Cash Flow Statement and Analysis of Ratios

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 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 ended 28 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 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: 2010 2009 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

INFORMATION: 1. EXTRACT FROM THE INCOME STATEMENT FOR THE YEAR ENDED 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 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 Cr Shareholders for Dividends 320 000 175 000 R R 70 Brought to you by Page 13

Learner Answer book QUESTION 1 1.1 General Ledger of Zee Limited Final Accounts Section APPROPRIATION ACCOUNT 11 Brought to you by Page 14

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 Brought to you by Page 15

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

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

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

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 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 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: 1.3.1 1.3.2 1.4 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

INFORMATION: Extract from the financial records of Headwork Ltd on 30 September 2010: Balance Sheet accounts section R Retained income (1 October 2009) 960 000 Creditors' control 87 500 Expenses payable (accrued) 50 400 Bank overdraft? Nominal accounts section Interest on loan 103 600 Rent income 105 980 Ordinary 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 shares were issued at the par value of R3,00). On 1 April 2010, 100 000 new shares were issued 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 year Monthly payments to City Bank R 15 800 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 2010. The rent was increased 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. Brought to you by Page 20

Learner Answer Book 1.1 1.2.1 Brought to you by Page 21

1.2.1 Brought to you by Page 22

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 1 200 000 Fixed deposit 160 000 Trading stock 215 000 Debtors control 39 090 Equipment (for office and shop) 224 000 Accumulated depreciation on office and shop equipment 130 000 Mortgage loan from Credbank 281 200 Sales 1 703 200 Debtors allowances 17 000 Cost of sales? Service fee income (in respect of repair services) 297 140 Rent income 105 000 Interest income 11 200 Salaries and wages 234 750 Employers' contributions to Pension Fund and UIF 53 200 Audit fees 30 000 Directors fees 230 000 Consumable stores 51 100 Bank charges 5 240 Sundry expenses? Brought to you by Page 23

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 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 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 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 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 000 was purchased half-way through the financial year (this was properly recorded). Brought to you by Page 24

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 R332 800 Interest charged? Monthly payments to Credbank in terms of the loan agreement (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 Brought to you by Page 25

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

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

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

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 the financial year ended 31 December 2008. 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: 1.1.1 Prepare the notes to calculate the Direct materials cost and factory overhead 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 January 2008 31 December 2008 Raw materials stock 360 000? Work-in-process stock 68 200? Finished goods stock 750 000 110 000 Factory 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 the salary of the factory foremen R120 000 Commission on sales, R90 000 all sales are subject to a commission of 3%) Brought to you by Page 29

Maintenance of factory equipment paid, R23 000 Water & electricity paid, R49 000 (this is to be split between the factory,office and sales sections in the ratio 4:2:1 respectively) Rent paid, R157 200 (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 R72 400. Bad debts, R34 000 1.2 You are provided with information relating to Gcenaphi Heaters, a business which manufactures only one type of heater REQUIRED: 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 calculate unit 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: 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. 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. Gcenaphi Heaters use the FIFO method of valuation of finished goods [50] Brought to you by Page 30

Learner Answer Book Question 1 MANUFACTURING 1.1.1. CALCULATION OF RAW MATERIALS COST (50 marks; 30 minutes) 8 CALCULATION OF FACTORY OVERHEAD COST 16 1.1.2 SHAIDS SHOE MANUFACTURERS PRODUCTION COST STATEMENT FOR YEAR ENDED 31 DECEMBER 2008 12 Brought to you by Page 31

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 % on cost. REQUIRED: 2.1.1 Prepare the Production Cost Statement of NERD Manufacturers for the year ended 31 August 2008. 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) 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 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 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 ) 140 000 Rent 24 000 Factory foreman s 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 Brought to you by Page 32

ADDITIONAL INFORMATION 1. Inventory on hand at 31 August 2008 is as follows: Raw materials R 6 000 Finished goods R12 600 Work in progress R10 870 Consumable 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 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 36 000 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: 2.2.1 Calculate the unit cost of production. (3) 2.2.2 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 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 2008 Sales 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 Brought to you by Page 33

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 224 000 2010 Feb 28 Profit and Loss 747 000 Ordinary share dividends Retained Income 425 000 Retained Income 68 000 166 000 815 000 815 000 11 Brought to you by Page 34

1.2 ZEE LIMITED CASH-FLOW STATEMENT FOR THE YEAR ENDED 28 FEBRUARY 2010 Cash effects of operating activities 233 350 Cash 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 000 Purchase 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 ) 1 100 000 Repayment of long-term loan (940 000 125 000 ) (815 000) Net change in cash equivalents 1 721 350 Cash equivalents beginning of year (922 000) Cash equivalents end of year 799 350 23 Brought to you by Page 35

1.3.1 Rate of stock turnover Cost of Sales Average Stock 1 330 000 (210 000 + 175 000)/2 61,43 4 1.3.2 Debt/Equity Ratio Non-current liabilities: Shareholder s Equity 125 000 : 1 966 000 = 0,06:1 3 1.3.3 % Return on average shareholders equity Net profit after tax x 100 Average shareholders equity 1 747 000 224 000 x 100 (1 966 000 + 768 000) / 2 1 523 000 x 100 1 367 000 1 38,25% 5 1.4 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 R1 100 000 in order to repay loan and eliminate bank overdraft Sold fixed assets generated R1 047 000 in order to repay loan and eliminate bank overdraft Used cash generated from issuing of shares and sale of fixed assets to repay loan R815 000 to improve cash flow 9 Brought to you by Page 36

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. 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 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

Solutions to Topic 2: Financial Statements Question 1 Balance Sheet 1.1 General Ledger of Headwork Limited Sars(Income tax) 2009 Oct 30 Bank 11 000 2009 Oct 1 Balance b/d 11 000 Bank 2010 115 000 Sept 30 Income tax 243 600 Bank 109 200 Balance c/d 19 400 254 600 254 600 2010 Oct 1 Balance b/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 Brought to you by Page 38

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 Note 2 Trade and other payables 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 Brought to you by Page 39

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 : 1 OR R794 000 : R4 274 400 = 0,19 : 1 or 0,2 : 1 1.4 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

Question 2 Income Statement INCOME STATEMENT FOR THE YEAR ENDED 30 JUNE 2008 Sales 1 703 200 17 000 6 200 1 680 000 Cost of sales (1 050 000) Gross profit 630 000 Other income 386 000 Service fee income 297 140 540 296 600 Rent income 105 000 15 600 89 400 1 016 000 Operating expenses (680 000) Salaries and wages 234 750 + 6 000 240 750 Employer's contributions 53 200 + 690 53 890 Audit fees 30 000 + 28 000 58 000 Directors' fees 230 000 Consumable stores 51 100 900 50 200 Bank charges 5 240 + 310 5 550 Sundry expenses 15 910 Trading stock deficit 13 000 + 4 800 17 800 Depreciation 6 400 + 1 500 / 4 700 + 3 200 7 900 Operating profit 336 000 Interest income 11 200 347 200 Interest expense (44 800) Net profit before tax 302 400 Income tax (90 720) Net profit after tax 211 680 Brought to you by Page 41

Solutions to Topic 3 Manufacturing Question 1 MANUFACTURING MANUFACTURING 1.1.1. CALCULATION OF RAW MATERIALS COST (50 marks; 30 minutes) Opening stock 360 000 Purchases(490 000 +356 000-10 000 ) 836 000 Carriage on purchases 29 500 1 225 500 Closing 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 (⁴/7 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 MANUFACTURERS PRODUCTION COST STATEMENT FOR YEAR ENDED 31 DECEMBER 2008 Prime / Direct cost 1 296 000 Direct materials cost see 540 000 DMC Direct labour cost 756 000 Factory overhead cost 448 200 Total manufacturing costs 1 744 200 Work-in-process at the beginning of the year 68 200 see FOC 1 812 400 Work-in-process at the end of the year 452 400 Cost of production of finished goods 1 360 000 12 Brought to you by Page 42

1.2 1.2.1 Calculate the gross profit Sales(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 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 3 1.2.3 Calculate the variable cost per unit Direct 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 Brought to you by Page 43

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 Statements Factory 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 Foreman s 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 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