TUTORING 2020 ACCOUNTING Grade 12 Answers

Directorate: Curriculum FET

TUTORING 2020

ACCOUNTING

Grade 12

Answers

(Term 1 Revision)

Accounting Tutoring MEMO Companies 2020

2

ACTIVITY 1 (Buy Back of shares: Calculations, Ledger & Notes to Fin Statements) (30; 20 min) 1.1 1 March 2019

Calculations Workings Answer

Average Share price R4 500 000 ÷ 750 000 shares R6,00 per share

Net Asset Value per share R5 700 000 ÷ 750 000 shares R7,60 per share

(4) 1.2 1 June 2019

Calculations Ordinary Share Capital

portion Retained Income

portion Buy Back price

Price per share R6,00 R2,00 R8,00

For 100 000 shares R600 000 R200 000 R800 000

(4) 1.3 28 February 2020

Calculations Workings Answer

Average Share price R3 900 000 ÷ 650 000 shares R6,00 per share

Net Asset Value per share R4 900 000 ÷ 650 000 shares R7,54 per share

(4)

1.4 Complete the ledger accounts for the year ending 28 February 2020:

ORDINARY SHARE CAPITAL 2019 Jun 1 Bank CPJ 600 000

2019 Mar 1 Balance b/d 4 500 000

3 900 000

(2)

RETAINED INCOME 2019 Jun 1 Bank 200 000

2019 Mar 1 Balance b/d 1 200 000

2020 Feb 28 Balance c/o

1 650 000

2020 Feb 28 Appropriation a/c 650 000

1 850 000 1 850 000

2020 Mar 1 Balance b/d 1 650 000

(5)

BANK 2019 Mar 1 Balance b/d 1 100 000

2019 Jun 1

Ordinary Share Capital CPJ 600 000

Retained income 200 000

(2)


3

APPROPRIATION ACCOUNT

2020 Feb 28

Income tax 390 000 2020 Feb 28 Profit & loss 1 300 000

Dividends on ordinary shares

260 000


1 300 000 1 300 000

(5)

1.4 Retained Income

Balance at beginning of year (1 March 2019) 1 200 000

Net profit after tax 910 000

Repurchase of 100 000 ordinary shares (200 000)

Dividends (260 000)

Balance at end of year (28 Feb 2020) 1 650 000

(4)

TOTAL: 30

ACTIVITY 2: (50; 40 min )

*1 mark for AOL (all three columns correct); 2nd mark for amount where indicated

2.1 Account Dr Account Cr * A O L

E.G. Directors fees Accrued Expenses 0 - 15 000 +15 000

1 Shareholders for dividends Bank - 60 000 0 - 60 000

2 Dividends on ordinary shares Bank - 30 000 - 30 000 0

3 Bank Ordinary share capital (80 000 x 6,50)

+ 520 000 + 520 000 0

4 Dividends on ordinary shares Shareholders for dividends

(200 000 x 3,50)

0 - 70 000 + 70 000

5a Ordinary share capital Bank

(920 000 / 200 000 = R4,60) [20 000 x 4,60]

- 92 000 - 92 000 0

5b Retained Income Bank

(R7,50 - R4,60 = R2,90) [200 000 x 2,90]

- 58 000 - 58 000 0

(6) (6) (9) (21)


4

2.2 ORDINARY SHARE CAPITAL

AUTHORISED

10

200 000 ordinary shares

ISSUED

120 000 ordinary shares in issue on 1 March 2019 400 000

80 000 shares issued at R6,50 p.s. during the year 520 000

(20 000) shares bought back on 1 Nov 2019 at ave. price (R4,60 p.s) (20 000 x R4.60)

(92 000)

180 000 ordinary shares in issue on 28 Feb 2020 (180 000 x R4,60) 828 000

RETAINED INCOME

Balance on 1 March 2019 30 000

10

Net profit after tax 420 000

Repurchase of 20 000 shares at R2,90 above ave. price (20 000 x R2.90 ) (58 000)

Dividends for the year (100 000)

Paid (120 000 x R0.25) 30 000

Recommended (200 000 x R0,35) 70 000

Balance on 28 Feb 2020 292 000

2.3 The directors are not sure whether the price of the new shares issued on 1 November 2019 was appropriate or not. Calculate the net asset value (NAV) per share on 28 February 2020. (4)

(1 120 000) 828 000 + 292 000 x 100c = 622,22c (OF R6,22) 180 000

In your opinion were the directors correct in issuing shares at R6.50 per share? Bear in mind that the NAV per share for the 2019 financial year was 600 cents. Provide TWO reasons for your answer. (5)

YES + reasons [ALWAYS quote figures to support your answer!]

The NAV improved from 600c tot 622c per shrae

The issue price (650c) was higher than the NAV (600c). NAV is Tot Assets minus Tot Liabilities. Fixed assets are reflected at carrying value (or historical value) in the Balance sheet so BS-values are conservative. Shares should always be issued at a price higher than the NAV.

The Balance sheet shows the financial position based on past information, therefore the NAV does not reflect growth prospects and future plans. Shareholders are often prepared to pay more than the NAV.

TOTAL: 40


5

ACTIVITY 3: SARS (income tax) (16; 12 min)

3.1 Supply a reason for the debit entry on 25 March 2018.

2

Payment of the tax outstanding/payable/owed to SARS from the previous financial year.

3.2 Give a possible transaction for the debit entry on 31 August 2018.

2

Paid provisional tax, R30 000

3.3 What was the total income tax expense for the current financial year?

2

R75 500

3.4 Calculate the balance of SARS (income tax) on 28 February 2019. Show your workings.

5

12 000 + 75 500 - 12 000 - 30 000 - 55 000 = - R9 500 operation OR: 75 500 - (30 000 + 55 000) = R9 500 (negative/debit) operation

3.5 Refer to the balance calculated in Question 3.4 above. Indicate whether this amount is a Current Asset or a Current Liability.

1

Current Asset

3.6 Account debited Account credited Amount A O L

4

Income Tax

SARS

(income tax)

R75 500

0

-

+

TOTAL: 16


6

ACTIVITY 4 (Adjustments and Fin Statements for the year ended 30 June 2020)

Adjustment Statement of Comprehensive Income (Income Statement)

Statement of Fin. position (Balance Sheet)

Section & Item Calculation & Amount Section & Item Calculation & Amount

E.g. W&L for June not paid yet Operating Expenses Water& Lights

R1 200 Current Liabilities Accrued Expenses

R1 200

1.

Defective stock costing R6 000 was returned to the manufacturers. A physical count at year-end revealed stock on hand to be R427 000.

Operating expenses

Trading stock deficit

[438 000 – 6 000 –

427 000]

= 5 000

Current Assets

Inventory

[438 000 – 6 000 –

5 000]

= 427 000

2.1 Further bad debts of R4 000 are to be written off.

Operating expenses

Bad debts

[2 800 + 4 000]

= 6 800

Current Assets

Trade & other receivables note

Trade debtors

[80 000 – 4 000]

= 76 000

2.2 The provision for bad debts is to be adjusted to R6 080.

Other Operating income

Provision for bad debts

adjustment

[10 400 – 6 080]

= 4 320

Current Assets

Trade & other receivables

note

(Provision for bad debts)

[10 400 – 4 320]

= (6 080)

3. The advertising contract has been

paid for 13 months

Operating expenses

Advertising

(11 700/13= 900)

[11 700 - 900)

= 10 800

Trade and other

receivables

Prepaid expenses

900

4. The tenant has paid two months’

rent in advance.

Other Operating income

Rent income

[78 400 – 11 200]

= 67 200

Trade & other payables

Income received in advance 11 200

5. R8 000 is still owed to the auditors Operating expenses Audit fees

[36 000 + 8 000]

= 44 000


Accrued Expenses /

Expenses payable

8 000

6.1

Provide for interest on the mortgage loan from the South Bank at 15% p.a. for the month of June 2020. interest on the loan is capitalised.

Interest expense [31 200 + 8 050]

= 39 250

Non-current liabilities

Loan: South Bank

[644 000 + 8 050 – 50 400]

= 601 650

6.2

Capital repayments on the loan of R4 200 per month (excluding interest) will be paid in the next financial year.


Current portion of mortgage loan

50 400


7

Adjustment

Statement of Comprehensive Income (Income Statement)

Statement of Fin. position (Balance Sheet)

Section & Item Calculation & Amount Section & Item Calculation & Amount

7.

Details of Sundry expense items at

year-end:

Stationery on hand estimated, R800;

Packing materials counted, R1600

Operating expenses

Sundry expenses

[9 200 – 2 400]

= 6 800

Current Assets

Inventory note

Consumable stores on hand

1 600


Prepaid expense 800

8.

The insurance policy was taken out

on 1 September 2019 at a monthly

premium of R2 420.

Operating expenses

Insurance

[29 040 – 4 840]

=24 200


Prepaid expense 4 840

9.1

New Equipment was purchased on

1 January 2020 and properly

entered, R26 000.

Non-Current Assets

Fixed Asset note:

Equipment

1/7/2019: R230 000

Additions: R 26 000

30/6/2020: R256 000

9.2

Equipment is to be depreciated at

10% p.a. on the diminishing

balance method.

Operating expenses

Depreciation

Old: R4 600

(230 000-184 000) x 10%

New: R1 300

(26 000 x 6/12 x 10%)

= 5 900

Non-Current Assets

Fixed Asset note:

Acc Depr on Equipment

5 900

10.

Repairs costing R22 000 were

incorrectly debited to the Land and

buildings account.

Operating expenses

Repairs 22 000

Non-Current Assets

Fixed Asset note:

Land & Buildings

2 076 000 - 22 000

2 054 000

11.

150 000 new shares were issued

on 1 July 2019 at 220c per share

and correctly entered

Shareholders' Equity

Ordinary Share Capital

150 000 x 2,20

330 000

12. R4 600 is owed to SARS in respect

of income tax. Income tax

[47 000 + 4 600]

= 51 600


SARS (income tax) 4 600

13. The directors recommended a final dividend of 10c per share

Shareholders' Equity

Retained Income note Trade & other payables

Shareholders for Dividends

900 000 x 0.10

90 000


8

ACTIVITY 5 (Financial Statements) (follow on Activity 4) 5.1 TONI LTD STATEMENT of COMPREHENSIVE INCOME FOR THE YEAR ENDED 30 JUNE 2020

R

Gross Profit (1 942 000 – 24 000 – 1 080 000) 838 000

Other operating income operation 73 050

Discount received 1 530

Rent Income (78 400 – 11 200) 67 200

Provision for Bad debts adjustment (10 400 – 6 080) 4 320

Gross operating income (838 000 + 73 050) 911 050

Operating expenses (11) operation (553 300)

Salaries and wages 307 300

Directors fees 120 500

Trading stock deficit (438 000 – 6 000 – 427 000) 5 000

Bad Debts (2 800 + 4 000) 6 800

Advertising (11 700 – 900 [11700/13]) 10 800

Audit fees (36 000 + 8000 ) 44 000

Sundry Expenses (9 200 – 800 – 1 600 ) 6 800

Insurance (29 040 – 4 840 ) 24 200

Repairs 22 000

Depreciation (22) 5 900

Operating profit (911 050 – 553 350) 357 750

Interest Income (9 000 + 1 600) 10 600

Profit before interest expense 368 350

Interest Expense (31 200 + 8 050) (39 250)

Net Profit before tax 329 100

Income tax (47 000 + 4 600) (51 600)

Net profit after tax (7) 277 500

(40)


9

5.2 TONI LTD: Notes to Financial Statements on 30 June 2020

FIXED / TANGIBLE ASSETS LAND &

BUILDINGS EQUIPMENT TOTAL

CARRYING VALUE (beginning of year) 2 054 000 46 000 2 100 000

Cost 2 054 000 230 000 2 284 000

Accumulated Depreciation (184 000) (184 000)

Movements:

Additions at cost 26 000 26 000

Disposals at Carrying value

Depreciation (see IS) (5 900) (5 900)

CARRYING VALUE (end of year) 2 054 000 66 100 2 120 100

Cost 2 054 000 256 000 2 310 000

Accumulated Depreciation (189 900) (189 900)

(14)

5.3 Trade and other receivables

Net trade debtors 69 920

Trade debtors (80 000 – 4 000) 76 000

Provision for Bad Debts (10 400 – 4 320) (6 080)

Prepaid Expenses (900 + 800 + 4 840) 6 540

76 460

(8)

5.4 STATEMENT OF FINANCIAL POSITION ON 30 JUNE 2018 (EQUITY SECTION)

EQUITY AND LIABILITIES

SHAREHOLDERS' EQUITY 2 117 500

Ordinary Share Capital (1 540 000 + 330 000) 1 870 000

Retained Income (120 000 + 277 500 – (60 000+90 000)) 247 500

NON-CURRENT LIABILITIES 601 650

Mortgage Loan: South Bank (644 000 + 8 050 - 50 400) 601 650

(10)


10

ACTIVITY 6 (Statement of Financial Position [Balance sheet] - format) Fill in the missing amounts to complete the Statement of Financial Statement.

STATEMENT OF FINANCIAL POSITION AS AT 28 FEBRUARY 2020

ASSETS Notes

NON-CURRENT ASSETS 4 980 000

Fixed/tangible assets 3 4 820 000

Financial assets 160 000

CURRENT ASSETS 1 820 000

Inventories 4 956 000

Trade and other receivables 5 861 000

Cash and cash equivalents 6 2 500

TOTAL ASSETS 6 800 000


SHAREHOLDERS’ EQUITY 5 286 200

Share capital 7 5 068 000

Retained income 8 218 200

NON-CURRENT LIABILITIES 592 000

Mortgage Loan (740 000 – 148 000) 592 000

CURRENT LIABILITIES 921 800

Trade and other payables 9 728 500

Bank overdraft 45 300

Current portion of loan 148 000

6 800 000


11

ACTIVITY 7 (Statement of Financial Position - Notes) (40; 35 min)

7.1 FIXED/TANGIBLE ASSETS Land and Building

Vehicles Equipment Total

Carrying value beginning of the year 2 394 860

208 000

55 000

2 657 860

Cost

2 394 860 290 000 380 000 3 064 860

Accumulated depreciation (82 000) (325 000) (407 000)

Movement

Additions 1 000 000 450 000

1 450 000

Disposal at carrying value

Depreciation for the year (41 600 + 15 000 / 54 999)

(56 600) (54 999)

111 499

Carrying value at the end of the year

3 394 860

601 400

1

3 996 261

Cost 3 394 860 740 000 380 000 4 514 860

Accumulated depreciation (138 600) (379 999) (518 599)

(25)

7.2 ORDINARY SHARE CAPITAL

AUTHORISED

8

5 000 000 ordinary shares

ISSUED

2 500 000 ordinary shares in issue on 1 March 2018 2 875 000

500 000 shares issued at R1,75 p.s. during the year 875 000

(312 000) shares repurchased during the year at R1,25* p.s.

(390 000)

2 240 000 ordinary shares in issue on 28 February 2019 828 000

* R1, 25 = (2 875 000 + 875 000) (2 500 000 + 500 000)


12

7.3 TRADE AND OTHER PAYABLES

Trade creditors 393 400

Expenses Accrued 12 000

Income received in advance 19 800

Shareholders for dividends (2 240 000 x 0,15) 336 000

SARS (Income Tax) 10 482

SARS (PAYE) 25 280

Creditors for Salaries / Wages 10 538

Pension fund 38 750

846 250 7

ACTIVITY 8 (Balance Sheet + notes) (50; 40 minutes)

8.1 RETAINED INCOME NOTE

Balance at the beginning of the year 345 000 Net profit after tax (1 250 000 x 72%) 900 000

Re-purchase of shares (75 000 x R1,50) OR

(450 000 (1 mark) – 337 500) (2 marks) (112 500)

Ordinary share dividends (492 000)

10

Interim dividend 240 000

Final dividend (900 000x 28c) 252 000

Balance at the end of the year 640 500


13

8.2 STATEMENT OF FINANCIAL POSITION (BALANCE SHEET) ON 28 FEBRUARY 2019

ASSETS

Non-current assets balancing figure 4 860 030

Fixed assets (4 350 000– 650 520) 3 699 480

Financial assets 1 160 550 5

Current assets 479 970

Inventory (258 740+ 2 180) 260 920

Trade and other receivables 364 000- 350 000

(195 000– 6 500 – 5 500+ 8 050+ 14 000) 205 050

Cash + cash equivalents (464 000 – 450 000) see buy back of OSC

14 000

TOTAL ASSETS same as TE+L 5 340 000 17


Shareholder’s equity 4 353 000

Ordinary share capital 450 000 – 112 500 (4 050 000 – 337 500 )

3 712 500

Retained income see 7.1 640 500 6

Non-current liabilities 490 000

Loan: Vida Bank 750 000 + 57 300 – 192 300 – 125 000)

490 000 5

Current liabilities 497 000

Trade and other payables (101 000 + 19 000) 120 000

7

40 Shareholders for dividends see 7.1 252 000

Current portion of loan 125 000

TOTAL EQUITY AND LIABILITIES 5 340 000

*Trade and other payables can combine the elements under current liabilities.


14

AUDIT REPORTS ACTIVITY 9 (Audit Reports - concepts)

9.1 Choose the audit opinion from COLUMN B that best describes the audit report in COLUMN A. Write the letter ( A – C) in the Answer column.

COLUMN A COLUMN B (opinion) Answer

9.1.1 Qualified audit report A In our opinion, the annual financial statements present fairly, in all material respects, the financial position of Shabba Ltd as at 29 February 2016.

C

9.1.2 Unqualified audit report

B We have not been able to obtain sufficient audit evidence to provide for an audit opinion. Accordingly, we do not express an opinion on the financial statements of Khothule Ltd for the year ended 29 February 2016.

A

9.1.3 Disclaimer report C In our opinion, except for the effect of the unauthorised interest-free loan to the Chief Executive Officer, the annual financial statements present fairly, in all material respects, the financial position of Dai Ltd.

B

9.2 Complete the following sentences in Column A by choosing the correct concepts from Column B.

Write only the letter (A – F) in the ANSWER column.

COLUMN A COLUMN B ANSWER

9.2.1

The …………. expresses an opinion on whether the financial statements are correct and is a fair reflection of the company's financial results

A International Financial Reporting Standards (IFRS)

E

9.2.2 The…………….set guidelines for the preparation of financial statements of companies to ensure a degree of consistency

B SARS report A

9.2.3 The…………….comments on the financial position and the current status of the company.

C Audit sampling D

9.2.4 ………………….is when auditors choose certain items to audit from all the available financial information.

D Directors report C

E Independent audit report


15

9.3 Read the extract from the independent audit report of Sumba Ltd and answer the questions that follow:

EXTRACT FROM THE AUDIT REPORT OF SUMBA LTD

We found that internal control procedures were not adhered to and documentation did not exist for a significant portion of the transactions tested. Because of the significance of the matter described in the previous paragraph, we have not been able to obtain sufficient audit evidence to provide a basis for an audit opinion. Accordingly, we do not express an opinion on the financial statements for the year ended 29 February 2020.

9.3.1 Explain why the Companies Act makes it a requirement for public companies to be audited by an independent auditor. Give ONE reason. Any ONE reason

Unbiased view presented.

Separation between management and ownership – interest of shareholders are safeguarded.

9.3.2 The audit report is an example of a/an (qualified/unqualified/disclaimer of opinion) audit report. Disclaimer of opinion

9.3.3 Who is the audit report addressed to? Give ONE reason for your answer. Shareholders They are the owners of the company and have appointed the auditors

9.3.4 Explain why it is likely that this audit report will have a negative effect on the value of the shares of this company on the JSE. Any valid explanation

The value of the shares will decrease

Shareholders lose confidence in the company and might sell their shares

Potential shareholders would not want to invest in this company


16

ACTIVITY 10 (Basic knowledge of the activities in the CFS)

Complete the following table. Tick in the correct column. The first one has been done for you.

Description of transaction

Operating activity

Investing activity

Financing activity

1 Buy goods on credit

2 Sell goods to a debtor

3 Debtor settles his account

4 Company raises funds by issuing new shares

5 Place surplus funds in a fixed deposit

6 Purchase more fixed assets

7 Pay a creditor

8 Raise a loan from a bank

9 Repay part of the loan

10 Pay salaries

11 Pay income tax

12 Withdraw funds from a fixed deposit when it matures

13 Receive fee income for services rendered

14 Sell fixed assets that are not needed

15 Company buys back shares from an existing shareholder

ACTIVITY 11 (Cash Flow Statement)

11.1 What is the main purpose of a Cash Flow Statement?

It provides users of financial statements with information on the inflow and outflow

of the cash resources of the company

To see how monies were generated or spent and what the cash flow position is.

To account for the difference in opening and closing bank balances (2)

11.2 Calculate the missing amounts (indicated by a, b, c & d) in the Fixed/Tangible Asset note for the year ended 31 October 2019.

Workings Amount

(10)

a 3 000 000 – 2 500 000 500 000 (2)

b 660 000 x 20% 132 000 (2)

c

660 000 – (b) – 446 000

OR 150 000 – 68 000 82 000

(3)

d 157 500 + 48 000 -55 000

OR 258 000 – 108 000 150 000

(3)


17

11.3 BARBIE LTD

CASH FLOW STATEMENT FOR THE YEAR ENDED 31 OCTOBER 2019

CASH FLOW FROM OPERATING ACTIVITIES 625 000

40

Cash generated from operations 1 985 500

Interest paid (175 500)

Taxation paid (27 500 + 375 000 + 22 500) ( 425 000)

Dividends paid (385 000 + 825 000 – 450 000) ( 760 000)

CASH FLOW FROM INVESTING ACTIVITIES 534 000

Fixed assets purchased (48 000)

Proceeds from sale of fixed assets

(500 000 + 82 000) 582 000

CASH FLOW FROM FINANCING ACTIVITIES 925 000

Proceeds from the sale of shares 300 000

Change in loan (2 000 000 - 1 375 000) 625 000

NET CHANGE IN CASH AND CASH EQUIVALENTS 2 084 000

CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 207 500

CASH AND CASH EQUIVALENTS AT END OF YEAR 2 291 500

11.4

Decisions by

directors

Reason to support John's

opinion

Reason to support directors'

decision

(other than improving cash flow)

Issued more

shares

Dilutes the returns to existing

shareholders

Cheaper option of raising funds as

loans carry interest

Sold fixed

assets

Prevents the company from

benefiting through capital

gains

Unproductive or unused assets will

incur maintenance expenses.

(4)


18

ACTIVITY 12 (Cash Flow Statement; Appropriation account; calculation and interpretation of financial indicators

12.1 RECONCILIATION BETWEEN NET PROFIT BEFORE TAX AND

CASH GENERATED FROM OPERATIONS

Net profit before taxation 540 000

Adjustments in respect of:

Depreciation 207 300

Interest expense 104 000

Operating profit before changes in working capital 851 300

Cash effects of changes in working capital 7 000

Change in inventory (650 000 – 575 000) 75 000

Change in receivables (269 000 – 233 000) (36 000)

Change in payables (404 000 – 372 000) (32 000)

Cash generated from operations 585 300

COBRA LIMITED

CASH FLOW STATEMENT FOR YEAR ENDED 30 APRIL 2019

Cash effects of operating activities 255 400

Cash generated from operations 858 300

Interest paid (104 000)

Dividends paid (224 000 + 128 000) (352 000)

Taxation paid (151 200 – 11 600 + 7 300) (146 900)

Cash effects of investing activities (730 400)

Purchase of fixed assets (1 917 500 + 145 000 + 207 300 – 1 514 400) 744 400

Proceeds from sale of fixed assets 145 000

Investments placed (120 000)

Cash effects of financing activities 231 000

Proceeds of shares issued 576 000

Repurchase of shares (192 000 + 93 000) (285 000)

Repayment of loans (60 000)

Net change in cash & cash equivalents (244 000)

Cash & cash equivalents at beginning of year 105 000

Cash & cash equivalents at end of year 139 000


19

12.2

GENERAL LEDGER OF COBRAH LIMITED

FINAL ACCOUNTS SECTION

Dr APPROPRIATION ACCOUNT Cr

2019 April 30 Income tax 151 200

2019 April 30

Profit and loss

(388 800 + 151 200) 540 000

Dividends on

ordinary shares

(128 000 + 273 000)

401 000


552 000 552 000

12.3 Calculate the: ANSWER

(a) Acid test ratio

279 300 : 787 000

0,4 : 1

(b) Stock turnover rate

2 200 000

½ (575 000 + 650 000)

= 2 200 000

612 500

3,6 times

(c) Debt equity ratio

740 000 : 1 564 800 = 0,5 : 1

(d) Net asset value per share

1 564 800 X 100

2 100 000

74,5 cents


20

(e) Return on shareholders’ equity

388 800 x 100

½ (1 564 800 + 1 286 000) 1

= 388 800 x 100

1 425 400 1

27,3%

12.4 Explain why the shareholders will or will not be satisfied with the dividends, earnings and

returns earned. Quote appropriate financial indicators to support your answer.

The shareholders should be satisfied

DPS: improved from 12 to 22 cents

EPS: improved from 12,5 to 19,9 cents

ROSHE: improved from 19,6% to 27,3% and this exceeds returns on alternative investments.

12.5 Comment on the liquidity of the company. Quote and explain FOUR financial indicators to

support your answer.

Fin. Indicators: Current ratio decreased from 1,6 : 1 to 1,1 : 1

Acid test ratio decreased from 0,6 : 1 to 0,4 : 1

Stock turnover rate has improved from 2,3 to 3,6 times, so stock is selling faster

Debtors collection period improved from 43 days to 24 days

Overall comment:

The acid test ratio indicates a possible problem in liquidity if stock is not sold quickly enough.

However, since the stock turnover rate has improved and debtors are paying faster, the liquidity

is satisfactory.

12.6 Comment on the financial gearing of the company. Explain and quote financial indicators

to support your answer.

Debt equity ratio has decreased from 0,7 : 1 to 0,5 : 1 indicating that the financial risk has

decreased.

The ROTCE of 24,5% is significantly higher than the interest rate on loans which indicates

positive gearing.

The above indicates that the conditions are favourable for using loans to generate profit.

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TUTORING 2020 ACCOUNTING Grade 12 Answers

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