 2018.
Calculate the figure of fixed assets purchased that will appear on the Cash Flow
Statement:


2018 2017
Fixed assets (at carrying value) 3 350 000 2 000 000
Fixed assets:
• Fixed assets were sold for cash at a carrying value of R200 000 during the financial
year. Fixed assets were also purchased during the financial year.
130
Answer Book
C) You are provided with information about Vooma Limited for the past two financial
years ended 30 June. The company is situated in KZN and trades in racing bikes.
Calculate the following figures that will appear in the 2018 Cash Flow Statement:
Fixed assets sold (at carrying value) (5)
FIGURES IDENTIFIED FROM INCOME STATEMENT:

2018 2017
Depreciation 412 000 275 000
EXTRACT FROM BALANCE SHEET ON 30 JUNE:

2018 2017
Fixed assets (carrying value) R12 154 000 R8 031 000
CASH FLOW STATEMENT:

2018 2017
Cash flows from investing activities
Purchases of land and buildings (4 840 000) 0
Sale of fixed assets ? 383 000
Answer Book
131
D) You are provided with information relating to Phumlani LTD for the financial year
ended 30 June 2018.
Calculate the following figures that will appear on the Cash Flow Statement:
• Purchases of fixed/tangible assets (5)


2018 2017
Fixed assets (at carrying value) 3 350 000 2 000 000
Fixed assets:
• Fixed assets were sold for cash at a carrying value of R200 000 during the financial
year. Fixed assets were also purchased during the financial year.
Answer Book
132
4. Financing Activities
A) Mika Limited provided you with extracts from their financial statements for the year
ended 29 February 2016, together with comparative figures for 2015.
Prepare the section of Cash Flow Statement showing the cash effects on financing
activities for the year ended 29 February 2016. (9)
Extract from the financial statements:

29 Feb 2016 28 Feb 2015
Financial Assets (Fixed Deposits) 931 800 1 006 000
Non-current Liabilities 260 000 1 880 000
ADDITIONAL INFORMATION:
• 320 000 shares were in issue at the beginning of the financial year.
• On 1 April 2015 the company’s board of directors authorised the
buy-back of 20 000 shares from an unhappy shareholder. A repurchase
price was set at R17,00 per share. An electronic transfer of funds was
made to the shareholder.
• 150 000 new shares were issued on 1 September 2015.
Answer Book
Prepare the section of the cash effects on financing activities of the Cash
Flow Statement for the year ended 29 February 2016
CASH FLOW FROM FINANCING ACTIVITIES
133
B)The information below relates to Senzo Ltd.
Complete the section of the Cash Flow Statement for cash effects of financing
activities. (12)
Figures from the Balance Sheet and notes:
28 FEBRUARY 28 FEBRUARY
2015 2014
Financial assets (fixed deposit) 350 000 600 000
Non-current liabilities 1 200 000 500 000
Share capital:
• Authorised share capital consists of 800 000 ordinary shares.

• 150 000 new ordinary shares were issued on 1 October 2014.
• 60 000 ordinary shares were repurchased on 1 January 2015 at 90 cents above the
average issue price of R4,30.
• On 28 February 2015 the share register reflected that a total of 690 000 shares had
been issued to date.
Answer Book
CASH EFFECTS OF FINANCING ACTIVITIES
12
134
C)MAFUSA LTD
Complete the section on FINANCING ACTIVITIES in the Cash Flow Statement. (7)
Information extracted from the Balance Sheet on 30 April 2016:

2016 2015
(R) (R)
Fixed deposit 200 000 520 000
Share capital and dividends:
The business is registered with an authorized share capital of

1 200 000 ordinary shares.
1 May 2015 The issued share capital consisted of 800 000

ordinary shares.
1 February 2016 200 000 ordinary shares were issued at R8,00 per
share.
25 April 2016 75 000 ordinary shares were repurchased from a
retired shareholder at a total cost of R600 000.
30 April 2016 There were 925 000 shares in issue.
Answer Book
135
TOPIC 6 : Analysis and Interpretation of financial statements
Key Concepts/Terminology
136
Formulae
137
Activity 1
A) Liquidity
1. Comment on the liquidity position of the company. Quote THREE relevant financial
indicators (actual figures/ratios/percentages) and their trends.
INFORMATION
Financial indicators:
28 Feb. 28 Feb. 2013
2014
Debt-equity ratio ? 0,1 : 1
Net asset value per share (NAV) ? 617 cents
Acid-test ratio 1,2 : 1 3,1 : 1
Stock turnover rate 6,8 times 5,1 times p.a.
p.a.
Debtors' collection period 40 days 35 days
% return on average capital
18,8% 16,4%
employed
Answer Book
1. Comment on the liquidity position of the company. Quote THREE

relevant financial indicators (actual figures/ratios/percentages)
and their trends.
Financial indicator 1 and trend:
General comment:
138
2. FINANCIAL INDICATORS OF TWO COMPANIES
Your friend, James, wants to buy shares in a company which sells running
shoes. He asks you for advice and presents you with the following financial
indicators of two companies he is considering. Both companies have the
same number of shares.
KWELA LTD POMI LTD
Market price per share on the JSE 750 cents 885 cents
Net asset value per share 609 cents 939 cents
Earnings per share 410 cents 176 cents
Dividends per share 240 cents 185 cents
% return on shareholders' equity 21,3% 11,2%
% interest rate on loans 15,0% 15,0%
Debt/Equity ratio 0,3 : 1 2,0 : 1
Period for which stock is on hand 150 days 88 days
Average debtors' collection period 53 days 25 days
REQUIRED:
Explain your answers to the following question. In each case compare and
quote financial indicators of both companies (actual figures, ratios or
percentages) to support your answer.
James is of the opinion that Pomi Ltd is handling its working capital
more effectively and is in a better liquidity situation than Kwela Ltd.
Explain and quote THREE financial indicators to support his
opinion. (9)
Answer Book
2. James is of the opinion that Pomi Ltd is handling its working capital
more effectively and is in a better liquidity situation than Kwela Ltd.
Explain and quote THREE financial indicators to support his opinion.
139
3. In answering the following two questions, quote financial indicators in your
explanations:
• Is there an improvement in the company’s ability to settle its short-term

debts? Explain. (3)
• Suggest TWO strategies the company could use to improve its cash flow
other than raising capital or loans. (4)
FINANCIAL INDICATORS
28 Feb 2018 28 Feb 2017

% Gross profit on sales 79,6% 58.3%
Net profit after tax on turnover 24,9% 23,8%
Acid-test ratio 0,33:1 0,5:1
Stock holding period 73 days 91 days
Stock turnover rate 5 times 4 times
Debtors collection period 47,2 days 30,8 days
Dividend per share (DPS) 96 cents 52 cents
Return on shareholders’ equity (ROSHE) ? 21%
Return on Capital Employed (ROTCE) ? 24,3%
Debt / equity ratio ? 0,6:1
Market price of shares on the JSE 950 cents 850 cents
Interest on loan (rate) 15% 15%
140
Answer Book
In answering the following two questions, quote financial indicators in

your explanations.
Is there an improvement in the company’s ability to settle its short-term
debts? Explain.
RATIO AND FIGURES
COMMENT
Suggest TWO strategies the company could use to improve its cash flow
other than raising capital or loans.
4. Refer to Information.
The directors are not satisfied with the liquidity position. Quote and explain
THREE relevant financial indicators (with figures) to support this statement. (6)
Financial Indicators on 28 February:

2016 2015
Net profit after tax on sales 31,9% 24,5%
Creditors' payment period 45 days 80 days
Rate of stock turnover 3 times 5times
Return on shareholders' equity ? 17,5%
Return on total capital employed 24,2% 21,2%
Interest rate on loans 10,5% 10,5%
Market value per share 505 cents 480 cents
141
Answer Book
4. The directors are not satisfied with the liquidity position. Quote and
explain THREE relevant financial indicators (with figures) to support
this statement.
Activity 2 Financial Risk Gearing
1. Explain how the sale of new shares affected the risk and financial gearing of the
company. Quote TWO financial indicators. (5)
A 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.
142
B FINANCIAL INDICATORS
28 Feb 2018 28 Feb 2017

% Gross profit on sales 79,6% 58.3%
Net profit after tax on turnover 24,9% 23,8%
Acid-test ratio 0,33:1 0,5:1
Stock holding period 73 days 91 days
Stock turnover rate 5 times 4 times
Debtors collection period 47,2 days 30,8 days
Dividend per share (DPS) 96 cents 52 cents
Return on shareholders’ equity (ROSHE) 21%
Return on Capital Employed (ROTCE) 32.2% 24,3%
Debt / equity ratio 0.3:1 0,6:1
Net asset value per share (NAV) 836 cents 745 cents
Market price of shares on the JSE 950 cents 850 cents
Interest on loan (rate) 15% 15%
Answer Book
Explain how the sale of new shares affected towards the risk and
financial gearing of the company. Quote TWO financial indicators.
143
2. One of the directors is of the opinion that the company should make more use of
loans. Comment on the degree of risk and gearing. Quote financial indicators
with figures. (6)
The following financial indicators were calculated on 28 February:
2017 2016
Earnings per share ? 157 cents
Return on average capital employed 43,6% 46,9%
Return on average shareholders’equity 38,4% 55%
Interest rate on borrowed funds 15% 15%
Interest rate on investments 8% 8%
Debt-Equity ratio ? 1,2:1
ANSWER BOOK
One of the directors is of the opinion that the company should make
more use of loans. Comment on the degree of risk and gearing. Quote
financial indicators with figures.
144
3.The directors are proposing that the business operations be expanded in the new
financial year. One of the directors suggested that they finance the expansions by
taking a loan of R1 000 000, instead of issuing new shares to the public. Quote and
explain TWO financial indicators to support his opinion. (6)
Financial indicators for the past two financial years:

31 October 2014 31 October 2013
Current ratio 3,10 : 1 2,23 : 1
Acid-test ratio 2,3:1 0,92 : 1
Return on average shareholders' equity 23% 15%
Debt-equity ratio 0,5:1 0,34 : 1
Return on average capital employed 26% 18%
Prices of Classico Ltd shares on the JSE 950 cents 725 cents
Interest on fixed deposit 5,5% 5,5%
Interest rate on loans 12% 12%
Answer Book
The directors are proposing that the business operations be expanded in

the new financial year. One of the directors suggested that they finance
the expansions by taking a loan of R1 000 000, instead of issuing new
shares to the public. Quote and explain TWO financial indicators to
support his opinion.
4. The companies have made different decisions regarding the use of loans.
Comment on the degree of risk and financial gearing. Give ONE financial
indicator in EACH case for EACH company. (7)
145
INFORMATION:
The following financial indicators/other information is from the records of

Grayson Ltd and Joni Ltd on 31 March 2016, the financial year-end:
GRAYSON JONI
LTD LTD
Current ratio 1,65 : 1 4,40 : 1
Acid-test ratio 1,20 : 1 0,85 : 1
Stock-holding period 38 days 184 days
Return on average shareholders' equity
16,1% 8,9%
(ROSHE)
Return on average total capital employed
27% 4%
(ROTCE)
Net asset value per share (NAV) 1 200 cents 425 cents
Interest rate on fixed deposits 8% 8%
Percentage dividend pay-out 98% 40%
ANSWER BOOK
4. The companies have made different decisions regarding the use of

loans. Comment on the degree of risk and financial gearing. Give ONE
financial indicator in EACH case for EACH company.
DEGREE OF RISK FINANCIAL GEARING

Financial indicator: Financial indicator:
Grayson Ltd
Financial indicator: Financial indicator:
Joni Ltd
Comment
146
Activity 3: Returns
1.
a) Calculate the return on average shareholders' equity for 2014. (5)
b) Comment on whether the shareholders should be satisfied with the percentage

return and the market price of their shares. Quote TWO relevant financial indicators
(actual figures/ratios/percentages) and their trends. Give an additional comment in
each case. (6)
A. The authorised share capital consists of 750 000 ordinary shares.

On 1 March 2013, only 60% of the shares were in issue.
B. The following amounts were extracted from the records:
28 Feb. 2014 28 Feb. 2013
Total ordinary shareholders' equity ? 3 537 500
Fixed assets (carrying value) ?
Fixed deposit: Sam Bank 650 000
Loan: William Bank 482 600
Inventories 275 400
Creditors' Control 62 460
Cash in the bank and petty cash 336 600
Income received in advance (Rent) 12 120
Prepaid expenses (Insurance) 7 600
Provisional income tax payments 299 980
Interim dividends 270 000
The net profit before tax was calculated to be R1 161 000. The income tax is calculated at
30% of net income before tax.
Answer Book
Calculate the return on average shareholders' equity for 2014.
147
Comment on whether the shareholders should be satisfied with the
percentage return and the market price of their shares. Quote TWO
relevant financial indicators (actual figures/ratios/percentages) and their
trends. Give an additional comment in each case.
2.
2.1 Calculate the following financial indicators on 30 June 2016:
• Acid-test ratio (4)

• % return on average shareholder's equity (ROSHE) (5)
• Net asset value per share (NAV) (3)
2.2 The liquidity of the company has improved. Quote THREE financial
indicators to support this statement. (6)
2.3 Dividend policy:
• Provide calculations to show the change in the dividend pay-out policy. (4)
• Explain why the directors decided to change the policy. State ONE
point with figures. (2)
2.4 Mary is the CEO of the company. Her shareholding is as follows:
NUMBER OF DATE %
SHARES PURCHASED SHAREHOLDING
420 000 10 January 2015 46,7%
(a) Calculate Mary's % shareholding on 1 October 2015 after the

repurchase of shares. (4)
(b) Explain how Mary has benefitted from the decision to

repurchase the shares. (2)
(c) The independent auditor discovered that Mary had made the
decision to repurchase the shares without informing the board of
directors.
Why should the independent auditor be concerned about this? (2)
148
INFORMATION:
A. Share capital and dividends:
• 900 000 shares were in issue on 1 July 2015.
• 75 000 ordinary shares were repurchased from the estate of a deceased

shareholder at R10,70 per share on 1 October 2015.
• The company issued 125 000 ordinary shares at R10,80 per share on 1 April
2016.
• The 2016 Cash Flow Statement reflected dividends paid of R434 250.
B. Extract from Income Statement for the year ended 30 June 2016:
R
Sales 5 220 000
Operating profit 1 295 000
Income tax 190 500
C. Extract from Balance Sheet on 30 June:
2016 2015
R R
Fixed deposit: Ken Bank 250 000 380 000
Current assets 1 015 000 456 000
Inventories (only trading stock) 564 000 281 500
Trade and other receivables (debtors) 246 000 167 000
Loan: Barbie Bank 8 000 000 4 500 000
Current liabilities 635 200 1 479 300
SARS: Income tax 6 200 23 400
149
D. The following financial indicators were calculated on 30 June:
2016 2015
Acid-test ratio ? 0,1 : 1
Stock turnover rate 8,5 times 10 times
Solvency ratio 2,2 : 1 2,6 : 1
Return on total capital employed
8,2% 9,5%
(ROTCE)
Return on shareholders' equity (ROSHE) ? 6,2%
Net asset value per share (NAV) ? 1 060 cents
Market price 1 000 cents 1 030 cents
Answer Book
2.1 Calculate the acid-test ratio on 30 June 2016.
4
Calculate the debt-equity ratio on 30 June 2016.
3
Calculate the % return on average shareholders' equity (ROSHE) for the
5
Calculate the net asset value per share (NAV) on 30 June 2016.
3
150
2.2 The liquidity of the company has improved. Quote THREE financial
indicators to support this statement. Provide figures and trends.
2.3 Provide calculations to show the change in the dividend pay-out policy.
4
Explain why the directors decided to change the policy. State ONE point
with figures.
151
2.4 (a) Calculate Mary's % shareholding on 1 October 2015 after the
repurchase of shares.
(b) Explain how Mary has benefitted from the decision to repurchase
the shares.
directors. Why should the independent auditor be concerned about
this?
152
Summative Assessment
1 MAFUSA LTD
NOTE: When financial indicators are required to support answers, you have to
give the name of the financial indicator and the actual figure, ratio
or percentage.
REQUIRED:
1.1 Calculate the following financial indicators on 30 April 2016:

• Return on average shareholders' equity (5)
• Net asset value (3)
1.2 Comment on the overall liquidity position of the company. Quote THREE
relevant financial indicators (with figures). (8)
1.3 The directors decided to change the dividend pay-out policy in 2016.
• Provide calculations that indicate the policy change. (4)

• Explain the effect of this change of policy on the company.
State TWO points. (4)
1.4 One of the directors feels that the company should pay back the loan as
soon as possible. What are your views about this? Quote and explain
TWO relevant financial indicators with figures. (6)
1.5 Explain why the shareholders are satisfied with:
• The market price of the shares on the JSE (2)

• The price at which the 75 000 shares were repurchased on
25 April 2016 (2)
In EACH case, quote figures/financial indicators.
INFORMATION:
A. Information extracted from the Income Statement on 30 April 2016:

R
Net profit before income tax 1 279 000
153
B. Information extracted from the Balance Sheet on 30 April 2016:
2016 2015
(R) (R)
Fixed deposit 200 000 520 000
Current assets
946 550 887 250
(including cash and cash equivalents)
Bank overdraft 0 92 000
C. Share capital and dividends:
The business is registered with an authorized share capital of 1 200 000

ordinary shares.
1 May 2015 The issued share capital consisted of 800 000

ordinary shares.
1 February 2016 200 000 ordinary shares were issued at R8,00 per
share.
25 April 2016 75 000 ordinary shares were repurchased from a
retired shareholder at a total cost of R600 000.
30 April 2016 There were 925 000 shares in issue.
Total dividends for the financial year amounted to R871 250.

D. The following financial indicators were calculated on 30 April:
2016 2015
Stock-holding period 52 days 68 days
Return on capital employed 11% 13%
Return on shareholder's equity ? 14,5%
Market price per share (JSE) 960 cents 777 cents
Repurchase price per share 800 cents -
Interest rate of loan 14% 13%
154
Answer Book
1.1 Calculate the return on average shareholders' equity.
5
Calculate the net asset value.
1.2 Comment on the overall liquidity position of the company. Quote

THREE relevant financial indicators (with figures).
155
1.3 The directors decided to change the dividend pay-out policy in 2016.
Provide calculations that indicate the policy change.
4
Explain the effect of this change of policy on the company. State TWO
points.
4
1.4 One of the directors feels that the company should pay back the loan
as soon as possible. What are your views about this? Quote and
explain TWO relevant financial indicators with figures.
156
1.5 Explain why the shareholders are satisfied with the market price of the
shares on the JSE (Quote figures/financial indicators.)
2
Explain why the shareholders are satisfied with the price at which the
75 000 shares were repurchased on 25 April 2016 (Quote figures/
financial indicators.)
157
LEARNER/TEACHER MANUAL
TOPIC: Cash Flow Statement
Activity 1: CASH FLOW STATEMENT AND INTERPRETATION

1.1 Choose a term from COLUMN B that matches the description in COLUMN
A. Write only the letter (A–D) next to the question number (1.1.1–1.1.4) in
the ANSWER BOOK, for example 1.1.5 E.
COLUMN A COLUMN B
1.1.1 Ability of the business to pay off all A gearing
its debts
B return on equity
1.1.2 Ability of the business to pay off its
short-term debts C solvency
1.1.3 The benefit that shareholders D liquidity

receive for investing in the
company
1.1.4
The extent to which a company is
financed by loans
(4 x 1) (4)
1.2 REID LTD
You are provided with information relating to Reid Ltd for the financial year
ended 30 June 2016.
Where financial indicators are required to support your answer, name

the financial indicator, the actual figure/ratio/percentage and trends.
REQUIRED:
1.2.1 Prepare the following notes to the Balance Sheet:
• Ordinary share capital (7)

1.2.2 Calculate the following amounts for the Cash Flow Statement:
• Change in loan (2)

1.2.3 Complete the extract from the Cash Flow Statement for cash and
cash equivalents. (4)

• Acid-test ratio (4)
• % return on average shareholder's equity (ROSHE) (5)
158
• Net asset value per share (NAV) (3)
1.2.5 The liquidity of the company has improved. Quote THREE financial
indicators to support this statement. (6)
1.2.6 Dividend policy:
• Provide calculations to show the change in the dividend pay-out policy. (4)
• Explain why the directors decided to change the policy. State ONE point
with figures. (2)
1.2.7 Mary is the CEO of the company. Her shareholding is as follows:
NUMBER OF DATE %
SHARES PURCHASED SHAREHOLDING
420 000 10 January 2015 46,7%
(a) Calculate Mary's % shareholding on 1 October 2015 after the

repurchase of shares. (4)
the shares. (2)
directors.
Why should the independent auditor be concerned about this? (2)
1.2.8 The Cash Flow Statement reflected fixed assets purchased to the
amount of R4,5 million.
• Name TWO major sources of funding for these fixed assets with figures
(over R1 000 000 each). (4)
• State for EACH source whether it was a good or bad decision. Explain
your choice. Quote relevant financial indicators/figures to support your
opinion. (6)
INFORMATION:
A. Share capital and dividends:
• 900 000 shares were in issue on 1 July 2015.
• 75 000 ordinary shares were repurchased from the estate of a deceased

shareholder at R10,70 per share on 1 October 2015.
• The company issued 125 000 ordinary shares at R10,80 per share on
1 April 2016.
• The 2016 Cash Flow Statement reflected dividends paid of R434 250.
159
B. Extract from Income Statement for the year ended 30 June 2016:
R
Sales 5 220 000
Income tax 190 500
C. Extract from Balance Sheet on 30 June:
2016 2015
R R
Fixed deposit: Ken Bank 250 000 380 000
Current assets 1 015 000 456 000
Inventories (only trading stock) 564 000 281 500
Trade and other receivables (debtors) 246 000 167 000
Loan: Barbie Bank 8 000 000 4 500 000
D. The following financial indicators were calculated on 30 June:
2016 2015
Stock turnover rate 8,5 times 10 times
Solvency ratio 2,2 : 1 2,6 : 1
Return on total capital employed
8,2% 9,5%
(ROTCE)
Return on shareholders' equity
? 6,2%
(ROSHE)
Net asset value per share (NAV) ? 1 060 cents
Market price 1 000 cents 1 030 cents
160
Activity 1
1.1
1.1.1
1.1.2
1.1.3
1.1.4 4
1.2.1 ORDINARY SHARE CAPITAL:

1 500 000 ordinary shares

900 000 Ordinary shares on 1 July 2015 9 180 000
RETAINED INCOME:
Balance on 1 July 2015 360 000
Balance on 30 June 2016 9
161
1.2.2 Calculate the change in loan for the Cash Flow Statement.
2
Calculate the income tax paid for the Cash Flow Statement.
1.2.3
Net change in cash and cash equivalents
1.2.4 Calculate the acid-test ratio on 30 June 2016.
4
Calculate the debt-equity ratio on 30 June 2016.
3
Calculate the % return on average shareholders' equity (ROSHE) for the
5
Calculate the net asset value per share (NAV) on 30 June 2016.
3
162
1.2.5 The liquidity of the company has improved. Quote THREE financial
indicators to support this statement. Provide figures and trends.
1.2.6 Provide calculations to show the change in the dividend pay-out policy.
4
Explain why the directors decided to change the policy. State ONE point
with figures.
163
1.2.7 (a) Calculate Mary's % shareholding on 1 October 2015 after the
repurchase of shares.
the shares.
directors. Why should the independent auditor be concerned about
this?
1.2.8 The Cash Flow Statement reflected fixed assets purchased to the
amount of R4,5 million.
Major sources of
Good/Bad Explanation with
funding with figures
decision financial indicators/figure
(over R1 000 000 each)
Source 1:
Source 2:
10
TOTAL MARKS
75
164
2.1 Match the terms/concepts in Column A with an appropriate description from
Column B. Write only the letter (A – E) next to the numbers in the ANSWER
BOOK.
COLUMN A COLUMN B
2.1.1 Solvency A The operating efficiency of the business.
B The ability of the business to meet it’s short

2.1.2 Gearing
term obligations (debts).
C The extent to which the business is making
2.1.3 Liquidity
use of loans (borrowed capital).
2.1.4 Profitability D Total assets : total liabilities
E The rate of return earned by shareholders.

(4)
2.2 MUMBAI LTD

The information relates to Mumbai Ltd for financial year ended on 30 April 2018.
REQUIRED:
2.2.1 Fill in the missing amounts on the partially completed Cash Flow
Statement. Show all workings in brackets. (24)
2.2.2 Calculate the following financial indicators / ratios:
(i) Debt/equity ratio. (3)
(ii) Return on average shareholders’ equity (ROSHE). (5)
(iii) Net asset value per share (NAV). (4)
2.2.3 Comment on the liquidity position of the business. Quote TWO relevant
financial indicates (with the trends) in your answer. (4)
2.2.4 The CEO wants to increase the loan by an additional R300 000 to
finance extensions to the building. What advice would you offer her?
Quote TWO financial indicators (with figures) to support your advice. (6)
2.2.5 The directors plan to issue additional shares at R6,00 per share in the
new year. Explain whether prospective investors will be eager to buy
shares in this business or not. Quote figures.. (4)
2.2.6 The existing shareholders are pleased with the performance of their
investment. Comment on the returns (ROSHE), earnings (EPS) and
dividends (DPS). (6)
2.2.7 M. Mouse owned 220 000 shares on 1 May 2017. He was disappointed
that he did not increase his shareholding when additional shares were
issued on 1 January 2018.
• Do a calculation to show the change in his percentage shareholding. (3)
• Explain why M. Mouse would be disappointed. (2)
165
INFORMATION:
A. Information extracted from the Income Statement on 30 April 2018:
Depreciation 83 720
Income tax 135 000
Net income after tax. 450 000
B. Information extracted from the Balance Sheet on 30 April :
30 April 2018 30 April 2017
Fixed Deposit 150 000 280 000
SARS: Income tax 6 800 (Dr) -
Loan: Lands Bank 950 000 1 050 000
Bank overdraft 27 800 -
SARS: Income tax - 22 600 (Cr)
C. Share capital information:
Authorized share capital of 750 000 ordinary shares.
Issued share capital:
420 000 Ordinary shares in issue on 1 May 2017 1 596 000
80 000 Additional shares issued on 1 January 2018 336 000
D. New equipment was purchased during this financial year, but no fixed
assets were sold.
E. An interim dividend of 32 cents per share was paid on 1 October 2017.
The new shareholders were not entitled to interim dividends.
A final dividend of 46 cents per share was declared on 30 April 2018.
F. The following financial indicators were calculated:
30 APRIL 2018 1 MAY 2017
Acid test ratio 0,4 : 1 0,7 : 1
Debt equity ratio ? 0,64 : 1
Return on shareholders’ equity (ROSHE) ? 17,5%
Return on average capital employed (ROTCE) 23,5% 25,2%
Market price of shares (on stock exchange) 545 cents 532 cents
Current interest rate on loans 9,5% 9%
65
166
Activity 2
2.1
2.1.1
2.1.2
2.1.3
2.1.4 4
2.2 MUMBAI LTD

2.2.1 Cash Flow Statement for the year ended 30 April 2018
OPERATING ACTIVITIES
Cash generated from operations
Interest paid (85 500)

Income tax paid
Dividends paid
INVESTING ACTIVITIES
FINANCING ACTIVITIES
NET CHANGE IN CASH AND CASH EQUIVALENTS
24
167
2.2.2 (i) Debt/equity ratio.
(ii) Return on average shareholders’ equity (ROSHE)
(iii) Net asset value per share (NAV).
2.2.3 Comment on the liquidity position of the business. Quote TWO

relevant financial indicates (with the trends) in your answer.
2.2.4 The CEO wants to increase the loan by an additional R300 000 to
finance extensions to the building. What advice would you offer her?
Quote TWO financial indicators (with figures) to support your advice.
168
2.2.5 The directors plan to issue additional shares at R6,00 per share in the
new year. Explain whether prospective investors will be eager to buy
shares in this business or not. Quote figures.
2.2.6 The existing shareholders are pleased with the performance of their
investment. Comment on the returns (ROSHE), earnings (EPS) and
dividends (DPS).
2.2.7 Do a calculation to show the change in his percentage shareholding.
Explain why M. Mouse would be disappointed.
65
169
3.1 TINAMERA Ltd
You are provided with information relating to Tinamera Ltd for the financial year
ended 30 June 2018.
REQUIRED:
3.1.1 Refer to Information C.
Complete the Fixed/Tangible Asset Note for the year ended 30 June 2018. (15)
3.1.2 Complete the Cash Flow Statement Ltd for the year ended 30 June 2018. Some
of the details and figures have been entered in the ANSWER BOOK. (25)
• Percentage operating profit on sales (3)

3.1.4 Refer to Information E.
• The following statement was taken from the minutes of the annual general
meeting: ‘We, the shareholders, would like to express our concern over the
directors’ decision to repurchase 80 000 shares during this financial year.’
Provide a reason supported by information from the Cash Flow Statement as
to why the shareholders feel this way. (2)
• After an investigation, it has come to light that Jim Jeffs, the shareholder from
whom the company repurchased the shares, is a close friend of the financial
director.
Briefly explain why you as a shareholder may find this to be a problem. (2)
INFORMATION:
A. Information extracted from the Income Statement on 30 June 2018:
Sales 5 611 000
B. Figures extracted from the Balance sheet and notes on 30 June:

2018 2017
Shareholder’s equity R4 607 300 R3 808 100
Fixed assets ? 3 948 600
Mortgage loan 1 142 000 920 000
Bank overdraft ? 91 000
170
C. Fixed/Tangible assets
Buildings Vehicles Equipment
Carrying value - 1 July 2017 3 452 000 413 400 83 200
Cost 3 452 000 872 000 340 000
Movement
Additions at cost ? 0 ?
Disposals at carrying value 0 ? 0
Depreciation 0 ? ?
Carrying value - 30 June 2018 4 522 800 ? ?
Cost 4 522 800
Additional information in respect of fixed assets:

• An extension to the office block was undertaken during the year.
• The business had three vehicles at the beginning of the year. The
following details appeared in the Fixed Asset Register on 1 July 2017:
Vehicle 1 Vehicle 2 Vehicle 3
Cost 240 000 352 000 280 000
Accumulated depreciation (225 000) (70 400) (163 200)
Carrying value 15 000 281 600 116 800
NOTE: Vehicle 1 is old and is reaching the end of its useful life.
Vehicle 3 was sold at its carrying value of R102 800 during the
year.
• Equipment of R116 000 was purchased on 1 December 2017. No
equipment was sold.
• Depreciation policy: Vehicles: 20% on cost
Equipment: 15% on carrying value
D. Loan
The company took out an additional loan on 30 June 2018. Repayments on
the old loan, including interest totalled R164 760. Interest on loan is
capitalised.
E. Shares
• Jim Jeffs, a shareholder, is very concerned about the liquidity and
profitability situation of the company and has decided to sell his shares.
The directors repurchased all 80 000 ordinary shares from him at a price
of R4,20 per share. The average issue price on this date was R3,05.
• No new shares were issued.
• Number of shares in issue on 30 June 2018 was 750 000.
F. Dividends
Total dividends paid and declared for the financial year ended 30 June 2018
amounts to R170 000.
171
3.2 INTERPRETATION OFFINANCIAL INDICATORS
Your friend, Phakamile, is a director in two companies. You are considering buying
shares in one of the companies. He presents you with the financial indicators of the
two companies. The companies are of similar size and they have issued the same
number of shares.
REQUIRED:
Study the financial indicators given and answer the questions that follow.
3.2.1 Which company uses more loans? Explain whether this is a good idea or not.
In each case, quote a financial indicator to support your answer. (6)
3.2.2 According to Phakamile the liquidity indicators of Thabiso Ltd are better than
those of Lauren Ltd. Explain, quoting THREE financial indicators to support
his opinion. (9)
3.2.3 Although the market price of the shares of Lauren Ltd is higher than those of
Thabiso Ltd, Phakamile is of the opinion that Thabiso Ltd’s shareholders are
more satisfied with the market price of their shares. Explain, quoting financial
indicators to support this opinion. (4)
3.2.4 In which company is Phakamile a major shareholder? Support your answer

with a calculation. (3)
FINANCIAL INDICATORS
Thabiso Ltd Lauren Ltd

Number of shares in issue 500 000 500 000
Phakamile’s shareholding 50 000 300 000
% return on shareholders' equity 11,8% 28,5%
% return on total capital employed (before tax) 12,4% 30,3%
% interest rate on loans 14% 14%
Debt/Equity ratio 1,8 : 1 0,3 : 1
Period for which enough stock is on hand 80 days 140 days
Debtors' average collection period 26 days 55 days
75
172
Activity 3
3.1 TINAMERA LTD
3.1.1 FIXED ASSET NOTE TO THE BALANCE SHEET ON 30 JUNE 2018

Land and
Vehicles Equipment
Buildings
Carrying value – 1 July 2017 3 452 000 413 400 83 200
Cost 3 452 000 872 000 340 000
Movements
Additions at cost 0
Disposal at carrying value 0 0
Depreciation 0
Carrying value – 30 June 2018 4 522 800
Cost 4 522 800
15
3.1.2 TINAMERA LTD

173
CASH FLOW STATEMENT FOR THE YEAR ENDED 30 JUNE 2018
CASH FLOW FROM OPERATING ACTIVITIES
Cash generated from operations 1 295 760

Interest paid (86 760)
Dividends paid
Income tax paid (625 000)
CASH FLOW FROM INVESTING ACTIVITIES
Purchase of fixed assets
Proceeds of new loans

Repayment of loan
Net change in cash and cash equivalents

Cash and cash equivalents beginning of year (91 000)
Cash and cash equivalents at the end of year

25
174
3.1.3 Calculate the percentage operating profit on sales
3
Calculate the debt-equity ratio
3
Calculate the net asset value per share
3.1.4 • Provide a reason supported by information from the Cash Flow

Statement as to why the shareholders are concerned over the directors’
decision to repurchase 80 000 shares.
• After an investigation, it has come to light that Jim Jeffs, the

shareholder from whom the company repurchased the shares, is a
close friend of the financial director. Explain briefly why you as a
shareholder may find this to be a problem.
175
3.2 INTERPRETATION OF FINANCIAL INDICATORS
3.2.1 Which company uses more loans? Quote a financial indicator to support
your answer.
Explain whether this is a good idea or not. Quote a financial indicator to

support your answer.
3.2.2 According to Phakamile the liquidity indicators of Thabiso Ltd are better
than those of Lauren Ltd. Explain, quoting THREE financial indicators to
support his opinion.
176
3.2.3 Although the market price of the shares of Lauren Ltd is higher than those
of Thabiso Ltd, Phakamile is of the opinion that Thabiso Ltd’s
shareholders are more satisfied with the market price of their shares.
Explain, quoting financial indicators to support this opinion.
3.2.4 In which company is Phakamile a major shareholder? Support your

answer with a calculation.
TOTAL MARKS
75
177
Activity 4 (70 marks; 40 minutes)
You are provided with information about Vooma Limited for the past two financial years
ended 30 June. The company is situated in KZN and trades in racing bikes.
REQUIRED:
NOTE: Provide figures or financial indicators (ratios or percentages) and

comparisons with the previous year to support comments or explanations.
4.1 Calculate the following for 2018:
4.1.1 % operating expenses on sales (2)
4.1.2 Acid-test ratio (4)
4.1.3 % return on shareholders' equity (4)
4.2 Calculate the following figures that will appear in the 2018 Cash Flow
Statement:
4.2.1 Change in investment. (2)
4.2.2 Income tax paid (4)
4.2.3 Fixed assets sold (at carrying value) (5)
4.3 Cash flow and financing activities:
4.3.1 Explain why the directors are satisfied with the improvement in cash
and cash equivalents since 1 July 2016. (3)
4.3.2 Decisions and gearing in 2018:
• Identify THREE decisions that the directors made to pay for land
and buildings. (6)
• Explain how these decisions affected:
- Capital employed
- Financial gearing (Quote TWO indicators.) (6)
4.3.3 From the Cash Flow Statement identify ONE decision made by the
directors in 2017 that they did NOT make in 2018, besides the
points mentioned above. Give a possible reason for the decision
in 2017. (3)
178
4.4 Dividends, returns and shareholding for the 2018 financial year:
• On 1 July 2017 there were 800 000 shares in issue.

• On 31 December 2017 interim dividends were paid.
• On 1 January 2018, 200 000 shares were issued to existing shareholders.
• On 30 June 2018 final dividends of 75 cents per share were declared on
all shares but have not yet been paid.
4.4.1 Calculate for the 2018 financial year:
• Total interim dividends paid (3)

• Interim dividends per share (3)
4.4.2 Calculate total dividends earned by Dudu Mkhize for the 2018
financial year. Her shareholding is:
SHARES PURCHASE PRICE

PURCHASED
31 August 2016 380 000 shares R7,00
1 January 2018 110 000 shares R20,00
TOTAL 490 000 shares (5)
4.4.3 On 1 January 2018 each shareholder was offered two shares for
every five shares owned. Dudu did not buy enough shares to
become the majority shareholder.
Calculate the minimum number of additional shares that Dudu

should have bought. (3)
4.5 The directors decided to buy land and buildings in two other provinces in 2018
to solve the problem of low sales that they had previously had in KZN.
4.5.1 Explain:
• Why it was necessary to purchase properties in other provinces

instead of in KZN (2)
• Whether the decision to purchase these properties had the
desired effect on sales (3)
• Another strategy they used to solve the problem of low sales (3)
4.5.2 The CEO, Ben Palo, wants to communicate other good news to the
shareholders at the AGM. Give advice on what he should say about
the following topics:
• Earnings per share (3)

• % return earned (3)
• Share price on the JSE (3)
179
INFORMATION FOR THE YEAR ENDED 30 JUNE:
A. FIGURES IDENTIFIED FROM INCOME STATEMENT:

2018 2017
Sales R13 182 000 R7 740 000
Number of bikes sold 1 750 bikes 900 bikes
Mark-up % 58% 72%
Cost of sales 8 330 000 4 500 000
Gross profit 4 852 000 3 240 000
Operating expenses 1 900 000 1 500 000
Depreciation 412 000 275 000
Income tax 819 000 444 000
Net profit after tax 1 911 000 1 036 000
B. EXTRACT FROM BALANCE SHEET ON 30 JUNE:

2018 2017
Fixed assets (carrying value) R12 154 000 R8 031 000
Investments 625 000 600 000
Current assets 2 427 000 2 090 000
Inventories 1 652 000 1 250 000
SARS: Income tax 0 15 000
Non-current liabilities (Loan) 1 850 000 2 600 000
SARS: Income tax 74 000 0
Bank overdraft 0 135 000
180
C. CASH FLOW STATEMENT:
2018 2017
Cash flows from operating activities R1 850 000 R1 046 000
Cash generated from operations 3 322 000 1 989 000
Interest paid ? (260 000)
Dividends paid (520 000) (254 000)
Income tax paid ? (429 000)
Cash flows from investing activities (4 560 000) (167 000)

Purchases of land and buildings (4 840 000) 0
Sale of fixed assets ? 383 000
Change in investments ? (550 000)
Cash flows from financing activities 3 250 000 (400 000)

Share capital issued 4 000 000 0
Shares repurchased 0 (1 000 000)
Change in non-current liabilities (750 000) 600 000
Cash and cash equivalents: Net change 540 000 479 000
Opening balance (130 000) (609 000)
Closing balance 410 000 (130 000)
D. FINANCIAL INDICATORS:
2018 2017
Mark-up % achieved 58% 72%
Operating expenses on sales ? 19,4%
Return on shareholders' equity ? 14,4%
Return on capital employed 20,8% 17,8%
Dividends per share ? 70 cents
Dividend pay-out rate 50% 54%
Net asset value per share 1 211 cents 899 cents
Market price on stock exchange 2 800 cents 2 100 cents
Interest on loans 12% 12%
181
4.1 CALCULATION OF FINANCIAL INDICATORS FOR 2018
4.1.1 Calculate: % operating expenses on sales
Workings Answer
2
4.1.2 Calculate: Acid-test ratio
Workings Answer
4
4.1.3 Calculate: % return on shareholders' equity
Workings Answer
4.2 FIGURES FOR 2018 CASH FLOW STATEMENT
4.2.1 Calculate: Change in investments
Workings Answer
2
4.2.2 Calculate: Income tax paid
Workings Answer
4
4.2.3 Calculate: Fixed assets sold (at carrying value)
Workings Answer
182
4.3 EXPLANATIONS ON CASH FLOW STATEMENT
4.3.1 Explain why the directors are satisfied with the improvement in cash and
cash equivalents since 1 July 2016. Quote figures.
3
4.3.2 Identify THREE decisions that the directors made to pay for land and
buildings.
Decision 1
(with figures)
Decision 2
(with figures)
Decision 3
(with figures) 6
Explain how these decisions affected the capital employed in the 2018
financial year. Quote figures.
Explain how these decisions affected the financial gearing in the 2018
financial year. Quote TWO indicators and their figures.
6
4.3.3 From the Cash Flow Statement identify ONE decision made by the
directors in 2017 that they did NOT make in 2018, besides the points
mentioned above. Give a possible reason for the decision in 2017.
Decision (with figures) Possible reason
183
4.4 DIVIDENDS, RETURNS AND SHAREHOLDING
4.4.1 Calculate: Total interim dividends paid for the 2018 financial year
Workings Answer
Calculate: Interim dividends per share for the 2018 financial year
Workings Answer
6
4.4.2 Calculate total dividends earned by Dudu Mkhize for the 2018 financial
year.
Workings Answer
4.4.3 Calculate the minimum number of additional shares that Dudu should
have bought.
Workings Answer
184
4.5.1 Explain why it was necessary to purchase properties in other provinces
instead of in KZN.
2
Explain whether the decision to purchase these properties had the
desired effect on sales. Quote figures.
3
Explain another strategy they used to solve the problem of low sales.
Quote figures.
185
4.5.2 Give advice on what Ben Palo should say about the following topics:
Advice on what to say on earnings per share:
3
Advice on what to say on % return earned:
3
Advice on what to say on share price on the JSE:
TOTAL MARKS
70
186
Activity 5
5.1 Three financial statements are provided as options in which each of the following
items would appear. Choose the financial statement and write only the letter
(A–C) next to the question numbers (5.1.1 to 5.1.4) in the ANSWER BOOK, e.g.
5.1.5 D.
A Statement of Financial Position (Balance Sheet)

B Statement of Comprehensive Income (Income Statement)
C Cash Flow Statement
5.1.1 Profit on sale of a fixed asset
5.1.2 Amount due to shareholders for final dividends payable
5.1.3 Total amount spent on the repurchase of shares
5.1.4 Total income tax amount for the current financial year (4 x 1) (4)
5.2 SUNSET LTD
The financial year ended on 28 February 2019.
REQUIRED:
5.2.1 Calculate the following figures for the 2019 Cash Flow Statement:

• Proceeds of shares issued (6)
• Fixed assets purchased (5)
5.2.2 Calculate financial indicators for the year ended 28 February 2019:
• % operating profit on sales (4)

187
INFORMATION FOR SUNSET LTD:
A. Information from Income Statement on 28 February 2019:
Sales R8 725 000

Income tax 477 900
B. Information from Balance Sheet on 28 February:
2019 2018
Fixed assets (carrying value)* R11 835 100 R10 658 000
SARS: Income tax 18 000 Cr 63 000 Dr
Loan: Funza Bank 3 500 000 2 800 000
*NOTE: Fixed assets were sold at carrying value, R490 000.
C. Share capital and dividends:
NUMBER
SHARE CAPITAL DETAILS OF SHARES
OF SHARES
1 March 1 500 000 In issue at R6,20 per share
2018
30 April 300 000 Repurchased at R6,90 per share
1 January 40 000 New shares issued
2019 28 1 240 000 In issue
February
DIVIDENDS DIVIDENDS PER SHARE

Final 2 March 2018 Paid 13 cents
Interim 31 August 2018 Paid 35 cents
Final 28 February 2019 Declared 30 cents
188
5.3 HORIZON LTD and OPTIMA LTD
Refer to Information D to F.
Mike Mbele owns shares and is a director in both these companies.
He recently invested another R420 000 in each company by buying shares on

the JSE at market value as follows:
HORIZON LTD OPTIMA LTD

R8,40 R4,00
REQUIRED:
NOTE: Provide figures, financial indicators or calculations in EACH case to

support your comments and explanations.
5.3.1 Purchase of shares:
• Explain why directors should be interested in the price of their

companies' shares on the JSE. (2)
• Calculate the number of additional shares in Horizon Ltd that Mike
was able to buy on the JSE in 2019. (3)
• Comment on the price that Mike paid for these shares and give TWO
reasons why he might have been satisfied to pay this price. (6)
5.3.2 Dividends and earnings:
• Explain your opinion on which company has the better dividend

pay-out policy. (6)
• Compare and comment on the % return on equity earned by EACH
company. (4)
• Mike feels that the earnings per share (EPS) of Optima Ltd is much
better than that of Horizon Ltd. Explain why he feels this way. (5)
5.3.3 Refer to the Cash Flow Statements.
The poor economy has negatively affected Horizon Ltd more than
Optima Ltd.
• Explain TWO decisions taken by the directors of Horizon Ltd in

response to the state of the economy, and how these decisions will
affect the company in future. (6)
• Explain TWO decisions taken by the directors of Optima Ltd that
affect risk and gearing. Quote and comment on TWO financial
indicators. (8)
189
D. Shareholding of Mike Mbele in two companies:

Number of shares bought in 2017 580 000 shares 1 430 000 shares
Total shares issued by each
1 240 000 shares 2 600 000 shares
company
Additional shares bought by Mike ? 105 000 shares
Mike's % shareholding before
46,8% 55,0%
buying additional shares
E. Financial indicators and additional information on 28 February 2019:

% return on average equity 6,2% 18,2%
% return on average capital
9,4% 15,1%
employed
Net asset value (NAV) 750 cents 445 cents
Additional information:
Interest rate on loans 12,0% 12,0%
Interest on investments 6,5% 6,5%
F. Extracts from Cash Flow Statements for year ended 28 February 2019:

Cash flows from investing
R2 700 000 (R2 730 000)
activities
Purchase of fixed assets 0 (1 580 000)
Sale of fixed assets 1 800 000 0
Change in investments 900 000 (1 150 000)
Cash flows from financing

(2 670 000) 4 000 000
activities
Proceeds of new shares
0 200 000
issued
Shares repurchased (1 070 000) 0
Cash effects of long-term loan (1 600 000) 3 800 000
75
190
QUESTION 5
5.1 5.1.1
5.1.2
5.1.3
5.1.4 4
5.2 SUNSET LTD
5.2.1 Calculate: Income tax paid

Workings Answer
4
Calculate: Dividends paid
Workings Answer
4
Calculate: Proceeds of shares issued
Workings Answer
6
Calculate: Fixed assets purchased
Workings Answer
191
5.2.2 Calculate financial indicators for the year ended 28 February 2019:
% operating profit on sales

Workings Answer
4
Net asset value per share
Workings Answer
4
Debt-equity ratio
Workings Answer
5.3 HORIZON LTD and OPTIMA LTD
5.3.1 Explain why directors should be interested in the price of their

companies' shares on the JSE.
2
Calculate the number of additional shares in Horizon Ltd that Mike was
able to buy on the JSE in 2019.
Workings Answer
3
192
Comment on the price that Mike paid for these shares and provide TWO
reasons why he might have been satisfied to pay this price.
Comment (with figures):
Reason 1 :
Reason 2:
5.3.2 Explain your opinion on which company has the better dividend pay-out
policy. Quote figures.
Compare and comment on the % return on equity earned by EACH

company. Quote figures.
Mike feels that the earnings per share (EPS) of Optima Ltd is much
better than that of Horizon Ltd. Explain why he feels this way. Quote
figures or calculations.
193
5.3.3 Explain TWO decisions taken by the directors of Horizon Ltd in response
to the state of the economy, and how these decisions will affect the
company in future.
Decision 1 (with figures):
Effect on Horizon Ltd in future:
6
Explain TWO decisions taken by the directors of Optima Ltd that affect
risk and gearing. Quote and comment on TWO financial indicators.
Quote and comment on TWO financial indicators that affect risk and
gearing.
TOTAL MARKS
75
194
Bibliography[hy
1. Department of Education Examination Paper.
2. Study and Master Grade 12
3. Mind the Gap
4. www.wikipidea.org
195

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ACCOUNTING

LEARNERS MANUAL GRADE 12:

Companies Ledger accounts Financial statements Notes to

Company Financial statement: Company Financial statement:

JENN TRAINING: GRADE 12 ACCOUNTING COMPANIES TERM ONE 1

➢ Notes to balance sheet 14

TOPIC 3: Company Financial statement: Income

TOPIC 4: Company Financial statement: Balance sheet

➢ Worked Example 116-124

MIND MAP EXAMINATION CONTENTS ACTIVITIES

BIBLIOGRAPHY WORKED EXAMPLES STEPS

Use the following information to prepare:

1.1 Calculate the following:

1.2 The entry in the Cash Payments Journal on 31 August 2012.

1.3 The following accounts in the general ledger:

1.4 Calculate the following:

The issued shares were made up as follows:

1.1 Calculate the average share price on 1 September 2011

1.2 CASH PAYMENTS JOURNAL OF CLIFTON LTD – AUGUST 2012

1.3 GENERAL LEDGER OF CLIFTON LTD

2.2 COMPANY LEDGER ACCOUNTS

2.2.1 Retained Income (9)

2.2.2 SARS: Income Tax (12)

2.2.3 Dividends on ordinary shares (9)

2.2.4 Appropriation (8)

Retained Income 1 400 000

SARS: Income Tax 96 000

Shareholders for dividends 120 000

Information relating to the financial year ending 30 June 2013

30 The net profit for the year amounted to R2 300 000.

The company is taxed at the rate of 30% of the net profit.

GENERAL LEDGER OF VENUS LIMITED

2.1.2 SARS – INCOME TAX

2.1.4 APPROPRIATION ACCOUNT

1. Prepare the following ledger accounts:

3.1 Ordinary Share Capital

The following balances appeared in the ledger on 1 July 2012:

Ordinary Share Capital (500 000 shares) R2 500 000

GENERAL LEDGER OF VENUS LIMITED

ORDINARY SHARE DIVIDENDS

SARS – INCOME TAX

NOTES TO BALANCE SHEET – HAROLD LTD.

Prepare the following notes to the financial statements for the

Notes to the financial statements on 28 February 2018

Ordinary share capital

Balance beginning of the year 1 704 000

Ordinary share dividends

• Ordinary Share capital (7)

• Retained income (6)

A. INFORMATION EXTRACTED FROM THE INCOME STATEMENT ON 28

Gross profit 5 300 000

B. EXTRACT FROM THE BALANCE SHEET ON 28 FEBRUARY:

Equity & Liabilities

1. Prepare the Ordinary share capital.

A. Balances extracted from the accounting records on 28 February

• Always Ltd. is authorised to sell 3 000 000 ordinary shares.

• 1 500 000 shares were in issue on 1 March 2017, the beginning of

• 500 000 new shares were issued on 1 December 2017 at R3,00

• 100 000 shares were repurchased on 20 February 2018 from a

C. Net profit before tax:

• An interim dividend of R420 000 was paid on 28 August 2017.

• A final dividend of 44 cents per share was declared on

Activity 3: Answer Book