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AccountingSpring School 20113rd 7th OctoberLearners Guide


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Accounting Exam Revision Learners Guide

Spring School October 2011

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Brought to you by Page 2

IntroductionHave you heard about Mindset? Mindset Network, a South African non-profit organisation, was

founded in 2002. We develop and distribute quality and contextually relevant educationalresources for use in the schooling, health and vocational sectors. We distribute our materialsthrough various technology platforms like TV broadcasts, the Internet (www.mindset.co.za/learn)and on DVDs. The materials are made available in video, print and in computer-based multimediaformats.

At Mindset we are committed to innovation. In the last two years, we successfully ran a series ofbroadcast events leading up to and in support of the NSC examinations

Now we are proud to announce our 2011 edition of Matric Exam Revision, which began with ourWinter School in July. Weve expanded the broadcast to support you in seven subjects -

Mathematics, Physical Sciences, Life Sciences, Mathematical Literacy, English 1st

AdditionalLanguage, Accounting and Geography.

During our Spring School, you will get exam overviews, study tips on each of the topics we cover,detailed solutions to selected questions from previous examination papers, short question andanswer sessions so you can check you are on track and live phone in programmes so you canwork through more exam questions with an experienced teacher.

Getting the most from Spring SchoolBefore you watch the broadcast of a topic, read through the questions for the topic and try toanswer them without looking up the solut ions. If you get stuck and cant complete the answer

dont panic. Make a note of any questions you have. When watching the Topic session, comparethe approach you took to what the teacher does. Dont just copy the answers down but take noteof the method used.

Make sure you keep this booklet for after Spring School. You can re-do the exam questions youdid not get totally correct and mark your own work by looking up the solutions at the back of thebooklet.

Remember that exam preparation also requires motivation and discipline, so try to stay positive,even when the work appears to be difficult. Every little bit of studying, revision and exam practicewill pay off. You may benefit from working with a friend or a small study group, as long as

everyone is as committed as you are. Mindset believes that the 2011 Spring School programmewill help you achieve the results you want.

If you find Spring School a useful way to revise and prepare for your exams, remember that wewill be running Exam School from 15th October to 22nd November as well. Join us on Saturday15th and 22nd October to go over your Prelim exam questions.
http://www.mindset.co.za/learnhttp://www.mindset.co.za/learnhttp://www.mindset.co.za/learnhttp://www.mindset.co.za/learn


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Programme OutlineThe Mindset Winter School is designed to focus on two subjects each day. For each subject you

will find the following sessions:

Examination OverviewThis is a 15 minute session that gives details of what you can expect in each examinationpaper. Practical guidelines are also given on how to prepare for the day of the exam.

Topics TipsIn this session you will be given a 15 minutes summary of the key ideas you need to know,common errors and study hints to help you prepare for your exams.

Topic Session

An expert teacher will work through specially selected questions from previous exam papers.

Live Phone-inThis is your chance to ask your own questions. So submit your question to the Help Desk andwe might call you back to help you live on TV. All questions you submit will be answered within48 hours as normal.

Spring School Broadcast Schedule

Monday 3rd

October

Tuesday 4th

October

Wednesday 5th

October

Thursday 6th

October

Friday 7th

October

09h30Maths Paper 1:Calculus

English FAL: Paper2

Physical SciencesPaper 1: Waves,Sound and Light

Maths Paper 2:

TrigonometryGraphs and Solving3D Problems

Physical SciencesPaper 2:Electrochemistry

13h00 Lunch

13h30Maths Literacy:Shape and Space

Accounting:ManufacturingAccounts

Life Sciences Paper 1:Evolution

Geography:Climatology

Life SciencesPaper 2:EnvironmentalStudies

17h00Maths Paper 1:LinearProgramming

English FAL: Paper3

Physical SciencesPaper 1: Mechanics

Maths Paper 2:TrigonometryEquations andIdentities

Physical SciencesPaper 2: OrganicChemistry

19h00Maths Literacy:Data Handling

Accounting: CashFlow andInterpreting

Statements

Life Sciences Paper 1:DNA & RNA

Geography:Geomorphology

Life SciencesPaper 2: LifeProcesses

21h00Maths Paper 1:Functions

English FAL: Paper1

Physical SciencesPaper 1: Electricityand Magnetism

Maths Paper 2: Co-ordinate Geometryand Transformations

Physical SciencesPaper 2: Ratesand ChemicalEquilibrium

23h00Maths Literacy:Financial Maths

Accounting:FinancialStatements

Life Sciences Paper 1:Genetics

Geography: MapworkLife SciencesPaper 2:Reproduction

01h00 Broadcast Ends


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Topic Tips for Cash Flow Statement and Analysis of Ratios

Overview Cash Flow Statement and Notes Interpretation of Financial Statements

Summary of Ratios

Cash Flow Statement and Notes

Key Concepts

Objective of the Cash Flow Statement

TO PROVIDE USERS OF FINANCIAL STATEMENTS WITHINFORMATION OF ALL FINANCIAL RESOURCES DURING THEPERIOD - IN PARTICULAR DETAILS OF CASH GENERATED ORUTILISED BY OPERATING, INVESTING AND FINANCINGACTIVITIES

Operating Activities

Cash effects of operating activities are the most common source ofcash for a company. It does not only involve the buying and selling ofinventory, but also includes transactions such as payments to

creditors, receipt from debtors and paying expenses.Investing Activities

Financing Activities

Cash effects of financing activities involve the changes in funding ofthe growth and development of the company This includes raising

capital, raising loans and the repayment of loans.

Information for the three activities is sourced from the Income Statement/Balance Sheetand notes

Cash effects of investing activities involve the changes to fixedassets such as the buying and selling of land, buildings, equipmentand vehicles and financial assets (matured / placed)


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THE THREE ACTIVITIES AS REFLECTED IN THE FINANCIAL STATEMENTSINCOME STATEMENT

Sales XXCost of Sales (XX)

Gross Profit XXOther operating income XX

X xxX xx

Gross operating income XX

Operating expenses (XX)Operating ActivitiesX xx

X xxDepreciation

Operating profit XXInterest income X

Profit before interest expense XXInterest expense / financing cost (X)

Net profit before tax XXTaxation (XX)

Net profit after tax for the year XX


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BALANCE SHEET

ASSETS Notes 20.2 20.1

Non - current assets XX XX

Tangible assets 3 XX XX Investing activitiesFinancial assets-Fixed Deposit XX XX Investing activities

Current Assets XX XX

Inventories (Stock) 4 XX XX Operating activitiesTrade and other receivables (Debtors) 5 XX XX operating activitiesCash and cash equivalents 7 XX XX Flow of cash

Total assets XX XX

EQUITY AND LIABILITIES

Share capital and reserves XX XXOrdinary share capital 7 XX XX

Financing activitiesShare premium XX XX

Retained Income 8 XX XX Operating Activities - dividends

Non- current liabilities XX XX

Mortgage loan XX XX Financing activities

Loan XX XX Financing activities

Current Liabilities XX XX

Trade and other payable (Creditors) 9 XX XX Operating Activities

Bank overdraft ( if overdrawn) XX XX Flow of cash

Total equity and liabilities XXX XX

Note 1 - Reconciliation between profit before taxation and cash generatedfrom operations

Calculation for the purchase and sale of fixed assets

Common ErrorsWhen to bracket and not to bracket the amountsCalculation of:

Purchase/sale of assetNet profit before tax for note1Increase/decrease of Inventories/debtors/creditorsIncrease in share capitalProceeds/repayment of loans

Study Hints

Know the format of the Financial Statements (Income Statement and Balance sheet) tosource information to complete the Cash Flow Statement

Know the format of the Cash Flow Statement and NotesIf Net Profit before tax is not given draw up an Appropriation account

CASH FLOW STATEMENT


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Name of company___________________________________

CASH FLOW STATEMENT FOR THE YEAR ENDED.

Notes RCash effects of operating activities

Cash generated/utilised from operations 1Interest paidDividends paid 3Income tax paid 4

Cash effects of investing activities

Purchase of fixed assets 5Proceeds from sale of fixed assetsInvestments matured/placed

Cash effects of financing activities

Proceeds from shares issuedProceeds from long term loansPayment of long term loans

Net change in cash and cash equivalents 2

Cash and cash equivalents at beginning of the year 2

Cash and cash equivalents at end of the year 2


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NOTES TO THE CASH FLOW STATEMENT

1. Reconciliation between profit before taxation andCash generated from operations

Profit before taxationAdjustments i.r.o.

DepreciationInterest expense

Operating profit before changes in working capitalCash effects of changes in working capital

Changes in inventory

Changes in debtors

Changes in creditorsCash generated/utilised from operations

2. Cash and cash equivalents Net change Year 2 Year 1

Bank *Cash floatPetty cash

* Bank overdraft ( ) bracket

3. Dividends paid

Dividends for the year as reflected in financial statementsBalance at the beginning of yearBalance at the end of current year

Dividends paid

4. Taxation paid

Income Tax for the year as reflected in financial statements

Balance at the beginning of yearBalance at the end of current year

Taxation paid

5. Tangible assets purchased / Fixed assets purchased /Property, plant and equipment purchased

Land and buildingsEquipmentVehicles


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Interpretation of Financial Statements

Key Concepts

Calculations done to determineOperating efficiencyProfitabilityLiquidityReturnsSolvencyRisk

Know all the formulae and also know how to apply them to a given question

Common ErrorsApplying the wrong formulae/amounts to given questions

Where comments are required, the comments are not appropriate or incorrect

Study HintsKnow all the formulae and also know how to apply them to a given questionWhen answering the question

Show the formulaShow calculationsObtain the result/answer from the calculationComment on your answer /result


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SUMMARY OF RATIOS

1. Gross Profit % on Sales

Gross Profit X 100 Profitability/Operating efficiencySales 1

2. Gross Profit % on Cost of SalesGross Profit

X100 Profitability/Operating efficiency

Cost of Sales 1

3. Net Profit % before Tax on SalesNet Profit before Tax


Sales 1

4. Net Profit % after Tax on SalesNet Profit after Tax


Sales 1

5. Operating expenses % on SalesOperating expenses


Sales 1

6. Current RatioCurrent Assets : Current Liabilities Liquidity/Operating efficiency

7. Acid test RatioCurrent Assets - Inventory : Current Liabilities Liquidity/Operating efficiency

8. Rate of Stock TurnoverCost of Sales

Liquidity/Operating efficiencyAverage Stock

9. Number of Months stock on handAverage Stock

X12

Liquidity/Operating efficiencyCost of Sales 1

10. Average Debtors collection periodAverage debtors

X365

Liquidity/Operating efficiency/RiskCredit Sales 1

11. Average Creditors paymentAverage Creditors

X365

Liquidity/Operating efficiency/RiskCredit Purchases 1


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12. Net Current assetsCurrent Assets Current Liabilities Profitability/Solvency

13. Solvency RatioTotal Assets : Total Liabilities Profitability/Solvency

14. Solvency Amount (NET ASSETS)

Total Assets - Total Liabilities Profitability/Solvency

15. Profitability on total assetsNet Profit after Tax

X100 Profitability/

Operating efficiency/ReturnsTotal assets 1

16. Return on Shareholders Equity (ROSHE)Net Profit after Tax

X100 Profitability/Operating efficiency/ Returns

Average Shareholders equity 1

17. Return on average capital employed (ROTCE)Net Profit before Tax + Interest on Loan

X100 Profitability/

Operating efficiency/ReturnsAverage Capital employed 1

18. Earnings per shareNet Profit after Tax

X100 Profitability/

Operating efficiency/ReturnsNumber of issued shares 119. Dividends per shareDividends paid and declared

X100 Profitability/

Operating efficiency/ReturnsNumber of issued shares 1

20. Gearing Ratio/Debt Equity ratioNon current Liabilities : Shareholders Equity Risk

21. Net Asset value per ShareShareholders Equity

X100 Profitability/

Operating efficiency/ReturnsNumber of issued shares 1


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Topic 1: Cash Flow Statement and Analysis of Ratios

QUESTION 1 Cash Flow Statement and Interpretation

(Adapted from March 2010 Question 5) (70 marks; 45 minutes)

You are provided with information relating to Zee Limited, a public company. Thecompany issued additional shares half-way through the year, 31 August 2009.

REQUIRED:

Study the information provided and answers the question which follows:

1.1 Prepare the Appropriation Account on 28 February 2010. (11)

1.2 Complete the Cash Flow Statement for the year ended28 February 2010. (23)

1.3 Calculate the following for 2010:1.3.1 Rate of stock turnover (4)1.3.2 Debt Equity ratio (3)1.3.3 % Return on average shareholders equity (5)

1.4 The Cash Flow Statement reflects some important decisions that havebeen taken by the directors during the current financial period.

Explain three of these decisions and their effect on the company.Explain whether these decisions are good ones or not and quote figuresto support your answer. (9)

1.5 One of the directors is of the opinion that the company should makemore use of loans. Do you agree? Quote two relevant financialindicators to support your answer. (5)

1.6 The directors feel that the shareholders should be satisfied with theperformance of the company. Do you agree? Comment on thedividends, earnings and % return earned by the shareholders in the2010 financial year. Quote financial indicators (actual ratios or

percentages) to support your comments. (10)

The following financial indicators were calculated:

2010 2009

Earnings per share 23 cents 40 centsDividends per share 35 cents 25 centsReturn on Average Capital Employed 31,7% 35%Return on Average Shareholders Equity ? 55%Net Asset value per share 61,43cents 119 centsDebt Equity ratio ? 0,5:1


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INFORMATION:

1. EXTRACT FROM THE INCOME STATEMENT FOR THE YEARENDED 28 FEBRUARY 2010

Cost of Sales R1 330 000

Depreciation 56 000

Disposal of fixed assets (book value R1 047 000) 0

Interest expense (78 750)

Net profit before tax 747 000

Income tax 224 000

2. EXTRACT FROM THE BALANCE SHEET ON 28 FEBRUARY 2010

2010 2009

R R

Ordinary shareholders equity 1 966 000 768 000

Ordinary share capital (par value 50 cents) 1 600 000 700 000

Share premium 200 000 0

Retained Income 166 000 68 000

Long Term liabilities (15% p.a.) 125 000 940 000

Investment in fixed deposit 80 000 330 000

Inventories 210 000 175 000

Debtors 140 000 112 000

Creditors 142 100 82 250

Bank (favourable balance) ? -

Bank overdraft - 922 000

Fixed/tangible Assets 1 928 600 2 937 600

SARS Income Tax 45 000 Dr 17 500 CrShareholders for Dividends 320 000 175 000

70


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Learner Answer book

QUESTION 1

1.1 General Ledger of Zee Limited

Final Accounts Section

APPROPRIATION ACCOUNT

11


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1.2

ZEE LIMITED

CASH-FLOW STATEMENT FOR THE YEAR ENDED 28 FEBRUARY 2010

Cash effects of operating activities

Cash generated from operations (Note 1)

Interest paid

Dividends paid

Cash effects of investing activities

Purchase of fixed assets

Proceeds of sale of fixed assets

Cash effects of financing activities

Net change in cash equivalents

Cash equivalents beginning of year (922 000)

Cash equivalents end of year

23


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NOTES TO THE CASH FLOW STATEMENT

1. Reconciliation between profit before taxation and

Cash generated from operationsProfit before taxationAdjustments i.r.o.

DepreciationInterest expense

Operating profit before changes in working capitalCash effects of changes in working capital

Changes in inventory

Changes in debtorsChanges in creditors

Cash generated/utilised from operations

2. Cash and cash equivalents Net change Year 2 Year 1

Bank *Cash floatPetty cash

* Bank overdraft ( ) bracket

3. Dividends paidDividends for the year as reflected in financial statementsBalance at the beginning of yearBalance at the end of current year

Dividends paid

4. Taxation paid

Income Tax for the year as reflected in financial statementsBalance at the beginning of year

Balance at the end of current yearTaxation paid

5. Tangible assets purchased / Fixed assets purchased /Property, plant and equipment purchased

Land and buildingsEquipmentVehicles

3. Fixed assets / Tangible assets /Property, plant and equipment

Land and Vehicles Equipment


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buildings

Cost

Accumulated depreciationCarrying value end of previous year

MovementsAdditions at costDisposals at carrying valueDepreciation for the year

Carrying value end of current year

CostAccumulated depreciation

Carrying value end of current year


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Topic Tips for Financial Statements

Overview Income Statement Balance Sheet

Income Statement

Key Concepts

Income vsExpenses

Profit / Loss

GAAP (Genarally accepted accounting principles) matching

Common Errors Incorrect format

Foreign items i.e. assets and liabilities

Calculations not shown in brackets

Balance Sheet

Key Concepts

Assets = Owner's equity + Liabilities

Non - current assets VS Current assets

Non - current liabilities VS Current liabilities

GAAP

Common Errors

Incorrect format

Foreign items i.e. Income statement items

Study Hints

Begin with the given information from the Pre-adjustment trial balance. (nominal accounts)

Time limit per adjustment.


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Topic 2: Financial Statements

Question 1 Balance Sheet

Adapted from March, 2011, Paper 1, Question 5

QUESTION 1: FINANCIAL STATEMENTS OF A COMPANY

You are provided with information relating to Headwork Limited for the year ended30 September 2010.

REQUIRED:

1.1

1.2

Prepare the SARS (income tax) Account in the General Ledger.

Prepare the following on 30 September 2010:

(12)

1.2.1

1.2.2

Notes to the Balance Sheet for: Retained IncomeTrade and other payables

Equity and Liabilities section of the BalanceSheet

(10)(8)

(21)

1.3 Calculate the following on 30 September 2010:

1.3.1

1.3.2

1.4

1.5

Net asset value per share

Debt-equity ratio

You were one of the original shareholders who bought shares at the par valueof R3,00 when the company was established many years ago. You are alsoaware that the price of the shares on the JSE is currently R5,75.

Refer to Information 2B below.

Would you be happy with the issue of the new shares on 1 April at a premiumof R2,80? Explain TWO points, quoting figures orfinancial indicatorsto support your answer.

Comment on risk and gearing of the company. Explain TWO points, quotingfigures or financial indicators to support your answerApart from the financial indicators calculated above, you are also informed of thefollowing:Return on total capital employed 23%Interest rate on loans 13% to 15%

(3)

(3)

(7)

(6)


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INFORMATION:Extract from the financial records of Headwork Ltd on30 September 2010:

Balance Sheet accounts section RRetained income (1 October 2009) 960 000Creditors' control 87 500Expenses payable (accrued) 50 400Bank overdraft ?

Nominal accounts sectionInterest on loan 103 600Rent income 105 980Ordinary share dividends 112 000

2. Adjustments and additional information:

A. The income tax details are as follows:

The amount owed to SARS on 1 October 2009 R11 000 The amount owed to SARS in respect of the previous financial year was

paid on 30 October 2009. The total tax assessment for the 2010 financial year R243 600 First provisional tax payment made on 31 March 2010 R115 000 Second provisional tax payment made on 28 September 2010 ?

Amount owing to SARS on 30 September 2010 R19 400

B. 800 000 shares have been issued before 1 October 2009 (all of these shareswere issued at the par value of R3,00). On 1 April 2010, 100 000 new shares wereissued at a premium of R2,80 per share.

C. Net profit after tax for the year is R626 400.

D. The loan statement received from City Bank reflected the following:

Balance at the beginning of the year R880 000

Interest capitalised R103 600 for the yearMonthly payments to City Bank R 15 800 per monthBalance at the end of the year ?

In terms of the loan agreement, fixed monthly repayments of capital plus interest isto be paid until the loan is settled.

E. Rent income for October 2010 was received in September 2010. The rent wasincreased by R820 per month on 1 July 2010.

F. A final dividend of 20 cents per share was declared at the end of the year. G.

The total current assets amounted to R846 900.H. The current ratio for 2010 is 1,8 : 1.


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Learner Answer Book

1.1

1.2.1


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1.2.1


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Question 2 Income StatementAdapted from November, 2008, Paper 1, Question 4

COMPANY REPORTING

2.1 INCOME STATEMENT

You are provided with information relating to Samora Sports Limited. The companysells sports equipment and repairs equipment for their customers.

REQUIRED:

Prepare the Income Statement for the year ended 30 June 2008 after taking all theadjustments and additional information into account. (50)

INFORMATION:

1. Figures extracted from the Pre-Adjustment Trial Balance on 30 June 2008:

Ordinary share capital (R5 par value) R 1 200 000Fixed deposit 160 000Trading stock 215 000Debtors control 39 090Equipment (for office and shop) 224 000Accumulated depreciation on office and shop

e ui ment 130 000Mortgage loan from Credbank 281 200Sales 1 703 200Debtors allowances 17 000Cost of sales ?Service fee income (in respect of repair services) 297 140Rent income 105 000Interest income 11 200Salaries and wages 234 750Em lo ers' contributions to Pension Fund and UIF 53 200Audit fees 30 000

Directors fees 230 000Consumable stores 51 100Bank charges 5 240Sundry expenses ?


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2. Adjustments and additional information:

The auditors have identified the following errors or omissions:

2.1 The auditors are owed a further R28 000 after completing the audit.

2.2 Bank charges of R310 reflected on the June 2008 bank statement have notyet been entered in the books.

2.3 A credit note issued to a debtor, A Mona, dated 28 June 2008 wasnot recorded in the books. The credit note was for:

Goods returned by A Mona, R 6 200 (the cost was R4 800) Price reduction on unsatisfactory repair of a tennis racket, R540

2.4 The stock count on 30 June 2008 revealed the following on hand: Trading stock, R202 000 Consumable stores, R900

2.5 An employee was left out of the Salaries Journal for June 2008. The detailsfrom his pay-slip were:

The business contributions were: Pension Fund: 10,5% of gross salary UIF: Rand-for-rand basis

2.6 The tenant paid the July and August rent in June 2008.The rent was increased by R700 per month on 1 January 2008.

2.7 Provide for depreciation on office and shop equipment at 10% p.a. on the

diminishing-balance method. Note that new shop equipment costing R30 000was purchased half-way through the financial year (this was properly recorded).

Gross salary R6 000PAYE deduction (18%) (1 080)Pension deduction (7,5%) (450)UIF (60)

Net salary R4 410


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2.8 Interest on the loan was capitalised. The loan statement from Credbank on30 June 2008 reflects the following:

CREDBANKLoan statement on 30 June 2008

Balance on 1 July 2007 R332 800

Interest charged ?

Monthly payments to Credbank in terms of the loanagreement (12 months x R4 300) R 51 600

Balance on 30 June 2008 R326 000

The interest expense for the year has not yet been entered in the books.

2.9 Use the following percentages to calculate the missing figures: Mark-up % achieved: 60% on cost Operating profit on sales: 20% Income tax rate: 30% of net profit


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Learner Answer Book

2.1 SAMORA SPORTS LIMITEDINCOME STATEMENT FOR THE YEAR ENDED 30 JUNE 2008

Sales

Cost of sales

Gross profit

Other income

Service fee income

Rent income

Operating expenses

Salaries and wages

Employer's contributions

Audit fees

Director's fees

Consumable stores

Bank charges

Sundry expenses

Operating profit

Net profit before tax

Income tax

Net profit after tax


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Topic Tips for Manufacturing Accounts

Overview of LEDGER ACCOUNTS

Direct / Raw Material stockWork in Process stock STOCK ACCOUNTSFinished Goods stockConsumable stores stock

Direct MaterialFactory OverheadsDirect Labour COSTS ACCOUNTSSelling & Distribution

Administration

HEEDAS MANUFACTURERSNOTES TO THE FINANCIAL STATEMENTS

1. Direct material costs

Opening stockNet purchases

Carriage on purchasesCustom duties

Closing stock

Direct material cost

2. Direct labour costs

Factory wagesPension Fund ContributionsMedical Aid ContributionsUIF Contributions

Direct labour cost

3. Factory overhead costs

Indirect materialIndirect labourDepreciation: factory plantInsuranceUnemployment Insurance fund contributionsSalaries ETC


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4. Cost of finished goods sold

Opening stock of finished goodsCost of finished goods produced during the year

Debtors Allowances / Sales returns

Closing stock of finished goods

Cost of finished goods sold

HEEDAS MANUFACTURERSPRODUCTION COST STATEMENT FOR THE YEAR ENDED 31 DECEMBER2010

Notes R

Direct costs

Direct material costs 1Direct labour costs 2

Factory overhead costs 3

Total manufacturing costsWork-in-process at beginning of the year

Work-in-process at end of the yearCost of production of finished goods

Key Concepts

Direct materials

Direct labour

Factory Overheads

Ratios

Theory

Common Errors Foreign items e.g. selling and distribution and admin costs

Not apportioning the various expenses

Adding the work in process at the end of year

No calculations shown

Study Hints

Make sure you understand your ledger accounts

Always show calculations

Look at floor space when apportioning expenses

Make sure you learn your ratios. Break even point


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Topic 3: Manufacturing Accounts

Question 1 MANUFACTURING (50 marks; 30 minutes)

Gauteng department of education Prelim 2009 Question 3

1.1 PRODUCTION COST STATEMENT & PERIODIC STOCK

You are provided with information relating to Shaids Shoe Manufacturers for thefinancial year ended 31 December 2008.

The business makes shoes, and sells these at a mark-up of 50% on cost. They usethe perpetual inventory system for finished goods and periodic system for rawmaterials and indirect materials.

REQUIRED:

1.1.1 Prepare the notes to calculate the Direct materials cost and factoryoverhead cost (24)

1.1.2 Prepare the Production Cost Statement for the year ended 31 December (12)

INFORMATION:1. The following balances appeared, amongst others, in the ledger at the

beginning and end of the financial year.

1 January2008

31 December2008

Raw materials stock 360 000 ?Work-in-process stock 68 200 ?Finished goods stock 750 000 110 000Factory Indirect materials stock 64 000 27 000

2. Transactions during the year:

Raw materials purchased on credit, R490 000 Raw materials purchased for cash, R356 000

Raw materials issued for production, R540 000

Raw materials donated by the factory to the local school, R10 000

Cost of transporting raw materials to the factory, R29 500

Factory indirect materials bought for cash, 79 000

Factory indirect materials returned to suppliers, R12 000

Wages paid to factory workers who make the shoes, R756 000

Salary paid to employees, R478 000 Included in this amount is thesalary of the factory foremen R120 000

Commission on sales, R90 000 all sales are subject to acommission of 3%)


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Maintenance of factory equipment paid, R23 000

Water & electricity paid, R49 000 (this is to be split between thefactory ,office and sales sections in the ratio 4:2:1 respectively)

Rent paid, R157 200 (this is to be split across the variousdepartments according to floor area - the factory accounts for 70%out of the total area) The rent for January 2009 was paid inadvance and the lease agreement provides for an annual 10%increase of rental effective from 1 January each year. ShaidsShoe Manufacturers complies with the lease agreement.

Depreciation on factory equipment amounts to R72 400.

Bad debts, R34 000

1.2 You are provided with information relating to Gcenaphi Heaters, a businesswhich manufactures only one type of heaterREQUIRED:

Use the information to

1.2.1 Calculate the gross profit (3)

1.2.2 Explain why it is important for a manufacturing business to calculateunit costs and a break -even-point each month (3)

1.2.3 Calculate the variable cost per unit for 2008(4)

1.2.4 Calculate the break-even point for 2008 (4)

INFORMATION:

7. Number of heaters sold during the year, 10 000.

8. Number of unsold heaters at the beginning of the financial year?? (The cost per

unit of these heaters were the same as those that were produced this year.)

9. Administration costs for the year amounted to R240 000.

10. Selling and distribution costs for the year amounted to R117 000.

11. Number of unsold heaters at the end of the financial year, 300. GcenaphiHeaters use the FIFO method of valuation of finished goods [50]

1. There was no work-in-process at the beginning or end of the financial year

2. All heaters were sold at a fixed price of R114 each in 2008.

3. Direct material cost per heater, R25.

4.5.6.

Prime cost per heater, R55.Total cost of production of finished heaters, R760 000.Number of heaters completed during the year, 10 000.


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Learner Answer Book

Question 1 MANUFACTURING (50 marks; 30 minutes)

1.1.1.CALCULATION OF RAW MATERIALS COST

8

CALCULATION OF FACTORY OVERHEAD COST

16

1.1.2 SHAIDS SHOE MANUFACTURERSPRODUCTION COST STATEMENT FOR YEAR ENDED 31 DECEMBER 2008

12


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Question 2 Manufacturing (45 marks; 25 minutes)Adapted from November 2008 Gauteng prelim Question 5

2.1 NERD MANUFACTURERS (32 marks)Nerd Manufactures makes school tracksuits and sell these at a mark up of 50 % oncost.REQUIRED:

2.1.1 Prepare the Production Cost Statement of NERD Manufacturers forthe year ended 31 August 2008. Only the note for factory overheadcosts is required. Workings must be shown in brackets where notesare not required so that part marks can be awarded. (28)

2.1.2 The owner, D. Dunn, is of the opinion that employees are not using

the raw materials very effectively or track suits are being stolen inthe factory. Recommend TWO internal control measures that couldbe implemented by management to solve these problems. (4)

INFORMATION:

NERD MANUFACTURERS

Balances on 1 September 2007:

Factory plant 260 000

Accumulated depreciation on factory plant 84 000

Stocks on hand :

Raw materials 14 700

Work in progress 3 400

Finished goods 4 200

Consumable stores stock 1 600

Transactions for the year ended 31 August 2008:

Factory wages: Direct 156 000

Indirect 9 200

Purchases: Raw materials 136 000

Factory plant purchased ( 1 February 2008 ) 140 000Rent 24 000

Factory foremans salary 86 000

Carriage on raw materials purchased 5 800

Insurance 5 600

Consumable stores purchased on credit 5 900

Other Factory overheads 25 200


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ADDITIONAL INFORMATION1. Inventory on hand at 31 August 2008 is as follows:

Raw materials R 6 000

Finished goods R12 600Work in progress R10 870Consumable stores R 2 100

2. The factory plant is depreciated at 15% p.a. on the carrying value.

3. 80% of the consumable stores is used in the factory and the balance usedin sales

4. The rent must be apportioned as follows: Factory 60% and the rest equallybetween sales and administration.

5. Insurance must be divided among the factory, sales and office inproportion to the floor area which is currently in the ratio 4:2:1 respectively.

2.2 SOWETO SHOE FACTORY (13 marks)SOWETO SHOE FACTORY manufactures sport shoes. The factory produced 36000 pairs of shoes during the year and all were sold. There was no work in progressstock either at the beginning or at the end of the year.REQUIRED:

2.2.1 Calculate the unit cost of production. (3)

2.2.2 Calculate the number of pairs of shoes that must be produced andsold to break even. (10)

INFORMATION extracted from the Production Cost Statement for the yearended 29 February 2008.

Direct material cost R1 980 000

Direct labour cost 2 592 000

Factory overheat cost 864 000

Total cost of production 5 436 000

Information from the Income Statement for the year ended 29 February 2008Sales R8 964 000

Cost of sales 5 436 000

Administration cost (all fixed costs) 540 000

Selling and distribution cost (all Variable costs) 792 000

Net profit for the year 2 196 000


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Solutions to Topic 1 Cash Flow Statement and Analysis of Ratios

QUESTION 1

1.1 General Ledger of Zee Limited

Final Accounts Section

APPROPRIATION ACCOUNT

2010

Feb 28

Income Tax 224 0002010

Feb

28

Profit and Loss 747 000

Ordinary sharedividends 425 000 Retained Income 68 000

Retained Income 166 000

815 000 815 000

11


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1.2

ZEE LIMITED

CASH-FLOW STATEMENT FOR THE YEAR ENDED 28 FEBRUARY 2010

Cash effects of operating activities 233 350Cash generated from operations (Note 1) 878 600

Interest paid (78 750)

Dividends paid (175 000 + 425 000 320 000) (280 000)

Income tax paid (17 500 + 224 000 + 45 000 ) (286 500)

Cash effects of investing activities 1203 000Purchase of fixed assets(56 000 + 1 928 600 + 1 047 000 2 937 600 )

(94 000)

Proceeds of sale of fixed assets 1 047 000

Proceeds of financial assets matured(330 000 80 000 )

250 000

Cash effects of financing activities 285 000

Proceeds of issue of shares (1 800 000

700 000

)

1 100 000Repayment of long-term loan (940 000 125 000 ) (815 000)

Net change in cash equivalents 1 721 350Cash equivalents beginning of year (922 000)

Cash equivalents end of year 799 350

23


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1.3.1 Rate of stock turnover

Cost of SalesAverage Stock

1 330 000 (210 000 + 175 000)/2

61,43 4

1.3.2 Debt/Equity Ratio

Non-current liabilities: Shareholders Equity

125 000 : 1 966 000

= 0,06:1

3

1.3.3 % Return on average shareholders equity

Net profit after tax x 100Average shareholders equity 1

747 000 224 000 x 100(1 966 000 + 768 000) / 2 1

523 000 x 1001 367 000 1

38,25% 5

1.4 Excellent explanation with figures = 3 marks; good/satisfactory explanation withfigures= 2 marks; satisfactory explanation with no figure = 1 mark;incorrect explanation = 0 marks

Issued shares generated R1 100 000 in order to repay loanand eliminate bank overdraft

Sold fixed assets generated R1 047 000 in order to repayloan and eliminate bank overdraft

Used cash generated from issuing of shares and sale of fixed

assets to repay loan R815 000 to improve cash flow9


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1.5 Yes

Two relevant financial indicators

The debt : equity ratio decreased from 0,5:1 to 0,06:1(shareholders equity greatly exceeds long-term debts)

Return on capital employed is 31,7% which exceeds theinterest rate of 15% indicating positive gearing.

The risk has been reduced.5

1.6 Yes/No

Earnings per share decreased from 40 cents 23 cents (7

cents) Dividends increased from 25 cents 35 cents (10 cents). This year dividends were 12 cents higher than the earnings

which indicate that the dividends are being supported byaccumulated funds and that less funds are being retained forthe future.

% return on shareholders equity decreased substantially from55% to 38,25%.

The return still exceeds returns on alternative investments. 10


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Solutions to Topic 2: Financial Statements

Question 1 Balance Sheet

1.1 General Ledger of Headwork LimitedSars(Income tax)

2009Oct 30 Bank 11 000

2009Oct 1 Balance b/d 11 000

Bank115 000

2010Sept 30 Income tax 243 600

Bank109 200

Balance c/d 19 400

254 600 254 600

2010Oct 1

Balanceb/d

19 400

1.2.1 NOTES TO THE BALANCE SHEET

Note 1. Retained income

Balance at the beginning of the year 960 000

Net profit after tax 626 400

Dividends for the year (292 000)

Interim 112 000

Final (900 000 x 20c) 180 000

Balance at the end of the year 1 294 400

Note 2. Trade and other payables

Trade creditors 87 500

Expenses payable (accrued) 50 400

Income received in advance (Deferred income) 8 720

SARS (Income tax) 19 400

Shareholders for dividends 180 000

346 020


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1.2.2

BALANCE SHEET ON 30 SEPTEMBER 2010

ASSETS R

Fixed assets 4 606 000

Current assets 846 900

TOTAL ASSETS 5 452 900

EQUITY AND LIABILITIES

Shareholders' equity 4 274 400

Ordinary share capital 900 000 x R3,00 2 700 000

Share premium 100 000 x R2,80 280 000

Retained income Note

1

1 294 400

Non-current liabilities 708 000

Loan from City Bank 708 000

880 000 + 103 600 189 600 86 000

Current liabilities 470 500

Trade and other payables

Note 2

346 020

Current portion of loan (may be shown in Note 2) 86 000

Bank overdraft 38 480

TOTAL EQUITY AND LIABILITIES 5 452 900


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1.3.1 Net asset value per share.

R4 274 400 / 900 000 shares = 474,9 cents

1.3.2 Debt-equity ratio.

R708 000 : R4 274 400 = 0,16 : 1 or 0,2 : 1ORR794 000 : R4 274 400 = 0,19 : 1 or 0,2 : 1

1.4

Yes / No: Yes

Explanation: TWO points Quote figuresAny TWO valid points e.g.

The issue price of R5,80 is higher than the value of the share according to the books (NAVof R4,75) this enhances the value of the share in the books.

The issue price of R5,80 is approximately the same as the market price of R5,75 thedirectors have sold the new shares at a realistic value.

The shareholders who bought the shares when the company started took a risk at avalue of R3,00 the public is now prepared to pay R5,75 for those shares this isfair to the existing shareholders because the new shareholders are paying a realisticprice without taking the initial risk.

1.5TWO points Quote figuresAny TWO valid points e.g.

The debt-equity ratio of 0,2 : 1 is low, which indicates the company is not heavily funded

by equity which means it is in a low-risk position.

The ROTCE of 23% exceeds the interest rates of between 13% and 15% which meansthat the company can gear up its returns to shareholders by making use of borrowedfunds.


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Question 2 Income Statement

INCOME STATEMENT FOR THE YEAR ENDED 30 JUNE 2008

Sales 1 703 200 17 000 6 200 1 680 000Cost of sales (1 050 000)

Gross profit 630 000Other income 386 000

Service fee income 297 140 540 296 600Rent income 105 000 15 600 89 400

1 016 000Operating expenses (680 000)Salaries and wages 234 750 + 6 000 240 750Employer's contributions 53 200 + 690 53 890Audit fees 30 000 + 28 000 58 000Directors' fees 230 000Consumable stores 51 100 900 50 200Bank charges 5 240 + 310 5 550Sundry expenses 15 910

Trading stock deficit 13 000 + 4 800 17 800Depreciation 6 400 + 1 500 / 4 700 + 3 200 7 900

Operating profit 336 000

Interest income 11 200347 200

Interest expense (44 800)Net profit before tax302 400Income tax (90 720)Net profit after tax 211 680


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Solutions to Topic 3 Manufacturing

Question 1 MANUFACTURINGMANUFACTURING (50 marks; 30 minutes)1.1.1.

CALCULATION OF RAW MATERIALS COST

Opening stock 360 000

Purchases(490 000+356 000-10 000) 836 000

Carriage on purchases 29 500

1 225 500Closing stock 685 500

Raw materials issued to production 540 000

8

CALCULATION OF FACTORY OVERHEAD COST

Factory indirect materials (64 000+79 000-12 000-27 000 104 000

Factory maintenance 23 000

Salary to factory foreman 120 000

Water & electricity (/7 x 49 000 ) 28 000

Factory rent (144 000 x 70%) 100 800

Depreciation on factory equipment 72 400

-1 for salesmen's commission/bad debts 448 200 16

1.1.2 SHAIDS SHOE MANUFACTURERSPRODUCTION COST STATEMENT FOR YEAR ENDED 31 DECEMBER 2008

Prime / Direct cost 1 296 000

12

Direct materials cost 540 000 seeDMC

Direct labour cost 756 000

Factory overhead cost448 200

seeFOC

Total manufacturing costs 1 744 200

Work-in-process at the beginning of the year 68 200

1 812 400

Work-in-process at the end of the year 452 400

Cost of production of finished goods 1 360 000


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1.2

1.2.1 Calculate the gross profitSales(10 000xR114) 1 140 000

Cost of sales(10 000x R76) 760 000

Gross profit for the year 380 000

3

1.2.2 Any valid explanationGood answer=3 Satisfactory=2 poor=1 Incorrect=0

To make comparisonsTo identify potential problem cost items in advance

To assess whether it is practical for the business to achieve thedesired production that will result in a profit

3

1.2.3 Calculate the variable cost per unitDirect material+ direct labour + selling and distribution=R25 + R30 + R11,70

=R66,70

4

1.2.4 F/C/contribution per unit

= 450 000/(114-66,7) accept if same as 3.2.3

=450 000/47,3

=9513 OR 9514 4


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Question 2 Manufacturing

QUESTION 2 NERD MANUFACTURERS

Production Cost Statement for the year ended 31 August 2008.DIRECT COSTS 306 500

Direct material costs(14 700 + 136 000 + 5 800 6 000 )

150 500

Direct labour costs 156 000

Factory overhead costs 180 970

Total manufacturing cost 487 470

Work in progress at the beginning of the year 3 400

490 870

Work in progress at the end of the year (10 870)

Cost of production of finished goods 480 000

Note to Financial StatementsFactory overhead costs

Consumable stores(1 600 + 5 900 2 100 ) X 80%

4 320

Indirect labour 9 200

Rent ( 24 000 X 60% ) 14 400

Foremans salary 86 000

Insurance (5 600 X 4/7 ) 3 200

Other Factory overheads 25 200

Depreciation (26 400 + 12 250) 38 650

180 970 28

2.1.2 Two control measures Possible answers:

Regular stock counts of raw materials and finished goods and compareto the ledger.Supervise the usage of raw materials by obtaining correct cutting offabric measurements minimising wastage/ off cuts.Train employees to use raw materials economically.Supervisor monitors the number of units cut from the raw materials.Supervisor to monitor the number of units made by each employee andmake them answerable for shortages.Completed stock should be securely kept in a stock room and not lyingaround on the factory floor. Proper stock records must be maintained. 4


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2.2 Soweto Shoe Factory

2.2.1 Calculate the unit cost of production.

5 436 000 / 36 000 =R151

3

2.2.2 Calculate the number of pairs of shoes that must be produced and soldto break even.

Fixed costs / selling price per unit variable cost per unit

= (864 000 + 540 000 ) / (249 149 )

= 1 404 000 / 100 = 14 040 units

SP per unit = 8 964 000 / 36 000 = R249VC per unit = (1 980 000 + 2 592 000 + 792 000) / 36 000 = 5 364000 / 36 000

= R 14910

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