MBA 8 Year 2 Accounting For Decision Making Workbook January 2020

ACCOUNTING FOR DECISION MAKING
MBA
ENRICHMENT EXERCISES
AND
SOLUTIONS
ACCOUNTING FOR DECISION MAKING WORKBOOK
CONTENTS
ENRICHMENT EXERCISES Page
1. Accounting information and managerial decisions 3
2. Financial statements and accounting concepts 4
3. Accounting for and presentation of assets, liabilities and Equity 6
4. Statement of Comprehensive Income and cash flows 9
5. Financial Analysis 18
6. Cost-volume-profit (CVP) relationships 21
7. Cost analysis for planning, control and decision-making 25
8. Transfer pricing for decentralised enterprises 35
9. Corporate governance 36
Present value tables 37
SOLUTIONS
1. Accounting information and managerial decisions 39
2. Financial statements and accounting concepts 41
3. Accounting for and presentation of assets, liabilities and Equity 45
4. Statement of Comprehensive Income and cash flows 50
5. Financial Analysis 58
6. Cost-volume-profit (CVP) relationships 66
7. Cost analysis for planning, control and decision-making 75
8. Transfer pricing for decentralised enterprises 88
9. Corporate governance 90
MANCOSA 2
TOPIC 1
ACCOUNTING INFORMATION AND MANAGERIAL
DECISIONS
1. Accounting information is required by various individuals and organizations in order to

make decisions. Explain why each of the following user groups need accounting
information relating to a business.
1.1 Customers
1.2 Suppliers
1.3 Government
1.4 Owners
1.5 Lenders
1.6 Employees
1.7 Investment analysts
1.8 Community representatives
1.9 Managers
2. Explain how external auditors and internal auditors differ as far as their main duty is
concerned.
3. Tabulate 5 differences between management accounting and financial accounting.
4. Whilst there are differences between the information needs of mangers and other users,
use examples to show how there could be an overlap of between the needs of managers
and other users.
MANCOSA 3
TOPIC 2
FINANCIAL STATEMENTS AND ACCOUNTING CONCEPTS
FINANCIAL STATEMENTS
1. The Statement of Comprehensive Income for Heidi Limited revealed an increase in profit
of R200 000. However, during the same financial period the bank balance declined by
R120 000. How would you explain this apparent discrepancy?
FINANCIAL STATEMENT RELATIONSHIPS

2. Discuss how the following financial statements are integrated:
● Statement of Comprehensive Income
● Statement of changes in equity
● Statement of Financial Position
● Statement of cash flows
ACCOUNTING CONCEPTS
3. Critically discuss the following accounting concepts:
3.1 Materiality
3.2 Conservatism
4. Explain the significance of the following accounting concepts in the preparation of a

Statement of Financial Position of an enterprise. Support your answer with examples.
4.1 Going concern
4.2 Full disclosure
4.3 Consistency
MANCOSA 4
ACCOUNTING EQUATION AND FINANCIAL STATEMENTS

5. Required
5.1 Use the format of the accounting equation presented below to analyse the transactions of
Gwala Stores. Use + for an increase and – for a decrease.
5.2 Thereafter prepare the:
5.2.1 Statement of Comprehensive Income the month ended 31 August 20.9.
5.2.2 Statement of Changes in Equity for the month ended 31 August 20.9.
5.2.3 Statement of Financial Position at 31 August 20.9.
5.2.4 Statement of changes in Cash Flows for the month ended 31 August 20.9.
Assets = Equity + Liabilities
Equipment Inventory Receivables Bank = Capital Income Expenses + Payables
TRANSACTIONS FOR AUGUST 20.9

01 T Gwala, the proprietor, transferred R90 000 from her personal banking account into a
bank account in the name of her business.
05 Purchased equipment by cheque, R50 000.
15 Bought stationery for office use on credit, R4 000.
25 The rent for August 20.9 was paid by cheque, R5 000.
31 Fees collected from customers for services rendered, R10 000.
MANCOSA 5
TOPIC 3
ACCOUNTING FOR AND PRESENTATION OF ASSETS,
LIABILITIES AND EQUITY
1. Pixma Limited began operations in January 20.9 with R900 000 obtained from selling
450 000 ordinary shares at an issue price of R2 each. Some of the major transactions for
the year included the following:
It purchased plant and equipment for R750 000 as well as land and buildings for
R450 000, financing the purchase with a mortgage bond of R287 500, a long-term loan of
R595 000, and cash for the balance. During the year the company used cash to reduce
the mortgage bond balance by R25 000 and to repay R75 000 towards the long-term loan.
The company also invested R195 000 in short-term marketable securities. On 01 October
20.9, the company issued a further 200 000 shares at R3 each. Depreciation expense for
the year was R200 000. The Profit after tax for the year ended 31 December 20.9 was
R250 000. Dividends for the year (declared and paid) amounted to R220 000.
REQUIRED
1.1 From the information provided above, calculate the amount that should be reflected for
each of the following items in the Statement of Financial Position of Pixma Limited at the
financial year end 31 December 20.9:
1.1.1 Non-current assets
1.1.2 Retained earnings
1.1.3 Total Equity
1.1.4 Non-current liabilities
1.2 Explain why it is important for Pixma Limited to consistently take advantage of cash
discounts offered by creditors for early settlement of accounts.
1.3 Explain how the shareholders of Pixma Limited can benefit from financial leverage.
MANCOSA 6
1.4 Name 2 control measures that you would recommend to prevent the following from
occurring at Pixma Limited for each of the following situations:
1.4.1 Payments made without proper authorization
1.4.2 Theft of stock from the warehouse
2. Name 4 decisions that need to be made before calculating the depreciation expense for
an asset. Also explain what impact these decisions will have on reported profits.
3. The first-in-first-out (FIFO), last-in-last-out (LIFO) and the weighted average cost (AVCO)
methods may be used to value inventory. Answer the following questions related to the
use of these methods during a period of rising prices:
3.1 Which method will show the highest gross profit? Why?
3.2 Which method will show the lowest gross profit? Why?
3.3 How will the valuation of inventories using the AVCO method compare with the FIFO and
LIFO methods?
3.4 Which method will show the highest closing inventory figure in the Statement of Financial
Position? Why?
3.5 Which method will show the lowest closing inventory figure in the Statement of Financial
Position? Why?
3.6 Comment on the closing inventory figure if the AVCO method is used.
4. Name 4 instances when the net realizable value of inventory would be lower than the
cost price of the inventory held.
5. What would be the effect of not taking into account the fact that a debt is bad, when
preparing the financial statements, on the reflection of financial performance and
financial position?
6. State which of the following items would appear on the Statement of Financial Position of
Jensen Manufacturers as an asset. Explain your reasoning in each case.
6.1 R4 000 owing to Jensen Manufacturers by a customer who will never be able to pay.
MANCOSA 7
6.2 The hiring by Jensen Manufacturers of a new marketing manager who is confident of
increasing profits by over 50% over the next four years.
6.3 Purchase of a machine that will save Jensen Manufacturers R30 000 per year. It is
presently being used by the business but has been acquired on credit and is not yet paid
for.
7. The following is a list of balances extracted from the financial records of Manhattan Ltd
on 30 November 20.9.
R
Debtors 185 000
Land and buildings 320 000
Inventories 153 000
Bank overdraft 116 000
Equipment 207 000
Loan from Kia Bank 260 000
Motor vehicles 38 000
Creditors 86 000
Required
7.1 Prepare the Statement of Financial Position of Manhattan Ltd at 30 November 20.9.
7.2 Provide an interpretation of the Statement of Financial Position by making reference to
the following:
7.2.1 The liquidity of the business
7.2.2 The mix between current and non-current assets
7.2.3 The financial structure of the Statement of Financial Position (finance provided by
owners and outsiders)
MANCOSA 8
TOPIC 4
STATEMENT OF COMPREHENSIVE INCOME AND CASH
FLOWS
STATEMENT OF COMPREHENSIVE INCOME

1. Edgar Limited has an authorized share capital of 300 000 ordinary shares. 200 000
shares have been issued at R2 each.
Study the Statement of Comprehensive Income of Edgar Limited for the year ended
30 September 20.9 and answer the questions that follow:
Edgar Limited
Statement of Comprehensive Income for the year ended 30 September 20.9
(R)
Net sales 470 000
Cost of sales (206 800)
Gross profit 263 200
Selling, general and administrative expenses (163 200)
Income from operations 100 000
Other income/expenses
Interest expense (6 000)
Other income 12 000
Profit on disposal of asset 4 000
Profit before tax 110 000
Income tax (33 000)
Net profit 77 000
Earnings per share ?
1.1 The earnings per share for the year ended 30 September 2008 was 45 cents. As a
director of Edgar Limited would you satisfied with the earnings per share for the year
ended 30 September 20.9? Motivate your answer.
MANCOSA 9
1.2 The interest rate on loans is 15% per annum. If there was no increase or decrease in the
loan balance during the financial year, calculate the loan balance.
1.3 Calculate the gross profit ratio for the year ended 30 September 20.9. Thereafter state
two possible reasons why this ratio is lower than the ratio for the previous financial year.
1.4 Recommend two ways in which Edgar Limited can improve its profitability.
2. MVP Ltd presented the Statement of Comprehensive Income below for its most recent
financial year.
R
Sales 743 000
Cost of sales 402 000
Operating expenses 145 000
Income from operations 196 000
Other income 1 100
Other expenses 26 000
Income tax 60 000
Net profit 111 100
Answer the following questions:

2.1 Explain the difference between “sales” and “other income”.
2.2 MVP Ltd would like to earn a large gross profit by selling its products at a much higher
price than its cost. Describe two factors that may prevent it from doing so.
2.3 Explain how cost of sales, operating expenses and other expenses are different from
one another.
2.4 Explain why cost of sales, operating expenses, other expenses and income tax are
listed separately in the Statement of Comprehensive Income rather than being lumped
together as one item?
2.5 Explain why the Statement of Comprehensive Income presented above is inadequate to
provide a proper interpretation of the financial result of MVP Ltd for the financial year.
MANCOSA 10
3. The Statement of Comprehensive Income for 20.9 and 20.8 given below were extracted
from the accounting records of Afri Manufacturers Ltd:
Afri Manufacturers Ltd

Statement of Comprehensive Income for the year ended 31 December
20.9 20.8
(R) (R)
Net sales 1 003 600 901 300
Cost of sales (905 600) (744 300)
Gross profit 98 000 157 000
Selling, general and administrative expenses (92 000) (65 000)
Income from operations 6 000 92 000
Other income/expenses
Non-operating income 124 500 18 000
Interest expense (90 500) (57 000)
Profit before tax 40 000 53 000
Income tax (12 000) (15 900)
Net profit 28 000 37 100
Required
Refer to the Statement of Comprehensive Income of Afri Manufacturers Ltd for 20.9 and
20.8 and comment on the performance of the company including the operating profit
earned. Take into account that the profit margin (percentage Profit after tax to sales) for
the industry was 4.51% for 20.8 and 2.60% for 20.9.
MANCOSA 11
CASH FLOW STATEMENT

4. What impact would changes in the Statement of Financial Position items listed below
have on the cash position of an enterprise? Place a tick () in the correct column.
Change in Statement of Financial Position Inflow of cash Outflow of cash
items
Increase in current assets other than cash
Decrease in current assets other than cash
Increase in non-current assets
Decrease in non-current assets
Increase in current liabilities
Decrease in current liabilities
Increase in non-current liabilities
Decrease in non-current liabilities
5. Study the extracts of the Cash flow statement of Vuyo Limited for the year ended 30 June
20.9 and answer the questions that follow.
Extracts of Cash Flow Statement for the year ended 30 June 20.9 R
Cash flow from operating activities 100 000
Cash flow from investing activities (300 000)
Additions to plant and equipment (300 000)
Cash flow from financing activities 250 000
Increase in Long-term borrowings 250 000
5.1 What do you understand by “Cash generated from operating activities R100 000”?
5.2 Name one transaction that improves cash flow but does not increase profit.
5.3 There is a combination of a positive net cash flow from operating activities (R100 000)
and a negative cash flow from investing activities (R300 000). Is this good for the
company? Explain.
MANCOSA 12
6. The cash flow statement for Mega Ltd is provided below:
Mega Ltd
Cash flow statement for the year ended 31 December 20.9
R
Cash flow from operating activities
Profit before interest and tax i.e. operating profit 61 047
Adjustments to convert to cash from operations
Non-cash flow adjustments 53 418
Add: Depreciation 53 418
Profit before working capital changes 114 465
Working capital changes (80 485)
Increase in inventory (55 170)
Increase in receivables (53 061)
Increase in payables 27 746
Cash generated from operations 33 980
Cash flow from investing activities 129 767
Proceeds from sale of plant and equipment 129 767
Cash flow from financing activities (172 860)
Long-term borrowings redeemed (172 860)
Net decrease in cash (9 113)
Cash balance (31 December 20.8) 23 243
Cash balance (31 December 20.9) 14 130
Use the cash flow statement to answer the following questions:

6.1 How did the company use its cash flows from operating and investing activities?
6.2 Why were depreciation and increase in payables added to operating profit in computing
the cash flow from operating activities?
6.3 Is the cash flow statement above presented according to the direct method or indirect
method? Explain how the method used above is different from the alternative method.
MANCOSA 13
6.4 Based on the cash flow information above, how does the company appear to be
performing? Explain.
7. Required
Study the extracts of the Cash flow statement of Siya Limited for the year ended
30 November 20.9 and state your observations.
Extracts of Cash Flow Statement for the year ended 30 November 20.9 R
Cash flow from operating activities 270 000
Additions to plant and equipment (Property and machinery) (1 000 000)
Sale of investments 250 000
Proceeds from issue of ordinary shares 750 000
Increase in Long-term borrowings 50 000
Net increase in cash and cash equivalents 320 000
Cash and cash equivalents at beginning of year 180 000
Cash and cash equivalents at end of year 500 000
MANCOSA 14
8. You are provided with the following information:
Asic Ltd
STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 DECEMBER
20.13
R
Sales 1 800 000
Cost of sales (1 125 000)
Operating expenses (474 000)
Directors’ fees 127 500
Auditor’s fees 67 500
Depreciation 81 000
Loss on sale of asset 21 000
Other non-disclosable costs 177 000
Operating profit 201 000
Other income: Investment income 24 600
Interest expense: on debentures (3 900)
Income tax (77 595)
Profit for the year 144 105
Asic Ltd
STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 DECEMBER 20.13
Ordinary
share Retained
capital earnings Total
MANCOSA 15
R R R
Balance on 01 January 20.13 525 000 263 775 788 775
Issue of ordinary shares 150 000 150 000
Profit for the year 144 105 144 105
Dividends:
Ordinary interim (18 750) (18 750)
Ordinary final (35 250) (35 250)
Balance on 31 December 20.13 675 000 353 880 1 028 880
ASIC LTD
STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER
20.13 20.12
R R
ASSETS
Non-current assets 996 090 858 075
Property, plant and equipment (See Note 1) 790 590 699 600
Financial assets: Investment – Subsidiary company 85 500 60 000
Investment – Listed shares (at cost) 120 000 98 475
Current assets 188 925 203 505
Inventories 120 690 119 700
Trade and other receivables 67 335 82 305
Trade debtors 67 335 82 305
Cash and cash equivalents 900 1 500
Bank - -
Petty cash 900 1 500
Total assets 1 185 015 1 061 580
EQUITY AND LIABILITIES

Equity 1 028 880 788 775
Ordinary share capital 675 000 525 000
Retained earnings 353 880 263 775
Non-current liabilities 30 000 135 000
Long-term borrowings: 13% Debentures 30 000 135 000
MANCOSA 16
Current liabilities 126 135 137 805

Trade and other payables 43 185 59 805
Trade creditors 43 185 59 805
South African Revenue Services (Income tax payable) 45 000 30 000
Shareholders for dividends 35 250 39 000
Bank overdraft 2 700 9 000
Total equity and liabilities 1 185 015 1 061 580
Note 1
Property, plant and equipment
20.13 20.12
Land and Land and
buildings Equipment Vehicles buildings Equipment Vehicles
Cost 462 000 242 340 300 000 346 500 188 100 300 000
Accumulated
depreciation (82 500) (131 250) (45 000) (90 000)
Carrying value 462 000 159 840 168 750 346 500 143 100 210 000
Additional information
1. Equipment was sold for cash, R16 500. The cost price of the equipment sold was
R39 750 and the accumulated depreciation on it to the date of sale was R2 250.
Equipment was also purchased for cash.
2. Additions were made to the buildings for cash.
REQUIRED
Prepare the Cash Flow Statement for the year ended 31 December 20.13.
MANCOSA 17
TOPIC 5
FINANCIAL ANALYSIS
1. Excerpts of financial data for Polar Enterprises are as follows:
Statement of Comprehensive Income 20.10 (R) 20.9 (R)

Sales (10% credit) 32 011 500 19 373 000
Cost of sales (10% credit purchases) 26 180 100 15 993 700
Operating profit 1 931 200 1 327 800
Profit before tax 1 831 400 1 226 420
Tax (25%) 457 850 306 600
Profit after tax 1 373 550 919 820
Statement of Financial Position 20.10 20.9
Non-current assets 5 200 000 4 700 000
Current assets 2 866 530 4 974 530
Inventories 1 482 200 2 038 860
Accounts receivable 261 290 155 200
Marketable securities 326 950 2 306 440
Cash 796 090 474 030
Current liabilities 1 088 860 588 310
Accounts payable 190 660 192 040
Other current liabilities 898 200 396 270
Required
1.1 Calculate the gross margin, operating margin and profit margin for 20.10 and 20.9.
MANCOSA 18
1.2 Comment on your answers calculated in question 1.1.

1.3 Calculate the current ratio and acid test ratio at the end of each year. How has the
enterprise’s liquidity changed over this period?
1.4 Compute the following for 20.10 (ratios for 20.9 are given in brackets):
■ Inventory turnover (20.9: 9.04 times)
■ Debtors collection period (20.9: 29.24 days)
■ Creditors payment period (20.9: 42.40 days)
■ Turnover to net assets (20.9 2.13)
1.5 What is your interpretation of the enterprise’s performance with respect to your
answers in question 1.4?
2. Answer the questions below based on the following information. Income tax is
calculated at 35% of profit.
Vuyo Traders Sipho Stores

20.10 (R) 20.09 (R) 20.10 (R) 20.09 (R)
Operating profit 400 000 320 000 420 000 380 000
Profit after tax 120 000 100 000 140 000 80 000
Non-current debt (10% p.a.) 200 000 80 000 1 200 000 1 000 000
Equity 800 000 720 000 300 000 280 000
Note: The enterprise has no current liabilities.
Required
2.1 Calculate the return on assets for both enterprises for 20.10.
2.2 Calculate the return on equity for both enterprises for 20.10.
2.3 Which enterprise is more profitable? Explain.
2.4 Should Vuyo Traders be satisfied with its return on assets? Explain.
3. In 20.10, Mestle Wholesalers had R2 000 000 of assets, R200 000 of current
liabilities and R600 000 non-current liabilities. Operating profit was R500 000,
interest expense was R120 000 and the tax rate was 40%.
Required
3.1 Calculate the following ratios:
■ Debt to assets
■ Debt to equity
MANCOSA 19
■ Interest coverage
3.2 Comment on your answers obtained in question 3.1.
4. The following information was extracted from the financial statements of Premier
Limited:
Statement of Comprehensive Income 20.10 (R) 20.9 (R)
Profit after tax 10 000 000 7 500 000
Statement of changes in equity
Interim dividends 500 000 300 000
Final dividends 1 500 000 1 100 000
Ordinary share capital 100 000 000 64 000 000
Retained earnings 18 000 000 10 000 000
Other
Market price per share 4 3.75
Required
4.1 Calculate the following ratios for 20.10 (ratios for 20.9 are given in brackets):
■ Return on equity (10.04%)
■ Earnings per share (25 cents)
■ Dividends per share (4.67 cents)
■ Earnings retention (81.32%)
■ Price/Earnings ratio (15)
4.2 Comment on your answers obtained in question 4.1.
MANCOSA 20
TOPIC 6
COST-VOLUME-PROFIT (CVP) RELATIONSHIPS
EXPANDED CONTRIBUTION MARGIN MODEL

1. The following budgeted details for 20.9 relate to a product manufactured by Manto Ltd:
Sales R50 000
Variable cost per unit sold R7.50
Total fixed cost R12 500
Sales volume 2 500 units
Required
Consider the following situations independently:
1.1 Calculate the operating profit.
1.2 Suppose sales increase by R10 000 without changes to any costs. By what amount will
contribution margin and operating profit increase?
1.3 Suppose fixed costs increase by R3 000. By how much must sales increase if operating
profit was to remain unchanged?
1.4 Would you recommend an advertising programme costing R5 000 that would generate
an additional R10 000 of sales? Why?
1.5 Calculate the volume of sales required to achieve an operating profit of R20 000.
Consider the following situations independently and in each case motivate your
answer by doing the relevant calculations:
1.6 Should management consider a drop of R2 per unit in the selling price if sales volume is
expected to increase by 200 units?
MANCOSA 21
1.7 Should management adopt the following proposal?

Decrease the selling price by R4 and increase marketing costs by R8 000 with the
expectation of an increase in sales to 5 000 units.
2. Rissik Limited manufactures product D. The budgeted details for 20.9 are as follows:
Selling price per unit R12
Variable cost per unit sold R5
Total fixed cost R700 000
Required
Calculate the number of units that must be sold in order to earn an operating profit of
R260 000 (answer expressed to the nearest whole number).
BREAK-EVEN POINT
3. Sepata Enterprises makes sandals. The fixed costs of operating the workshop for a
month total R5 000. Each pair of sandals requires material that cost R20. Each pair of
sandals takes 2 hours to make, and the business pays the sandal makers R12.50 an
hour. The sandal makers are all on contract and if they do not work for any reason, they
are not paid. Each pair of sandals is sold to shoe stores at R70. The business expects
to sell 350 pairs of sandals per month.
Questions
3.1 Calculate the number of pairs of sandals that the business must sell in order to break
even each month.
3.2 Why is it necessary for the management of Sepata Enterprises to know the break-even
point?
3.3 Suppose the business has an opportunity to rent a sandal-making machine. Doing so
would increase the total fixed costs of operating the workshop for a month to R9 375.
Using the machine will reduce the labour time to 1 hour for each pair of sandals. The
sandal makers will still be paid R12.50 per hour.
MANCOSA 22
3.3.1 Calculate the break-even quantity if the machine is rented.

3.3.2 After considering the information given and the calculations you made, should the
machine be rented or not?
3.3.3 Calculate and comment on the margin of safety (calculated in units) for each option i.e.
without the machine and with the machine.
4. The following budgeted data relates to a product produced by Gnome Manufacturers and
to a similar product produced by Humpty Manufacturers for 20.9:
Gnome Humpty
R R
Selling price per unit 60 60
Direct material cost per unit 16 14
Direct labour cost per unit 12 6
Direct overhead cost per unit 8 4
Fixed factory overhead costs 10 000 20 000
Fixed administration costs 5 000 10 000
Expected sales for each manufacturer is 2 000 units.
Required
4.1 Calculate the total revenues required to break even for each manufacturer.
4.2 Which manufacturer experiences a higher operating leverage? Motivate your answer by
doing the relevant calculations.
4.3 What is the consequence of a small drop in sales to an enterprise that has a high
operating leverage? Use a calculation to support your answer.
4.4 Calculate the margin of safety (expressed as a percentage) for each manufacturer.
MANCOSA 23
5. The following budgeted information for the year ended 31 October 20.9 is provided by
Sonke Ltd, a manufacturer of a single product called Rimex:
Sales (30 000 units X R12 per unit) R360 000

Total variable cost (30 000 units X R5.40 per unit) R162 000
Total fixed costs R78 000
The sales forecast for the year ended 31 October 20.9 is 15% less than the actual sales
for the year ended 31 October 20.8. The sales director produced three proposals to
improve the position:
 Proposal A involves launching an aggressive marketing campaign. This would involve a
single additional fixed cost of R18 000 for advertising. Sales commission will increase by
R1.20 per unit. Sales volume is expected to increase by 10% above the budgeted sales
of 30 000 units with no change in the unit selling price.
 Proposal B involves a 10% reduction in the unit selling price. Fixed selling overheads will
also reduce by R12 000. The sales volume is expected to be 34 000 units.
 Proposal C involves a 10% reduction in the unit selling price and this is estimated to bring
the sales volume back to the level as the year ended 31 October 20.8.
Required
For each of the three proposals, calculate the break-even quantity (answer expressed to
the nearest whole number).
MANCOSA 24
TOPIC 7
COST ANALYSIS FOR PLANNING, CONTROL AND
DECISION-MAKING
BUDGETS
1. “Budgets are half used if they serve only as a planning device”. Comment on this
statement.
2. What are the principal considerations involved in preparing a production budget?
3. The following is the sales forecast (in units) of Manco Ltd that manufactures two
products viz. product X and product Y:
November 20.6 December 20.6 January 20.7
Product X 3 000 4 500 4 000
Product Y 4 000 6 000 5 000
The selling price per unit of product X is R20 and the selling price of product Y is
R30.
Required
 Prepare a sales budget for the period 1 November 20.6 to 31 January 20.7.
4. PC Solutions makes and sells computers. On 31 March 20.6, the entity had 60
computers in inventory. The company’s policy is to maintain a computer inventory of
5% of the following month’s sales. The sales forecast of the entity for second
quarter of the year is:
MANCOSA 25
April 1 200 computers

May 1 000 computers
June 900 computers
Required
Draw up a production budget for April and May 20.6.
5. Computek Ltd sells computers. At the beginning of May 20.9 the business had an
overdraft of R70 000 and the bank had asked that it be settled by the end of October
20.9. As a result, the directors decided to review their plans for the next 6 months and
the following is the cash budget that was subsequently drawn up for the 6 months
ending 31 October 20.9.
Computek Ltd
Cash Budget for the 6 months ended 31 October 20.9
May Jun Jul Aug Sep Oct
R’000 R’000 R’000 R’000 R’000 R’000
Cash receipts 454 630 492 276 236 216
Cash sales 454 630 492 276 236 216
Cash payments 404 528 506 328 264 240
Cash purchase of merchandise 270 360 284 188 150 132
Administration expenses 80 82 76 66 62 60
Loan repayments 10 10 10 10 10 10
Selling expenses 44 48 56 52 42 38
Shop refurbishment 28 36 12
Tax payment 44
Cash surplus (shortfall) 50 102 (14) (52) (28) (24)
Opening cash balance (70) (20) 82 68 16 (12)
Closing cash balance (20) 82 68 16 (12) (36)
(a) The business maintains a minimum monthly inventory level of R80 000 of merchandise.
MANCOSA 26
(b) The gross profit margin is 40%.
Question
What problems are likely to be faced by Computek Ltd during the 6 month period May to
October 20.9? Suggest ways in which the business may deal with these problems.
VARIANCE ANALYSIS
6. GMX Ltd uses the standard costing system. The standards are as follows:
Standards
Material J 2kg @ R5 per kg
Labour 4 hours @ R50 per hour
Variable overheads R11 per labour hour
Fixed overheads R14 000
Normal production 12 000 per month
Actual information for the month October 20.8 is:

Material J used 20 050kg @ R5,20 per kg
Labour 39 500 hours @ R48 per hour
Variable overheads R12 per labour hour
Fixed overheads R14 500
Production 10 000 units manufactured
Required
6.1 Calculate the raw material usage variance. Also provide possible reasons for the
variance.
6.2 Calculate the direct labour rate variance.
6.3 Calculate the direct labour efficiency variance.
6.4 Calculate the variable overhead efficiency variance.
MANCOSA 27
7. Zimba Manufacturers uses the standard costing system. The following information for
September 20.9 is available in respect of product H that it manufactures:
Budgeted figures
Variable manufacturing overheads R32 000
Fixed manufacturing overheads R76 800
Number of labour hours 6 400
Expected production 1 600 units
Actual results
Variable manufacturing overheads R30 616
Fixed manufacturing overheads R79 808
Number of labour hours worked 6 880
Actual production 1 680 units
Required
7.1 Calculate the fixed overhead spending variance.
7.2 Calculate the fixed overhead volume variance.
7.3 Calculate the variable overhead efficiency variance. Also provide possible reasons for
the variance.
MANCOSA 28
ACCEPTANCE OF A SALES OFFER

8. Kremo Limited produces only premium ice cream. The factory has a capacity of
10 million litres but only plans to produce 8 million litres. The variable costs per litre
associated with producing and selling 8 million litres are as follows:
R
Ingredients 5.00
Packaging 1.00
Direct labour 2.00
Variable overheads 0.50
Sales commission 0.50
Total variable costs 9.00
The selling price per litre is R12 and the fixed costs for producing the ice cream is
R4 656 000.
An ice cream distributor from Gauteng not normally served by Kremo Limited has offered
to buy 2 million litres at R8.90 per unit. Since the distributor approached the company
directly, there is no sales commission.
REQUIRED
8.1 Calculate the operating profit or loss.
8.2 As the manager of Kremo Limited, would you accept or reject the offer? Substantiate
your answer by calculating the differential profit or loss from accepting the offer.
MANCOSA 29
9. Femino Enterprises produces product Z that it sells for R63 each. The costs of
producing and selling 120 000 units of product Z are estimated as follows:
Variable costs per unit:
Direct materials R15.00
Direct labour R9.00
Factory overhead R6.00
Selling and administrative expenses R7.50
R37.50
Fixed costs:
Factory overhead R1 600 000
Selling and administrative expenses R600 000
To date, this year, 90 000 units have been produced and sold. An additional 22 500
units are expected to be sold on the domestic market during the remainder of the year.
Femino Enterprises received an offer from Zambesi Traders for 6 000 units of product Z
at R42 each. Zambesi Traders will market the product in Zambia under its own brand
name, and no additional selling and administrative expenses associated with the sale
will be incurred by Femino Enterprises. The sale to Zambesi Traders is not expected to
affect domestic sales of product Z and the additional units could be produced during the
current year using excess capacity.
Required
Should the proposal be accepted? Motivate your answer.
MAKE OR BUY DECISION

10. Dubai Ltd needs a component for one of its products. It can subcontract production of
the component to a subcontractor who can provide the component at R20 each. Dubai
MANCOSA 30
Ltd can produce the component internally for total variable costs of R15 per component.
Dubai Ltd has no spare capacity, so it can only produce the component internally by
reducing its output of another of its products. While it is making each component it will
lose contributions (contribution margin) of R12 from the other product.
Required
10.1 Should the component be subcontracted or produced internally? Motivate your answer.
10.2 Name two problems Dubai Ltd may experience if it decides to subcontract any of its
components.
11. Trike Enterprises assembles tricycles with motors. It also produces a component for
assembly. The costs of making this component for May 20.9 are as follows:
R
Direct Material 866 000
Labour and other variable costs 844 000
Fixed overheads – allocated 267 000
Total cost 1 977 000
Number of units produced 8 500
Per unit cost 232.59
A recently established spare part manufacturer approached Trike Enterprises with a

proposal of supplying this component at R210.
Required
What would be your advice to Trike Enterprises?
MANCOSA 31
CAPITAL INVESTMENT APPRAISAL

NOTE: WHERE APPLICABLE, USE THE PRESENT VALUE TABLES SUPPLIED AT
THE END OF THE ENRICHMENT EXERCISES.
12. The following information relates to two capital expenditure projects. Because of capital
rationing, only one project can be accepted.
Project A Project B
Initial cost R800 000 R920 000
Expected life 5 years 5 years
Expected scrap value R40 000 R60 000
Expected net cash inflows: R R
End of year 1 320 000 400 000
2 280 000 280 000
3 260 000 200 000
4 240 000 200 000
5 220 000 200 000
The company estimates its cost of capital is 12%. Depreciation is calculated using the
straight-line method.
Required
12.1 Calculate the payback period for project B. (Answer expressed in years and months)
12.2 Calculate the accounting rate of return for project A. (Answer expressed to 2 decimal
places)
MANCOSA 32
12.3 Calculate the net present value of project A. (Round off amounts to the nearest Rand)
12.4 Using your answers from questions 12.2 and 12.3, should project A be considered for
acceptance? Why?
13. The financial manager at Reno Ltd had to choose between these two projects, Turbo
and Gusto, which have the following after-tax cash inflows:
Year Turbo Gusto

1 0 R54 000
2 R27 750 R54 000
3 R54 300 R54 000
4 R184 500 R54 000
Both projects require an initial investment of R176 550. All cash flows take place at the
end of the year except the original investment in the project which takes place at the
beginning of the project.
Required
13.1 Calculate the net present value (NPV) for each project, using a discount rate of 12%.
Which project would you choose? Why?
13.2 Calculate the Internal Rate of Return (IRR) for both projects. Which project should be
chosen? Why?
14. Your company has the option to invest in machinery in projects F and G but finance is
only available to invest in one of them. You are given the following projected data:
Project F Project G
R R
Initial cost 140 000 150 000
Net cash inflows:
MANCOSA 33
Year 1 30 000 40 000

Year 2 36 000 50 000
Year 3 40 000 50 000
Year 4 44 000 80 000
Year 5 26 000 0
1. All cash flows take place at the end of the year except the original investment in the
project which takes place at the beginning of the project.
2. Project F machinery will be disposed of at the end of year 5 with a scrap value of
R20 000.
3. Project G machinery will be disposed of at the end of year 4 with a nil scrap value.
4. Depreciation is calculated on a straight line basis.
5. The discount rate to be used by the company is 14%.
Required
14.1 Calculate the payback period for project F. (Answer must be expressed in years and
months)
14.2 Calculate the accounting rate of return for project F. (Answer expressed to 2 decimal
places)
14.3 Calculate the net present value of each project. (Round off amounts to the nearest Rand)
15. A machine with a purchase price of R140 000 is estimated to eliminate manual operations
by R40 000 per year. The machine will last 5 years and have no residual value at the end
of its life.
Required
Calculate the internal rate of return.
MANCOSA 34
TOPIC 8
TRANSFER PRICING FOR DECENTRALISED
ENTERPRISES
1. Briefly discuss the use of “market-based transfer price” as the transfer price between
divisions of the same entity.
2. “It is possible to adopt an approach that allows divisional managers to arrive at

negotiated prices for inter-divisional transfers.”
2.1 Under what circumstances would you recommend negotiated transfer prices?
2.2 Discuss the possible implications of negotiated transfer pricing on divisional
performance of a selling division that sells the whole of its output to another division.
3. A company has two divisions. The output of Division A is product Alpha. There is a
market outside the company for product Alpha, but this product is mainly used by
Division B which has first call on Division A’s output. The output of division B is Product
Beta and is sold on the external market. Product Alpha has the following cost structure:
Variable cost per unit R8
Fixed cost per unit R2
Management has decided on a target rate of return of 12% for each division. The cost
structure of product Beta is given below:
Transfer price ?
Variable cost per unit R15
MANCOSA 35
Fixed cost per unit R7

Market price per unit R28
Required
3.1 Determine the transfer price of product Alpha per unit using the variable cost method.
3.2 Determine the transfer price of product Alpha per unit using the cost-plus method.
3.3 Calculate the selling price of product Beta (for each of the two transfer methods).
3.4 Explain two drawbacks of using variable cost transfer prices.
TOPIC 9
CORPORATE GOVERNANCE
1. According to King III companies should remunerate directors and executives fairly and
responsibly. Explain what you understand by this.
2. The first principle dealt with in King III under ethical leadership and corporate citizenship
is that the board should provide responsible leadership based on an ethical foundation.
Explain what responsible leadership means.
3. How can the board (of directors) ensure that the company acts as a responsible
corporate citizen?
4. Explain the role played by internal audit in a company and also explain the responsibility
of the board in this regard.
5. What steps may be taken by a company to ensure that appropriate persons are
appointed as directors?
6. The board is not only responsible for the company’s financial bottom line, but for the
company’s performance in respect of its “triple bottom line”. Explain what you
understand by “triple bottom line”.
MANCOSA 36
7. “A director is a steward of the company. The ethics of governance requires that in this
stewardship role, each director be faithful to the four basic ethical values of good
corporate governance (responsibility, accountability, fairness and transparency). In
performing their stewardship role directors need to exercise the following five moral
duties: conscience, care, competence, commitment and courage.” Explain what is
meant by each of these five moral duties.
8. Explain the function of external auditors.
MANCOSA 37
APPENDIX 1
Present value of R1: PVFA (k,n) =

Number
of 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 11% 12% 13% 14% 15% 16% 17% 18% 19% 20% 25%
Periods
1 0.9901 0.9804 0.9709 0.9615 0.9524 0.9434 0.9346 0.9259 0.9174 0.9091 0.9009 0.8929 0.8850 0.8772 0.8696 0.8621 0.8547 0.8475 0.8403 0.8333 0.8000
2 0.9803 0.9612 0.9426 0.9246 0.9070 0.8900 0.8734 0.8573 0.8417 0.8264 0.8116 0.7972 0.7831 0.7695 0.7561 0.7432 0.7305 0.7182 0.7062 0.6944 0.6400
3 0.9706 0.9423 0.9151 0.8890 0.8638 0.8396 0.8163 0.7938 0.7722 0.7513 0.7312 0.7118 0.6931 0.6750 0.6575 0.6407 0.6244 0.6086 0.5934 0.5787 0.5120
4 0.9610 0.9238 0.8885 0.8548 0.8227 0.7921 0.7629 0.7350 0.7084 0.6830 0.6587 0.6355 0.6133 0.5921 0.5718 0.5523 0.5337 0.5158 0.4987 0.4823 0.4096
5 0.9515 0.9057 0.8626 0.8219 0.7835 0.7473 0.7130 0.6806 0.6499 0.6209 0.5935 0.5674 0.5428 0.5194 0.4972 0.4761 0.4561 0.4371 0.4190 0.4019 0.3277
6 0.9420 0.8880 0.8375 0.7903 0.7462 0.7050 0.6663 0.6302 0.5963 0.5645 0.5346 0.5066 0.4803 0.4556 0.4323 0.4104 0.3898 0.3704 0.3521 0.3349 0.2621
7 0.9327 0.8706 0.8131 0.7599 0.7107 0.6651 0.6227 0.5835 0.5470 0.5132 0.4817 0.4523 0.4251 0.3996 0.3759 0.3538 0.3332 0.3139 0.2959 0.2791 0.2097
8 0.9235 0.8535 0.7894 0.7307 0.6768 0.6274 0.5820 0.5403 0.5019 0.4665 0.4339 0.4039 0.3762 0.3506 0.3269 0.3050 0.2848 0.2660 0.2487 0.2326 0.1678
9 0.9143 0.8368 0.7664 0.7026 0.6446 0.5919 0.5439 0.5002 0.4604 0.4241 0.3909 0.3606 0.3329 0.3075 0.2843 0.2630 0.2434 0.2255 0.2090 0.1938 0.1342
10 0.9053 0.8203 0.7441 0.6756 0.6139 0.5584 0.5083 0.4632 0.4224 0.3855 0.3522 0.3220 0.2946 0.2697 0.2472 0.2267 0.2080 0.1911 0.1756 0.1615 0.1074
11 0.8963 0.8043 0.7224 0.6496 0.5847 0.5268 0.4751 0.4289 0.3875 0.3505 0.3173 0.2875 0.2607 0.2366 0.2149 0.1954 0.1778 0.1619 0.1476 0.1346 0.0859
12 0.8874 0.7885 0.7014 0.6246 0.5568 0.4970 0.4440 0.3971 0.3555 0.3186 0.2858 0.2567 0.2307 0.2076 0.1869 0.1685 0.1520 0.1372 0.1240 0.1122 0.0687
13 0.8787 0.7730 0.6810 0.6006 0.5303 0.4688 0.4150 0.3677 0.3262 0.2897 0.2575 0.2292 0.2042 0.1821 0.1625 0.1452 0.1299 0.1163 0.1042 0.0935 0.0550
14 0.8700 0.7579 0.6611 0.5775 0.5051 0.4423 0.3878 0.3405 0.2992 0.2633 0.2320 0.2046 0.1807 0.1597 0.1413 0.1252 0.1110 0.0985 0.0876 0.0779 0.0440
15 0.8613 0.7430 0.6419 0.5553 0.4810 0.4173 0.3624 0.3152 0.2745 0.2394 0.2090 0.1827 0.1599 0.1401 0.1229 0.1079 0.0949 0.0835 0.0736 0.0649 0.0352
16 0.8528 0.7284 0.6232 0.5339 0.4581 0.3936 0.3387 0.2919 0.2519 0.2176 0.1883 0.1631 0.1415 0.1229 0.1069 0.0930 0.0811 0.0708 0.0618 0.0541 0.0281
17 0.8444 0.7142 0.6050 0.5134 0.4363 0.3714 0.3166 0.2703 0.2311 0.1978 0.1696 0.1456 0.1252 0.1078 0.0929 0.0802 0.0693 0.0600 0.0520 0.0451 0.0225
18 0.8360 0.7002 0.5874 0.4936 0.4155 0.3503 0.2959 0.2502 0.2120 0.1799 0.1528 0.1300 0.1108 0.0946 0.0808 0.0691 0.0592 0.0508 0.0437 0.0376 0.0180
19 0.8277 0.6864 0.5703 0.4746 0.3957 0.3305 0.2765 0.2317 0.1945 0.1635 0.1377 0.1161 0.0981 0.0829 0.0703 0.0596 0.0506 0.0431 0.0367 0.0313 0.0144
20 0.8195 0.6730 0.5537 0.4564 0.3769 0.3118 0.2584 0.2145 0.1784 0.1486 0.1240 0.1037 0.0868 0.0728 0.0611 0.0514 0.0433 0.0365 0.0308 0.0261 0.0115
25 0.7798 0.6095 0.4776 0.3751 0.2953 0.2330 0.1842 0.1460 0.1160 0.0923 0.0736 0.0588 0.0471 0.0378 0.0304 0.0245 0.0197 0.0160 0.0129 0.0105 0.0038
30 0.7419 0.5521 0.4120 0.3083 0.2314 0.1741 0.1314 0.0994 0.0754 0.0573 0.0437 0.0334 0.0256 0.0196 0.0151 0.0116 0.0090 0.0070 0.0054 0.0042 0.0012
40 0.6717 0.4529 0.3066 0.2083 0.1420 0.0972 0.0668 0.0460 0.0318 0.0221 0.0154 0.0107 0.0075 0.0053 0.0037 0.0026 0.0019 0.0013 0.0010 0.0007 0.0001
50 0.6080 0.3715 0.2281 0.1407 0.0872 0.0543 0.0339 0.0213 0.0134 0.0085 0.0054 0.0035 0.0022 0.0014 0.0009 0.0006 0.0004 0.0003 0.0002 0.0001 *
60 0.5504 0.3048 0.1697 0.0951 0.0535 0.0303 0.0173 0.0099 0.0057 0.0033 0.0019 0.0011 0.0007 0.0004 0.0002 0.0001 0.0001 * * * *
MANCOSA 38
APPENDIX 2
n
Present value of a regular annuity of R1 per period for n periods : PVFA (k,n) = ∑ =
i=1
Number
of 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 11% 12% 13% 14% 15% 16% 17% 18% 19% 20%
Periods
1 0.9901 0.9804 0.9709 0.9615 0.9524 0.9434 0.9346 0.9259 0.9174 0.9091 0.9009 0.8929 0.8850 0.8772 0.8696 0.8621 0.8547 0.8475 0.8403 0.8333
2 1.9704 1.9416 1.9135 1.8861 1.8594 1.8334 1.8080 1.7833 1.7591 1.7355 1.7125 1.6901 1.6681 1.6467 1.6257 1.6052 1.5852 1.5656 1.5465 1.5278
3 2.9410 2.8839 2.8286 2.7751 2.7232 2.6730 2.6243 2.5771 2.5313 2.4869 2.4437 2.4018 2.3612 2.3216 2.2832 2.2459 2.2096 2.1743 2.1399 2.1065
4 3.9020 3.8077 3.7171 3.6299 3.5460 3.4651 3.3872 3.3121 3.2397 3.1699 3.1024 3.0373 2.9745 2.9137 2.8550 2.7982 2.7432 2.6901 2.6386 2.5887
5 4.8534 4.7135 4.5797 4.4518 4.3295 4.2124 4.1002 3.9927 3.8897 3.7908 3.6959 3.6048 3.5172 3.4331 3.3522 3.2743 3.1993 3.1272 3.0576 2.9906
6 5.7955 5.6014 5.4172 5.2421 5.0757 4.9173 4.7665 4.6229 4.4859 4.3553 4.2305 4.1114 3.9975 3.8887 3.7845 3.6847 3.5892 3.4976 3.4098 3.3255
7 6.7282 6.4720 6.2303 6.0021 5.7864 5.5824 5.3893 5.2064 5.0330 4.8684 4.7122 4.5638 4.4226 4.2883 4.1604 4.0386 3.9224 3.8115 3.7057 3.6046
8 7.6517 7.3255 7.0197 6.7327 6.4632 6.2098 5.9713 5.7466 5.5348 5.3349 5.1461 4.9676 4.7988 4.6389 4.4873 4.3436 4.2072 4.0776 3.9544 3.8372
9 8.5660 8.1622 7.7861 7.4353 7.1078 6.8017 6.5152 6.2469 5.9952 5.7590 5.5370 5.3282 5.1317 4.9464 4.7716 4.6065 4.4506 4.3038 4.1633 4.0310
10 9.4713 8.9826 8.5302 8.1109 7.7217 7.3601 7.0236 6.7101 6.4177 6.1446 5.8892 5.6502 5.4262 5.2161 5.0188 4.8332 4.6586 4.4941 4.3389 4.1925
11 10.3676 9.7868 9.2526 8.7605 8.3064 7.8869 7.4987 7.1390 6.8052 6.4951 6.2065 5.9377 5.6869 5.4527 5.2337 5.0286 4.8364 4.6560 4.4865 4.3271
12 11.2551 10.5753 9.9540 9.3851 8.8633 8.3838 7.9427 7.5361 7.1607 6.8137 6.4924 6.1944 5.9176 5.6603 5.4206 5.1971 4.9884 4.7932 4.6105 4.4392
13 12.1337 11.3484 10.6350 9.9856 9.3936 8.8527 8.3577 7.9038 7.4869 7.1034 6.7499 6.4235 6.1218 5.8424 5.5831 5.3423 5.1183 4.9095 4.7147 4.5327
14 13.0037 12.1062 11.2961 10.5631 9.8986 9.2950 8.7455 8.2442 7.7862 7.3667 6.9819 6.6282 6.3025 6.0021 5.7245 5.4675 5.2293 5.0081 4.8023 4.6106
15 13.8651 12.8493 11.9379 11.1184 10.3797 9.7122 9.1079 8.5595 8.0607 7.6061 7.1909 6.8109 6.4624 6.1422 5.8474 5.5755 5.3242 5.0916 4.8759 4.6755
16 14.7179 13.5777 12.5611 11.6523 10.8378 10.1059 9.4466 8.8514 8.3126 7.8237 7.3792 6.9740 6.6039 6.2651 5.9542 5.6685 5.4053 5.1624 4.9377 4.7296
17 15.5623 14.2919 13.1661 12.1657 11.2741 10.4773 9.7632 9.1216 8.5436 8.0216 7.5488 7.1196 6.7291 6.3729 6.0472 5.7487 5.4746 5.2223 4.9897 4.7746
18 16.3983 14.9920 13.7535 12.6593 11.6896 10.8276 10.0591 9.3719 8.7556 8.2014 7.7016 7.2497 6.8399 6.4674 6.1280 5.8178 5.5339 5.2732 5.0333 4.8122
19 17.2260 15.6785 14.3238 13.1339 12.0853 11.1581 10.3356 9.6036 8.9501 8.3649 7.8393 7.3658 6.9380 6.5504 6.1982 5.8775 5.5845 5.3162 5.0700 4.8435
20 18.0456 16.3514 14.8775 13.5903 12.4622 11.4699 10.5940 9.8181 9.1285 8.5136 7.9633 7.4694 7.0248 6.6231 6.2593 5.9288 5.6278 5.3527 5.1009 4.8696
25 22.0232 19.5235 17.4131 15.6221 14.0939 12.7834 11.6536 10.6748 9.8226 9.0770 8.4217 7.8431 7.3300 6.8729 6.4641 6.0971 5.7662 5.4669 5.1951 4.9476
30 25.8077 22.3965 19.6004 17.2920 15.3725 13.7648 12.4090 11.2578 10.2737 9.4269 8.6938 8.0552 7.4957 7.0027 6.5660 6.1772 5.8294 5.5168 5.2347 4.9789
40 32.8347 27.3555 23.1148 19.7928 17.1591 15.0463 13.3317 11.9246 10.7574 9.7791 8.9511 8.2438 7.6344 7.1050 6.6418 6.2335 5.8713 5.5482 5.2582 4.9966
50 39.1961 31.4236 25.7298 21.4822 18.2559 15.7619 13.8007 12.2335 10.9617 9.9148 9.0417 8.3045 7.6752 7.1327 6.6605 6.2463 5.8801 5.5541 5.2623 4.9995
60 44.9550 34.7609 27.6756 22.6235 18.9293 16.1614 14.0392 12.3766 11.0480 9.9672 9.0736 8.3240 7.6873 7.1401 6.6651 6.2402 5.8819 5.5553 5.2630 4.9999
MANCOSA 39
TOPIC 1
ACCOUNTING INFORMATION AND MANAGERIAL
DECISIONS
1.1 Customers: To assess the ability of the business to continue in business and satisfy the
needs of customers.
1.2 Suppliers: To assess the ability of the business to pay for the goods and services
provided.
1.3 Government: To assess the amount of tax the business should pay.
1.4 Owners: To assess how effectively the business is managed and to make judgements
about likely levels of risk and return in the future.
1.5 Lenders: To assess the ability of the business to pay interest and the principal sum lent.
1.6 Employees: To assess the ability of the business to provide employment and to reward
them for their labour.
1.7 Investment analysts: To assess the possible risks and returns associated with the
business in order to determine its investment potential so that they could advise their
clients accordingly.
1.8 Community representatives: To assess the ability of the business to continue to
provide employment for the community and use community resources, to engage in
corporate social responsibility projects etc.
1.9 Managers: To assist them in making decisions and plans for the business and to help
them to exercise control to ensure that plans succeed.
2. The main duty of external auditors is to report to shareholders and others whether, in
their opinion, the financial statements show a true and fair view, and comply with
statutory, regulatory and accounting standard requirements.
The role of internal auditors is to provide an independent appraisal function within an
organisation to examine and evaluate its activities as a service to the organisation with
the aim of assisting members of the organisation in the effective discharge of their
responsibilities.
MANCOSA 40
3. Management accounting Financial accounting

User groups Internal users: Managers External: Owner(s); Lenders,
Creditors; Investors
Nature of reports Reports tend to be specific usually Reports tend to be general-purpose
with some decision in mind. useful to a wide range of users.
Legal Management accounting reports are Financial reports are required by law
requirements not required by law since they are for and are also regulated in terms of
internal use only. content and format.
GAAP Management accounting reports are Financial reports must conform to the
not subject to the practices and practices and principles set by
principles of GAAP (Generally GAAP.
Accepted Accounting Practice).
Time focus The emphasis is on the future but It reflects on the financial result and
also provides information on past financial position for the past period.
performance.
Nature of Information used may be less Objective and verifiable information
information objective and verifiable. is needed to prepare reports.
Frequency of Reports are produced as often as Reports are produced annually
reporting required by managers even on a although some businesses prepare
weekly basis. half-yearly or even quarterly reports.
Focus on the Focuses on parts of the business Focuses on the performance of the
whole or parts of e.g. a certain department as well as business as a whole.
the business the business as a whole.
4. Managers will at times be interested in the historic overview of business operations of

the sort provided to other users. Equally, other users would be interested in receiving
information relating to the future e.g. profit forecasts, non-financial information such as
product innovations.
Etc
MANCOSA 41
TOPIC 2
FINANCIAL STATEMENTS AND ACCOUNTING CONCEPTS
1. Due to the practice of adhering to the recognition of revenue concept, accrual concept
and matching concept, revenue and expenses are not the same as cash received and
cash paid and the net profit does not normally reflect the net cash flows for the period.
Although making a profit will increase wealth, cash is only one form in which wealth may
be held. Wealth may also be held in other forms such as inventory, land and buildings,
equipment etc.
2. The net profit in the Statement of Comprehensive Income also appears in the
Statement of Changes in Equity as an addition to retained earnings. The net profit
also affects the retained earnings component of equity in the Statement of Financial
Position.
The Statement of Changes in Equity and Statement of Financial Position are
integrated. The retained earnings also appear as part of equity in the Statement of
Financial Position.
The Statement of Financial Position and the Statement of Cash Flows are also
integrated. The cash that appears in the Statement of Financial Position also appears
as the end of the financial year cash in the Statement of Cash Flows.
3.
3.1 Materiality
The materiality principle urges one to disclose significant matters in the financial reports
and to eliminate trivial details. What may be significantly material in one instance to
warrant full disclosure may not justify complete reporting in another circumstance. For
instance, an item involving R1 000 may be material enough to justify full disclosure for a
small business, but would probably not justify disclosure as a separate item for a
company as large as, say, Samsung. No objective test of materiality exists. Deciding
what is material or not depends largely on management policy.
MANCOSA 42
3.2 Conservatism
This principle calls for a conservative approach on the part of the accountant in his/her
estimations, opinions and selection of procedure. Losses should be recognized and
reflected in the financial statements if a reasonable likelihood exists that they may occur.
On the other hand, anticipated gains and other financial benefits should not be realized.
A drawback of this principle is that it may make the business appear to be in a more
unfavourable position than is actually the case.
4.
4.1 Going concern
The Statement of Financial Position is prepared on the assumption that the entity will
continue to operate in the future. If for example the entity is aware of its intention to
liquidate, the amounts shown in the balance would now have to show the liquidation
values.
4.2 Full disclosure
Lack of full disclosure by not including all the necessary information in the Statement of
Financial Position may result in its users being misled or making inappropriate decisions.
For example certain explanations or notes about investments may be omitted.
4.3 Consistency
This concept is important when making trend comparisons of the Statement of Financial
Position for several years. For example, the change in the valuation method of
inventories would make trend comparison difficult.
MANCOSA 43
5.
5.1
Assets = Equity + Liabilities
Equipment Inventory Receiv. Bank = Capital Income Expenses + Payables
+90 000 +90 000

+50 000 -50 000
-4 000 +4 000
-5 000 -5 000
+10 000 +10 000
+50 000 +45 000 +90 000 +10 000 -9 000 +4 000
5.2.1
Gwala Stores
STATEMENT OF COMPREHENSIVE INCOME FOR
THE MONTH ENDED 31 AUGUST 20.9
R
Revenue 10 000
Expenses (9 000)
Net profit 1 000
5.2.2
Gwala Stores
STATEMENT OF CHANGES IN EQUITY FOR THE
MONTH ENDED 31 AUGUST 20.9
Opening balance 0
Additional capital contributed 90 000
Net profit 1 000
Closing balance 91 000
MANCOSA 44
5.2.3
Gwala Stores
STATEMENT OF FINANCIAL POSITION AT
31 AUGUST 20.9
ASSETS
Non-current assets:
Property, plant and equipment 50 000
Current assets:
Cash 45 000
Total assets 95 000

Equity 91 000
Current liabilities:
Accounts payable 4 000
Total equity and liabilities 95 000
5.2.4
Gwala Stores
STATEMENT OF CHANGES IN CASH FLOWS FOR THE MONTH
ENDED 31 AUGUST 20.9
R
Cash flows from operating activities 5 000
Net profit 1 000
Working capital changes
Increase in accounts payable 4 000
Cash flows from investing activities (50 000)
Purchase of plant, machinery and equipment (50 000)
Cash flows from financing activities 90 000
Capital contributed 90 000
Net increase in cash for the year 45 000
Cash (opening balance) 0
Cash (closing balance) 45 000
MANCOSA 45
TOPIC 3
ACCOUNTING FOR AND PRESENTATION OF ASSETS,
LIABILITIES AND EQUITY
1.1.1 NON-CURRENT ASSETS R

Plant and equipment 750 000
Less: Depreciation (200 000) 550 000
1 000 000
1.1.2 RETAINED EARNINGS R

Balance (31 December 20.8) 0
Net profit 250 000
Dividends (220 000)
Balance (31 December 20.9) 30 000
1.1.3 TOTAL EQUITY R

Ordinary share capital (900 000 + 600 000) 1 500 000
Retained earnings 30 000
1 530 000
1.1.4 NON-CURRENT LIABILITIES R

Mortgage bond (287 500 – 25 000) 262 500
Long-term loan (595 000 – 75 000) 520 000
782 500
MANCOSA 46
1.2 The percentage cash discount, when converted to an annualised return on

investment, can be a very attractive return.
The creditworthiness of a company, when evaluated by credit rating agencies and
credit grantors, is affected by its consistent use of cash discounts.
Etc.
1.3 If Pixma Limited can borrow money at an interest rate of, say, 12% and use the
money to purchase assets that realise a return that is greater than 12%, then the
shareholders will get a greater return on investment than if they provided the
funding.
1.4
1.4.1 Cheques must be signed by two persons.
Payments should only be made when supported by authorized vouchers.
Etc
1.4.2 Proper records must be kept of all stock received and issued.
Requests for stock from the warehouse must be authorised.
Security cameras may be installed.
Etc
2. Four decisions
*The cost of asset (e.g. whether to include interest charges or not)
*The expected residual or disposal value of the asset
*The expected useful life of the asset
*The choice of the depreciation method
*The percentage per annum
Effect on reported profits
Making different choices for the above matters will result in a different pattern of
depreciation charges over the life of the asset and therefore a different pattern of
reported profits.
MANCOSA 47
3.1 FIFO will show the highest gross profit because sales are matched with the earlier (and
cheaper) purchases.
3.2 LIFO will show the lowest gross profit because sales are matched with the more recent
(costlier) purchases.
3.3 The AVCO method will usually give a figure which is between these two extremes.
3.4 The closing inventory figure in the Statement of Financial Position will be highest with the
FIFO method. This is because the cost of inventory still held will be based on the more
recent (and costlier) purchases.
3.5 The closing inventory figure in the Statement of Financial Position will be lowest with the
LIFO method. This is because the cost of inventory still held will be based on the earlier
(and cheaper) purchases.
3.6 The AVCO method will usually give a figure between these two extremes.
4. *The inventory is damaged or deteriorated.

*The inventory is obsolete.
*The market price of the inventory has fallen.
*The inventory item is being used as a “loss leader”.
5. The effect would be to overstate the assets (debtors/accounts receivable) in the

Statement of Financial Position and to overstate profit in the Statement of
Comprehensive Income as the loss/expense (which has been recognized) will not result
in any future benefits.
6.
6.1 The amount owing by any customer is typically shown as an asset (accounts receivable).
However, since the debtor is unable to pay, the item cannot provide future benefits and
the R4 000 owing would not be regarded as an asset.
6.2 The hiring of a new marketing manager cannot be considered as an acquisition of an
asset. One reason is that the business does not have exclusive rights of control over
that manager (perhaps only to his/her services). Furthermore the value of the manager
cannot be measured in monetary terms with any degree of reliability.
MANCOSA 48
6.3 The machine can be considered as an asset even if it has not yet been paid for. Once
the business has agreed to purchase the machine and has accepted it, the machine is
legally owned by the business even if payment is still outstanding.
7.
7.1
Manhattan Ltd
Statement of Financial Position at 30 November 20.9
ASSETS
Non-current assets 565 000
Plant and equipment 207 000
Motor vehicles 38 000
Current assets 338 000
Inventories 153 000
Accounts receivable 185 000
Total assets 903 000

Equity 441 000
Non-current liabilities 260 000
Loan from Kia Bank 260 000
Non-current liabilities 202 000
Accounts payable 86 000
Bank overdraft 116 000
Total equity and liabilities 903 000
MANCOSA 49
7.2.1 The liquidity of the business

Liquid assets amounting to R338 000 (R153 000+R185 000) is available to meet the
short-term obligations of R202 000 (R86 000+R116 000). Whilst the liquid assets are
greater, none of it is cash and furthermore it is not easy to convert inventories to cash at
short notice. Also, a large amount is tied up in accounts receivable and if debtors do not
abide by the credit terms and/or if credit terms are greater than 30 days, the business
may experience liquidity problems.
7.2.2 The mix between current and non-current assets
Current assets total R338 000 whilst the non-current assets equal R565 000. When too
much of funds are tied up in non-current assets, the business could be vulnerable to
business failure. This is because non-current assets are typically not easy to turn into
cash in order to meet short-term debts. Converting many non-current assets into cash
may lead to substantial losses as such assets are not always worth in the open market
what the business paid for them or what they may be worth to the business.
7.2.3 The financial structure of the Statement of Financial Position
The own capital (equity) is 1.70 times greater than the outside capital (long-term liability).
However, the long-term liability of R260 000 brings with it the obligation to pay interest
and make large capital repayments at regular intervals.
MANCOSA 50
TOPIC 4
STATEMENT OF COMPREHENSIVE INCOME AND CASH
FLOWS
1. Edgar Limited
1.1 Earnings per share = R77 000 X 100c
200 000
= 38.5 cents
No. EPS has dropped by 6.5 cents.
1.2 R6 000 = 15%

Loan balance = R6 000 X 100 ÷ 15
= R40 000
1.3 Gross profit ratio = Gross profit X 100

Net sales
= R263 200 X 100
R470 000
= 56%
- Goods may have been sold below the normal selling price.
- Monthly or seasonal sales may have been held.
- Some goods may have been incorrectly priced (lower).
1.4 - Negotiate with suppliers for higher discounts, to reduce costs.

- Seek alternative suppliers for better deals.
- Use substitute materials but do not compromise quality.
- Reduce administrative expenses by cutting down on overtime.
- Pay off the loan as soon as possible to reduce interest expense.
MANCOSA 51
2. MVP Ltd
2.1 Sales reflect the amount an enterprise earns by selling its products. It is revenue
generated through the enterprise’s primary operating activities.
Other income is not directly related to the enterprise’s primary operating activities.
They are considered non-operating items and are reported separately on the Statement
of Comprehensive Income, example interest on investment.
2.2 Competition is one factor that will prevent it from doing so.
The products must be also be priced at amounts that customers are willing to pay.
2.3 Cost of sales refers to the cost to the enterprise of goods sold to customers. It is an
expense linked directly with the revenue generated through sales.
Operating expenses are costs of resources incurred as part of operating activities that
are not directly associated with specific goods.
Other expenses are expenses not directly related to the enterprise’s primary operating
activities. They are considered non-operating items.
2.4 A separate disclosure is required as each item is relevant to various decision makers
(concept of materiality). If they were grouped together it would diminish the ability of
decision-makers to make important economic decisions. The separate listing also
distinguishes expenses that result from the enterprise’s primary operating activities.
2.5 The Statement of Comprehensive Income of the previous year is not provided to enable
one to make a comparison of the performance of the enterprise over the past year.
Statements of Comprehensive Income of the previous years will enable users to do a
trend analysis.
MANCOSA 52
3. Afri Manufacturers Ltd

The performance of the company in 20.9 appears lacklustre compared to 20.8. The
profit after tax dropped from R37 100 to R28 000. Since profit is a function of turnover,
let’s examine the profits of both years in relation to their respective turnovers. The ratio
of profit to sales (profit margin) for 20.9 was 2.79% whilst that of 20.8 was 4.12%. The
previous year performance appears better. However, when one compares the profit
margins achieved to the industry average, one finds that the company’s performance in
20.8 was below the industry average of 4.51% whereas in 20.9 the performance was
better than the industry (2.60%). Operating profit on sales decreased from 10.21% to
0.60%.
Etc
4.
Change in Statement of Financial Position Inflow of cash Outflow of cash
items
Increase in current assets other than cash 
Decrease in current assets other than cash 
Increase in non-current assets 
Decrease in non-current assets 
Increase in current liabilities 
Decrease in current liabilities 
Increase in non-current liabilities 
Decrease in non-current liabilities 
5. Vuyo Limited
5.1 The operating activities the company yielded a positive inflow of funds of R100 000.
It has sufficient funds to finance its day-to-day activities.
5.2 A debtor pays an amount owed.

A bank loan is received.
Additional capital is raised.
Etc
MANCOSA 53
5.3 Yes.
It is a sign of both good performance and growth.
The excess cash from operating activities is available for the purchase of plant and
equipment.
The value of the company increases as it grows.
As the company expands by purchasing additional assets, more products are produced
and sold, which in turn improves profitability and operating cash flows.
6. Mega Ltd
6.1 Cash flows from operating and investing activities were used to redeem long-term
borrowings.
6.2 Depreciation expense does not require the payment of cash (non-cash item) and is thus
added to profit to determine cash flows.
An increase in payables implies that resources have been used but payment has not
been made. Increase in payables is added to profit to calculate operating cash flow.
6.3 The indirect method is used.

The indirect method explains cash flows from operating activities by explaining the
change in each of the non-cash operating accounts in the Statement of Financial
Position.
The direct method explains how much cash was received or paid during the year for
each item reported. It thus reflects (as operating activities) cash received from
customers, cash paid to merchandise suppliers, cash paid to employees and cash paid
for operating expenses.
6.4 The company does not appear to be performing well.

Its cash flow from operations (R33 980) is significantly lower that it’s operating profit
(R61 047).
The increase in merchandise suggests that the company was not selling the inventory it
was purchasing fast enough.
The increase in receivables suggests that the company was experiencing difficulty in
collecting from its customers.
The increase in payables implies that the company was having difficulty in paying its
MANCOSA 54
suppliers.
The sale of plant and equipment to generate cash is a sign of poor financial
performance.
The cash from operating activities was inadequate to meet its obligations resulting in the
sale of assets to raise cash.
In the long-term the company cannot continue selling assets to repay debt.
7. Siya Limited’s operations appear to be quite profitable (Cash generated from operating
activities is R270 000). The company appears to be on an expansion spree. The
company’s expansion is most likely funded by the issue of shares (R750 000) and the
divestment of non-current investment (R250 000) although funds were available from
operations
(R270 000) and long term borrowings (R50 000). The company seems to be building up
a large cash balance. One needs to explore the reasons for increasing the cash
balance.
MANCOSA 55
8. Asic Ltd
CASH FLOW STATEMENT FOR THE YEAR ENDED 31 DECEMBER 20.13
R
Cash flows from operating activities 200 715
Profit before interest and tax (a) 201 000
Adjustments to convert to cash from operations
Non-cash flow adjustments 102 000
Add: Depreciation (b) 81 000
Loss on disposal of asset (c) 21 000
Profit before working capital changes 303 000
Working capital changes (2 640)
Increase in inventory (d) (990)
Decrease in receivables (e) 14 970
Decrease in payables (f) (16 620)
Cash generated from operations 300 360
Interest paid (g) (3 900)
Investment income (h) 24 600
Dividends paid (i) (57 750)
Income tax paid (j) (62 595)

Investment in listed shares (k) (21 525)
Investment in subsidiary company (l) (25 500)
Non-current assets purchased (m) (209 490)
Proceeds from sale of equipment (n) 16 500
Proceeds from issue of ordinary shares (o) 150 000
Long-term borrowings redeemed (p) (105 000)
Net increase in cash and cash equivalents 5 700
Cash and cash equivalents at beginning of year (q) (7 500)
Cash and cash equivalents at end of year (r) (1 800)
MANCOSA 56
Calculations and explanatory notes

(a) Profit before interest and tax
This amount is obtained from the Statement of Comprehensive Income (operating
profit).
(b) Depreciation
The amount is obtained from the Statement of Comprehensive Income.
(c) Loss on disposal of asset

(d) Increase in inventory

The increase is calculated by comparing the inventory figures for both years:
R120 690 – R119 700 = R990 (The amount is bracketed as it represents a use of cash.)
(e) Decrease in receivables

The decrease is calculated by comparing the Trade and other receivables figures for
both years:
R82 305 – R67 335 = R14 970 (The amount represents a source of cash.)
(f) Decrease in payables

The decrease is calculated by comparing the Trade and other payables figures for both
years:
R59 805 – R43 185 = R16 620 (The amount is bracketed as it represents a use of cash.)
(g) Interest paid

(h) Investment income

MANCOSA 57
(i) Dividends paid

The amount paid is calculated as follows:
Dividends due on 31 December 20.12 (39 000)
Dividends for the year (54 000)
Dividends due on 31 December 20.13 35 250
(57 750)
Note:
 Dividends due on 31 December 20.12/20.13 is obtained from the item “Shareholders for
dividends” in the Statement of Financial Position.
 Dividends for the year are obtained from the Statement of Changes in Equity:
R13 200 + R21 000 + R35 250 = R69 450
(j) Income tax paid

The amount paid is calculated as follows:
Income tax due on 31 December 20.12 (30 000)
Income tax for the year (77 595)
Income tax due on 31 December 20.13 45 000
(62 595)
Note:
 Income tax due on 31 December 20.12/20.13 is obtained from the item “South African
Revenue Services” in the Statement of Financial Position.
 Income tax for the year is obtained from the Statement of Comprehensive Income.
(k) Investment in listed shares

The amount is calculated by comparing the figures for “Investment – Listed shares” (in
the Statement of Financial Position) for both years:
R120 000 – R98 475= R21 525 (The amount is bracketed as it represents a use of
cash.)
(l) Investment in subsidiary company

The amount is calculated by comparing the figures for “Investment – Subsidiary
company” (in the Statement of Financial Position) for both years:
R85 500 – R60 000= R25 500 (The amount is bracketed as it represents a use of cash.)
MANCOSA 58
TOPIC 5
FINANCIAL ANALYSIS
1.1
20.10 20.9
Gross margin = Gross profit X 100 Gross margin = Gross profit X 100
Sales 1 Sales 1
= R5 831 400 X 100 = R3 379 300 X 100
R32 011 500 1 R19 373 000 1
= 18.22% = 17.44%
20.10 20.9
Operating margin Operating margin
= Operating profit X 100 = Operating profit X 100
Sales 1 Sales 1
= R1 931 200 X 100 = R1 327 800 X 100
R32 011 500 1 R19 373 000 1
= 6.03% = 6.85%
20.10 20.9
Profit margin Profit margin
= Profit after tax X 100 = Profit after tax X 100
Sales 1 Sales 1
= R1 373 550 X 100 = R919 820 X 100
R32 011 500 1 R19 373 000 1
= 4.29% = 4.75%
1.2 Gross margin has increased marginally while operating margin and profit margin
showed a slight decrease. The cost of sales is high in relation to sales. It thus
appears that Zebcom Enterprises is operating on very low profit margins. Operating
expenses does appear to be high as there is a large difference between the gross
margin and profit margin.
MANCOSA 59
1.3 20.10 20.9

Current ratio Current ratio
= Current assets = Current assets
Current liabilities Current liabilities
= R2 866 530 = R4 974 530
R1 088 860 R588 310
= 2.63:1 = 8.46:1
20.10 20.9
Acid test ratio Acid test ratio
= Current assets – Inventory = Current assets – Inventories
Current liabilities Current liabilities
= R2 866 530 – R1 482 200 = R4 974 530 – R2 038 860
R1 088 860 R588 310
= 1.27:1 = 4.99:1
The liquidity has deteriorated considerably from the previous year. However, one
could say that high liquidity ratios for 20.9 may point towards slack management in
respect of the inventories and idle cash. The ratios for 20.10 have dropped to more
acceptable levels.
1.4 20.10
Inventory turnover
= Cost of sales
Average inventory
= R26 180 100
R1 760 530
= 14.87 times
N.B. Average inventory = (R1 482 200 + R2 038 860) ÷2 = R1 760 530
MANCOSA 60
20.10
Debtor collection period
= Accounts receivable X 365
Credit sales
= R261 290 X 365
R3 201 150
= 29.79 days
20.10
Creditor payment period
= Accounts payable X 365
Credit purchases
= R190 660 X 365
R2 562 344
= 27.16 days
Note: Credit purchases are calculated as follows:

R
Cost of sales 26 180 100
Add: Closing inventory 1 482 200
27 662 300
Less opening inventory (2 038 860)
Total purchases 25 623 440
Credit purchases = 10% of R25 623 440 = R2 562 344
MANCOSA 61
20.10
Turnover to net assets
Sales
Net assets
= R32 011 500
R8 066 530 – R1 088 860
= R32 011 500
R6 977 670
= 4.59:1
1.5 Inventory turnover has increased from 9.04 times to 14.87 times per annum
suggesting that the enterprise sold inventory at a faster rate. Debtors’ collections
seem to be good with the outstanding debt expected to be collected within 30 days.
Creditors accounts are being settled earlier than the previous year and the
enterprise should not settle accounts earlier than required unless a discount for early
settlement is forthcoming. The sales generated by each rand of net assets have
increased greatly from R2.13 to R4.59. This also indicates that the net assets
required to support a level of sales have decreased.
2.1
Vuyo Traders Sipho Stores
Return on assets Return on assets
= Operating profit X 100 = Operating profit X 100
Total assets 1 Total assets 1
= R400 000 X 100 = R420 000 X 100
R1 000 000 1 R1 500 000 1
= 40% = 28%
N.B. Total assets = R200 000 + R800 000 = R1 000 000 (Vuyo Traders)
Total assets = R1 200 000 + R300 000 = R1 500 000 (Sipho Stores)
MANCOSA 62
2.2
Vuyo Traders
Return on equity
= Profit after tax X 100
Equity 1
= R120 000 X 100
R800 000 1
= 15%
Sipho Stores
Return on equity
Equity 1
= R140 000 X 100
R300 000 1
= 46.67%
2.3 Sipho Stores. It achieved a return of 46.67% compared to Vuyo Traders’ return of
15%.
2.4 Yes. A 40% return is greater than the cost of borrowing funds (10%). It is also
greater than the inflation rate and the return that one could get from alternative
investments e.g. fixed deposits.
3.1
20.10
Debt to assets
= Total debt X 100
Total assets 1
= R800 000 X 100
R2 000 000 1
= 40%
MANCOSA 63
20.10
Debt to equity
= Non-current debt X 100
Equity 1
= R600 000 X 100
R1 200 000 1
= 50%
N.B. Equity = R2 000 000 – R600 000 – R200 000= R1 200 000
20.10
Interest coverage
= Operating profit
Interest expense
= R500 000
R120 000
= 4.17 times
3.2 The debt to assets ratio indicates that 40% of Mestle Wholesalers assets come from
borrowed funds.
The debt to equity ratio indicates that the creditors supply Mestle Wholesalers with
50 cents for every Rand supplied by the owners.
Mestle Wholesalers earned its interest obligations 4.17 times over in 20.10; or one
could say that profit before interest and tax was 4.17 times as large as interest. The
business can therefore meet its interest obligations
MANCOSA 64
4.1
Return on equity
Equity 1
= R10 000 000 X 100
R118 000 000 1
= 8.47%
Earnings per share

= Profit after tax
Number of ordinary shares issued
= R10 000 000 X 100
40 000 000
= 25 cents
Dividend per share

= Dividends for the year
Number of ordinary shares issued
= R2 000 000 X 100
40 000 000
= 5 cents
Earnings retention ratio

= Earnings per share – Dividend per share X 100
Earnings per share 1
= 25 cents – 5 cents X 100
25 cents 1
= 20 cents
25 cents
= 80%
OR
MANCOSA 65
Earnings retention ratio

= Retained earnings for the year X 100
Profit due to ordinary shareholders 1
= R10 000 000 – R2 000 000 X 100
R10 000 000 1
= R8 000 000 X 100
R10 000 000 1
= 80%
20.9
Price earnings ratio
= Market price per share
Earnings per share
= 400 cents
25 cents
= 16 times
4.2 Return on equity has decreased slightly (from 10.04% to 8.47%). A comparison with
alternative investments of a similar risk would indicate whether the profitability is low
or not. Earnings per share remained stable and there was a slight drop in the
dividends per share. The company retains a high percentage of the net profit (over
80%) which may not please all shareholders. The price earnings ratio has increased
from (15 to 16 times) indicating greater investor confidence in the company.
Investors are willing to pay 16 times earnings for the shares.
MANCOSA 66
TOPIC 6
COST-VOLUME-PROFIT (CVP) RELATIONSHIPS
1.
1.1 Per unit x Volume = Total %
Sales 20.00 2 500 50 000
Variable costs 7.50 2 500 18 750
Contribution margin 12.50 x 2 500 = 31 250 62.5%
Fixed costs 12 500
1.2 Contribution margin and operating profit will increase by R6 250 (R10 000 X 62.5%).
1.3 Contribution margin must increase by the same amount if operating profit was to remain
the same. Sales must increase by R4 800 (R3 000 ÷ 62.5%).
1.4 Yes.
The increase in contribution margin would be R6 250 (R10 000 X 62.5%) which is
R1 250 more than the cost of the advertising (R5 000).
1.5 Per unit x Volume = Total %

Sales 20.00
Variable costs 7.50
Contribution margin 12.50 x 2 600 = 32 500 62.5%
Fixed costs 12 500
Work to the middle to obtain the required sales volume (R32 500 ÷ R12.50 = 2 600 units)
MANCOSA 67
OR
1.5
Target sales volume = Fixed costs + Target profit

Contribution margin per unit
= R12 500 + R20 000

R12.50
= 2 600 units
1.6 Per unit x Volume = Total

Sales 18.00
Variable costs 7.50
Contribution margin 10.50 x 2 700 = 28 350
Fixed costs 12 500
No. They should reject the proposal. Contribution margin and operating profit will
decrease by R2 900.
1.7 Per unit x Volume = Total

Sales 16.00
Variable costs 7.50
Contribution margin 8.50 x 5 000 = 42 500
Fixed costs 20 500
Yes. Operating profit increases from R18 750 to R22 000 i.e. by R3 250.
MANCOSA 68
2. Per unit x Volume = Total

Sales 12
Variable costs 5
Contribution margin 7 x 137 143 = 960 000
Fixed costs 700 000
Work to the middle to obtain the required sales volume (R960 000 ÷ R7 = 137 143 units)
OR
2.
Target sales volume = Fixed costs + Target profit

= R700 000 + R260 000

R7.00
= 137 143 units
3. Workings
Per unit x Volume = Total
Sales R70 350 24 500
Variable costs R45
Contribution margin R25 x 350 = R8 750
Fixed costs (5 000)
Operating profit R3 750
Note: Variable costs include material cost of R20 per unit and labour cost of R25 per unit
(R12.50 X 2 hours).
MANCOSA 69
3.1 Break even quantity = Fixed costs

= R5 000
R25
= 200 units
3.2 It makes it possible to compare the expected volume of activity (350 units) with the
break-even point (200 units) and so make a judgement about risk.
Planning to operate slightly above the break-even point is risky as a small drop in
volume of activity could lead to loss.
3.3 Workings Per unit x Volume = Total

Sales R70 350 24 500
Variable costs R32.50
Contribution margin R37.50 x 350 = R13 125
Fixed costs (9 375)
Note: Variable costs include material cost of R20 per unit and labour cost of R12.50 per
unit (R12.50 X 1 hour).
3.3.1 Break even quantity = Fixed costs

= R9 375
R37,50
= 250 units
MANCOSA 70
3.3.2 With both options, a profit of R3 750 is expected. However, the break-even point
differs.
Without the machine, the actual volume of sales could drop by 43.86% (from 350 to
200) before the business will fail to make a profit.
With the machine a 28.67% drop in sales (from 350 to 250) would be enough to cause
the business to fail to make a profit.
On the other hand, for each additional pair of sandals above the expected 350, an
additional profit of only R25 would be made without the machine whereas R37.50
would be made with the machine.
3.3.3 Without the machine With the machine

Margin of safety = 350 – 200 = 150 units 350 – 250 = 100 units
The option of not renting the machine might be preferable since the margin of safety
between the expected volume of activity and the break-even point is greater.
For the same level of activity, the risk will be lower without renting the machine.
However, ones attitude towards risk is important. As pointed out previously, sales
above 350 units mean a higher profit per unit with the use of the machine.
MANCOSA 71
4.
Workings -Gnome Per unit x Volume = Total %
Sales 60 120 000
Variable costs 36 72 000
Contribution margin 24 x 2 000 = 48 000 40%
Fixed costs 15 000
Workings –Humpty Per unit x Volume = Total %

Sales 60 120 000
Variable costs 24 48 000
Contribution margin 36 x 2 000 = 72 000 60%
Fixed costs 30 000
4.1
Gnome
Total revenues at break even = Total fixed cost

Contribution margin ratio
= R15 000
40%
= R37 500
MANCOSA 72
Humpty
Total revenues at break even = Total fixed cost

Contribution margin ratio
= R30 000
60%
= R50 000
Note: Alternative method is to calculate break even quantity and then multiply by selling
price per unit.
4.2 Gnome
Operating leverage = Contribution margin
Operating profit
= R48 000
R33 000
= 1.45:1
Humpty
Operating leverage = Contribution margin
Operating profit
= R72 000
R42 000
= 1.71:1
The above calculations show that Humpty Manufacturers has a higher operating
leverage.
4.3 Humpty Manufacturers has a higher operating leverage. Suppose that its sales drop by
10%. Let us see by what percentage operating profit will fall.
MANCOSA 73
R
Sales (1 800 X R60) 108 000
Variable costs (1 800 X R24) (43 200)
Contribution margin 64 800
Fixed costs 30 000
Operating profit dropped from R42 000 to R34 800, a percentage decrease of 17.14%.
One can therefore see that the consequence of a small drop in sales is a relatively larger
percentage decrease in operating profit.
4.4
Gnome
Margin of safety = Sales – Break even sales X 100

Sales
= R120 000 – R37 500 X 100

R120 000
= 68.75%
Humpty
Margin of safety = Sales – Break even sales X 100

Sales
= R120 000 – R50 000 X 100

R120 000
= 58.33%
MANCOSA 74
5.
A B C
(R) (R) (R)
Sales 12.00 10.80 10.80
Variable cost 6.60 5.40 5.40
Marginal income 5.40 5.40 5.40
Fixed cost 96 000 66 000 78 000
PROPOSAL A
Break-even quantity = Total fixed cost

Marginal income per unit
= R96 000
R5.40
= 17 778 units
PROPOSAL B

= R66 000
R5.40
= 12 222 units
PROPOSAL C

= R78 000
R5.40
= 14 444 units
MANCOSA 75
TOPIC 7
COST ANALYSIS FOR PLANNING, CONTROL AND
DECISION-MAKING
BUDGETING
1. A budget is a planning device as it guides executives to anticipate the influence and
impact of a given set of events on the firm’s business and its resources. A budget also
serves as an effective tool for managerial control by providing a proper yardstick for the
evaluation of actual performance.
Etc.
2. Quantity required to meet projected sales.

Opening and closing levels of inventories.
Maximum production capacity of the firm.
Available storage facilities.
Amount of investment required.
Etc.
3. Sales budget
Product November December January

Units/price R Units/price R Units/price R
Product X 3 000@R20 60 000 4 500@R20 90 000 4 000@R20 80 000
Product Y 4 000@R30 120 000 6 000@R30 180 000 5 000@R30 150 000
180 000 270 000 230 000
4.
Production budget April May

Sales forecast (in units) 1 200 1 000
Desired closing inventory of finished goods 50 45
Total budgeted production needs 1 250 1 045
Opening inventory of finished goods (60) (50)
Required production 1 190 995
MANCOSA 76
5. Problems:
The company will not be able to achieve the requirement of settling the overdraft by
the end of October.
Although the initial overdraft is expected to be eliminated in June, a study of the
closing cash balance each month thereafter suggests that the cash balance is
expected to get worse each month.
Except for the first 2 months, a cash shortfall is expected for the rest of the budgeted
period.
The company expects a decline in sales each month from July to October.
Dealing with the problems:
The shop refurbishment could be postponed.
The company could obtain funds from the shareholders or other investors.
It may try to stimulate sales in some way.
Ways could be found to reduce overhead expenses.
Sales were declining, yet selling expenses are high – investigate this.
6.1 Raw material usage variance

(Actual quantity – Standard Quantity) X Standard price
= (20 050 – 20 000) X R5
= R250 (unfavourable)
Possible reasons for the variance:

Poor control over materials
Faulty standards
Changes in the quality of material supplied
Etc
6.2 Direct labour rate variance

(Actual rate – Standard rate) X Actual hours
= (R48 – R50) X 39 500
= R79 000 (favourable)
MANCOSA 77
6.3 Direct labour efficiency variance

(Actual time worked – Standard time allowed) X Standard rate
= (39 500 hrs – 40 000 hrs) X R50
6.4 Variable overhead efficiency variance

(Actual hours – Standard hours) X Standard rate
= (39 500 – 40 000) X R11
7.1 Fixed overhead spending variance

Actual fixed overheads – Budgeted fixed overheads
= R79 808 – R76 800
= R3 008 (unfavourable)
7.2 Fixed overhead volume variance

Budgeted fixed overheads – Standard fixed overheads
= R76 800 – (1 680 units X 4 hrs X R12)
= R76 800 – R80 640
Note:
Standard fixed overheads =
Number of units produced X Standard time to make 1 product X Standard rate per hr
Standard time to make 1 product = 6 400 hrs ÷ 1 600 units = 4 hours
Standard rate per hour = Standard fixed overheads ÷ standard number of labour hrs
= R76 800 ÷ 6 400
= R12
MANCOSA 78
7.3 Variable overhead efficiency variance

(Actual hours – Standard hours) X Standard rate
= (6 880 – 6 720) X R5
= R800 (unfavourable)
Note
Standard hours = Number of units produced X Standard time to make 1 product
= 1 680 X 4 hours
= R6 720
Standard rate = R32 000 ÷ 6 400 hours = R5
Possible reasons for the variance:
Absenteeism
Efficiency of employees
Working conditions
Etc
8.1 R
Sales (8 000 000 X R12) 96 000 000
Variable costs (8 000 000 X R9) (72 000 000)
Contribution margin 24 000 000
Fixed costs (4 656 000)
Operating profit 19 344 000
8.2 R
Differential revenue from accepting the offer (2 000 000 X R8.90) 17 800 000
Differential cost by accepting the offer (2 000 000 X [R9 – R0.50]) (17 000 000)
Differential profit from accepting the offer 800 000
Accept the offer as a differential profit of R800 000 is expected.
MANCOSA 79
9. A comparison of the sales offer of R42 with the selling price of R63 indicates that the
offer should be rejected. However, Femino Enterprises has excess capacity and one
should focus on the relevant cost, which in this case is the variable cost. The
differential profit from accepting the offer is calculated as follows:
Differential revenue from accepting the offer:
6 000 units @ R42 R252 000
Differential cost by accepting the offer:
6 000 units @ R30 (R15+R9+R6) (R180 000)
Differential profit from accepting the offer. R72 000
The offer should therefore be accepted.
10.
10.1 The relevant cost of internal production of each component is:
Variable cost of production of the component R15
Opportunity cost of lost production of the other product R12
R27
It is obviously more costly (R27) than the R20 per component which will have to be
paid to the subcontractor. Dubai Ltd should therefore subcontract the component.
10.2 Loss of control of quality

Potential unreliability of supply
Etc.
11. The relevant cost is the variable cost per unit which is calculated as follow:
R
Direct Material 866 000
Labour and other variable costs 844 000
Total variable costs 1 710 000
Number of units produced 8 500
Variable cost per unit

(R1 710 000 ÷ 8 500) R201.18
MANCOSA 80
The variable cost of making the component (R201.18) is cheaper than buying it
(R210). Trike Enterprises should therefore make the component in its plant.
12.1 Project A
Investment (920 000)
Year 1 Cash flow 400 000
(520 000)
(240 000)
(40 000)
Year 4 cash flow 200 000
Payback period is 3 years 3months

Note:
R40 000_ X 12 mths
R200 000
= 2.4 months
12.2 Accounting rate of return (Project A)

= Average annual profit X 100
Average investment 1
= R104 000 X 100
R420 000 1
= 24.76%
Note:
Depreciation= R800 000 – R40 000

5
= R760 000
5
= R152 000 per year
MANCOSA 81
Calculation of accounting profit

Cash flow – Depreciation/Scrap value = Accounting profit
320 000 (152 000) R168 000
280 000 (152 000) 128 000
260 000 (152 000) 108 000
240 000 (152 000) 88 000
220 000 (152 000) 28 000
*(40 000)
R520 000
*(40 000) is scrap value
Average annual profit

= R520 000
5 years
= R104 000
12.3 Project A
Year Cash inflow Discount Present

Factor value
1 320 000 0.8929 285 728
2 280 000 0.7972 223 216
3 260 000 0.7118 185 068
4 240 000 0.6355 152 520
5 220 000 0.5674 124 828
Total PV 971 360
NPV (positive) 171 360
12.4 Yes.
ARR is higher than the cost of capital.
NPV is positive.
MANCOSA 82
13.
13.1 Project Turbo
Factor Value
1 0 0,8929 0
2 R27 750 0.7972 R22 122
3 R54 300 0,7118 R38 651
4 R184 500 0,6355 R117 250
Total PV R178 023
Investment (R176 550)
NPV (positive) R1 473
Project Gusto
Net inflow R54 000

Discount factor X 3,0373
Total Present value R164 014
Investment (R176 550)
NPV (negative) (R12 536)
Project Turbo should be chosen since the NPV is positive. The NPV for project Gusto is
negative and is therefore rejected.
MANCOSA 83
13.2 Project Turbo

Step 1
We notice that the NPV is positive, and above zero, but not by a large margin.
Step 2
We now pick a higher rate e.g. 13%. (Trial-and-error is used to obtain the higher
rate.)
Project Turbo
Year Cash Discount Discount Present Present
inflow Factor Factor value value
12% 13% 12% 13%
1 0 0,8929 0,8850 0 0
2 R27 750 0.7972 0,7831 R22 122 R21 731
3 R54 300 0,7118 0,6931 R38 651 R37 635
4 R184 500 0,6355 0,6133 R117 250 R113 154
Total PV R178 023 R172 520
Investment (R176 550) (R176 550)
NPV R1 473 (R4 030)
Step 3
Interpolation:
The IRR is between 12% and 13%.
IRR = 12% + 1 473

1 473 + 4 030
= 12% + 1 473
5 503
= 12.27%
MANCOSA 84
Project Gusto
Step 1
We notice that the NPV is negative.
Step 2
We now pick a lower rate e.g. 10%. (Trial-and-error is used to obtain the higher rate.)
Cash Disc. Disc. Disc. Present Present Present

inflow Factor Factor Factor value value value
Year p.a. 10% 9% 8% 10% 9% 8%
1-4 R54 000 3,1699 3,2397 3,3121 171 175 174 944 178 853
Investment 176 550 176 550 176 550
NPV (R5 375) (R1 606) R2 303
Step 3
Interpolation: The IRR is between 8% and 9%.
IRR = 8% + 2 303
1 606 + 2 303
= 8% + 2 303
3 909
= 8.59%
Decision: Project Turbo should be chosen as the IRR is greater.
MANCOSA 85
14.
14.1 Payback period (Project F)
(110 000)
(74 000)
(34 000)
Payback period is 3 years 10 months

Note:
R34 000 X 12 mths
R44 000
= 9.27 months
14.2 Accounting rate of return (Project F)

= Average annual profit X 100
Average investment
= R7 200 X 100
R80 000
= 9%
Note:
Depreciation = R140 000 – R20 000
5
= R120 000
5
= R24 000 per year
MANCOSA 86
Calculation of accounting profit

Cash flow – Depreciation/Scrap = Accounting profit
value
30 000 (24 000) R6 000
36 000 (24 000) 12 000
40 000 (24 000) 16 000
44 000 (24 000) 20 000
26 000 (24 000) (18 000)
*(20 000)
R36 000
*(20 000) is scrap value
Average annual profit

= R36 000
5 years
= R7 200
Average investment
= [140 000+20 000] ÷ 2
= R80 000
14.3 Project F

Factor value
1 30 000 0.8772 26 316
2 36 000 0.7695 27 702
3 40 000 0.6750 27 000
4 44 000 0.5921 26 052
5 26 000 0.5194 13 504
Total PV 120 574
NPV (negative) (19 426)
MANCOSA 87
Project G

Factor value
1 40 000 0.8772 35 088
2 50 000 0.7695 38 475
3 50 000 0.6750 33 750
4 80 000 0.5921 47 368
Total PV 154 681
NPV (positive) 4 681
15. Use trial and error method

Year Cash Discount Discount Present Present
inflow Factor Factor value value
p.a. 13% 14% 13% 14%
1-5 R40 000 3.5172 3.4331 140 688 137 324
Investment 140 000 140 000
NPV R688 (R2 676)
IRR = 13% + 688

688 + 2 676
= 13% + 688
3 364
= 13.20%
MANCOSA 88
TOPIC 8
TRANSFER PRICING FOR DECENTRALISED
ENTERPRISES
1. These are the actual prices that the supplying division sells the product to external
clients for or they may the prices a competitor is offering. If a perfectly competitive
market exists, the current market price is the most suitable basis for setting the
transfer price. The supply of transfer goods at market prices usually results in
optimal profits for the entire enterprise.
In a perfectly competitive market, the supplying division should supply as much as is

required by the receiving division at the current market price. If the receiving
division’s demand is greater then the supplying division can meet, additional
supplies must be obtained from an outside supplier at market price.
If the supplying division cannot sustain a profit in the long term at the current outside
market price, then the enterprise will be better off not producing the product
internally. It should rather purchase from outside suppliers
2.
2.1 Negotiated prices is suited to circumstances where there is an external market for
the goods supplied by the buying and selling divisions and where divisional
managers are free to accept or reject offers made by other divisions.
Negotiated transfer prices are also appropriate when there are market imperfections
for the product.
2.2 By not being able to sell outside the enterprise, the selling division is likely to be in a
weak bargaining position and the transfer price may result in an under-par divisional
performance. The inability of the manager of the selling division to negotiate with
authority would affect the division’s profitability negatively.
MANCOSA 89
3.
3.1 The transfer price of product Alpha using the variable cost method would be R8.
3.2 Variable cost per unit R8.00

Fixed cost per unit R2.00
Total cost R10.00
Profit (12%) R1.20
Transfer price R11.20
3.3 Using variable cost method

Variable cost per unit R15.00
Total cost R30.00
Profit (12%) R3.60
Selling price R33.60
Using cost plus method

Variable cost per unit R15.00
Total cost R33.20
Profit (12%) R3.98
Selling price R37.18
3.4 The biggest problem with this method is that the receiving division will generate a profit
at the expense of the supplying division.
Quite often supplying divisions are reluctant to transfer their products at variable costs.
Another problem is that variable cost per unit may not be constant over the entire range
of output as increases may occur.
Where the division is operating at full capacity, variable cost transfers will mean that
inter-divisional sales will be less profitable than sales to external customers.
MANCOSA 90
TOPIC 9
CORPORATE GOVERNANCE
1. Companies should adopt remuneration policies aligned with the strategy of the company
and linked to individual performance. These policies should create value over the long
term.
2. Responsible leadership is categorized by ethical values of responsibility, accountability,

fairness and transparency. To provide this the leadership of companies should direct the
strategy and operations to build a sustainable business, while doing business ethically
and considering the short and long-term impacts of the strategy on the economy, society
and the environment and taking into account the company’s impact on internal and
external stakeholders.
3. The board should consider not only the financial performance but the impact of the
company’s operations on society and the environment. This includes being guided by
the Constitution and the Bill of Rights and to ensure that measurable corporate
citizenship programmes are implemented. Corporate citizenship and sustainability
require business decision makers to adopt a holistic approach to economic, social and
environmental issues in their core business strategy. bIncreasingly, companies view
corporate, social and environmental responsibility, corporate, social investment and
other social initiatives as central to doing business. Companies no longer treat these
initiatives as merely ad hoc or nice to have, but as an integral part of their business
strategy. This in turn supports business growth.
4. Internal audit plays an important role in providing assurance to the management and the
board regarding the effectiveness of internal controls.
The board should ensure that assurance of internal control procedures provides reliable,
valid and timely information for purposes of monitoring and evaluating the management
and company performance.
Internal controls should be established not only over financial matters but also
operational, compliance and sustainability matters to manage the risks facing the
company.
MANCOSA 91
The board should ensure that the internal audit plan is risk-centric, and that the internal
audit function has given the audit committee a written assessment of the adequacy of the
internal controls.
This assessment should be discussed by the audit committee, which should report the
outcomes of that discussion to the board.
5. Boards should ascertain whether potential directors are competent to be appointed and
can contribute to the business decisions to be made by the board. Prior to their
appointment, their backgrounds should be investigated along the lines of the approach
required for listed companies by the JSE. It is also important to ensure that new
directors have not been declared delinquent nor are serving probation in terms of section
162 of the Act. The nomination committee should play a role in this process.
6. This means that the board should report to its shareholders and other stakeholders on
the company’s economic, social and environmental performance. Although a company
is an economic institution, it remains a corporate citizen and therefore has to balance
economic, social and environmental value.
The triple bottom line approach enhances the potential of a company to create economic
value. It ensures that the economic, social and environmental resources the company
requires to remain in business are treated responsibly. By looking beyond immediate
financial gain, the company ensures that its reputation, its most significant asset, is
protected. There is growing understanding in business that social and environmental
issues have financial consequences.
The triple bottom line performance approach recognises the effect of the modern
company on society and the natural environment. It acknowledges that companies need
to act with economic, social and environmental responsibility. It is unethical for
companies to expect society and future generations to carry the economic, social and
environmental costs and burdens of its operations. Business itself needs to ensure that
its impact on society and the natural environment is socially and environmentally
sustainable.
MANCOSA 92
Good corporate citizenship is the establishment of an ethical relationship of responsibility

between the company and the society in which it operates. As good corporate citizens of
the societies in which they do business, companies have, apart from rights, also legal
and moral obligations in respect of their social and natural environments.
The company as a good corporate citizen should protect, enhance and invest in the
wellbeing of society and the natural ecology. Corporate citizenship and sustainability
require business decision makers to adopt a holistic approach to economic, social, and
environmental issues in their core business strategy. Only a holistic approach will allow
for the effective management of business opportunities and risks.
The expectation that business has an important role to play in responding to social and
environmental challenges has become widely accepted. The debate on the need for
voluntary business action or government regulation is being superseded by an
understanding that an appropriate mix of both approaches is important.
7. Conscience: A director should act with intellectual honesty in the best interest of the
company and all its stakeholders in accordance with the enlightened shareholder value
approach. Conflicts of interest should be avoided. Independence of mind should prevail
to ensure the best interest of the company and its stakeholders is served.
Care: A director should devote serious attention to the affairs of the company. Relevant
information required for exercising effective control and providing innovative direction to
the company needs to be acquired.
Competence: A director should have the knowledge and skills required for governing a
company effectively. This competence should be developed continuously. Willingness
to be regularly reviewed is a prerequisite for ensuring competence
Commitment: A director should be diligent in performing directors’ duties. Sufficient time

should be devoted to company affairs. Effort needs to be put into ensuring company
performance and conformance.
MANCOSA 93
Courage: A director should have the courage to take the risks associated with directing
and controlling a successful sustainable enterprise, but also the courage to act with
integrity in all board decisions and activities.
8. External audit is an independent assurance function performed primarily for the benefit of
the shareholders.
The objective of an audit of financial statements is to enable the auditor to express an

opinion as to whether the financial statements fairly present, in all material respects, the
financial position of the company at a specific date and the results of operations and
cash flow information for the period ended on that date, in accordance with an identified
financial reporting framework and/or statutory requirements.
The auditor’s opinion enhances the credibility of the financial statements, but does not
guarantee the future viability of the company or the effectiveness or efficiency with which
the management has conducted the affairs of the company.
MANCOSA 94

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ACCOUNTING FOR DECISION MAKING

1. Accounting information is required by various individuals and organizations in order to

3. Tabulate 5 differences between management accounting and financial accounting.

FINANCIAL STATEMENT RELATIONSHIPS

4. Explain the significance of the following accounting concepts in the preparation of a

ACCOUNTING EQUATION AND FINANCIAL STATEMENTS

Assets = Equity + Liabilities

Equipment Inventory Receivables Bank = Capital Income Expenses + Payables

TRANSACTIONS FOR AUGUST 20.9

STATEMENT OF COMPREHENSIVE INCOME

Answer the following questions:

Afri Manufacturers Ltd

CASH FLOW STATEMENT

6. The cash flow statement for Mega Ltd is provided below:

Use the cash flow statement to answer the following questions:

8. You are provided with the following information:

EQUITY AND LIABILITIES

Current liabilities 126 135 137 805

1. Excerpts of financial data for Polar Enterprises are as follows:

Statement of Comprehensive Income 20.10 (R) 20.9 (R)

1.2 Comment on your answers calculated in question 1.1.

Vuyo Traders Sipho Stores

EXPANDED CONTRIBUTION MARGIN MODEL

1.7 Should management adopt the following proposal?

3.3.1 Calculate the break-even quantity if the machine is rented.

Expected sales for each manufacturer is 2 000 units.

Sales (30 000 units X R12 per unit) R360 000

2. What are the principal considerations involved in preparing a production budget?

April 1 200 computers

(b) The gross profit margin is 40%.

Actual information for the month October 20.8 is:

ACCEPTANCE OF A SALES OFFER

MAKE OR BUY DECISION

A recently established spare part manufacturer approached Trike Enterprises with a

CAPITAL INVESTMENT APPRAISAL

Year Turbo Gusto

Year 1 30 000 40 000

2. “It is possible to adopt an approach that allows divisional managers to arrive at

Fixed cost per unit R7

8. Explain the function of external auditors.

Present value of R1: PVFA (k,n) =

3. Management accounting Financial accounting

4. Managers will at times be interested in the historic overview of business operations of

Equipment Inventory Receiv. Bank = Capital Income Expenses + Payables

+90 000 +90 000

EQUITY AND LIABILITIES

1.1.1 NON-CURRENT ASSETS R

1.1.2 RETAINED EARNINGS R

1.1.3 TOTAL EQUITY R

1.1.4 NON-CURRENT LIABILITIES R

1.2 The percentage cash discount, when converted to an annualised return on

4. *The inventory is damaged or deteriorated.

5. The effect would be to overstate the assets (debtors/accounts receivable) in the

EQUITY AND LIABILITIES

7.2.1 The liquidity of the business

1.2 R6 000 = 15%

1.3 Gross profit ratio = Gross profit X 100