Fixed Assets, Cash Flow Statement, Analysis and Interpretation

Accounting Reconciliations

Directorate: Curriculum FET

ACCOUNTING
Grade 12 Revision
Cash Flow Statement
Financial indicators

8

8

Activity 1: (Taken from March 2015)

FIXED ASSETS, CASH FLOW STATEMENT, ANALYSIS AND INTERPRETATION

(75 marks; 45 minutes)

You are provided with information relating to Classico Limited. The financial year-end is on 31October2014. New shares were issued on the first day of the financial year.
REQUIRED:
1.1 / What is the main purpose of a Cash Flow Statement? / (2)
1.2 / Refer to the fixed asset note under information C.
Calculate the missing amounts (indicated by a, b, c and d) in the fixed/tangible asset note for the year ended 31 October 2014. / (9)
1.3 / Complete the Cash Flow Statement for the year ended 31October2014. Show ALL workings in brackets. / (24)
1.4 / The directors issued more shares and sold fixed assets in order to improve the cash flow. A shareholder, John Meanwell, has criticised them for these decisions.
In each case:
·  Provide a reason to support John's opinion.
·  Other than improving the cash flow, provide a reason to support the directors' decision. / (8)
1.5 / Calculate the following financial indicators on 31 October 2014:
·  Acid-test ratio
·  Earnings per share
·  Return on average shareholders' equity
·  Debt-equity ratio / (4)
(3)
(5)
(3)
1.6 / The directors are proposing that the business operations be expanded in the new financial year. One of the directors suggested that they finance the expansions by taking a loan of R1000000, instead of issuing new shares to the public. Quote and explain TWO financial indicators to support his opinion. / (6)
1.7 / Bongani is a shareholder in Classico Limited. He owns 32000 shares which he purchased two years ago at R4,75 each.
1.7.1 / Calculate the amount of dividends Bongani would earn for the financial year ending 31October2014. / (3)
1.7.2 / Should Bongani be satisfied with the dividend policy of Classico Limited? Quote and explain relevant financial indicators to support your answer. / (4)
1.7.3 / Bongani wants to sell his shares in Classico Ltd and invest his funds in an alternative investment. You disagree with him. Quote and explain ONE relevant financial indicator, other than dividends, to discourage him from selling his shares. Your answer must include the actual figure/ratio/percentage. / (4)
INFORMATION:
A. / The following information was extracted from the Income Statement for the year ended 31 October 2014:
Interest on loan (all capitalised) / 175 500
Income tax / 375 000
Net profit after tax / 975 000
B. / Information extracted from the Balance Sheet:
31 October 2014 / 31 October 2013
Current assets / 4 804 000 / 2 820 000
Inventories / 1437 500 / 1656 250
Trade and other receivables (see D) / 1075 000 / 956 250
Cash and cash equivalents / 2291 500 / 207 500
Ordinary shareholders' equity / 4 450 000 / 4 000 000
Ordinary share capital (see F) / 3450 000 / 3150 000
Retained income / 1 000 000 / 850 000
Loan: Freeport Bank (12% p.a.) / 2000 000 / 1375 000
Current liabilities / 1 450 000 / 1 262 500
Trade and other payables (see E) / 1450 000 / 1262 500
C. / Fixed/Tangible assets:
Land and buildings / Vehicles / Equipment
Carrying value at beginning of financial year / 3000 000 / 660 000 / ?
Cost / 3000 000 / 900 000 / ?
Accumulated depreciation / 0 / (240000) / (52500)
Movements
Additions at cost / 0 / 0 / 48 000
Disposals at carrying value / (a) / (c) / 0
Depreciation / 0 / (b) / (55 500)
Carrying value at end of financial year / 2500 000 / 446 000 / (d)
Cost / 2500 000 / 750 000 / 258 000
Accumulated depreciation / 0 / (304000) / ?
Additional information in respect of fixed assets:
·  A vehicle was sold at its carrying value on the LAST day of the financial year. Depreciation is written off on vehicles at 20% p.a. on the diminishing-balance method.
·  Land and buildings were sold at cost during the financial year.
D. / Trade and other receivables include: / 31 October 2014 / 31 October 2013
SARS: Income tax / R22 500 / 0
E. / Trade and other payables include: / 31 October 2014 / 31 October 2013
SARS: Income tax / 0 / R27 500
Shareholders for dividends / R450 000 / R385 000
F. / Details of ordinary share capital:
·  Ordinary share capital at the beginning of the 2014 financial year consisted of 700000 ordinary shares with a total value of R3150000.
·  On 1 November 2013, 50000 additional shares were issued at R6,00 each.
·  There were no further changes to share capital.
G. / The dividends (interim and final) for the financial year ended 31October2014 amounted to R825000.
H. / Financial indicators for the past two financial years:
31 October 2014 / 31 October 2013
Current ratio / 3,10 : 1 / 2,23 : 1
Acid-test ratio / ? / 0,92 : 1
Earnings per share / ? / 94 cents
Dividends per share / 110 cents / 75 cents
Return on average shareholders' equity / ? / 15%
Debt-equity ratio / ? / 0,34 : 1
Return on average capital employed / 26% / 18%
Net asset value per share / 593 cents / 571 cents
Prices of Classico Ltd shares on the JSE / 950 cents / 725 cents
Interest on fixed deposit / 5,5% / 5,5%
Interest rate on loans / 12% / 12%
75

Activity 2 (Taken from June 2015)

CASH FLOW STATEMENT, INTERPRETATION AND AUDITORS' REPORT (65 marks; 40 minutes)
You are provided with information extracted from the records of Maxie Ltd for the financial year ended 28 February 2015. When financial indicators are required to support answers, you must provide the name of the financial indicator and the actual figure, ratio or percentage.
REQUIRED:
2.1 / Complete the note for Cash Generated from Operations for the year ended 28February2015. / (10)
2.2 / Complete the Cash Flow Statement for the year ended 28February2015.
Some of the figures are entered in the ANSWER BOOK.
Where notes are not required, show ALL workings. / (21)
2.3 / Calculate the following for 2015 (round off calculations to ONE decimal point):
2.3.1 / Current ratio / (3)
2.3.2 / Debt-equity ratio / (3)
2.3.3 / Net asset value per share / (3)
2.4 / On 1March2014 additional shares were issued at R5,00 each. Will the existing shareholders be satisfied with this price? Explain. Quote relevant financial indicators with figures in your explanation. / (5)
2.5 / The directors decided to pay back a large portion of the loan. Do you think that this was a wise decision? Quote TWO relevant financial indicators and figures to support your answer. / (7)
2.6 / Besides paying back the loan, the directors have taken other major decisions that have affected the cash balances. State TWO other major decisions (exceeding R200000) and quote the figures from the Cash Flow Statement. In EACH case, state how the decision will affect the future of the company. / (6)
2.7 / Refer to the extract of the auditors' report (Information G).
2.7.1 / Choose the correct word from those given in brackets. Write down the word and briefly explain your choice.
Maxie Ltd received a/an (unqualified/qualified/disclaimer of opinion) auditors' report. / (3)
2.7.2 / Explain the consequences of this auditors' report for the chief executive officer (CEO) and/or the company. State TWO points. / (4)
INFORMATION:
A. / Extract from the Income Statement for the year ended 28February 2015
R
Depreciation / 178 000
Interest expense / 52 000
Income tax / 93 520
Net profit after income tax / 240 480
B. / Figures obtained from the Balance Sheet and notes on 28February
2015
R / 2014
R
Fixed assets (carrying value) / 2 568 730 / 2 174 390
Financial assets (fixed deposit) / 150 000 / 230 000
Current assets / 413 600 / 496 810
Inventories / 194 600 / 262 000
Trade debtors / 214 000 / 198 000
SARS: Income tax / - / 2 110
Cash and cash equivalents / 5 000 / 34 700
Shareholders' equity / 2 392 480 / 1 848 000
Ordinary share capital / 2 016 000 / 1 520 000
Retained income / 376 480 / 328 000
Non-current liabilities / 500 000 / 800 000
Current liabilities / 239 850 / 253 200
Trade creditors / 124 800 / 165 200
Shareholders for dividends / 96 000 / 88 000
SARS: Income tax / 6 300 / -
Bank overdraft / 12 750 / -
C. / Share capital
·  The business has an authorised share capital of 800 000 ordinary shares.
·  400000 shares were issued before 28 February 2014.
·  On 1March2014 an additional 200000 shares were issued at R5,00 each.
·  On 1September2014 the company repurchased 120000 shares from a dissatisfied shareholder at R4,50 each.
·  After the above transactions there were 480000 shares in issue.
D. / Fixed assets
Extensions to the existing buildings were undertaken during July 2014.
There were no other movements of fixed assets during the financial year.
E. / Dividends
An interim dividend of R60 000 was paid on 30 September 2014.
The final dividend was declared on 28 February 2015.
F. / The following financial indicators were calculated for the past two financial years:
2015 / 2014
Solvency ratio / 4,5 : 1 / 2,8 : 1
Current ratio / ? / 1,9 : 1
Acid-test ratio / 1 : 1 / 0,9 : 1
Debt-equity ratio / ? / 0,4 : 1
Return on average capital employed / 10,2% / 13,2%
Return on shareholders' equity / 11,3% / 11,8%
Net asset value per share / ? / 462 cents
Market price of shares (on the securities exchange) / 512 cents / 490 cents
Current interest rate on loans / 12% / 13%
G. / Extract from the report of the independent auditors
Basis for Opinion
In terms of the company policy on travelling for business purposes, all business travelling arrangements outside the country (international trips) must be approved by the board of directors. The application must be supported by quotations and details of the organisations to be visited on the trip.
During the year the CEO approved three overseas business trips without referring it to the board of directors. Documentation for these trips could not be produced.
Audit Opinion
In our opinion, except for the item described above, the annual financial statements present fairly, in all material respects, the financial position of MaxieLtd as at 28February2015, and its financial performance and cash flows for the year then ended in accordance with IFRS and the Companies Act (Act 61 of 1973) of South Africa.
Snow and White
Chartered Accountants (SA)
Pretoria
28 May 2015
65

Activity 3 (Taken from November 2012)

INTERPRETATION OF COMPANY INFORMATION (70 marks; 40 minutes)

3.1 / Complete the following sentences by using the words in the list below. Write only the word next to the question number (5.1.1–5.1.5) in the ANSWER BOOK.
profitable; solvent; liquid; return; risk/gearing
3.1.1 / A company with total assets exceeding the total liabilities is ...
3.1.2 / A company which relies heavily on loans will have high ...
3.1.3 / A company which controls its income and expenses properly will be ...
5.1.4 / The percentage net income on equity indicates the ... earned by shareholders.
5.1.5 / A company which is able to settle its immediate debts is ... / (10)

See next page for Activity 3.2

3.2 / JANKELO LIMITED
You are provided with information related to Jankelo Ltd. New shares were issued on the first day of the financial year.
REQUIRED:
Use the information below to calculate the following figures or financial indicators for the financial year ended 30 June 2012. Calculate to ONE decimal place where relevant.
3.2.1
3.2.2
3.2.3
3.2.4
3.2.5 / Acid-test ratio
Earnings per share (in cents)
Net asset value per share (in cents)
Percentage return on average shareholders' equity
The figures that will appear in the Cash Flow Statement for:
§  Repayment of loans
§  Proceeds of issue of ordinary shares (Note 26000 shares were issued during the 2012 financial year; no shares were repurchased)
§  Fixed assets purchased (Note that fixed assets with a book value of R105000 were sold at carrying value.) / (4)
(4)
(3)
(5)
(2)
(3)
(6)
INFORMATION RELATING TO JANKELO LTD:
30 JUNE 2012 / 30 JUNE 2011
Sales / R 1 500 000 / R 1 300 000
Depreciation / 40 000 / 32 000
Net profit after tax / 330 000 / 374 000
Ordinary shareholders' equity / 1445 000 / 1133 000
Ordinary share capital
(2012: 180 000 issued shares) / 1 080 000 / 872 000
Retained income / 365 000 / 261 000
Non-current liabilities / 500 000 / 630 000
Fixed/Tangible assets / 1 667 000 / 1 620 000
Current assets (including inventories) / 190 000 / 203 000
Current liabilities / 120 000 / 170 000
Inventories / 110 000 / 135 000
3.3 / FINANCIAL INDICATORS OF TWO COMPANIES
Your friend, James, wants to buy shares in a company which sells running shoes. He asks you for advice and presents you with the following financial indicators of two companies he is considering. Both companies have the same number of shares with the same par values.
KWELA LTD / POMI LTD
Market price per share on the JSE / 750 cents / 885 cents
Net asset value per share / 609 cents / 939 cents
Earnings per share / 410 cents / 176 cents
Dividends per share / 240 cents / 185 cents
% return on shareholders' equity / 21,3% / 11,2%
% return on total capital employed / 32,6% / 13,6%
% interest rate on loans / 15,0% / 15,0%
Debt/Equity ratio / 0,3 : 1 / 2,0 : 1
Current ratio / 6,0 : 1 / 1,5 : 1
Acid-test ratio / 2,8 : 1 / 0,9 : 1
Period for which stock is on hand / 150 days / 88 days
Average debtors' collection period / 53 days / 25 days
REQUIRED:
Explain your answers to the following questions. In each case compare and quote financial indicators of both companies (actual figures, ratios or percentages) to support your answer.
3.3.1 / James is of the opinion that Pomi Ltd is handling its working capital more effectively and is in a better liquidity situation than Kwela Ltd. Explain and quote THREE financial indicators to support his opinion. / (9)
3.3.2 / Consider the use of loans by the two companies:
§  Which company is making more use of loans? Quote a financial indicator for each company.
§  Explain whether or not it was a good idea for that company to make use of loans. Quote ONE financial indicator. / (6)
3.3.3 / Kwela Ltd has a better percentage return, earnings and dividends than Pomi Ltd. Explain and quote THREE financial indicators for each company. / (9)
3.3.4 / The existing shareholders of the two companies hold different opinions of the current market value of their shares.
§  Explain why the existing shareholders of Kwela Ltd are happy with this. Quote a financial indicator/figures to support your answer.
§  Explain why the existing shareholders of Pomi Ltd are very disappointed with this. Quote a financial indicator/figures to support your answer. / (4)
3.4 / AUDIT REPORTS
You are provided with extracts from the independent audit reports of
Kwela Ltd and Pomi Ltd.
Extract from audit report of Kwela Ltd:
In our opinion, the financial statements fairly present, in all material respects, the financial position of this company at 29 February 2012 and the results of their operations and cash flows for the year ended in accordance with International Financial Reporting Standards, and in the manner required by the Companies Act of South Africa.
Extract from audit report of Pomi Ltd:
In our opinion, except for the effects of the company's overvaluation of its fixed assets, the financial statements fairly present the financial position of the company on 29 February 2012 and the results of their operations and cash flows for the year ended in accordance with International Financial Reporting Standards, and in the manner required by the Companies Act of South Africa.
REQUIRED:
Consider the audit reports of Kwela Ltd and Pomi Ltd.
How would these audit reports influence James in deciding in which company to buy shares? Explain in respect of each company. / (5)
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Activity 4 (Taken from November 2013)