Directorate: Curriculum FET

ACCOUNTING

Grade 12 Revision

Cash Flow StatementFinancial indicators

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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 31 October 2014. 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 31 October 2014. 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 R1 000 000, 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 32 000 shares which he purchased two years ago at R4,75 each.

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1.7.1 Calculate the amount of dividends Bongani would earn for the financial year ending 31 October 2014. (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 500Income tax 375 000Net profit after tax 975 000

B. Information extracted from the Balance Sheet:31 October

201431 October

2013Current assets 4 804 000 2 820 000Inventories 1 437 500 1 656 250Trade and other receivables (see D) 1 075 000 956 250Cash and cash equivalents 2 291 500 207 500Ordinary shareholders' equity 4 450 000 4 000 000Ordinary share capital (see F) 3 450 000 3 150 000Retained income 1 000 000 850 000Loan: Freeport Bank (12% p.a.) 2 000 000 1 375 000Current liabilities 1 450 000 1 262 500Trade and other payables (see E) 1 450 000 1 262 500

C. Fixed/Tangible assets:Land and buildings Vehicles Equipment

Carrying value at beginning of financial year 3 000 000 660 000 ?

Cost 3 000 000 900 000 ?Accumulated depreciation 0 (240 000) (52 500)

MovementsAdditions at cost 0 0 48 000Disposals at carrying value (a) (c) 0Depreciation 0 (b) (55 500)

Carrying value at end of financial year 2 500 000 446 000 (d)

Cost 2 500 000 750 000 258 000Accumulated depreciation 0 (304 000) ?

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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.

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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 500Shareholders 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 700 000 ordinary shares with a total value of R3 150 000.

On 1 November 2013, 50 000 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 31 October 2014 amounted to R825 000.

H. Financial indicators for the past two financial years:31 October

201431 October

2013Current ratio 3,10 : 1 2,23 : 1Acid-test ratio ? 0,92 : 1Earnings per share ? 94 centsDividends per share 110 cents 75 centsReturn on average shareholders' equity

? 15%

Debt-equity ratio ? 0,34 : 1Return on average capital employed 26% 18%Net asset value per share 593 cents 571 centsPrices 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%

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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 28 February 2015. (10)

2.2 Complete the Cash Flow Statement for the year ended 28 February 2015.

Some of the figures are entered in the ANSWER BOOK.Where notes are not required, show ALL workings. (21)

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 1 March 2014 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 R200 000) 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)

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INFORMATION:

A. Extract from the Income Statement for the year ended 28 February 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 28 February

2015R

2014R

Fixed assets (carrying value) 2 568 730 2 174 390Financial assets (fixed deposit) 150 000 230 000Current assets 413 600 496 810Inventories 194 600 262 000Trade debtors 214 000 198 000SARS: Income tax - 2 110Cash and cash equivalents 5 000 34 700

Shareholders' equity 2 392 480 1 848 000Ordinary share capital 2 016 000 1 520 000Retained income 376 480 328 000

Non-current liabilities 500 000 800 000Current liabilities 239 850 253 200Trade creditors 124 800 165 200Shareholders for dividends 96 000 88 000SARS: Income tax 6 300 -Bank overdraft 12 750 -

C. Share capital The business has an authorised share capital of 800 000 ordinary shares. 400 000 shares were issued before 28 February 2014. On 1 March 2014 an additional 200 000 shares were issued at R5,00 each. On 1 September 2014 the company repurchased 120 000 shares from a

dissatisfied shareholder at R4,50 each. After the above transactions there were 480 000 shares in issue.

D. Fixed assets

Extensions to the existing buildings were undertaken during July 2014.There were no other movements of fixed assets during the financial year.

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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 Maxie Ltd as at 28 February 2015, 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 WhiteChartered Accountants (SA)Pretoria

28 May 2015

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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

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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 26 000 shares were

issued during the 2012 financial year; no shares were repurchased)

Fixed assets purchased (Note that fixed assets with a book value of R105 000 were sold at carrying value.)

(4)

(4)

(3)

(5)

(2)(3)

(6)

INFORMATION RELATING TO JANKELO LTD:

30 JUNE 2012 30 JUNE 2011Sales R 1 500 000 R 1 300 000Depreciation 40 000 32 000Net profit after tax 330 000 374 000Ordinary shareholders' equity 1 445 000 1 133 000Ordinary share capital(2012: 180 000 issued shares)

1 080 000 872 000

Retained income 365 000 261 000Non-current liabilities 500 000 630 000Fixed/Tangible assets 1 667 000 1 620 000Current assets (including inventories) 190 000 203 000Current liabilities 120 000 170 000Inventories 110 000 135 000

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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 LTDMarket price per share on the JSE 750 cents 885 centsNet asset value per share 609 cents 939 centsEarnings per share 410 cents 176 centsDividends 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 : 1Current ratio 6,0 : 1 1,5 : 1Acid-test ratio 2,8 : 1 0,9 : 1Period for which stock is on hand 150 days 88 daysAverage 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)

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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)

CASH FLOW AND INTERPRETATION OF FINANCIAL STATEMENTS (60 marks; 35 minutes)

You are provided with information for the financial year ended 28 February 2013 for Jumbo Cellphones Ltd, a public company listed on the JSE.

REQUIRED:

4.1 Refer to Information 8 below regarding the special programmes that are published with the financial statements in the annual report.

4.1.1 Why would the directors want to spend money on these programmes? Explain the main benefit of EACH programme for the company. (4)

4.1.2 Apart from the points mentioned above, why would the directors want to mention these programmes in the annual report? Explain. (2)

4.2 Provide the missing figures indicated by A to G in the Cash Flow Statement. Show workings to earn part-marks. (18)

4.3 Calculate the financial indicators below for the financial year ending 28 February 2013. Show all workings to earn part-marks.

4.3.1 Percentage net profit after tax on sales (3)

4.3.2 Debt-equity ratio (3)

4.3.3 Return on average shareholders' equity (ROSHE) (5)

4.4 The directors are of the opinion that the operating efficiency of the company has improved. Quote and explain TWO financial indicators (with figures) to support their opinion. (4)

4.5 The shareholders are happy with their return, earnings and dividends. Quote and explain THREE financial indicators (with figures) to support their opinion. (6)

4.6

4.7

New shares were issued at the beginning of the financial year at R10,00 each. As an existing shareholder, would you be satisfied with this issue price? Quote TWO financial indicators (with figures) to explain your opinion.

A large loan repayment was made. Comment on whether this was a good idea or not. Quote TWO financial indicators (with figures) to

(5)

(4)

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4.8

support your comment.

Apart from the dividends and the loan, what other major decisions by the directors are reflected in the Cash Flow Statement? State TWO major decisions and quote the relevant figures. Also explain how EACH of these decisions would benefit the company in future.

(6)

INFORMATION:

1. The company has an authorised share capital of 2 000 000 ordinary shares. On 28 February 2012 there were 600 000 shares in issue.

2. Information extracted from the 2013 Income Statement:

Sales 6 200 000Depreciation 120 000Interest on loan 168 000Net profit before tax 1 200 000Net profit after tax 840 000

3. Information extracted from the Balance Sheet:

2013 2012Fixed Assets (carrying value) 7 125 000 6 931 000Current Assets 575 000 419 000

Inventories 135 000 80 000Accounts receivable 362 000 328 000SARS (Income tax) - 9 000Cash and cash equivalents 78 000 2 000

TOTAL ASSETS 7 700 000 7 350 000

Shareholders' Equity 5 091 250 4 000 000Ordinary share capital 4 590 000 3 600 000Retained income 501 250 400 000

Non-current Liabilities: Venus Bank (8% p.a.) 2 100 000 2 800 000Current Liabilities 508 750 550 000

Accounts payable 244 500 158 000SARS (Income tax) 28 000 -Shareholders for dividends 236 250 210 000Bank overdraft - 182 000

TOTAL EQUITY AND LIABILITIES 7 700 000 7 350 000

4. On 1 March 2012 150 000 new shares were issued at R10 per share.

5. An interim dividend of 30 cents per share was paid on 30 June 2012.

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6. On 31 December 2012, the directors decided to repurchase 75 000 shares at 1 050 cents per share from a disgruntled shareholder. This shareholder had originally purchased his shares on the JSE at various times and at different prices over the past years.

Information 7 on next page.

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7. The following financial indicators were calculated for the past two years:

2013 2012Net profit after tax on sales ? 11,3%Operating expenses on sales 25% 32%Operating profit on sales 22% 15,8%Return on average shareholders' equity (ROSHE) ? 15,2%Earnings per share (EPS) 114 cents 90 centsDividends per share (DPS) 63 cents 82 centsReturn on average capital employed (ROTCE) 19,6% 15,2%Debt-equity ratio ? 0,7 : 1Interest rate on borrowed funds 8% 8%Net asset value per share (NAV) 754 cents 667 centsMarket value per share 840 cents 820 cents

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8.CASH FLOW STATEMENT FOR YEAR ENDED 28 FEBRUARY 2013

CASH EFFECTS OF OPERATING ACTIVITIES

Cash generated from operations

Interest paid (168 000)

Income tax paid A

Dividends paid B

CASH EFFECTS OF INVESTING ACTIVITIES (314 000)

Fixed assets purchased (400 000)

Proceeds from sale of fixed assets 86 000

CASH EFFECTS OF FINANCING ACTIVITIES

Proceeds of shares issued C

Repurchase of shares D

Increase/Decrease in loans E

NET CHANGE IN CASH AND CASH EQUIVALENTS F

Cash and cash equivalents at beginning of year G

Cash and cash equivalents at end of year 78 000

9. The published annual report reflected that the company had spent money on the following special programmes:

Programme A:Donation of R200 000 to the local neighbourhood committee to combat crime

Programme B:Staff training costing R200 000

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Activity 5 (Taken from November 2014)

FIXED ASSETS, CASH FLOW STATEMENT: INTERPRETATION AND CORPORATE GOVERNANCE (75 marks; 45 minutes)

You are provided with information relating to Meteor Supermarkets Limited, a public company. The financial year-end is 28 February 2014.

REQUIRED:

5.1 Refer to Information E:

Calculate the missing amounts (indicated by a, b and c) in the Fixed/Tangible Asset Note for the year ended 28 February 2014. (12)

5.2 Complete the Cash Flow Statement for the year ended 28 February 2014. Some of the details and figures have been entered in the ANSWER BOOK. Show workings in brackets. (31)

5.3 At the AGM, a shareholder stated that the Cash Flow Statement reflects poor decisions by the directors.

Explain TWO points, with relevant figures, to support his opinion. (4)

5.4 Calculate the following financial indicators for the financial year ended 28 February 2014:

5.4.1 Net asset value per share (3)54.2 Debt-equity ratio (3)

5.5 Comment on the liquidity position of the company. Quote THREE relevant financial indicators (actual figures/ratios/percentages) and their trends. (9)

5.6 The directors decided to increase the loan during the current financial year. Quote TWO financial indicators (actual figures/ratios/percentages) that are relevant to their decision. Explain why this was a good decision, or not. (8)

5.7 The Bakker family owns 740 000 shares in this company. Explain the effect that the repurchase of shares on 31 December 2013 had on their control of the company. Give a calculation(s) to support your answer. (5)

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INFORMATION:

A. Extract from the Income Statement for the year ended 28 February 2014:Interest on loan (all capitalised) 88 500Net profit before tax 1 575 000Income tax 441 000

B. Extract from the Balance Sheet as at:28 Feb. 2014 28 Feb. 2013

Current assets 3 337 300 4 641 000Inventories 818 200 641 000Trade debtors 2 377 600 1 512 000SARS: Income tax 128 000 -Cash and cash equivalents 13 500 2 488 000

Shareholders' equity 8 839 000 7 400 000Ordinary share capital 8 700 000 6 600 000Retained income 139 000 800 000

Mortgage loan: Excel Bank(interest rate: 12,5% p.a.) 908 000 508 000

Current liabilities 2 063 700 1 302 000Trade creditors 678 700 700 000Shareholders for dividends 870 000 480 000Bank overdraft 515 000 -SARS: Income tax - 122 000

C. Shareholders' register:DATE DETAILS

1 March 2013 1 200 000 shares in issue31 March 2013 300 000 shares issued at R8 each31 December 2013 The company bought back 50 000 shares

from a dissatisfied shareholder, S Smit, at R9,50 each. The average price of all shares issued to date was R6 per share.

28 February 2014 1 450 000 shares in issue

D. Dividends for the financial year ending 28 February 2014:Interim dividends paid on 31 August 2013 R750 000Final dividends declared on 28 February 2014 R870 000

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E. Fixed/Tangible assets:LAND AND BUILDINGS

VEHICLES

Carrying value at the beginning of the financial year

2 689 000 1 880 000

Cost 2 689 000 3 250 000Accumulated depreciation - (1 370 000)

MovementsAdditions at cost a 330 000Disposals at carrying value - bDepreciation - c

Carrying value at the end of the financial year

6 740 000

Cost 6 740 000 3 440 000Accumulated depreciation -

Additional information in respect of fixed/tangible assets:

(i) A vehicle was sold for cash at its carrying value on 31 May 2013. The following extract of the vehicle sold was taken from the Fixed Assets Register:Cost price: R140 000 Date purchased: 1 March 2012Rate of depreciation: 20% p.a. on the diminishing-balance method

FINANCIAL YEAR END DEPRECIATION ACCUMULATED DEPRECIATION

28 February 2013 28 000 28 00031 May 2013 5 600 33 600

(ii) A new vehicle, costing R330 000, was purchased and paid for by cheque on 1 January 2014.

(iii) Vehicles are depreciated at 20% p.a. on the diminishing balance method.

(iv) New premises (land and buildings) were acquired during the financial year.

F. Financial indicators:28 Feb. 2014 28 Feb. 2013

Debt-equity ratio ? 0,1 : 1Net asset value per share (NAV) ? 617 centsCurrent ratio 1,6 : 1 3,6 : 1Acid-test ratio 1,2 : 1 3,1 : 1Stock turnover rate 6,8 times p.a. 5,1 times p.a.Debtors' collection period 40 days 35 days% return on average capital employed 18,8% 16,4%

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