Cash Flow Statement and Analysis of Ratios

Transcription

1 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. The company issued additional shares half-way through the year, 31 August REQUIRED: Study the information provided and answers the question which follows: 1.1 Prepare the Appropriation Account on 28 February (11) 1.2 Complete the Cash Flow Statement for the year ended 28 February (23) 1.3 Calculate the following for 2010: Rate of stock turnover (4) Debt Equity ratio (3) % Return on average shareholders equity (5) 1.4 The Cash Flow Statement reflects some important decisions that have been 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 figures to support your answer. (9) 1.5 One of the directors is of the opinion that the company should make more use of loans. Do you agree? Quote two relevant financial indicators to support your answer. (5) 1.6 The directors feel that the shareholders should be satisfied with the performance of the company. Do you agree? Comment on the dividends, earnings and % return earned by the shareholders in the 2010 financial year. Quote financial indicators (actual ratios or percentages) to support your comments. (10) The following financial indicators were calculated: Earnings per share 23 cents 40 cents Dividends per share 35 cents 25 cents Return on Average Capital Employed 31,7% 35% Return on Average Shareholders Equity? 55% Net Asset value per share 61,43cents 119 cents Debt Equity ratio? 0,5:1 Brought to you by Page 12

2 INFORMATION: 1. EXTRACT FROM THE INCOME STATEMENT FOR THE YEAR ENDED 28 FEBRUARY 2010 Cost of Sales R Depreciation Disposal of fixed assets (book value R ) 0 Interest expense (78 750) Net profit before tax Income tax EXTRACT FROM THE BALANCE SHEET ON 28 FEBRUARY Ordinary shareholders equity Ordinary share capital (par value 50 cents) Share premium Retained Income Long Term liabilities (15% p.a.) Investment in fixed deposit Inventories Debtors Creditors Bank (favourable balance)? - Bank overdraft Fixed/tangible Assets SARS Income Tax Dr Cr Shareholders for Dividends R R 70 Brought to you by Page 13

3 Learner Answer book QUESTION General Ledger of Zee Limited Final Accounts Section APPROPRIATION ACCOUNT 11 Brought to you by Page 14

4 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 ( ) Cash equivalents end of year 23 Brought to you by Page 15

5 NOTES TO THE CASH FLOW STATEMENT 1. Reconciliation between profit before taxation and Cash generated from operations Profit before taxation Adjustments i.r.o. Depreciation Interest expense Operating profit before changes in working capital Cash effects of changes in working capital Changes in inventory Changes in debtors Changes in creditors Cash generated/utilised from operations 2. Cash and cash equivalents Net change Year 2 Year 1 Bank * Cash float Petty cash * Bank overdraft ( ) bracket 3. Dividends paid Dividends for the year as reflected in financial statements Balance at the beginning of year Balance 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 year Balance at the end of current year Taxation paid 5. Tangible assets purchased / Fixed assets purchased / Property, plant and equipment purchased Land and buildings Equipment Vehicles 3. Fixed assets / Tangible assets / Property, plant and equipment Land and Vehicles Equipment Brought to you by Page 16

6 Cost Accumulated depreciation Carrying value end of previous year buildings Movements Additions at cost Disposals at carrying value Depreciation for the year Carrying value end of current year Cost Accumulated depreciation Carrying value end of current year Brought to you by Page 17

7 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. Brought to you by Page 18

8 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 ended 30 September REQUIRED: Prepare the SARS (income tax) Account in the General Ledger. Prepare the following on 30 September 2010: (12) Notes to the Balance Sheet for: Retained Income Trade and other payables Equity and Liabilities section of the Balance Sheet (10) (8) (21) 1.3 Calculate the following on 30 September 2010: Net asset value per share Debt-equity ratio You were one of the original shareholders who bought shares at the par value of R3,00 when the company was established many years ago. You are also aware 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 premium of R2,80? Explain TWO points, quoting figures or financial indicators to support your answer. (3) (3) (7) 1.5 Comment on risk and gearing of the company. Explain TWO points, quoting figures or financial indicators to support your answer Apart from the financial indicators calculated above, you are also informed of the following: Return on total capital employed 23% Interest rate on loans 13% to 15% (6) Brought to you by Page 19

9 INFORMATION: Extract from the financial records of Headwork Ltd on 30 September 2010: Balance Sheet accounts section R Retained income (1 October 2009) Creditors' control Expenses payable (accrued) Bank overdraft? Nominal accounts section Interest on loan Rent income Ordinary share dividends Adjustments and additional information: A. The income tax details are as follows: The amount owed to SARS on 1 October 2009 R The amount owed to SARS in respect of the previous financial year was paid on 30 October The total tax assessment for the 2010 financial year R First provisional tax payment made on 31 March 2010 R Second provisional tax payment made on 28 September 2010? Amount owing to SARS on 30 September 2010 R B shares have been issued before 1 October 2009 (all of these shares were issued at the par value of R3,00). On 1 April 2010, new shares were issued at a premium of R2,80 per share. C. Net profit after tax for the year is R D. The loan statement received from City Bank reflected the following: Balance at the beginning of the year R Interest capitalised R for the year Monthly payments to City Bank R per month Balance at the end of the year? In terms of the loan agreement, fixed monthly repayments of capital plus interest is to be paid until the loan is settled. E. Rent income for October 2010 was received in September The rent was increased by R820 per month on 1 July F. A final dividend of 20 cents per share was declared at the end of the year. G. The total current assets amounted to R H. The current ratio for 2010 is 1,8 : 1. Brought to you by Page 20

10 Learner Answer Book Brought to you by Page 21

11 1.2.1 Brought to you by Page 22

12 Question 2 Income Statement Adapted from November, 2008, Paper 1, Question 4 COMPANY REPORTING 2.1 INCOME STATEMENT You are provided with information relating to Samora Sports Limited. The company sells sports equipment and repairs equipment for their customers. REQUIRED: Prepare the Income Statement for the year ended 30 June 2008 after taking all the adjustments 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 Fixed deposit Trading stock Debtors control Equipment (for office and shop) Accumulated depreciation on office and shop equipment Mortgage loan from Credbank Sales Debtors allowances Cost of sales? Service fee income (in respect of repair services) Rent income Interest income Salaries and wages Employers' contributions to Pension Fund and UIF Audit fees Directors fees Consumable stores Bank charges Sundry expenses? Brought to you by Page 23

13 2. Adjustments and additional information: The auditors have identified the following errors or omissions: 2.1 The auditors are owed a further R after completing the audit. 2.2 Bank charges of R310 reflected on the June 2008 bank statement have not yet been entered in the books. 2.3 A credit note issued to a debtor, A Mona, dated 28 June 2008 was not recorded in the books. The credit note was for: Goods returned by A Mona, R (the cost was R4 800) Price reduction on unsatisfactory repair of a tennis racket, R The stock count on 30 June 2008 revealed the following on hand: Trading stock, R Consumable stores, R An employee was left out of the Salaries Journal for June The details from his pay-slip were: Gross salary R6 000 PAYE deduction (18%) (1 080) Pension deduction (7,5%) (450) UIF (60) Net salary R4 410 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 The rent was increased by R700 per month on 1 January Provide for depreciation on office and shop equipment at 10% p.a. on the diminishing-balance method. Note that new shop equipment costing R was purchased half-way through the financial year (this was properly recorded). Brought to you by Page 24

14 2.8 Interest on the loan was capitalised. The loan statement from Credbank on 30 June 2008 reflects the following: CREDBANK Loan statement on 30 June 2008 Balance on 1 July 2007 R Interest charged? Monthly payments to Credbank in terms of the loan agreement (12 months x R4 300) R Balance on 30 June 2008 R 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 Brought to you by Page 25

15 Learner Answer Book 2.1 SAMORA SPORTS LIMITED INCOME 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 Brought to you by Page 26

16 Topic Tips for Manufacturing Accounts Overview of LEDGER ACCOUNTS Direct / Raw Material stock Work in Process stock Finished Goods stock Consumable stores stock STOCK ACCOUNTS Direct Material Factory Overheads Direct Labour Selling & Distribution Administration COSTS ACCOUNTS HEEDAS MANUFACTURERS NOTES TO THE FINANCIAL STATEMENTS 1. Direct material costs Opening stock Net purchases Carriage on purchases Custom duties Closing stock Direct material cost 2. Direct labour costs Factory wages Pension Fund Contributions Medical Aid Contributions UIF Contributions Direct labour cost 3. Factory overhead costs Indirect material Indirect labour Depreciation: factory plant Insurance Unemployment Insurance fund contributions Salaries ETC Brought to you by Page 27

17 4. Cost of finished goods sold Opening stock of finished goods Cost of finished goods produced during the year Debtors Allowances / Sales returns Closing stock of finished goods Cost of finished goods sold HEEDAS MANUFACTURERS PRODUCTION COST STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2010 Notes Direct costs Direct material costs 1 Direct labour costs 2 Factory overhead costs 3 Total manufacturing costs Work-in-process at beginning of the year R Work-in-process at end of the year Cost 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 Brought to you by Page 28

18 Topic 3: Manufacturing Accounts Question 1 MANUFACTURING (50 marks; 30 minutes) Gauteng department of education Prelim 2009 Question PRODUCTION COST STATEMENT & PERIODIC STOCK You are provided with information relating to Shaids Shoe Manufacturers for the financial year ended 31 December The business makes shoes, and sells these at a mark-up of 50% on cost. They use the perpetual inventory system for finished goods and periodic system for raw materials and indirect materials. REQUIRED: Prepare the notes to calculate the Direct materials cost and factory overhead cost (24) 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 January December 2008 Raw materials stock ? Work-in-process stock ? Finished goods stock Factory Indirect materials stock Transactions during the year: Raw materials purchased on credit, R Raw materials purchased for cash, R Raw materials issued for production, R Raw materials donated by the factory to the local school, R Cost of transporting raw materials to the factory, R Factory indirect materials bought for cash, Factory indirect materials returned to suppliers, R Wages paid to factory workers who make the shoes, R Salary paid to employees, R Included in this amount is the salary of the factory foremen R Commission on sales, R all sales are subject to a commission of 3%) Brought to you by Page 29

19 Maintenance of factory equipment paid, R Water & electricity paid, R (this is to be split between the factory,office and sales sections in the ratio 4:2:1 respectively) Rent paid, R (this is to be split across the various departments according to floor area - the factory accounts for 70% out of the total area) The rent for January 2009 was paid in advance and the lease agreement provides for an annual 10% increase of rental effective from 1 January each year. Shaids Shoe Manufacturers complies with the lease agreement. Depreciation on factory equipment amounts to R Bad debts, R You are provided with information relating to Gcenaphi Heaters, a business which manufactures only one type of heater REQUIRED: Use the information to Calculate the gross profit (3) Explain why it is important for a manufacturing business to calculate unit costs and a break -even-point each month (3) Calculate the variable cost per unit for 2008 (4) Calculate the break-even point for 2008 (4) INFORMATION: 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 Direct material cost per heater, R Prime cost per heater, R55. Total cost of production of finished heaters, R Number of heaters completed during the year, Number of heaters sold during the year, 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 R Selling and distribution costs for the year amounted to R Number of unsold heaters at the end of the financial year, 300. Gcenaphi Heaters use the FIFO method of valuation of finished goods [50] Brought to you by Page 30

20 Learner Answer Book Question 1 MANUFACTURING CALCULATION OF RAW MATERIALS COST (50 marks; 30 minutes) 8 CALCULATION OF FACTORY OVERHEAD COST SHAIDS SHOE MANUFACTURERS PRODUCTION COST STATEMENT FOR YEAR ENDED 31 DECEMBER Brought to you by Page 31

21 Question 2 Manufacturing (45 marks; 25 minutes) Adapted from November 2008 Gauteng prelim Question NERD MANUFACTURERS (32 marks) Nerd Manufactures makes school tracksuits and sell these at a mark up of 50 % on cost. REQUIRED: Prepare the Production Cost Statement of NERD Manufacturers for the year ended 31 August Only the note for factory overhead costs is required. Workings must be shown in brackets where notes are not required so that part marks can be awarded. (28) The owner, D. Dunn, is of the opinion that employees are not using the raw materials very effectively or track suits are being stolen in the factory. Recommend TWO internal control measures that could be implemented by management to solve these problems. (4) INFORMATION: NERD MANUFACTURERS Balances on 1 September 2007: Factory plant Accumulated depreciation on factory plant Stocks on hand : Raw materials Work in progress Finished goods Consumable stores stock Transactions for the year ended 31 August 2008: Factory wages: Direct Indirect Purchases: Raw materials Factory plant purchased ( 1 February 2008 ) Rent Factory foreman s salary Carriage on raw materials purchased Insurance Consumable stores purchased on credit Other Factory overheads Brought to you by Page 32

22 ADDITIONAL INFORMATION 1. Inventory on hand at 31 August 2008 is as follows: Raw materials R Finished goods R Work in progress R Consumable stores R The factory plant is depreciated at 15% p.a. on the carrying value % of the consumable stores is used in the factory and the balance used in sales 4. The rent must be apportioned as follows: Factory 60% and the rest equally between sales and administration. 5. Insurance must be divided among the factory, sales and office in proportion 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 pairs of shoes during the year and all were sold. There was no work in progress stock either at the beginning or at the end of the year. REQUIRED: Calculate the unit cost of production. (3) Calculate the number of pairs of shoes that must be produced and sold to break even. (10) INFORMATION extracted from the Production Cost Statement for the year ended 29 February Direct material cost R Direct labour cost Factory overheat cost Total cost of production Information from the Income Statement for the year ended 29 February 2008 Sales R Cost of sales Administration cost (all fixed costs) Selling and distribution cost (all Variable costs) Net profit for the year Brought to you by Page 33

23 Solutions to Topic 1 Cash Flow Statement and Analysis of Ratios QUESTION General Ledger of Zee Limited Final Accounts Section APPROPRIATION ACCOUNT 2010 Feb 28 Income Tax Feb 28 Profit and Loss Ordinary share dividends Retained Income Retained Income Brought to you by Page 34

24 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 (78 750) Dividends paid ( ) ( ) Income tax paid ( ) ( ) Cash effects of investing activities Purchase of fixed assets ( ) (94 000) Proceeds of sale of fixed assets Proceeds of financial assets matured ( ) Cash effects of financing activities Proceeds of issue of shares ( ) Repayment of long-term loan ( ) ( ) Net change in cash equivalents Cash equivalents beginning of year ( ) Cash equivalents end of year Brought to you by Page 35

25 1.3.1 Rate of stock turnover Cost of Sales Average Stock ( )/2 61, Debt/Equity Ratio Non-current liabilities: Shareholder s Equity : = 0,06: % Return on average shareholders equity Net profit after tax x 100 Average shareholders equity x 100 ( ) / x ,25% Excellent explanation with figures = 3 marks; good/satisfactory explanation with figures= 2 marks; satisfactory explanation with no figure = 1 mark; incorrect explanation = 0 marks Issued shares generated R in order to repay loan and eliminate bank overdraft Sold fixed assets generated R in order to repay loan and eliminate bank overdraft Used cash generated from issuing of shares and sale of fixed assets to repay loan R to improve cash flow 9 Brought to you by Page 36

26 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 the interest rate of 15% indicating positive gearing. The risk has been reduced 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 by accumulated funds and that less funds are being retained for the future. % return on shareholders equity decreased substantially from 55% to 38,25%. The return still exceeds returns on alternative investments. 10 Brought to you by Page 37

27 Solutions to Topic 2: Financial Statements Question 1 Balance Sheet 1.1 General Ledger of Headwork Limited Sars(Income tax) 2009 Oct 30 Bank Oct 1 Balance b/d Bank Sept 30 Income tax Bank Balance c/d Oct 1 Balance b/d NOTES TO THE BALANCE SHEET Note 1. Retained income Balance at the beginning of the year Net profit after tax Dividends for the year ( ) Interim Final ( x 20c) Balance at the end of the year Note 2. Trade and other payables Trade creditors Expenses payable (accrued) Income received in advance (Deferred income) SARS (Income tax) Shareholders for dividends Brought to you by Page 38

28 1.2.2 BALANCE SHEET ON 30 SEPTEMBER 2010 ASSETS R Fixed assets Current assets TOTAL ASSETS EQUITY AND LIABILITIES Shareholders' equity Ordinary share capital x R3, Share premium x R2, Retained income Note Non-current liabilities Loan from City Bank Current liabilities Note 2 Trade and other payables Current portion of loan (may be shown in Note 2) Bank overdraft TOTAL EQUITY AND LIABILITIES Brought to you by Page 39

29 1.3.1 Net asset value per share. R / shares = 474,9 cents Debt-equity ratio. R : R = 0,16 : 1 or 0,2 : 1 OR R : R = 0,19 : 1 or 0,2 : Yes / No: Yes Explanation: TWO points Any TWO valid points e.g. Quote figures The issue price of R5,80 is higher than the value of the share according to the books (NAV of 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 the directors have sold the new shares at a realistic value. The shareholders who bought the shares when the company started took a risk at a value of R3,00 the public is now prepared to pay R5,75 for those shares this is fair to the existing shareholders because the new shareholders are paying a realistic price without taking the initial risk. 1.5 TWO points Quote figures Any 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 means that the company can gear up its returns to shareholders by making use of borrowed funds. Brought to you by Page 40

30 Question 2 Income Statement INCOME 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 Directors' fees Consumable stores Bank charges Sundry expenses Trading stock deficit Depreciation / Operating profit Interest income Interest expense (44 800) Net profit before tax Income tax (90 720) Net profit after tax Brought to you by Page 41

31 Solutions to Topic 3 Manufacturing Question 1 MANUFACTURING MANUFACTURING CALCULATION OF RAW MATERIALS COST (50 marks; 30 minutes) Opening stock Purchases( ) Carriage on purchases Closing stock Raw materials issued to production CALCULATION OF FACTORY OVERHEAD COST Factory indirect materials ( Factory maintenance Salary to factory foreman Water & electricity (⁴/7 x ) Factory rent ( x 70%) Depreciation on factory equipment for salesmen's commission/bad debts SHAIDS SHOE MANUFACTURERS PRODUCTION COST STATEMENT FOR YEAR ENDED 31 DECEMBER 2008 Prime / Direct cost Direct materials cost see DMC Direct labour cost Factory overhead cost Total manufacturing costs Work-in-process at the beginning of the year see FOC Work-in-process at the end of the year Cost of production of finished goods Brought to you by Page 42

32 Calculate the gross profit Sales(10 000xR114) Cost of sales(10 000x R76) Gross profit for the year Any valid explanation Good answer=3 Satisfactory=2 poor=1 Incorrect=0 To make comparisons To identify potential problem cost items in advance To assess whether it is practical for the business to achieve the desired production that will result in a profit Calculate the variable cost per unit Direct material+ direct labour + selling and distribution =R25 + R30 + R11,70 =R66, F/C/contribution per unit = /(114-66,7) accept if same as = /47,3 =9513 OR Brought to you by Page 43

33 Question 2 Manufacturing QUESTION 2 NERD MANUFACTURERS Production Cost Statement for the year ended 31 August DIRECT COSTS Direct material costs ( ) Direct labour costs Factory overhead costs Total manufacturing cost Work in progress at the beginning of the year Work in progress at the end of the year (10 870) Cost of production of finished goods Note to Financial Statements Factory overhead costs Consumable stores ( ) X 80% Indirect labour Rent ( X 60% ) Foreman s salary Insurance (5 600 X 4/7 ) Other Factory overheads Depreciation ( ) Two control measures Possible answers: Regular stock counts of raw materials and finished goods and compare to the ledger. Supervise the usage of raw materials by obtaining correct cutting of fabric 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 and make them answerable for shortages. Completed stock should be securely kept in a stock room and not lying around on the factory floor. Proper stock records must be maintained. 4 Brought to you by Page 44