10 Acc Mod 11 Financial Statements Memos Update

MODULE 11
FINANCIAL STATEMENTS
Prior Knowledge of profit, net worth and its relation to owner’s equity
learning
Note to Teacher
This module concentrates on drawing up financial statements, i.e. Income Statements and Balance Sheets.
Many learners will have drawn up these statements in Grade 9. However, notes to the Income Statement
and Balance Sheet need to be introduced if not already done.
Many examinations are issuing the learners with incomplete skeletons for the completion of these
statements. This does save time in respect of writing out a whole lot of details, however, care must be taken
that the learners do understand what they are doing. Too often, it just becomes one of filling in a blank form.
Therefore it is often advisable to make the learners draw up the statements initially.
Note must be taken of the new formats of the financial statements as these are required in terms of the
National Core syllabus. An integral part of completion of financial statements is decision making. No longer
are learners only expected to complete the statements but they should be able to use them to analyse and
make decisions. Therefore, ratio and analysis should be done on an on-going basis where the emphasis is
on the understanding rather than learning formulae.
TASK 11.1  Desirable characteristics of financial statements

11.1.1 User of financial statements:
 Owners and managers.
 Shareholders (type of owner).
 Bank managers.
 Creditors.
 Potential buyers, investors, lenders, etc.
 Trade unions.
 Workers.
 Etc.
11.1.2 Comparability – users can compare one business to another and one year to another.
Understandability – must be understood by any user – not only qualified accountants.
Reliability – users must be confident that the information is reliable so that accurate
decisions can be made on these.
Fairness – must be fair to all users and not favour one user over another.
Timeliness – statements must be produced within a reasonable time so that users can
utilise the information in their decision making.
11.1.3 Incorrect decision could be made.
Bad investments made.
Lower or loss of profits.
Workers being retrenched.
Etc.
TASK 11.2  Financial year-ends

11.2.1 31 August 20.2
31 January 20.4
31 July 20.5
11.2.2 Consistency and comparisons from one year to another. Easier for planning purposes.
11.2.3 Christmas and holiday period with many people on leave and a busy period in many businesses.
Tax returns are due at the end of February.
New Era Accounting: Grade 10 269 Teacher’s Guide

TASK 11.3  Operating, Financing & Investing activities
11.3.1 Operating 11.3.9 Financing
11.3.3 Operating 11.3.11 Operating
11.3.5 Investing 11.3.13 Financing and investing
11.3.6 Investing 11.3.14 Financing
11.3.7 Investing 11.3.15 Operating
11.3.8 Financing 11.3.16 Operating
TASK 11.4 Peter’s Paint Shop: Operating, Financing & Investing

activities
Learners are to identify the three different aspects as follows:
Operating – Income Statement
Financing – Balance Sheet – Owner’s Equity and Liabilities
Investing – Balance Sheet – Assets
TASK 11.5 Jerry’s General Dealers: Accounting equation & con-

cepts
11.5.1
Accounts payable Current liability
Accounts receivable Current asset
Advertising Expense
Bank Current asset
Bank charges Expense
Capital Capital
Cash on hand Current asset
Commission income Income
Cost of sales Expense
Depreciation Expense
Drawings Drawings
Equipment Non-current asset
Fixed deposit: Gauteng Bank Non-current asset
Insurance Expense
Interest expense Expense
Interest Income Income
Loan from Gauteng Bank Non-current liability
Packing materials Expense
Rent expense Expense
SARS Current liability
Salaries and wages Expenses
Sales Income
Stationery Expense
Trading stock Current asset
Vehicle expenses Expenses
Vehicles Non-current assets
Water and electricity Expense

Table:
LEFT RIGHT
Non- Non-
Current Current
current Expenses Drawings current Capital Income
assets liabilities
assets liabilities
26 000 8 000 6 000 33 000 60 000 25 000 170 000 10 700
30 000 3 300 4 800 3 100 1 500
137 600 600 450 000 740 000
65 000 36 400
4 000
9 600
3 700
30 000
140 000
1 200
18 100
3 000
193 600 76 900 706 800 33 000 60 000 28 100 170 000 752 200
A + E + D = R1 010 300 L = C + I = R1 010 300
11.5.2 JERRY JUMBA TRADING AS JERRY’S GENERAL DEALERS

INCOME STATEMENT FOR THE YEAR ENDED 28 FEBRUARY 20.8
Sales 740 000
Cost of sales [450 000]
Gross profit 290 000
Other operating income 10 700
Commission income 10 700
Gross operating income 300 700
Operating expenses [247 200]
Advertising 6 000
Bank charges 4 800
Depreciation 36 400
Insurance 4 000
Packing materials 3 700
Rent expense 30 000
Salaries and wages 140 000
Stationery 1 200
Vehicle expenses 18 100
Water and electricity 3 000
Operating profit 53 500
Interest income 1 500
Profit before interest expense 55 000
Interest expense [9 600]
Net profit for the year 45 400

JERRY JUMBA TRADING AS JERRY’S GENERAL DEALERS
BALANCE SHEET AT 28 FEBRUARY 20.8
ASSETS
Non-current assets 193 600
Equipment 26 000
Vehicles 137 600
Fixed deposit : Gauteng Bank 30 000
Current assets 76 900
Trading stock 65 000
Accounts receivable 8 000
Bank 3 300
Cash on hand 600
TOTAL ASSETS 270 500
EQUITY AND LIABILITIES
Owner’s equity 182 400
Capital at the beginning of the year 150 000
Additional contribution 20 000
Net profit 45 400
Drawings (33 000)
Non-current liabilities 60 000
Loan from Gauteng Bank 60 000
Current liabilities 28 100
Accounts payable 25 000
SARS (PAYE) 3 100
TOTAL EQUITY AND LIABILITIES 270 500
11.5.3 Additional information:

Learners are to be given time to discuss each of the following and decide what adjustments they
would make. They would have completed a very similar type of exercise at the beginning of Module
9. Suggested answers are given in brackets.
1. Jerry knows that he can sell the trading stock for more than the cost price. (No entry – historical cost
rule and prudence – stock has not been sold)
2. Some items of stock have been destroyed in a fire. (Prudence – write it off)
3. Certain pens and pencils bought were incorrectly classified as packing materials. (Adjust the 2
expenses – matching principle)
4. Some of the packing materials have not yet been used. (Matching – adjust to create an asset for next
year)
5. Jerry has won R1m on the lottery. (no entry – business entity rule)
6. Jerry has not yet paid the water and electricity account for February. (add the expense on –
matching)
7. One of the debtors has disappeared and cannot be traced. (write off the account – prudence)
8. Commission income of R1 000 is owed to the business. This will be received in March. (no entry –
prudence – wait until the income is received)
9. Jerry is owed 20 cents by the business – one of the employees complained his wage was 20 cents
short. Jerry paid him out of his own pocket. (no entry – materiality or add the 20 cents on – matching)
10. The vehicles and equipment have declined in value due to wear and tear. (reduce the value –
prudence)
11. Half of the fixed deposit will mature (i.e. paid back) in April 20.8. (show as a current asset –
materiality)
12. The loan from Gauteng Bank has to be repaid in equal instalments over three years. (show current
portion as a current liability – matching)
13. One of the vehicles was sent in for repair on 28 February. The repair costs are not yet known. (adjust
for the repairs – matching)
14. As there is no refuse removal service in his area, Jerry has been telling his employees to dump the
waste on the nearby riverbanks.(no entry but this is against conservation regulations)
15. Jerry might close his business down next month as his wife says he is working too hard. (going
concern – needs to revalue)

TASK 11.6  Identifying categories for items in financial statements
Non- Non-
Current Current Explanation (if neces-
current current
asset liability sary)
asset liability
1. Land and buildings 
2. Accounts payable 
3. Accounts receivable 
4. Loan from ABC Bank Depends on when
  repayments are to be
made.
5. Fixed deposit at ABC Bank Depends on when it
 
matures.
6. Cheque account at ABC Bank Depends on whether it
 
is a Dr or Cr balance.
7. Equipment 
8. Cash float 
9. Savings account at ABC Bank 
10. Vehicles 
11. Trading stock 
TASK 11.7  Concepts related to financial statements

 Balance Sheet – shows the financial position i.e. Assets = Owner’s Equity + Liabilities
 Income Statement – used to calculate the profit or loss for the period of time, normally a year.
 Owner’s equity – investment by the owner in the business
 Current assets – things of value that change within a year
 Non-current assets – things of value that are expected to last for more than a year – made up of fixed
assets and investments
 Fixed assets – assets that last for more than a year
 Investments – financial assets
 Current liabilities – debts that will be paid in a year
 Non-current liabilities – debts that will be paid off over a longer period than a year.
TASK 11.8 Lennox Spaza: Understanding the logic of aspects of

financial statements
11.8.1
(a) Cost of sales = 90 000 x 100 = R45 000
200
Gross profit = 90 000 – 45 000 = R45 000
(b) Total operating expenses:

Wages [1 800 x 12] = 21 600
Telephone = 3 800
Electricity = 2 300
Sundry expenses = 1 980
Depreciation [12 000 – 10 000] = 2 000
Bad debts = 250
TOTAL = R31 930
(c) Operating profit:

Fee income = R6 580
Gross income = 45 000 + 6 580 = R51 580
Operating profit = 51 580 – 31 930 = R19 650
(d) Net profit = 19 650 + 300 – 2 250 = R17 700

11.8.2 INCOME STATEMENT FOR THE YEAR ENDED 28 FEBRUARY 20.3
Sales 90 000
Gross profit 45 000
Fee income 6 580
Wages 21 600
Telephone 3 800
Electricity 2 300
Sundry expenses 1 980
Depreciation 2 000
Bad debts 250
Interest income 300
10.8.3 Fee income (telephone service) R80.

10.8.4 Trade and other receivables.
10.8.5 Wages R1 800.
10.8.6 Trade and other payables.
10.8.7 Favourably because no interest on the loan is payable – expenses decrease, profits increase.
10.8.8 Loans should be decreased to show a current portion of loan.
10.8.9 Yes. Part of the increase of R4 320 (21 600 x 20%) will be offset by the interest expense which falls
away as the loan will be paid off.
Alternate answers are applicable, e.g. a lower increase may be granted – this would not have a
substantial effect on net profit.
TASK 11.9  Caxio Supplies: Preparing an Income Statement &

Balance Sheet
PART A
11.9.1 Debtors allowances R15 000 has been deducted to indicate the net sales for the period.
11.9.2 Net sales (turnover) minus cost of sales.
11.9.3 Gross profit + other income - expenses.
11.9.4/

11.9.4 CAXIO SUPPLIES
Sales 735 000
Rent income 48 000
Consumable stores 5 400
Advertising 3 200
Bank charges 4 330
Telephone 3 600
Depreciation 29 000
Trading stock deficit 5 000
Interest income 2 400
PART B
11.9.5 R700 000 + 38 680 (net profit) – 110 000 (drawings) = R628 680
11.9.6 Capital: To show the correct capital balance at the beginning the year and any changes in capital
that may occur during the year.
Fixed deposit: To indicate what portion of the fixed deposit becomes a current asset (matures
within the next 12 months). The concept of materiality applies here.
Loan: To indicate what portion of the loan becomes a current liability (will be paid within the next
12 months). The matching concept applies here.
11.9.7 CAXIO SUPPLIES

BALANCE SHEET ON 28 FEBRUARY 20.2
ASSETS Note
Fixed/Tangible assets 3 791 000
Financial assets: Fixed deposit at Beta Bank 28 000
[40 000 – 12 000]
Inventory 4 130 800
Trade and other receivables 5 46 000
Cash and cash equivalents 6 50 600
Total assets 1 046 400

Owner’s equity 7 628 680
Loan from Beta Bank [350 000 – 48 000] 302 000
Trade and other payables 8 115 720
Total equity and liabilities 1 046 400

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 28 FEBRUARY 20.2
3. FIXED/TANGIBLE ASSETS Land and
Vehicles Equipment Total
Buildings
Carrying value at beginning of year 530 000 207 000 83 000 820 000
Cost 530 000 210 000 140 000 880 000
Accumulated depreciation - [3 000] [57 000] [60 000]
Movements - [18 000] [11 000] [29 000]
Additions at cost - - - -
Disposals at carrying value - - - -
Depreciation - [18 000] [11 000] [29 000]
Carrying value at end of year 530 000 189 000 72 000 791 000
Cost 530 000 210 000 140 000 880 000
4. INVENTORY
Consumables on hand 800
130 800
5. TRADE AND OTHER RECEIVABLES
Trade debtors 42 000
Income receivable/accrued 3 000
Expenses prepaid 1 000
46 000
6. CASH AND CASH EQUIVALENTS
Fixed deposit 12 000
Bank 36 600
Cash float 2 000
50 600
7. OWNER’S EQUITY
Balance at beginning of year 620 000
Additional capital contributions 80 000
Drawings [110 000]
Balance at end of year 628 680
8. TRADE AND OTHER PAYABLES
Trade creditors 63 200
Mortgage loan/Short-term loan/Current portion of loan 48 000
Deferred income/Income received in advance 4 000
Expenses payable/Accrued expenses 520
115 720

TASK 11.10  Novak Clothing: Preparing an Income Statement &
Balance Sheet
11.10.1 NOVAK CLOTHING
Note
Sales[1 200 000 – 7 200] 1 192 800
Rent income 72 000
Cleaning materials 7 750
Advertising 15 000
Bank charges 5 200
Insurance 6 600
Telephone 5 700
Depreciation 53 200
Interest income 1 4 800
Interest expense 2 [84 000]
Net profit for the year 7 144 300
11.10.2 NOVAK CLOTHING

ASSETS Note
Non-current assets 1 168 800
Fixed/Tangible assets 3 1 118 800
Financial assets: Fixed deposit at Munibank 50 000
[80 000 – 30 000]
Inventory 4 161 050

Loan from Munibank [600 000 – 66 000] 534 000

1. INTEREST INCOME
from investments/fixed deposit 4 800
4 800
2. INTEREST EXPENSE
on loans 84 000
84 000

Buildings
Carrying value at beginning of year 968 000 127 500 76 500 1 172 000
Cost 968 000 220 000 207 000 1 395 000
Movements - [30 000] [23 200] [53 200]
Depreciation - [30 000] [23 200] [53 200]
Carrying value at end of year 968 000 97 500 53 300 1 118 800
Cost 968 000 220 000 207 000 1 395 000
4. INVENTORY
Consumables on hand 1 050
161 050
Trade debtors 65 000
Expenses prepaid 550
71 550
Fixed deposit at Munibank 30 000
Bank 31 100
Cash float 3 000
64 100
7. OWNER’S EQUITY
Drawings [240 000 + 4 500] [244 500]
Short-term loan/Current portion of loan 66 000
Expenses payable/Accrued expenses 2 500
131 700

TASK 11.11  Malaga Clothing: Preparing financial statements from
pre-adjustment figures & adjustments
11.11.1 MALAGA CLOTHING
Note
Sales [805 000 – 13 000] 792 000
Cost of sales (410 000)
Rent income [42 000 – 6 000] 36 000
Fee income [92 000 + 5 000] 97 000
Salaries & wages 186 000
Water & electricity 11 200
Insurance [10 400 – 800] 9 600
Telephone [7 600 + 820] 8 420
Repairs & maintenance [12 000 + 2 100] 14 100
Consumable stores [17 000 – 1 400] 15 600
Advertising 2 000
Bad debts 400
Depreciation 4 600
11.11.2 MALAGA CLOTHING

ASSETS Note
Financial assets: Fixed deposit at Magic Bank 100 000
Inventory 4 184 900

Loan from Magic Bank [360 000 + 3 900 – 30 000] 333 900

1. INTEREST INCOME
from investments/fixed deposit 7 200
from current bank account 300
7 500
2. INTEREST EXPENSE
on loan [50 300 + 3 900] 54 200
54 200

Equipment Total
Buildings
Carrying value at beginning of year 838 000 46 000 884 000
Cost 838 000 170 000 1 008 000
Accumulated depreciation - [124 000] [124 000]
Movements - [4 600] [4 600]
Additions at cost - - -
Disposals at carrying value - - -
Depreciation - [4 600] [4 600]
Carrying value at end of year 838 000 41 400 879 400
Cost 838 000 170 000 1 008 000
4. INVENTORY
Trading stock [202 000 – 15 000 – 3 500] 183 500
184 900
Trade debtors [35 000 – 400] 34 600
Prepaid expenses 800
40 400
Bank 28 020
Petty cash 2 000
Cash float 1 000
31 020
7. OWNER’S EQUITY
Balance at beginning of year [820 000 – 40 000] 780 000
Drawings [204 000 + 15 000] [219 000]
Expenses payable/Accrued expenses [820 + 2 000] 2 820
Current portion of loan 30 000
103 820

11.11.3 Yes. Profit of R197 000 compared to capital represents a high percentage return.
The return is 25% on capital at the beginning of the year.
At a later stage, teachers can introduce the concept of average capital. In this case, the percent-
age return would be similar.
11.11.4 Various options possible, e.g.:
 Liquidate the fixed deposit and reduce the loan to save on interest.
 Advertise more to increase sales and fee income.
 Decide whether the mark-up % should be increased or decreased to boost sales.
 Negotiate better cost price with suppliers.
 Economise on expenses.
11.11.5 Yes.
Assets exceed liabilities by R798 000.
Current assets are more than double the current liabilities.
11.11.6 It would be shown as a Current asset and not as a Non-current asset.
It would be shown as part of Cash and cash equivalents.
TASK 11.12 Thirsk Computer Traders: Preparing financial state-

ments from pre-adjustment figures & adjustments
11.12.1 THIRSK COMPUTER TRADERS
Note
Sales [2 400 000 – 100 000] 2 300 000
Cost of sales [1 350 000]
Fee income [120 000 + 2 300] 122 300
Gross operating income 1 072 300
Rent expense [55 000 + 5 500] 60 500
Bad debts [1 100 + 180] 1 280
Insurance [15 400 – 800 + 290] 14 890
Telephone [9 200 + 800] 10 000
Vehicle expenses [15 000 – 520] 14 480
Repairs and maintenance 8 200
Sundry expenses [34 000 + 640 – 320] 34 320
Bank charges [8 000 + 56] 8 056
Depreciation [55 000 + 6 300] 61 300

11.12.2 THIRSK COMPUTER TRADERS
ASSETS Note
Financial assets: Fixed deposit at Star Bank (8%) 80 000
Inventory 4 236 410
Total assets 919 790

Loan from Star Bank 197 800
Bank overdraft [24 000 + 56 + 1 050 + 290] 25 396
Total equity and liabilities 919 790
1. INTEREST INCOME
from overdue debtors [1 200 + 240] 1 440
from current bank account 850
2 290
2. INTEREST EXPENSE
on overdraft 1 050
on loan [28 000 + 2 800] 30 800
31 850
3. FIXED/TANGIBLE ASSETS Vehicles Computers Total

Cost 550 000 420 000 970 000
Accumulated depreciation [240 000] [160 000] [400 000]
Movements [55 000] [6 300] [61 300]
Depreciation [55 000] [6 300] [61 300]
Cost 550 000 420 000 970 000
4. INVENTORY
Trading stock [245 000 – 6 000 – 4 000] 235 000
Consumables on hand [320 + 1 090] 1 410
236 410
Trade debtors [90 000 – 180 + 240] 90 060
Prepaid expenses [520 + 800] 1 320
93 680

Petty cash 500
Cash float 500
1 000
7. OWNER’S EQUITY
Capital withdrawal [20 000]
Drawings [180 000 + 6 000] [186 000]
Expenses payable/Accrued expenses [800 + 640 + 5 500] 6 940
141 940
11.12.3 The business is earning 8% p.a. on the fixed deposit but it has a loan on which it is paying 14%
p.a. plus the business has an overdraft.
It would be better to use the fixed deposit to pay off the liabilities.
11.12.4 No. Capital should be invested in the assets of the business. He is making good profits and
should only be drawing out those.
OR Yes. He is making good profits of which he is leaving a considerable amount in the business.
11.12.5 Any allowance means a reduction of profits so, yes, they should be concerned.
OR No, Every business will have some allowances and it is only 4% of their sales.
TASK 11.13 Willy’s Vegetable Shop: Preparing Financial State-

WILLY’S VEGETABLE SHOP
Note
Sales [334 360 – 1 923] 332 437
Cost of sales (194 958)
Rent Income [1 500 – 500] 1 000
Commission Income [2 396 + 170] 2 566
Bad debts recovered [180 + 54] 234
Operating expenses (103 647)
Bank charges [300 + 66] 366
Wages 8 460
Salaries 42 450
Delivery expenses 490
Rates and taxes 1 100
Discount allowed 1 420
Bad debts 385
Consumable stores [1 860 – 600] 1 260
Insurance [940 – 60] 880
Sundry expenses [3 368 + 65] 3 433
Depreciation [42 450 + 953] 43 403
Interest expense 2 (4 254)

WILLY’S VEGETABLE SHOP
ASSETS Note
Financial assets: Fixed deposit at AB Bank
[5 000 + 1 240 – 6 240] 0
Inventory 4 27 762

Mortgage loan [25 250 + 4 040 – 4 200] 25 090
Bank overdraft [7 203 + 66 + 89 – 6 240] 1 118
1. INTEREST INCOME
from investments 1 240
from overdue debtors 33
1 273
2. INTEREST EXPENSE
on mortgage loan 4 040
on overdraft [125 + 89] 214
4 254
3. FIXED/TANGIBLE ASSETS Land &

buildings
Cost 150 000 212 250 12 420 374 670
Movements - [42 450] [953] [43 403]
Depreciation - [42 450] [953] [43 403]
Cost 150 000 212 250 12 420 374 670
4. INVENTORY
Trading stock [27 892 – 200 + 70] 27 762
27 762
Trade debtors [8 056 + 54 + 33] 8 143
Income receivable/accrued 170
Prepaid expenses [600 + 60] 660
8 973

Savings account 1 200
Cash float 200
Petty cash 100
1 500
7. OWNER’S EQUITY
Capital contribution 30 000
Drawings [30 078 + 200] [30 278]
Trade creditors [15 339 + 70] 15 409
Income received in advance/Deferred income 500
20 174
TASK 11.14 Milson Hi-Fi Store: Preparing financial statements

from pre-adjustment figures & adjustments
MILSON HI-FI STORE
INCOME STATEMENT FOR THE YEAR ENDED 31 MAY 20.8
Note
Sales [587 000 – 14 500 - 500] 572 000
Cost of sales [333 000 - 370] [332 630]
Commission income [26 411 – 300] 26 111
Salaries and wages [244 850 + 600] 245 450
Discount allowed [1 440 – 20] 1 420
Sundry expenses [24 260 – 220 – 500 – 80 + 327] 23 787
Packing materials [4 600 – 1 350] 3 250
Advertising 14 690
Depreciation [58 200 + 3 390] 61 590
Loss due to flood [1 960 – 1 600] 360
Bad debts 180
Operating loss [85 246]
Loss before interest expense [81 021]
Net loss for the year 7 [105 491]

MILSON HI-FI STORE
BALANCE SHEET ON 31 MAY 20.8
ASSETS Note
Financial assets: Fixed deposit at West Bank
[23 000 – 10 000] 13 000
Inventory 4 136 860

Mortgage loan [218 000 + 24 470 – 36 000] 206 470
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 MAY 20.8
1. INTEREST INCOME
from investments [2 200 + 1 020] 3 220
from savings 324
Interest income 630
from overdue debtors 30
from current account 21
4 225
2. INTEREST EXPENSE
24 470

buildings
Cost 552 000 291 000 232 000 1 075 000
Movements - [58 200] [3 390] [61 590]
Depreciation - [58 200] [3 390] [61 590]
Cost 552 000 291 000 232 000 1 075 000
4. INVENTORY
Trading stock [138 950 + 370 – 500 – 1 960] 136 860
136 860
Trade debtors [39 800 – 500 + 140 + 30 – 180 + 150 + 20] 39 460
Income receivable/accrued [1 020 + 1 600] 2 620
Prepaid expenses [220 + 500 + 1 350] 2 070
44 150

Fixed deposit: West Bank 10 000
Savings account: West Bank 22 150
Bank [15 255 + 21 – 327 – 150] 14 799
Cash float 1 200
48 149
7. OWNER’S EQUITY
Net loss for the year [105 491]
Drawings [124 330 + 80] [124 410
Trade creditors [42 660 + 140] 42 800
Expenses payable/Accrued expenses [600 – 500] 100
Current portion of loan/Short-term loan 36 000
79 200
TASK 11.15 Dunster Hobby Shop: Preparing financial statements

DUNSTER HOBBY SHOP
Note
Sales [236 360 – 3 000 – 200] 233 160
Cost of sales [140 000 – 125] (139 875)
Gross profit 93 285
Rent Income [8 540 – 1 220] 7 320
Commission income [18 210 – 1 100] 17 110
Discount received [200 – 20] 180
Operating expenses (76 458)
Salaries and wages [45 000 + 440] 45 440
Stationery [1 430 – 100] 1 330
Insurance [1 670 – 432] 1 238
Bank charges [5 700 + 15 + 305] 6 020
Sundry operating expenses 4 460
Advertising [7 800 + 120] 7 920
Repairs 450
Depreciation 3 200
Loss due to fire [4 800 – 4 000] 800
Interest expense 2 (10 240)

DUNSTER HOBBY SHOP
ASSETS Note
Financial assets: Fixed deposit at Dusi Bank -
[17 000 + 2 400 - 19 400]
Inventory 4 28 200

Mortgage loan: Palmiet Bank [64 000 + 10 240 – 13 700] 60 540
1. INTEREST INCOME
from investments [1 000 + 2 400] 3 400
3 400
2. INTEREST EXPENSE
10 240

Equipment Total
buildings
Cost 209 000 32 000 241 000
Movements - [3 200] [3 200]
Depreciation - [3 200] [3 200]
Cost 209 000 32 000 241 000
4. INVENTORY
Trading stock [35 300 – 4 800 + 125 – 125 – 800 – 1 500] 28 200
28 200
Trade debtors [26 500 – 200] 26 300
Accrued income/Income receivable 4 000
Prepaid expenses [100 + 432] 532
30 832

Fixed deposit at Dusi Bank 19 400
Bank [4 450 + 240 - 15 – 305] 4 370
Cash float 300
24 070
7. OWNER’S EQUITY
Capital withdrawal (65 000)
Drawings [34 880 + 800] (35 680)
Trade creditors [25 330 + 240 + 20 – 125] 25 465
Accrued expenses/Expenses payable [440 + 120] 560
Income received in advance/Deferred income [1 100 + 1 220] 2 320
Short term loan 13 700
42 045
TASK 11.16 Winwood Stores: Preparing financial statements from

WINWOOD STORES
INCOME STATEMENT FOR THE YEAR ENDED 31 DECEMBER 20.5
Note
Sales [235 128 - 2 000 – 560] 232 568
Cost of sales [110 000 – 420] [109 580]
Discount received 1 450
Bad debts recovered [2 475 + 140] 2 615
Rent income [18 872 – 1 568[1]] 17 304
Salaries 30 000
Wages 12 000
Telephone 1 580
Repairs 1 320
Insurance 2 565
Stationery [755 + 90] 845
Bad debts [730 + 140] 870
Bank charges [2 410 + 130 + 380 + 118] 3 038
Consumable stores [1 250 – 90 – 175] 985
Property expenses (including rates) [8 980 – 900[3]] 8 080
Depreciation [14 475[2] + 2 400] 16 875
Loss due to theft [300 + 80 – 240] 140
[1]
18 872 – (4 x 168) = 18 872 – 672 = 18 200 ÷ 13 = 1 400 (before the increase)
Rent for 1 month = 1 400 + 168 = R1 568
[2] 2 [3]
(160 000 – 111 100 x 25%) + (54 000 x 25% x /12) 1 800 ÷ 12 x 6 = 900
Total = 12 225 + 2 250 = 14 475 OR 1 800 ÷ 2 = 900

WINWOOD STORES
BALANCE SHEET ON 31 DECEMBER 20.5
ASSETS Note
Financial assets: Fixed deposit – HitBank [25 000 + 1 125] 26 125
Inventory 4 41 268

Mortgage loan: Zinzi Bank [35 000 + 6 750 – 16 800] 24 950
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 20.5
1. INTEREST INCOME
from fixed deposit 2 250
2 250
2. INTEREST EXPENSE
on loan 6 750
6 750

buildings
Cost 282 000 160 000 48 000 490 000
Movements - 39 525 [2 400] 37 125
Additions at cost - 54 000 54 000
Depreciation - [14 475] [2 400] [16 875]
Cost 282 000 214 000 48 000 544 000
4. INVENTORY
Trading stock [42 495 + 420 – 300 – 1 522] 41 093
Consumable stores on hand 175
41 268
Trade debtors [29 475 – 560 – 140] 28 775
Income receivable/Accrued income [1 125 + 240] 1 365
31 040

Bank [26 400 – 130 – 380 – 118 + 140] 25 912
Petty cash [100 – 80] 20
Cash float 300
26 232
7. OWNER’S EQUITY
Drawings [19 000]
Income received in advance/Deferred income 1 568
58 943
TASK 11.17 Opendoor Stores: Preparing financial statements

OPENDOOR STORES
Note
Sales [340 000 - 4 580] 335 420
Rent income [25 200 – 3 600] 21 600
Bad debts recovered 1 410
Consumable stores [16 200 – 95 – 302 – 1 947] 13 856
Telephone [12 450 + 578] 13 028
Insurance [24 560 – 2 010] 22 550
Rates and taxes 9 860
Bad debts [1 110 + 418] 1 528
Bank charges 4 180
Discount allowed 970
Depreciation [38 000 + 5 325*] 43 325
* Old : 51 000 – 18 000 x 15% = 4 950
New : 30 000 x 15% x 1/12 = 375
Total = 4 950 + 375 = 5 325

OPENDOOR STORES
ASSETS Note
Financial assets: Fixed deposit – FirstNat [20 000 – 20 000] -
Inventory 4 48 727

Mortgage loan: FirstNat Bank [65 000 + 12 375 – 20 000] 57 375
1. INTEREST INCOME
on fixed deposit [2 500 + 33] 2 533
on overdue debtors [440 + 95] 535
3 068
2. INTEREST EXPENSE
on loans 12 375
on overdraft 230
12 605

buildings
Cost 200 000 190 000 51 000 441 000
Movements - 38 000 [24 675] [13 325]
Additions at cost - - 30 000 30 000
Depreciation - [38 000] [5 325] [43 325]
Cost 200 000 190 000 81 000 471 000
Accumulated depreciation - 136 000] [23 325] [159 325]
4. INVENTORY
Trading stock [49 380 – 500 – 2 100] 46 780
48 727
Trade debtors [24 580 + 95 – 418] 24 257
Income receivable/Accrued income 33
Prepaid expenses [2 010 + 302] 2 312
26 602

Bank 16 000
Petty cash 1 000
Cash float 800
37 800
7. OWNER’S EQUITY
Additional capital contribution 52 000
Drawings [64 000 + 500 + 95] [64 595]
Expenses payable/Accrued expenses [578 + 30 000] 30 578
108 658
TASK 11.18 Carpet Trends: Preparing financial statements from

CARPET TRENDS
Note
Sales [594 784 - 6 400] 588 384
Fee income [60 000 – 150 + 1 500] 61 350
Rent income [5 740 + 840[1]] 6 580
Salaries and wages [124 700 + 9 000] 133 700
Bad debts [2 360 + 1 666[2]] 4 026
Consumable stores 17 000
Discount allowed [818 – 19[3]] 799
Advertising [2 448 - 160] 2 288
Sundry expenses [9 290 + 185 + 380] 9 855
Depreciation [5 920 + 12 630] 18 550
[1]
[700 x 7] + [700 + 20% x 2]
4 900 + 1 680 = 6 580
Amount due = 6 580 – 5 740 = 840
[2]
2 380 x 70c = 1 666
[3] 10
171 x /90 = 19

CARPET TRENDS
ASSETS Note
Financial assets: Fixed deposit [39 441 + 329 – 19 885] 19 885
Inventory 4 120 410

Loan: Yuknow Bank [75 000 + 3 000* – 15 000] 63 000
Bank overdraft [11 690 + 185 + 92 + 380 + 171] 12 518
*75 000 x 16% x 3/12 = 3 000
1. INTEREST INCOME
on fixed deposit [3 441 + 329*] 3 770
3 770
2. INTEREST EXPENSE
on loans 3 000
on overdraft 92
3 092
*39 441 x 10% x 1/12 = 329 (rounded off)

buildings
Cost 380 000 246 300 84 200 710 500
Movements 35 000 60 080 [12 630] 82 450
Additions at cost 35 000 66 000 - 101 000
Depreciation - [5 920] [12 630] [18 550]
Cost 415 000 312 300 84 200 811 500
4. INVENTORY
Trading stock [123 320 – 2 910] 120 410
120 410
Trade debtors [43 950 – 1 666 – 150 + 171 + 19] 42 324
Income receivable/Accrued income 840
43 324

Cash float 1 500
21 385
7. OWNER’S EQUITY
Capital contribution [25 000 + 66 000] 91 000
Drawings [78 010 + 1 500] [79 510]
Trade creditors [44 255 + 35 000] 79 255
Creditors for salaries/Expenses payable 7 200
SARS - PAYE 1 800
103 255
TASK 11.19 Higgins Book Shop: Preparing financial statements

HIGGINS BOOK SHOP
Note
Sales [580 000 - 3 000] 577 000
Rent income [19 400 – 1 600[1]] 17 800
Bad debts recovered 870
Fee income [62 750 – 300] 62 450
Salaries 165 000
Wages 27 000
Stationery [890 - 295] 595
Telephone 3 500
Motor expenses [3 250 + 1 300] 4 550
Insurance 5 560
Rates and taxes [6 000 - 1 200] 4 800
Bad debts [2 140 + 140] 2 280
Bank charges 1 010
Consumable stores [12 000 + 200 – 240] 11 960
Discount allowed [340 – 20] 320
Loss due to flooding [5 000 – 3 500] 1 500
Depreciation [17 999[2] + 6 720] 24 719
[1]
19 400 – (200 x 6) = 19 400 – 1 200 = 18 200
18 200 ÷ 13 = 1 400 (before the increase)
1 400 + 200 = 1 600 (after the increase)

[2]
120 000 x 20% = 24 000
Since this amount will result in a negative value, the maximum amount that can be written off is R17 999.
The carrying value then becomes R1.
HIGGINS BOOK SHOP

ASSETS Note
Financial assets: Fixed deposit - First Bank
[25 000 – 10 000] 15 000
Inventory 4 33 900

Mortgage loan: First Bank 2 188
[35 000 + 2 188 – 5 000 – 30 000]
1. INTEREST INCOME
Interest on fixed deposit [563 + 2 552] 3 115
3 115
2. INTEREST EXPENSE
2 188
* 25 000 x 12.25% x 10/12 = 2 552
25 000 x 13.5% x 2/12 = 563
Total = 2 552 + 563 = 3 115
Amount owing = 3 115 – 600 = 2 515

buildings
Cost 283 100 120 000 48 000 451 100
Movements - [17 999] [1 720] [19 719]
Depreciation - [17 999] [6 720] [24 719]
Carrying value at end of year 283 100 1 31 880 314 981
Cost 283 100 120 000 53 000 456 100
4. INVENTORY
Trading stock [42 000 – 500 – 510 – 5 000 – 2 330] 33 660
Consumable stores on hand 240
33 900

Trade debtors [24 000 – 300 – 140 + 200 + 20] 23 780
Income receivable/accrued [2 515 + 3 500] 6 015
Prepaid expenses [1 200 + 295] 1 495
31 290
Fixed deposit: First Bank 10 000
Bank [26 500 – 5 000 + 8 000 – 200] 29 300
Petty cash 800
Cash float 1 400
41 500
7. OWNER’S EQUITY
Capital contribution [30 000 + 8 000 + 5 000] 43 000
Drawings [50 000 + 500] [50 500]
Trade creditors [60 000 – 510] 59 490
Expenses payable/Accrued expenses [1 300 + 200] 1 500
92 590
TASK 11.20 The Lawnmower Shop: Preparing financial state-

THE LAWNMOWER SHOP
INCOME STATEMENT FOR THE YEAR ENDED 30 JUNE 20.9
Note
Sales [710 000 - 15 970 – 1 470] 692 560
Cost of sales [370 000 – 840] [369 160]
Fee income [79 000 – 130 – 320] 78 550
Rent income [24 000 + 600] 24 600
Discount allowed [3 200 – 63] 3 137
Bad debts [2 990 + 315] 3 305
Bank charges [2 070 + 375] 2 445
Stationery [5 600 – 520] 5 080
Telephone [11 400 + 610] 12 010
Repairs and maintenance [6 000 + 5 000] 11 000
Depreciation [11 999[1] + 4 100[2]] 16 099

[1]
95 000 x 20% = R19 000. However, the vehicle cannot have a negative value so the maximum
depreciation that can be written off is R11 999.
[2]
60 000 – 8 000 – 26 000 x 15% = 3 900
8 000 x 15% x 2/12 = 200
Total = 3 900 + 200 = 4 100
THE LAWNMOWER SHOP

BALANCE SHEET ON 30 JUNE 20.9
ASSETS Note
Financial assets: Fixed deposit at Zuma Bank
[35 000 – 35 000] 0
Inventory 4 141 370

Loan: QuickCash Loans 27 750
[60 000 + 8 250 – 20 250 – 20 250]
Bank overdraft [5 610 + 375 + 200 + 1 437] 7 622
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 20.9
1. INTEREST INCOME
on fixed deposit [1 200 + 1 425*] 2 625
2 625
2. INTEREST EXPENSE
on loans 8 250
on overdraft [2 220 + 200] 2 420
10 670
* [35 000 x 7% x 6/12] + [35 000 x 8% x 6/12]
Amount due = 2 625 – 1 200 = 1 425

buildings
Cost 495 000 95 000 52 000 642 000
Movements - [11 999] 3 900 [8 099]
Depreciation - [11 999] [4 100] [16 099]
Carrying value at end of year 495 000 1 29 900 524 901
Cost 495 000 95 000 60 000 650 000

4. INVENTORY
Trading stock [145 560 + 840 – 840 – 5 380] 140 180
Consumable stores on hand 1 190
141 370
Trade debtors [40 210 + 1 437 + 63 – 315 – 1 470] 39 925
Income receivable/Accrued income [1 425 + 600] 2 025
42 470
Petty cash [800 – 130] 670
Cash float 2 000
37 670
7. OWNER’S EQUITY
Drawings [93 750]
Trade creditors [24 000 – 840] 23 160
44 340
TASK 11.21  Solly’s Surf Shop: Ratio analysis

11.21.1 A mark-up profit of R50 000 on the cost of R100 000 is being made.
11.21.2 A profit of R24 000 is made on sales of R150 000 with expenses amounting to R20 000.
11.21.3 Made a profit of R24 000 on his investment of R50 000.
11.21.4 Total debts = R45 000 (R35 000 + R10 000). Total assets = R95 000 (R62 000 + R33 000).
Therefore can settle the debts.
11.21.5 Current debts amount to R10 000 while there is R12 000 in cash.
TASK 11.22 Bennie’s Book Store: Ratio analysis

11.22.1 They are making a mark-up profit of R220 000 on the cost of R200 000 (very high).
11.22.2 A profit of R60 000 is made on sales of R420 000 with expenses amounting to R140 000.
(Lower profit and higher expenses in comparison to previous exercise).
11.22.3 Made a profit of R60 000 on his investment of R900 000 (not good).
11.22.4 Total debts = R140 000 (R100 000 + R40 000). Total Assets = R1 040 000.
(R1 004 000 + R36 000). Therefore, the business can settle the debts.
11.22.5 Current debts amount to R40 000 while there is R15 000 in cash and R36 000 in current assets
– not enough to pay off the current liabilities.

TASK 11.23 Financial advice
Suggested Rubric
Criteria Level 1 Level 2 Level 3 Level 4
Very good under-
Has no understand- General under- Excellent under-
Explanation of fi- standing with as-
ing of financial standing is evident standing showing
nancial statements pects of insight re-
statements but with many gaps much insight
vealed
General under- Very good under- Excellent under-
Purpose of the fi- Has no idea of the standing of the pur- standing with as- standing of the pur-
nancial statements purpose pose but gaps still pects of insight re- pose showing in-
evident vealed sight
General interpreta- Very good interpre- Excellent interpreta-
Interpretation of the Fails to interpret the
tion but many gaps tation showing as- tion showing much
financial statements financial statements
evident pects of insight insight
Advice given but Very good advice Excellent advice

Advice Fails to give advice not always appro- showing some in- showing much in-
priate sight sight
TASK 11.24  RunEx Stores: Profitability calculations

11.24.1 57 110 x 100 = 31%
184 000 1
Slight increase from the previous year. On a sale of R100, gross profit (before expenses)
amounts to R31.
11.24.2 57 110 x 100 = 45%

126 890 1
Increase of 3% from the previous year. Still 5% below the target mark-up of 50%. The increase
implies that the business has been trying harder to achieve their target mark-up. Improved stock
control, discounts, security, etc., may help in the future.
11.24.3 15 720 x 100 = 8.5%

184 000 1
Decreased considerably from 15% to 8.5%. This needs to be investigated. Possible causes:
lower turnover, increased operating expenses, not achieving the target mark-up, economic
conditions, etc.
11.24.4 55 390 x 100 = 30.1%

184 000 1
Increased by 5% in 20.2. There is a need to exercise better control over expenses; turnover
needs to be boosted; mark-up may need to be reviewed; etc.
11.24.5 10 320 x 100 = 5.6%

184 000 1
Decreased substantially from the previous year. On a sale of R100 net profit amounts to R5.60.
The owner may not be pleased with this. The loan should be paid off or reduced. This will have
a positive effect on profitability.

TASK 11.25 Calculation: Profitability calculations
11.25.1 160 000 x 100 = R480 000
33.33 1
11.25.2 R480 000 + 160 000 = R640 000
11.25.3 160 000 x 100 = 25%

640 000 1
11.25.4 640 000 x 18 = R115 200

100
11.25.5 160 000 – 115 200 = R44 800
11.25.6 640 000 x 7 = R44 800

100
TASK 11.26  Fire-Start Stores: Return on Owner’s Equity

11.26.1 20 000 x 100
180 000 + 190 000  2 1
20 000 x 100 = 10.8%
185 000 1
Return has decreased by 5.2% compared to last year. The 10.8% return must be compared to
current interest rates offered on investments.
11.26.2 The owner is entitled to withdrawals from profit. He has withdrawn half of the net profit earned
resulting in an increase of R10 000 in owner’s equity.
TASK 11.27 Topshoe Stores: Return on Owner’s Equity

11.27.1
Year 2 Year 1
OWNER’S EQUITY
20.2 20.1
Balance at beginning of year 108 000 100 000
Net profit for the year 60 000 48 000
Additional capital contribution 10 000 -
Drawings (64 000) (40 000)
Balance at end of year 114 000 108 000

11.27.2 20.2:
60 000 x 100
108 000 + 114 000  2 1
60 000 x 100 = 54.1%

111 000 1
20.1:
48 000 x 100
100 000 + 108 000  2 1
48 000 x 100 = 46.1%

104 000 1
The return has increased in 20.2 - higher than alternative investments.
11.27.3 20.2: Nil, drawings (R64 000) are higher than earnings (R60 000)
20.1: 48 000 – 40 000 = R4 000
11.27.4 For expansion purposes; provides a back-up during leaner times; capital growth; ease up cash
flow problems; etc.
TASK 11.28 Abdul & Badul: Profitability analysis

11.28.1
ADBUL BADUL
Sales 1 800 000 2 209 840
Cost of sales 1 285 720 1 476 510
Gross profit 514 280 733 330
Operating expenses 393 740 490 780
Interest expense - 20 560
Net profit 120 540 221 990
Owner’s equity at beginning of year 499 960 500 000
Drawings 60 500 120 000
Owner’s equity at end of year 560 000 601 990
11.28.2
ABDUL
Gross profit on turnover = 514 280 x 100 = 28.6%
1 800 000 1
Mark-up achieved = 514 280 x 100 = 40%

1 285 720 1
Operating profit on turnover = 514 280 – 393 740 x 100 = 6.7%

1 800 000 1
Operating expenses on turnover = 393 740 x 100 = 21.9%

1 800 000 1
Net profit on turnover = 120 540 x 100 = 6.7%

1 800 000 1
Return on owner’s equity = 120 540 x 100

½[499 690 + 560 000] 1
120 540 x 100 = 22.7%

529 980 1

BADUL
Gross profit on turnover = 733 330 x 100 = 33.2%
2 209 840 1
Mark-up achieved = 733 330 x 100 = 49.7%

1 476 510 1
Operating profit on turnover = 733 330 – 490 780 x 100 = 11%

2 209 840 1
Operating expenses on turnover = 490 780 x 100 = 22.2%

2 209 840 1
Net profit on turnover = 221 990 x 100 = 10%

2 209 840 1

½[500 000 + 601 990] 1
221 990 x 100 = 40.3%

550 995 1
11.28.3
ABDUL
Observations
Gross profit percentage on turnover is low.
21.9% (28.6 – 6.7%) of gross income is utilised for expenses.
Not achieving the target mark-up – 10% below.
Return on owner’s equity is above that available on alternate investments.
Possible reasons
His turnover is low.
Location of his business may be unsuitable.
Mark-up is not being achieved – excessive discounts, sales etc.
Operating expenses are high.
Corrective action
Increase sales – advertising campaigns, review marketing strategies, etc.
Curb discounts.
Exercise tighter control over operating expenses.
BADUL
Observations
Gross profit percentage on turnover is satisfactory.
22.2% of gross profit is utilised to cover expenses.
Has almost attained the target mark-up – this is pleasing.
Return on owner’s equity is most favourable – very much higher than that available on alternate investments.
Possible reasons
Mark-up is being achieved – this indicates that excessive discounts have been curtailed, also better control
over stock is being implemented.
Expenses are also well-controlled and this has resulted in a higher net profit and an impressive return on
owner’s equity.
Corrective action
No corrective action need to be taken as the business seems to be doing well. The owner should be
pleased with the performance of his business.

TASK 11.29  Reibo Stores: Solvency
11.29.1 Total assets: 300 000 + 90 000 + 50 000 + 25 000 + 35 000 = R500 000
Total liabilities: 30 000 + 80 000 = R110 000
Owner’s equity: 500 000 – 110 000 = R390 000
11.29.2 Yes, he should use R30 000 of the fixed deposit and pay off the loan. His earnings on the fixed
deposit are only 8.5% p.a. while he is paying 18% p.a. interest on the loan.
11.29.3 500 000 : 110 000 = 4.5 : 1
11.29.4 The ratio has increased.

He may have purchased more fixed/tangible assets/stocks.
Cash may have increased.
More sales on credit.
Loan may have decreased.
Less credit purchases.
Etc.
TASK 11.30 Solvency

11.30.1 Total assets = 320 000 + 160 000
= R480 000
Owner’s equity = R20 000
Total liabilities = 480 000 – 20 000
= R460 000
Solvency ratio = 480 000 : 460 000
= 1.04 : 1
11.30.2 460 000 – 300 000 = R160 000
11.30.3 No.
11.30.4 Total assets are 4% higher than total liabilities.

The business is solvent but solvency problems can be experienced in the future.
Total assets are almost equal to total liabilities.
Some action which can be taken:
Pay off the loan, the owner may invest more capital; pay off the current liabilities, etc.
TASK 11.31 Polo Bolo Stores: Solvency & Return on Owner’s Eq-
uity
11.31.1 [R76 543 + 120 000 + 1 411 400 + 201 023 + 75 766] : [280 000 + 88 732]
1 884 732 : 368 732
5.11 : 1
11.31.2 Yes. Total assets are 5.11 times greater than total liabilities.
The business should not experience any solvency problems.
11.31.3 Owner’s equity at beginning = 1 516 000 + 360 000 – 180 000
= R1 696 000
½[1 696 000 + 1 516 000] 1
= 180 000 x 100 = 11.2%
1 606 000 1

11.31.4 She has assets to the value of R1 873 732. This indicates a sound financial position.
Her net worth (owner’s equity) is R1 516 000 – would she get this if she sells?
She needs to assess whether these assets are generating a satisfactory return – a comparison
should be made with current bank rates.
Market conditions – profitability may improve or deteriorate in the future.
If she sells, she would not benefit from the generous withdrawals she has been making (R30 000
per month).
She will have to consider the fate of her employees who will be out of a job.
Any other suitable reasons may apply.
TASK 11.32  Hugo Sobs Stores: Liquidity ratios

11.32.1 [58 000 + 16 120 + 5 800] : 45 000
79 920 : 45 000
1.8 : 1
11.32.2 [16 120 + 5 800] : 45 000

21 920 : 45 000
0.5 : 1
11.32.3 Current ratio decreased from the previous year.

A current ratio of 1.8 (nearly two) is adequate.
The acid test ratio decreased considerably by 1.
The business may experience liquidity problems – for every R1 owing on the short term it only
has 50 cents available.
The decrease from 1.8 to 0.5 is an indication that the business is carrying excess stock.
Of the 1.8 worth of current assets 1.3 consists of stock (1.8 – 0.5).
Expressed as a percentage this amounts to 72% (1.3/1.8 x 100).
The owner should be made aware of the dangers of carrying excess stock – exposure to
damage, theft, obsolescence, etc.
An attempt should be made to clear out the excess stock – clearance sales and other sales
promotions.
TASK 11.33 Stats Traders: Ratio analysis

11.33.1 (a) 39 600 x 100 = 45%
88 000 1
(b) 39 600 x 100 = 81.82%

48 400 1
(c) 14 960 x 100 = 17%

88 000 1
(d) 24 640 x 100 = 28%

88 000 1
(e) All percentages have increased with the exception of net profit
Mark-up achieved showed a considerable improvement – an increase of 6.42% indicating
better control over trade discounts and stock.
The mark-up achieved improved, yet the net profit decreased by 1%.
This is probably due to the increase in operating expenses from 11.6% to 17% - expenses
need to be controlled.
Any other suitable comment.

11.33.2 (a) 24 640 x 100 = 32.97%
½[73 920 + 75 560] 1
(b) The return improved by almost 4%.

The owner should be pleased with the performance of his business.
On a R100 investment, he earns almost R33 – this is very favourable.
His return is most probably higher than the returns available on alternative investments.
11.33.3 (a) 54 000 : 36 000 = 1.5 : 1
(b) [54 000 – 21 600] : 36 000 = 0.9 : 1
(c) 111 560 : 36 000 = 3.1 : 1
(d) Current ratio decreased by 1.5 while the acid test ratio increased by 0.4. 0.6 of total current
assets consists of trading stock.
Trading stock figure is probably too high – the owner should be made aware of the dangers
of overstocking – damage, may become obsolete (out-of-date).
The business may experience liquidity problems – it has only 90 cents available for every
R1 owing on the short-term.
Although the solvency ratio decreased by 2.5 in 20.4, the business is still solvent, it has
adequate assets to cover liabilities.
Total assets are three times more than total liabilities. The business should not experience
solvency problems.
11.33.4 The business repaid the overdraft on the first day of the current financial year.
A favourable bank balance implies that the business does not incur any interest expense – this
improves profitability.
11.33.5 In 20.3 he withdrew more than the net profit.

In 20.4 his drawings increased but he retained some of his earnings in the business.
Yes – his drawings are high – he should retain more in the business to encourage capital growth.
Over the two years owner’s equity improved by only 2.22% [(73 920 – 75 560) / 73 920 x 100]
Any other suitable comment.
TASK 11.34 Keith Stores: Ratio analysis

11.34.1 120 000 + 40 000 – 24 000 = R136 000
11.34.2 24 000 x 100 = 18.75%

½[136 000 + 120 000] 1
The return for the previous year is not supplied therefore a comparison with the previous year
cannot be made.
A return of 18.75% is satisfactory as it is most likely higher than rates available on alternate
investments.
11.34.3 212 400 – 120 682 x 100

120 682 1
91 718 x 100 = 76%
120 682 1
No, 4% below the target.
11.34.4 Current assets = 21 000 x 2.54 = R53 340

x (Stock) + 14 000 + 8 500 = 53 340
x (Stock) = 53 340 – 14 000 – 8 500
= R30 840

11.34.5 [14 000 + 8 500] : 21 000 = 1.07 : 1
11.34.6 The ratio in the previous year was less favourable.

For every R1 owing on the short term R1.07 is available for 20.9.
The ratio in the current year is more favourable – this is most likely due to a reduction of stock.
The business should not encounter any serious liquidity problems.
11.34.7 12  4 = 3 months
11.34.8 Interest rate % per month = 18  12

= 1.5%
Interest rate % for 5 months = 5 x 1.5
= 7.5%
Value of loan = 1 068 x 100
1 7.5
= R14 240
11.34.9 Owner’s equity = R120 000

Total liabilities = 14 240 + 21 000
= R35 240
Total equity and liabilities = 120 000 + 35 240
= R155 240
Current assets = 14 000 + 8 500 + 30 840
= 53 340
Fixed/Tangible assets = x + 53 340 = 155 240
Fixed assets = R101 900
TASK 11.35 Multiple choice questions

No. Answer Explanation No. Answer Explanation
11.35.1 B - 11.35.6 D [4]
11.35.2 D [1] 11.35.7 A [5]
11.35.3 A [2] 11.35.8 A -
11.35.4 B - 11.35.9 C [6]
11.35.5 C [3] 11.35.10 D [7]
[1] 50 000  2.8 = R17 857.14
[2] Debtors = 50 000 – 29 000 – 6 000 = R15 000

[15 000 + 6 000] : 17 857.14 = 1.18 : 1
[3] Total assets = 20 000 + 7 000 = R27 000

27 000 : 7 000 = 3.86 : 1
24.9
[4] 120 000 x /100 = R29 880
[5] Gross profit = 210 000 – 120 000

= R90 000
Mark-up = 90 000 x 100 = 75%
120 000 1
[6] 20 000 x 250/150 = R33 333

50
[7] Gross profit = 90 000 x /100 = R45 000
Total expenses = 45 000 + 12 000 – 20 000 = R37 000
Turnover = 45 000 + 90 000 = R135 000
% on turnover = 37 000 x 100 = 27.41%
135 000 1

TASK 11.36 Lories Trading Store: Ratio analysis
11.36.1 [36 500 + 23 000 + 1 500] : [16 500 + 14 000]
61 000 : 30 500
2 : 1
11.36.2 [61 000 – 36 500] : 30 500

24 500 : 30 500
0.8 : 1
11.36.3 Although the current ratio decreased by 1 in 20.2 it is still adequate.

The acid test ratio decreased considerably by 0.7.
The business is carrying excess stock – working capital is tied up with stock
An attempt should be made to reduce stocks by having sales, mark-downs, etc.
Without selling stock they cannot pay off the debts.
11.36.4 Capital at beginning = R300 000

Capital at end = 300 000 + 80 000 – 60 000
= R320 000
½[300 000 + 320 000] 1
= 80 000 x 100
310 000 1
= 25.8%
11.36.5 Yes, the return improved by 10.8%.

This is most favourable and is most probably higher than returns available on alternate
investments.
11.36.6 Non-current assets (Fixed/Tangible assets and Financial assets) and Non-current liabilities
figures are not supplied.
TASK 11.37 TK Computers: Ratio analysis

Section A
11.37.1 (a) 102 000 x 100 = 17%
600 000 1
(b) 102 000 x 100 = 14.53%

702 000 1
(c) 40 000 x 100 = 5.7%

702 000 1
(d) 67 000 x 100 = 9.54%

702 000 1
(e) 60 000 x 100 = 8.55%

702 000 1
159 100
11.37.2 Turnover increased by R159 100. This amounts to a 29% increase ( /542 900 x 100).
11.37.3 No. The mark-up is 3% below the target mark-up.
11.37.4 Turnover increased by 29% while operating expenses increased by 14% (5000/35 000 x 100).

11.37.5 All percentages have decreased in the current period.
Net profit on turnover decreased by 1.38%.
The profitability of the business can be improved if the target mark-up is achieved.
Tighter control measures should be put in place to control stocks, discounts, etc.
The loan repayment has also improved profits because the interest expense has been halved.
The decrease in mark-up has had a positive impact on profits and at this rate future prospects
look favourable.
11.37.6 480 000 + 60 000 – 20 000 = R520 000
11.37.7 60 000 x 100

½[480 000 + 520 000] 1
60 000 x 100
500 000 1
12%
11.37.8 Yes, the return increased by 1%.

A comparison should be made with returns available on alternate investments.
Conditions seem favourable for profits to improve in the future, e.g. they can generate more
profits by undertaking a repair service for computers.
Section B
11.37.9 [230 300 + 80 000 + 3 300] : 98 000
313 600 : 98 000
3.2 : 1
11.37.10 [313 600 – 230 300] : 98 000

83 300 : 98 000
0.85 : 1
11.37.11 The current ratio is favourable.

The acid test ratio is less favourable – after stock has been deducted TK Computers have 85c
available for R1 owing on the short-term term.
It is possible that liquidity problems may be experienced owing to the large amount of stock on
hand.
It should be borne in mind that a computer dealer would find it necessary to carry large stocks –
spare parts, accessories, software, etc.
11.37.12 Stock can become obsolete; may get stolen; may be exposed to mishandling and subsequent
damage; working capital is tied up in stocks, etc.
11.37.13 Negative impact on sales as the needs of customers are not being fully catered for.
11.37.14 This has a negative effect on working capital as debtors are taking too long to pay.
As a result of this, the business may find it difficult to pay their creditors and other operating
expenses.
11.37.15 B
Total assets = 520 00 + 150 000 = R670 000
670 000 : 150 000 = 4.47 : 1

TASK 11.38 Multiple choice questions
No. Answer Working No. Answer Working
11.38.1 B - 11.38.21 C [7]
11.38.2 B - 11.38.22 B [8]
11.38.3 C - 11.38.23 A -
11.38.4 A [1] 11.38.24 D [9]
11.38.5 D - 11.38.25 A [10]
11.38.6 D - 11.38.26 C -
11.38.7 B [2] 11.38.27 C -
11.38.8 B [3] 11.38.28 A -
11.38.9 C [4] 11.38.29 D -
11.38.10 A [5] 11.38.30 B -
11.38.11 D - 11.38.31 C -
11.38.12 B - 11.38.32 A -
11.38.13 A - 11.38.33 B -
11.38.14 A - 11.38.34 D -
11.38.15 B - 11.38.35 C -
11.38.16 D - 11.38.36 B -
11.38.17 A - 11.38.37 A [11]
11.38.18 C - 11.38.38 B -
11.38.19 B - 11.36.39 C [12]
11.38.20 B [6] 11.38.40 D [13]
Working:
[1] 3 200 x 15% x 9/12 = R360
[2] 22 500 – 3 760  4 = R4 685
[3] 90 000 x 25% x 8/12 = R15 000
[4] 90 000 – 15 000 = R75 000
[5] Depreciation = 75 000 x 25% p.a.

= R18 750
6 12
[6] 50 000 x 11.05% x /12 = 2 762.50 50 000 x 11.05% x /12 = 5 525
70 000 x 11.05% x 6/12 = 3 867.50 OR 20 000 x 11.05% x 6/12 = 1 105
6 630.00 6 630
[7] 80 000 x 15.45% x 9/12 = R9 270
[8] 9 270  3 = R3 090
[9] 2 200 x 3 = 6 600

2 200 + 10% x 8 = 19 360
25 960
[10] 2 200 + 10% = R2 420
[11] 244 x 150/100 = R366
[12] Dr side = 12 356 – 231 – 360

= R11 765
Cr side = 12 125 – 360
= R11 765
[13] 20 000 – 14 000 = R6 000

TASK 11.39 Kimlin Household Supplies: Ratio analysis
11.39.1 WORKINGS: 20.2 20.1
Mark-up %
585 000
/900 000 x100 65.0% 70.4%
% Gross profit on sales

585 000
/1 485 000 x 100 394% 41.3%
% Operating expenses on sales

440 000
/1 485 000 x 100 29.6% 36.5%
% Operating profit on sales

235 000
/1 485 000 x 100 15.8% 13.5%
% Net profit on sales

198 600
/1 485 000 x 100 13.4% 9.5%
Solvency ratio
1 352 600 : 342 000 4.0 : 1 2.6 : 1
Current ratio
237 000 : 162 000 1.5 : 1 1.3 : 1
Acid-test ratio
97 000 : 162 000 0.6 : 1 0.4 : 1
% Return on average owner's equity

198 600 x 100 22.3% 13.2%
½(902 000 + 1 010 600) 1
11.39.2 The mark-up % was decreased from 70,4% to 65%.

This apparently led to an increase in customers.
Sales increased from R1 150 000 to R1 485 000.
Despite the decrease in the mark-up % the gross profit went up from R475 000 to R585 000.
The strategy was successful.
11.39.3 Although the operating expenses increased by R20 000, they have been well controlled because
as a % of sales, they decreased from 36.5% to 29.6%.
The increase in the gross profit plus the good control over the operating expenses led to an
improvement in the operating profit on sales from 13.5% to 15.8%.
The interest expense leads to a lower net profit than operating profit, however, the interest
expense decreased by R9 200 due to the decrease in the non-current loan.
Consequently the % net profit on sales improved from 9.5% to 13.4%.
This now means that the business is earning a net profit of 14.4 cents for each R1.00 of sales.
The owner should be satisfied with the positive trend.
11.39.4 Yes. The solvency ratio improved from 2.6 : 1 to 4.0 : 1.

Total assets are now 4 times the total liabilities.
The business should not experience any solvency problems.
11.39.5 Both the current and the acid-test ratio look a little low, but there has been a positive trend in both.
The current ratio increased from 1.3 : 1 to 1.5 : 1. Acid-test ratio increased from 0.4 : 1 to 0.6 : 1.
The business could experience liquidity problems if the stock cannot be sold quickly and if debtors
do not pay on time.
However, there are investments in the Balance Sheet which the business could liquidate or borrow
against in the event of cash flow problems.
As the business has been operating on low liquidity ratios for the past two years, it appears their
cash flow from sales and debtors is reliable.

11.39.6 Yes, the % return earned by the owner has improved from 13.2% to 22.3%. He is now earning a
return which exceeds that which can be earned on alternative investments (e.g. a fixed deposit). In
this respect, the owner should be satisfied. However, he is earning a net profit of only R198 600
which might not be sufficient to support a family, so he might need to increase his net profit even
further in future.
11.39.7 Various responses possible: e.g.

 The government regulates the price of petrol – a very low mark-up is applied. Is he aware of
this?
 Garage owners can earn more by servicing and repairing vehicles. Does he have the skills to
do this?
 Petrol stations stay open for 24 hours a day and they often have to deal with crime in the eve-
nings. Also many customers pay by cash which adds a security risk. Does he want this re-
sponsibility, or should he get a partner to assist him?
 Is there any way in which the household supplies business could be enhanced, e.g. he could
open a branch in another city, he could admit a partner in order to develop the existing busi-
ness.
 He could critically examine his overheads to see if any cost-cutting procedures could be ap-
plied in order to earn a bigger profit in future.
 He could increase the non-current loan in order to develop the business further. The interest
rate would be about 11% to 13%. This is lower than the % profit he earns, so use of loans
would be beneficial to the business.
TASK 11.40 Rippa Computer Shop: Interpretation of financial in-

dicators
11.40.1 POINTS FOR INCLUSION IN THE BUSINESS LETTER:
1. Sales have dropped by R340 000 i.e. by 21% from the previous year. This is disappointing.
2. Cost of sales have decreased by R100 000 and fee income has decreased by R10 000 indicating that
the volume of goods sold has decreased, i.e. customers appear to have been lost, maybe due to
increased competition or perceptions of poor service.
3. The mark-up % has decreased from 80% to 60%. This should have led to increased sales volume, but
customers are obviously rejecting this business.
4. Due to the decline in the mark-up percentage, the percentage gross profit on sales has decreased from
44.4% to 37.5%.
5. Advertising is very low and has decreased from 3% to 1% of sales. This might have contributed to the
decline in sales volume and fee income.
6. Operating expenses on sales have increased from 30.2% to 38.3% which means that some expenses
have not been well controlled. These must be investigated and rectified in order to effect savings and
to increase the % operating profit on sales which has declined from 21.6% to 7.8%.
7. The salary of Ben Slack has gone up by the inflation rate of 8% each year, while the assistants have
had a 20% increase which is very unusual and possibly not deserved especially as the number of
customers appears to have declined. Ron should intrude in the business and study the efficiency of
the employees and the manner in which they are dealing with customers. Ron might have to consider
retrenching one or two of the assistants to bring the wages under control.
8. The interest rate on the loan has increased from 12% p.a. to 14.5% p.a. As interest is cutting into the
profits and is causing a big difference the operating profit and net profit. Ben could save a lot of money
if he could find a way to repay the loans as soon as possible.
9. Due to all of the above, the % net profit on sales has declined from 17.9% to 2.8% which indicates that
the business ultimately earns only 2.6 cents in every R1.00 of goods sold. This is clearly unacceptable
indicating low overall profitability.
10. The solvency ratio is healthy at 3.0 : 1 which reflects a slight improvement. The business appears not
to be at risk of going insolvent.
11. The business appears not to be in danger of experiencing liquidity problems. The current ratio and
acid-test ratio are too high and have increased over the past year. The current ratio moved from 2.2 : 1
to 3.8 : 1 which indicates that there are too many current assets on hand. By reducing stock, debtors
or cash resources, they could place more money in investments which could earn a return for the
business.

12. The acid-test ratio is also too high (at around 1.6 or 1.7 : 1) indicating there is too much cash on hand
or the debtors are taking too long to settle their accounts. These aspects must be investigated.
Possibly screen debtors properly before allowing them to open accounts, or consider legal action
against them if necessary.
13. The percentage return earned by Ron was very healthy in 20.1 with a 34.1% return which greatly
exceeds the return on alternative investments. However, in 20.2, there has been a significant swing
for the worse with Ron earning only a 2.8% return. All the above factors have led to this disappointing
decline.
14. Ron was still able to increase his drawings despite the considerable decline in the business. Although
the cash resources were obviously good enough to allow for this, the increased drawings could cause
financial strain on the business in future.
11.40.2 FORMAT OF BUSINESS LETTER
LETTERHEAD & LOGO

NAME, ADDRESS & PHONE NUMBER OF YOUR ACCOUNTING BUSINESS
Name & address of Rippa Computer Shop

Attention: RON RIPPA
Dear Ron,
PROVIDE A HEADING FOR YOUR LETTER
INTRODUCTION
SALES, GROSS PROFIT & FEE INCOME – Points 1-4
OPERATING EXPENSES – Points 5-7
INTEREST & NET PROFIT – Points 8-9
SOLVENCY – Point 10
LIQUIDITY – Points 11-12

RETURN EARNED BY OWNER – Points 13-14
CONCLUSION
Yours sincerely.
Insert your name, CA (SA)
TASK 11.41  Ethical & internal control scenarios relating to financial

statements
Before undertaking this task, it is advisable to inform the learners about what is meant by ethics in business,
fraud and internal control (you may refer to Modules 13 and 14). Refer also to the specific ethical and control
questions in the tasks in this module.
11.41.1 Wages – compare percentage increase in wages to percentage increase in salaries and % in-
crease in net profit.
11.41.2 Telephone – compare percentage increase in telephone expense to inflation rate.
11.41.3 Advertising – compare percentage increase in advertising to percentage increase in sales.
11.41.4 Stock – calculate stock turnover rate and compare to what is expected for this line of business.
11.41.5 Debtors – calculate debtors collection period and compare to normal credit terms of 30 days.
11.41.6 Creditors – calculate creditors payment period and compare to agreed terms.
11.41.7 Operating expenses – calculate percentage operating expenses on sales and compare to previ-
ous year.
11.41.8 Mark-up – calculate percentage gross profit on cost of sales and compare to previous year; as-
sess if sales have increased with the current mark-up percentage as this indicates that custom-
ers are supporting the business.
11.41.9 Return to owner – calculate percentage net profit on average owners’ equity and compare to
reasonable expectation.
11.41.10 All debts – calculate solvency ratio.
11.41.11 Immediate debts – calculate current ratio and acid-test ratio.
11.41.12 Land and buildings – calculate sales per square metre of property; assess capital gain in prop-
erty values.
11.41.13 Stock quality – compare debtors allowances to sales, calculate a percentage and compare to
previous year.
CHECKLIST
Requires more
Skills Yes – proficient Complete
attention
Identify the users of financial statements
Identify the desirable features of financial
statements
Complete Income Statement
Complete the Balance Sheet together
with notes
Analyse and interpret the financial
statements
Understand the GAAP principles and how
they apply to financial statements
Analyse ethical and internal control
scenarios relating to financial statements

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MODULE 11

TASK 11.1  Desirable characteristics of financial statements

TASK 11.2  Financial year-ends

New Era Accounting: Grade 10 269 Teacher’s Guide

TASK 11.4 Peter’s Paint Shop: Operating, Financing & Investing

TASK 11.5 Jerry’s General Dealers: Accounting equation & con-

New Era Accounting: Grade 10 270 Teacher’s Guide

11.5.2 JERRY JUMBA TRADING AS JERRY’S GENERAL DEALERS

New Era Accounting: Grade 10 271 Teacher’s Guide

11.5.3 Additional information:

New Era Accounting: Grade 10 272 Teacher’s Guide

TASK 11.7  Concepts related to financial statements

TASK 11.8 Lennox Spaza: Understanding the logic of aspects of

(b) Total operating expenses:

(c) Operating profit:

(d) Net profit = 19 650 + 300 – 2 250 = R17 700

New Era Accounting: Grade 10 273 Teacher’s Guide

10.8.3 Fee income (telephone service) R80.

TASK 11.9  Caxio Supplies: Preparing an Income Statement &

New Era Accounting: Grade 10 274 Teacher’s Guide

11.9.7 CAXIO SUPPLIES

EQUITY AND LIABILITIES

New Era Accounting: Grade 10 275 Teacher’s Guide

New Era Accounting: Grade 10 276 Teacher’s Guide

11.10.2 NOVAK CLOTHING

EQUITY AND LIABILITIES

New Era Accounting: Grade 10 277 Teacher’s Guide

3. FIXED/TANGIBLE ASSETS Land and

New Era Accounting: Grade 10 278 Teacher’s Guide

11.11.2 MALAGA CLOTHING

EQUITY AND LIABILITIES

New Era Accounting: Grade 10 279 Teacher’s Guide

3. FIXED/TANGIBLE ASSETS Land and

New Era Accounting: Grade 10 280 Teacher’s Guide

TASK 11.12 Thirsk Computer Traders: Preparing financial state-

New Era Accounting: Grade 10 281 Teacher’s Guide

EQUITY AND LIABILITIES

3. FIXED/TANGIBLE ASSETS Vehicles Computers Total

New Era Accounting: Grade 10 282 Teacher’s Guide

TASK 11.13 Willy’s Vegetable Shop: Preparing Financial State-

New Era Accounting: Grade 10 283 Teacher’s Guide

EQUITY AND LIABILITIES

3. FIXED/TANGIBLE ASSETS Land &

New Era Accounting: Grade 10 284 Teacher’s Guide

TASK 11.14 Milson Hi-Fi Store: Preparing financial statements

New Era Accounting: Grade 10 285 Teacher’s Guide

EQUITY AND LIABILITIES

3. FIXED/TANGIBLE ASSETS Land &

New Era Accounting: Grade 10 286 Teacher’s Guide

TASK 11.15 Dunster Hobby Shop: Preparing financial statements

New Era Accounting: Grade 10 287 Teacher’s Guide

EQUITY AND LIABILITIES

3. FIXED/TANGIBLE ASSETS Land &

New Era Accounting: Grade 10 288 Teacher’s Guide

TASK 11.16 Winwood Stores: Preparing financial statements from

New Era Accounting: Grade 10 289 Teacher’s Guide

EQUITY AND LIABILITIES

3. FIXED/TANGIBLE ASSETS Land &

New Era Accounting: Grade 10 290 Teacher’s Guide

TASK 11.17 Opendoor Stores: Preparing financial statements

New Era Accounting: Grade 10 291 Teacher’s Guide

EQUITY AND LIABILITIES

3. FIXED/TANGIBLE ASSETS Land &