SECONDARY SCHOOL IMPROVEMENT
PROGRAMME (SSIP) 2016
GRADE 12
SUBJECT:
ACCOUNTING
TEACHER NOTES
(Page 1 of 127)
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© Gauteng Department of Education
TABLE OF CONTENTS
SESSION
TOPIC
PAGE
1
Companies: Concepts, Ledger Accounts
1 - 26
2
Companies: Financial Statements
27 - 44
3
Companies: Financial Statements And
Financial Indicators
45 - 56
4
Cash Flow Statement and Financial
Indicators
57 - 97
5
Corporate Governance, Ethics And Internal
Control
98 - 127
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© Gauteng Department of Education
SESSION NO: 1
TOPIC: COMPANIES: CONCEPTS, LEDGER ACCOUNTS
TEACHER NOTE: SUGGESTIONS FOR IMPROVEMENT
(a)
Short formative tests at regular intervals on company ledger entries and the
Accounting Equation are advised. All transactions should be linked to the
double-entry principle.
(b)
The preparation of ledger accounts will enhance the learning of the candidates.
(c)
Use of past NSC papers will ensure that candidates are familiar with the style
of questions on the topic of reconciliations. Educators must encourage learners
to use the formats given in the answer books Kindly amend the past papers to
comply with the new CAPS requirements.
The Companies Act No. 71 of 2008 (applicable from 2011) has introduced several
significant changes to company law in South Africa. Two of the most significant
changes in terms of their effect on Accounting entries in the Grade 12 curriculum are:


Shares of no par value: Section 35 (2) states that ‘a share does not have a
nominal or par value’.
Buy-back of shares: Section 48 allows companies to repurchase its shares from
shareholders under certain conditions.
The main reason for the dispensing of par value is that this bears no resemblance to
the true worth of a share other than on the first day of a company’s existence and
was often confusing to uninformed investors. All shares are now of ‘no par value’.
Shares are issued at an ‘issue price’. This means that:



The full proceeds of the share issue are credited to the Share Capital account.
The Share Premium account no longer applies.
New shares may be issued at a higher or lower price than any previous issue
price.
There are several reasons for allowing a company to repurchase or ‘buy-back’ some
of the shares that it has previously issued. Companies with surplus funds might wish
to reduce the share capital account thereby increasing returns for the remaining
shareholders. A company might wish to buy out a difficult or troublesome
shareholder who creates problems for the company. The heirs of a deceased estate
might prefer to be paid out for the shares they have inherited. A private company
might wish to buy back shares in order for a family to maintain control of the private
company. A share repurchase will also allow a company to adjust its debt : equity
ratio as economic circumstances change.
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In terms of a share repurchase under the new Act, a company’s directors have to
satisfy a solvency and liquidity test before concluding a contract to repurchase
shares to ensure that the payment for the shares will not result in solvency or liquidity
problems thereafter. The decision regarding the repurchase of shares is authorised
and minuted at a meeting of the board of directors, together with the results of the
solvency and liquidity test. The following conditions will have to apply in respect of
the solvency and liquidity test:


Assets (fairly valued) must exceed liabilities (fairly valued) – note historical cost
does not apply.
The company will be able to pay is debts as they become due for a period of 12
months after the dividends are distributed.
The complications that buy-back of shares causes for the entries in the books is that
if the buy-back price exceeds the average issue price of the shares, the difference
between these prices effectively relates to a pay-out of retained income to the
shareholder selling the shares. In this case both the Share Capital and Retained
Income accounts will be reduced by the appropriate amounts.
Also note that companies are no longer registered with the Registrar of Companies.
They are now registered with the Companies and Intellectual Property
Commission (‘the Commission’ or ‘the Commissioner’).




Explain the concepts of double entry
Identifying the two accounts
Classification of the two accounts involved
Explain the concepts related to companies
LESSON FORMAT:
Pre-Test: 5 minutes
Class Activity 1 Completed by learners and Educator: 25 minutes
Class Activity 2 Completed by learners and Educator: 55 minutes
Post –Test: 5 minutes
SECTION 1: CLASS ACTIVITY 1 TYPICAL EXAM QUESTIONS
(Taken from NSC Nov 2013 Paper)
1.1
CONCEPTS
REQUIRED:
Choose the correct word(s) from those given in brackets. Write only the
word(s) next to the question number (1.1.1–1.1.3) in the ANSWER
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BOOK.
1.1.1
1.1.2
1.1.3
1.2
The concept that states that the financial affairs of the owner
must be kept separate from the financial affairs of the business
is the (business entity concept/going-concern concept).
(2)
In the event of bankruptcy, the shareholders are not
responsible for the debts of the business. This is because of
(limited/unlimited) liability.
(2)
In the financial statements, debtors will be shown as trade and
other (equity/receivables/payables).
(2)
COMPANY TRANSACTIONS
REQUIRED:
Use the table provided to indicate the following for each transaction:


Account debited and account credited in the General Ledger
Effect on the accounting equation
The bank balance is favourable at all times.
Example: Directors' fees paid, R145 000.
NO.
e.g.
ACCOUNT
DEBITED
Directors' fees
ACCOUNT
CREDITED
Bank
AMOUNT
145 000
A
O
L
–
–
0
TRANSACTIONS:
1.2.1
The amount owing to SARS at the end of the previous financial
year for income tax was paid, R37 400. (4)
1.2.2
Received R180 000 for additional shares issued . (4)
1.2.3
A final dividend of R55 000 was declared by the directors at the
end of the current financial year. (4)
[12]
1.3
REQUIRED:
Use the information supplied to prepare the following accounts in the ledger of
Verulam Ltd. for the accounting period ended 30 June 2013
1.
2.
3.
4.
Ordinary share capital
Retained income
SARS - Income tax
Shareholders for dividends
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5. Income tax
6. Ordinary shares dividends
7. Appropriation account
INFORMATION:
On the 1 July 2012, the following balances appeared, amongst others, in the
ledger:




Ordinary share capital (100 000 shares)
Retained income
SARS - Income tax
Shareholders for dividends
R300 000
R 60 000
R 15 000 (Credit)
R 10 000
15 July 2012
The company issued a further 40 000 ordinary shares at R3,50 each. The proceeds
of this issue were banked.
20 July 2012
The SARS and the shareholders were paid the amounts due to them.
31 Dec. 2012
The company paid provisional income tax of R80 175 and interim dividends of
15 cents per share.
30 June 2013
At the end of the accounting period, the company made a second provisional tax
payment of R70 000 and the directors recommended a final dividend of 30 cents per
share.
The audit was completed. The net profit for the year ended 30 June 2013 was
calculated at R420 000. Income tax is to be calculated at 30% of the net profit.
SESSION 1: ACTIVITY 1
1.1
SOLUTIONS
CONCEPTS
Choose the correct word(s) from those given in brackets. Write only
the word(s) next to the question number (1.1.1–1.1.3).
1.1.1
Business entity concept

1.1.2
Limited

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1.1.3
1.2

Receivables
COMPANY TRANSACTIONS
Use the table provided to indicate the following for each transaction:


Account debited and account credited in the General Ledger
Effect on the accounting equation
The bank balance is favourable at all times.
NO.
e.g.
ACCOUNT
DEBITED
ACCOUNT
CREDITED
Directors' Fees Bank
SARS (Income
AMOUNT
A
O
L
145 000
−
−
0
1.2.1 Tax) 
Bank

37 400
-
0
-
1.2.2 Bank
Ordinary
Share Capital
180 000
+
+
0
Shareholders for
Dividends 
55 000
0
-
+
1.2.3
Dividends on
Ordinary
Shares/Ordinary
Share Dividends
1.3
GENERAL LEDGER OF VERULUM LIMITED
BALANCE SHEET ACCOUNTS SECTION
DR
2013
June 30 Balance
ORDINARY SHARE CAPITAL
2012
c/d 440 000 July 1 Balance
2013
July 15 Bank
440 000
2013
July
1 Balance
B1
CR
b/d
300 000
CRJ
140 000
440 000
b/d
440 000
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DR
2013
Jun 30 Balance
RETAINED INCOME
2012
c/d 297 000 July 1 Balance
2013
Appropriation
Jun 30 Account
357 000
2013
July
DR
2012
July 20 Bank
2012
Dec 31 Bank
30 Balance
SARS - INCOME TAX
2012
CPJ 15 000 July 1 Balance
2013
CPJ 70 000 Jun 30 Income Tax
c/d
CR
b/d
60 000
GJ
237 000
357 000
b/d
297 000
B3
CR
b/d
15 000
GJ
126 000
56 000
141 000
141 000
2013
July
DR
2013
Jun 30 Balance
1 Balance
B2
1 Balance
SHAREHOLDERS FOR DIVIDENDS
2012
c/d 42 000 July 1 Balance
2013
Ordinary share
Jun 30 dividends
52 000
2013
July
1 Balance
b/d
56 000
B4
CR
b/d
10 000
GJ
42 000
52 000
b/d
42 000
N21
CR
GJ
126 000
NOMINAL ACCOUNTS SECTION
DR
SARS –
2013
Jun 30 Income Tax
INCOME TAX
Appropriation
2013
GJ 126 000 Jun 30 account
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DR
ORDINARY SHARE DIVIDENDS
Appropriation
2012
2013
CPJ 15 000 Jun 30 account
Dec 31 Bank
Shareholders for
2013
GJ 42 000
Jun 30 dividends
57 000
N22
CR
GJ
57 000
57 000
FINAL ACCOUNTS SECTION
DR
2013
Jun 30 Income tax
Ordinary share
dividends 
Retained
income
APPROPRIATION ACCOUNT
F3
CR
2013
126 000 Jun 30 Profit and loss 
420 000
57 000
237 000
420 000
420 000
SECTION B: NOTES ON CONTENT
LEGAL PERSONALITY
It is a legal person and has powers to trade in its own name.
A company registered in terms of the Companies Act, has a legal personality of its
own. This means that, in the eyes of the law, a company is regarded as a person. It
can own assets enter into contracts in its own name; institute legal proceedings in its
own name, sue and be sued.
LIMITED LIABILITY
Since the company is a separate legal person, the shareholders cannot be held liable
for the debts of the company. In the event of insolvency, the shareholders cannot be
asked to settle amounts owed by the company. The shareholders will lose only the
capital invested by them. The liability of the members is, therefore, limited to the
amount of capital invested.
The protection offered to shareholders by way of the concept of limited liability is,
therefore, vitally important in stimulating investment in businesses in a country.
STATUTORY CONTROL
The shareholders are the owners and they provide the capital. The directors are the
managers and are entrusted with the use of that capital.
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Certain controls are necessary to protect both the shareholders and the directors.
The shareholders need to receive adequate information on how their funds have
been utilised by the directors. The above process will prevent fraudulent practices.
CORPORATE GOVERNANACE
Corporate governance involves a set of relationships between a company’s
management, its board, its shareholders and other stakeholders. Corporate
governance also provides the structure through which the aims and objectives of the
company are set, and the means of attaining those aims and objectives and
monitoring performance are determined.
BEGINNING OF 2011
MEMORANDUM OF INCORPORATION STIPULATED THE FOLOWING:
AUTHORISED SHARE CAPITAL
3 000 000 ORDINARY SHARES
ISSUED 1 000 000 ORDINARY SHARES AT ISSUE PRICE OF (I.P.O.) OF 200
CENTS PER SHARE- (I.P.O Initial public offer)
GENERAL LEDGER OF TWELVE ABCD
LIMITEDBALANCE SHEET ACCOUNTS SECTION
DR
ORDINARY SHARE CAPITAL
2011
JAN 31 Bank
DR
2011
JAN 31 Total Receipts
Journal
CRJ
B1
CR
CRJ 2 000 000
BANK
B2
CR
CRJ 2 000 000
Debit
Credit
Bank
Ordinary
share
capital
A
O
L
+2 000
000
+2 000
000
0
Net Asset value per Share
Shareholders’ Equity
Number of issued
shares
2 000 000 X 100
1 000 000
1
X
100
1
Profitability/
Operating
efficiency/Returns
=200 CENTS PER SHARE
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31 December 2011 (1ST FINANCIAL YEAR END)
After taxation, the net profit for the year amounted to R500 000. The company
decides not to pay any dividends to its shareholders. The profits of R500 000 are
retained by the company. The entry in the ledger will be:
Journal
Debit
Credit
GJ
Appropriation Retained
Account
income
A
0
O
+500 000
- 500
000
L
0
The financial statements of a company will reflect the following:
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31
DECEMBER 2011
R
7
Ordinary share capital
Authorised
3 000 000 Authorised Ordinary Shares
Xxx
Issued
1 000 000 Ordinary shares in issue at the beginning of the
year
1 000 000 Ordinary shares in issue at the end of the year
8
2 000 000
2 000 000
Retained income
Balance at the beginning of the year
Net profit after tax for the year
Ordinary share dividends
Paid (interim)
Recommended (final)
Balance at the end of the year
000
500 000
( xxx)
X
X
500 000
BALANCE SHEET OF TWELVE ABCD LIMITED AT 31 DECEMBER 2011
EQUITY AND LIABILITIES
SHAREHOLDERS’ EQUITY
Ordinary share capital
Notes
7
2 500 000
2 000 000
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© Gauteng Department of Education
Retained Income
8
500 000
NON - CURRENT LIABILITIES
Mortgage Loan
X
Xx
CURRENT LIABILITIES
Net Asset value per Share
Shareholders’ Equity
Number of issued
shares
X
100
1
Profitability/
Operating
efficiency/Returns
2 500 000 X 100
1 000 000
1
=250 CENTS PER SHARE
POINTS TO CONSIDER





THE “I.P.O.’ WAS 200 CENTS PER SHARE
THE ACTUAL OR INTRINSIC VALUE IS THE NAV OF 250 CENTS PER SHARE
THE GROWTH IN THE NAV (200 CENTS TO 250 CENTS) IS AS A RESULTOF THE
RETAINING OF PROFITS
THE MARKET PRICE ON THE JOHANNESBURG SECURITIES EXCHAGE WOULD
PROBABLY BE > 250 CENTS
THE COMPANY STILL HAS 2 000 000 UNISSUED SHARES THAT HAVE BEEN
AUTHORISED. THESE SHARES CAN BE ISSUED AT ANY TIME BY THE DIRECTORS AS
AUTHORISATION HAS ALREADY BEEN RECEIVED TO DO SO.
TEACHERS NOTE:
IF THE COMPANY ISSUES FURTHER SHARES, AT WHAT PRICE
SHOULD THEY BE SOLD?
ISSUING A FURTHER 500 000 SHARES ORDINARY SHARES AT THE ‘I.P.O.’OF
200 CENTS.
GENERAL LEDGER OF TWELVE ABCD LIMITED
BALANCE SHEET ACCOUNTS SECTION
DR
DR
201
2
JAN
1
Total Receipts
ORDINARY SHARE CAPITAL
2012
BANK
JAN 1 BALANCE
31 BANK
CRJ
1 000
000
B1
B2
CR
CR
2 000 000
1 000 000
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Journal
Debit
CRJ
Bank
Credit
Ordinary
share
capital
A
O
L
+1 000
000
+1 000
000
0
The financial statements of a company will reflect the following:
BALANCE SHEET OF TWELVE ABCD LIMITED AT 31 JANUARY 2012
EQUITY AND LIABILITIES
SHAREHOLDERS’ EQUITY
Ordinary share capital
Retained Income
Notes
7
8
3 500 000
3 000 000
500 000
NON - CURRENT LIABILITIES
Mortgage Loan
X
Xx
CURRENT LIABILITIES
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31
JANUARY 2012
R
7
Ordinary share capital
Authorised
3 000 000 Authorised Ordinary Shares
Issued
1 000 000 Ordinary shares in issue at the beginning of the
year
500 000 Ordinary shares issued in January
Xxx
2 000 000
1 000 000
3 000 000
Net Asset value per Share
Shareholders’ Equity
Number of issued
X
shares
100
1
Profitability/
Operating
efficiency/Returns
3 500 000 X 100
1 500 000
1
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© Gauteng Department of Education
=233.33 CENTS PER SHARE
AVERAGE SHARE ISSUE PRICE
1 000 000 Ordinary shares in issue at the beginning of the
year
500 000 Ordinary shares issued in January
2 000 000
1 000 000
1 500 000 VALUED AT
3 000 000
AVERAGE PRICE 3 000 000/1 500 000
2 PER SHARE
CONCLUSION:
The existing shareholders:
Will not be happy. The intrinsic value (NAV) has been diluted from 250
cents per share to 233.33 cents per share. The existing shareholders are
being disadvantaged as they took the initial risk of investing in a new
company and they already have a retained income
The new shareholders:
Will be very happy. They bought shares for 200 cents and without any
effort on their part the share is valued at 233.33 cents (NA
CASE STUDY TWO
The additional shares ( 500 000) are sold at the current net asset value of
250cents per share (At an additional amount of 50 cents per share)
GENERAL LEDGER OF TWELVE ABCD LIMITED
BALANCE SHEET ACCOUNTS SECTION
DR
DR
201
2
JAN
1
Total Receipts
ORDINARY SHARE CAPITAL
2012
BANK
JAN 1 BALANCE
31 BANK
CRJ
1 250
000
B1
B2
CR
CR
2 000 000
1 250 000
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Journal
Debit
Credit
A
O
Ordinary
CRJ
Bank
share
+1 250 000 +1 250 000
capital
The financial statements of a company will reflect the following:
L
0
BALANCE SHEET OF TWELVE ABCD LIMITED AT 31 JANUARY 2012
EQUITY AND LIABILITIES
SHAREHOLDERS’ EQUITY
Ordinary share capital
Retained Income
Notes
7
8
3 750 000
3 250 000
500 000
NON - CURRENT LIABILITIES
Mortgage Loan
X
Xx
CURRENT LIABILITIES
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31
JANUARY 2012
R
7
Ordinary share capital
Authorised
3 000 000 Authorised Ordinary Shares
Issued
1 000 000 Ordinary shares in issue at the beginning of the
year
500 000 Ordinary shares issued in january
Xxx
2 000 000
1 250 000
3 250 000
Net Asset value per Share
Shareholders’ Equity
Number of issued
X
shares
100
1
Profitability/
Operating
efficiency/Returns
3 750 000 X 100
1 500 000
1
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=250 CENTS PER SHARE
AVERAGE SHARE ISSUE PRICE
1 000 000 Ordinary shares in issue at the beginning of the
year
500 000 Ordinary shares issued in January
2 000 000
1 250 000
1 500 000 VALUED AT
3 250 000
AVERAGE PRICE 3 250 000/1 500 000
2,17 PER
SHARE
CONCLUSION:
The existing shareholders:
No benefit even though they took the initial risk and should be rewarded
as they have a flourishing business that has retained profits
The new shareholders:
No benefit as they paid 250 cents for the share and the NAV is 250 cents
per share
CASE STUDY THREE
The additional shares (500 000) are sold at a higher price than the
current NAV ie. The shares are sold at 275 cents per share.
GENERAL LEDGER OF TWELVE ABCD LIMITED
BALANCE SHEET ACCOUNTS SECTION
DR
DR
201
2
JAN
1
Total Receipts
ORDINARY SHARE CAPITAL
2012
BANK
JAN 1 BALANCE
31 BANK
CRJ
1 375
000
Journal
Debit
CRJ
Bank
Credit
Ordinary
share
capital
A
B1
B2
O
+1 375 000 +1 375 000
CR
CR
2 000 000
1 375 000
L
0
The financial statements of a company will reflect the following:
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BALANCE SHEET OF TWELVE ABCD LIMITED AT 31 JANUARY 2012
EQUITY AND LIABILITIES
SHAREHOLDERS’ EQUITY
Ordinary share capital
Retained Income
Notes
7
8
3 875 000
3 375 000
500 000
NON - CURRENT LIABILITIES
Mortgage Loan
X
Xx
CURRENT LIABILITIES
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31
JANUARY 2012
R
7
Ordinary share capital
Authorised
3 000 000 Authorised Ordinary Shares
Issued
1 000 000 Ordinary shares in issue at the beginning of the
year
500 000 Ordinary shares issued in january
Xxx
2 000 000
1 375 000
3 375 000
Net Asset value per Share
Shareholders’ Equity
Number of issued
X
shares
100
1
Profitability/
Operating
efficiency/Returns
3 875 000 X 100
1 500 000
1
=258 CENTS PER SHARE
AVERAGE SHARE ISSUE PRICE
1 000 000 Ordinary shares in issue at the beginning of the
year
500 000 Ordinary shares issued in January
2 000 000
1 375 000
1 500 000 VALUED AT
3 375 000
AVERAGE PRICE 3 375 000/1 500 000
2,25 PER
SHARE
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CONCLUSION:
The existing shareholders:
Will be happy as they paid 200 cents per share.NAV per share was was
250 cents before the new shares were sold and this increased to 258
cents after the issue.They took the initial risk and therefore should be
rewarded for this.
The new shareholders:
This is fair as they should pay a premium for the shares as they are
buying into a a business that is successful and has a retained income.
WHICH OF THE THREE CASE STUDIES WOULD BE THE FAIREST TO
THE EXISTING SHAREHOLDERS:
3?
TWELVE ABCD LIMITED OPTED FOR OPTION THREE
Let us assume that a shareholder Ms I Need-Cash (who bought 5 000
shares at the initial public offer value) sold her shares, for 285 cents per
share, to MR Investor.
 By how much would the company benefit as a result of the sale of
the shares to Mr.Invester?
Provide an explanation.
The company will not benefit at all from the sale of the shares to
Mr.Invester.
Ms I Need-Cash would make a profit of (R14 250(5 000x285) –
(5000 x 200) R10 000=R4 250) from the sales of these shares to
Mr.Invest.
BUYING BACK (REPURCHASE) OF SHARES BY A COMPANY
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© Gauteng Department of Education
In terms of Section 48 of the new Companies Act the directors of a company may
decide to repurchase shares from a shareholder, subject to certain conditions.
Reasons:
The reasons are numerous e.g. reduction in the number of shareholders could result
in bigger returns for the remaining shareholders; directors might wish to adjust the
debt/equity ratio through the buy-back of shares; heirs of a deceased estate might
not wish to become shareholders of a company; a dissatisfied shareholder might
wish to withdraw for personal reasons; family members in a private company might
wish to retain control of the company by reducing the number of issued shares.


The effect on the Accounting Equation will be:
Assets – Owners’ equity –
In preparing the financial statements:
Bank is reduced by the repurchase value paid for
the shares
Ordinary share capital is reduced by the number
of shares multiplied by the average issue price
Retained income is reduced by the difference
(this represents the income that had previously been
retained in respect of the shares repurchased)
Reasons:
 As many shareholders will have bought shares from existing shareholders (third
parties) on the JSE at market prices, it is normally not possible for a company to
determine the original purchase price paid by a specific shareholder. The
average issue price will therefore be used in determining the entries to be
made in the buying back of shares. Note that this is effectively the weighted
average price as the balance on the Share Capital account already takes
price and quantity into account.
EXAMPLE BUY-BACK OF SHARES
On 1 March 2013, the following balances appeared in the ledger of Twelve ABCD
Ltd:
Bank R1 100 000; Ordinary share capital, R5 400 000; Retained income R1 200 000.
Calculations
Average share issue
price
Net Asset Value per
share
Workings
R4 500 000 ÷ 750 000 shares
R5 700 000 ÷ 750 000 shares
Answer
R6,00 per
share
R7,60 per
share
On 1 June 2013, the directors of Twelve ABCD Ltd decided to buy back 100 000
shares from a disgruntled shareholder at a price of R8,00 each. Paid him R800 000.
There are two aspects to this transaction:
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© Gauteng Department of Education
Per share
For 100 000
shares
2013
Mar
1
Balance
Share capital
portion
R6,00
Retained income
portion
R2,00
R8,00
R600 000
R200 000
R800 000
b/d
Total
B1. BANK
2013
1 100 Jun
Ordinary share
000 1
capital
600 000
Retained income
2013
Jun 1 Bank
2013
Jun 1 Bank
Calculations
Average share issue
price
Net Asset Value per
share
200 000
B2. ORDINARY SHARE CAPITAL
2013
Mar
600 000 1
Balance
b/d 4 500 000
3 900 000
B3. RETAINED INCOME
2012
Mar
200 000 1
Balance
b/d
1 000 000
Workings
R3 900 000 ÷ 650 000 shares
R4 900 000 ÷ 650 000 shares
TREATMENT OF CLOSING TRANSFERS
B3. RETAINED INCOME
2013
2012
Jun 1 Bank
200 000 Mar 1 Balance
2014
2014
Feb
Feb
28
Balance
c/d
1 650 000 28
Appropriation
Answer
R6,00 per
share
R7,54 per
share
b/d
1 200
000
650 000
1 850
000
1 850 000
2014
Mar 1 Balance
1 200
000
b/d
1 650
000
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2014
Feb
28
Income tax
Dividends on
ordinary shares
F3. APPROPRIATION ACCOUNT
2014
Feb
390 000 28
Profit & loss
1 300 000
260 000
Retained income
650 000
1 300 000
1 300 000
EXTRACT FROM THE FINANCIAL STATEMENTS:
Note 9. Retained Income
Balance at beginning of year
1 200 000
Net profit after tax
Repurchase of 100 000 ordinary
shares
910 000
(200 000)
Dividends
(260 000)
Balance at end of year
1 650 000
SESSION 1: ACTIVITY 2: 55 minutes
Happy Badgers Limited trades in making matric badges. The Company is authorized
to issue 1000 000 ordinary shares of no par value
The directors are concerned that the market price per share at Johannesburg
Securities Exchange (JSE) on 1 March 2013 has declined from R9, 00 to R6, 00 per
share. The directors informed the internal auditor to investigate what contributed to
the declined market price per share.
You have been requested by shareholders to present information relating to the
following company accounts for the period 1 March 2013 to 28 February 2014.
REQUIRED:
1.1
Complete the following accounts and balance/close off the accounts on 28 February
2014.
 Ordinary share capital
 Retained income
 Shareholders for dividends
 SARS: income tax
21
© Gauteng Department of Education
Ordinary share dividends
 Income tax
 Appropriation
1.2 Prepare the following notes



Ordinary share capital
Retained Income
1.3 Complete the equity section of the Balance Sheet (Statement of Financial
Position)
INFORMATION:
The following balances appeared in the books on 1 March 2013:
Ordinary Share Capital ( 100 000 shares issued)
500 000
Retained Income/ Accumulated Profits
98 000
SARS (Income Tax)
15 000
(Dr)
Shareholders for dividends
85 000
ADDITIONAL INFORMATION
1
2013
Mar 31
2
The amounts due to the shareholders for dividends were paid. We also
received a refund cheque from SARS for the amount due to us
Income tax details are as follows:
2013
Aug 31
2014
Feb 28
The company paid their first provisional tax of R280 000.
A second provisional tax payment of R290 000 was made.
The Income tax for the year amounted to R600 000, being 30% of net
profit.
3
Shares and Dividends
2013
Mar 31
Issued 40 000 no par value ordinary shares for R240 000.
22
© Gauteng Department of Education
Mar 31
Issued another 50 000 no par value ordinary shares @ R8 per share.
Aug 30 The directors decided to pay an interim dividend R125 000.
Sep18
After investigation the directors realised that the shares were
undervalued in the market place and therefore decided to buy
45000 ordinary shares for R333 000.
2014
28 Feb
The directors recommended and declared a dividend of 245cents per
share to the shareholders at the AGM meeting.
SESSION NO: 1 ACTIVITY 2 SOLUTION
TOPIC: COMPANIES CONCEPTS AND LEDGER ACCOUNTS
1.1
GENERAL LEDGER OF HAPPY BADGERS LIMITED
BALANCE SHEET ACCOUNTS SECTION
Dr.
2013
Sept
15 Bank
ORDINARY SHARE CAPITAL
2013

Mar 1
CPJ 270 000
Balance
May
2014
Feb
28 Balance
c/d
Cr.
b/d
500 000
31
Bank
CRJ
240 000
31
Bank
CRJ
400 000
870 000
1 140 000
1 140 000
2014
Mar 1
Dr.
2013 30 Bank
Balance
b/d
RETAINED INCOME
GJ
63 000
870 000
Cr.
1
© Gauteng Department of Education
b/d
98 000
23
Aug
2013
MAR
2014
Feb 28 Balance
c/d
954 750
Balance
2014
Feb
Appropriation
28
gj
1 017 750
1 017 750
Mar
14
Dr.
2013
Mar
31
2014
Feb
28
1
Balance
SHAREHOLDERS FOR DIVIDENDS
2013

Bank
CPJ
85 000
Mar
1 Balance
Ordinary
2014
share
Balance
c/d
355 250
Feb 28 dividends
b/d
b/d
85 000
GJ

355 250
440 250
2014
Mar 1
Aug
2014
Feb
2014
Feb
28 Bank
SARS: INCOME TAX
2013

CPJ 15 000 Mar
1
2014

CPJ 280 000 Feb
28

CPJ 290 000
28 Balance
c/d
1
Balance
31 Bank
Balance
b/d
355 250
Cr.
Bank
b/d
15 000
Income tax
GJ
600 000

30 000
615 000
615 000
2014
Mar
Dr.
954 750
Cr.
440 250
Dr.
2013
Mar
919 750
1
Balance
b/d
ORDINARY SHARE DIVIDENDS
2013
Aug
30 Bank
GJ
125 000
2014
Feb
Shareholders
28 for dividends
GJ
355 250

2014
Feb
28

Appropriation
30 000
Cr.
GJ
480 250
24
© Gauteng Department of Education
495 250
Dr.
495 250
Income tax
2014
Feb
SARS28 Income tax
GJ 600 000
2014
Feb
Cr.
28
Appropriation GJ
600 000
Dr.
600 000
APPROPRIATION
2014
Feb
28 Income tax
Ordinary Share
dividends
Retained
income
GJ
GJ
Gj
600 000
480 250

919 750
600 000
2014
Feb
Cr.
Profit and
loss
28
2 000 000
GJ
2 000 000
2 000 000
1.2 NOTES TO THE FINANCIAL STATEMENTS
R
7
Ordinary share capital
Authorised
1 000 000 Authorised Ordinary Shares
Issued
100 000 Ordinary shares in issue at the beginning of the
year @ R5,00
40 000 Shares issued during the year@ R6,00
50 000 Shares issued during the year@ R 8,00
(45 000) Shares repurchased @ R 6,00
145 000 Ordinary shares in issue at end of year
8
Retained income
Balance at the beginning of the year
Net profit after tax for the year
© Gauteng Department of Education
√500 000
√240 000
√400 000
√(270 000)
 870 000
√98 000
√1400 000
25
Repurchases of 45 000 @ R 1,40
Ordinary share dividends
Paid (interim)
Recommended (final) (145 000@ R2,45)
Balance at the end of the year
√
√ (63 000)
(480 250)
√125 000
√√355 250
 954 750
1.3 BALANCE SHEET OF HAPPY BADGERS LIMITED AT 28 FEBRUARY 2014
EQUITY AND LIABILITIES
SHAREHOLDERS’ EQUITY
Ordinary share capital
Retained Income
Notes
7
8
1824 750
870 000
954 750
26
© Gauteng Department of Education
SESSION NO: 2
TOPIC: COMPANIES: FINANCIAL STATEMENTS
TEACHER NOTE:
 Do a detailed base line assessment on the GAAP PRINCIPLES
 Discuss all the adjustments dealt with in grade 11
 Show the effect on the INCOME STATEMENT AS WELL AS THE
BALANCE SHEET
 Stress the importance of showing calculations in Brackets to Earn part
marks
 Use of past NSC papers: Every learner should have access to past
examination papers. With the introduction of CAPS in 2014, it will be
necessary for teachers to adapt parts of certain questions so that they can be
used for revision purposes. Questions that include par value of shares and
share premium will have to be altered and adapted. To comply with CAPS,
teachers should ensure that learners have sufficient practice with questions
involving repurchase (buy-back) of shares. Teachers should also answer
these papers themselves so as to improve their own confidence in their ability
to deal with each topic.
 Basic concepts and the Accounting equation: Teachers should ensure
that learners understand and can explain the essential basic concepts and
terminology before engaging in Accounting applications in each topic.
o The most vital concepts are those contained in the expanded
Accounting equation: Assets + Expenses + Drawings = Capital +
Income + Liabilities. The process of conceptualizing and understanding
the above goes much further than simply the rote-learning of
definitions.
TEACHER NOTE:
(a)
(b)
(c)
It is essential that the expanded Accounting Equation be fully understood from
an early stage of studies in Accounting i .e. from the GET phase, and
particularly from Grade 10 in the FET phase.
Formative tests must be regularly conducted on the fixed format, without
figures, of the Income Statement and Retained Income note, particularly for
weaker learners, so that they identify the correct placement of the various
categories of items . Candidates should also be alerted to the easily obtainable
method marks for sub-totals, even if errors have been made in the preceding
figures.
In the NSC exam, 300 marks have to be distributed to cover three modules . It
is therefore impossible for all financial statements to be tested in one paper.
The different financial statements will be rotated randomly over a period.
Learners must get to know the basic formats of all major financial statements,
27
© Gauteng Department of Education
(d)
as well as the relevant notes. Formative tests should be conducted on
calculations relating to the number of shares and the amount of interim and
final dividends. It is necessary to take heed of the changes relevant to CAPS
when addressing the number of shares and the issue price of shares.
The approved textbooks will have covered the different types of audit reports,
i.e. unqualified, qualified and disclaimer. After covering this topic, teachers
should include it in tests and school-based examinations. Learners should be
encouraged to discuss and debate the issues contained in different audit
reports . This would broaden their knowledge and hone their ability to comment
with insight .
BUSINESS
ENTITY
CONCEPT
MATERIALITY
CONCEPT
GOINGCONCERN
CONCEPT
Generally accepted
accounting
Practices
(GAAP)
HISTORICAL
COST
PRINCIPLE
PRUDENCE CONCEPT
MATCHING
AND
ACCRUAL
CONCEPT
CONSISTENCY
CONCEPT
EXPLANATION
GAAP PRINCIPLE
The value of an asset in the balance sheet is the reasonable
value of an asset still in use in a business which will continue
for the foreseeable future, not the actual amount it could be
sold for.
If an asset has only been used for 6 months, it will be
depreciated for 6 months as it will only have contributed to 6
month’s earnings.
Assets, with the exception of land and buildings, will be
depreciated as they lose value because of normal wear and
tear. Although land and buildings usually increase in value,
the profit will not be entered in the books until it is realized until they are actually sold.
All assets are entered in the books at the original cost price
Going concern
Matching
Prudence
Historic cost
28
© Gauteng Department of Education
as this can be proved and is not dependent on anyone’s
valuation.
Tangible assets are items used by the business for longer
than 12 months. However, if the business buys a stapler for
the accountant costing R150, it will last him forever. It will not
be considered an asset as the cost is too small to warrant a
page in the asset register and depreciation calculations for
years.
The owner bought a new car for his son and paid for it out of
the business bank account. This amount would be debited to
Drawings account and not to Vehicles account.
Materiality
Entity
Once it has been decided to depreciate computers by 25%
Consistency
p.a. on cost price, the same method must be used every year.
TERM
Accrued expenses/
M
expenses payable
Accrued income/income
receivable
Asset
Bad debts
Cost of sales
Creditors
Debtors
Depreciation
Income received in
advance/deferred income
Liability
Loss
Mark-up
Owners’ equity
Prepaid expenses
Profit
DEFINITION
Expenses that are still owing at the end of the
financial year.
Income that is still owing to the business at the
end of the financial year.
Item of value owned by a person or business
which enables a profit to be made.
Debts written off as the debtors are unlikely to
settle their accounts.
Cost of sales is the cost price of all goods that
have been sold.
People/suppliers the business owes money to.
People who owe the business money for goods
bought on credit.
The amount by which fixed assets reduce in value
over time due to wear and tear.
Income that has already been received by a
business but which is for the next financial year.
An amount owed by a person or business to
another person or business.
When the expenses are more than the income.
The percentage added to the cost price to
calculate the selling price, i.e. the profit %.
The net worth (value) of the business at any given
time.
Expenses that have already been paid but which
are for the next financial year.
When the income is more than the expenses.
29
© Gauteng Department of Education
Trading stock deficit
This amount is calculated when the physical
Stock-take figure is less than the figure for trading
stock in the general ledger.
Trading stock surplus
This amount is calculated when the physical
stock-take figure is more than the figure for
trading stock in the general
ledger.
NAME OF COMPANY: ……………………….
STATEMENT OF COMPREHENSIVE INCOME
INCOME STATEMENT FOR THE YEAR ENDED ……………………
Note
s
Sales
Cost of sales
Gross profit
Other Operating Income
Rent income
Commission income
Fee income
etc
Gross operating income
Operating expenses
Trading stock deficit
Salaries and wages
Directors fees
Audit fees
Depreciation
Provision for bad debts adjustment (expenses)
Insurance
Bad debts
Packing material
Sundry expenses
etc
Operating profit/(loss)
Interest income
Profit before interest expense/financing cost
Interest expense / financing cost
Net profit (loss) before tax
Income tax
Net profit (loss) after tax
R
xx
(xx)
xx
x
x
x
x
x
xx
(xx)
x
x
x
x
x
x
x
x
x
x
x
xx
1
2
8
x
xx
(x)
xx
(x)
xxx
30
© Gauteng Department of Education
FORMAT OF THE FINANCIAL STATEMENTS:
NAME OF THE COMPANY: …………… LIMITED
STATEMENT OF FINANCIAL POSITION
BALANCE SHEET AT ………………..
ASSETS
NON - CURRENT ASSETS
Fixed assets (Tangible assets)
Financial assets : Fixed deposits : XX Bank
CURRENT ASSETS
Inventories
Trade and other receivables
Cash and cash equivalents
Notes
R
3
x
x
x
4
5
6
x
x
x
x
xx
TOTAL ASSETS
EQUITY AND LIABILITIES
SHAREHOLDERS’ EQUITY
Ordinary share capital
Retained Income
7
8
NON-CURRENT LIABILITIES
Loan ……
xx
x
x
xx
xx
CURRENT LIABILITIES
Trade and other payables
Bank overdraft
Current Portion of loan (Short term loan)
TOTAL EQUITY AND LIABILITIES
9
x
xx
x
x
xx
NAME OF THE COMPANY: …………… LIMITED
NOTES TO THE FINANCIAL STATEMENTS AT ………………..
1.
INTEREST INCOME
On fixed deposit
On savings account
On current account
On overdue debtors
x
x
x
x
31
© Gauteng Department of Education
xx
2.
3.
INTEREST EXPENSE
On loan
On bank overdraft
On overdue accounts
x
x
x
xx
FIXED ASSETS
Carrying value at beginning
of year
Cost
Accumulated depreciation
LAND AND
BUILDINGS
VEHICLES
EQUIPMENT
TOTAL
x
xx
xx
xx
x
x
(x)
x
(x)
x
(x)
x
x
(x)
(x)
xx
xx
(x)
x
(x)
(x)
xx
xx
(x)
x
(x)
(x)
xx
xx
(x)
MOVEMENTS
Additions
Disposals at carrying value
Depreciation
Carrying value at end of year
Cost
Accumulated depreciation
4.
xx
xx
INVENTORIES
Trading stock
Consumable stores on hand
xx
x
xx
5.
6.
TRADE AND OTHER RECEIVABLES
Trade Debtors
Provision for bad debts
Net Trade Debtors
Prepaid expenses
Accrued income
Insurance Claim
SARS – Income Tax (DR Balance)
SARS – Vat control (DR Balance)
Deposit : light and water
x
(x)
xx
x
x
x
x
x
xx
CASH AND CASH EQUIVALENTS
Fixed deposit (maturing within 12 months)
Savings account
xx
X
32
© Gauteng Department of Education
Bank account
Cash float
Petty cash
7
8.
9.
X
x
x
xx
ORDINARY SHARE CAPITAL
Authorised
Number of ordinary shares : xxxxx shares
Issued
xxx Ordinary shares in issue at beginning of year
xxx Ordinary shares issued during the year at an issue price of
RXXX
xxx Ordinary shares bought back during the year at Rxxx per share
xxx Ordinary shares in issue at end of year
x
x
xx
Retained income
Balance at beginning of year
Net profit after tax for the year
Repurchase of ordinary shares
Ordinary share dividends
Paid
Recommended
Balance at end of year
xx
x
(xx)
(xx)
x
x
xxx
TRADE AND OTHER PAYABLES
Trade creditors
Accrued expenses
Income received in advance
Deposit :Rent income
SARS - Income tax (CR Balance)
SARS -PAYE
SARS - Vat control (CR Balance)
Creditors for salaries
Pension fund
Medical aid fund
Unemployment insurance fund
x
x
x
x
x
x
x
x
x
x
x
x
xx
33
© Gauteng Department of Education
SESSION2: ACTIVITY 1
LESSON FORMAT:
Pre-Test: 10 minutes
Class Activity 1 Completed by learners and Educator: 1hr:10 minutes
Post –Test: 10 minutes
FINANCIAL STATEMENTS AND AUDIT
REQUIRED:
(Taken from NSC Nov 2013 Paper)
1.1
Give ONE word/term for each of the following descriptions by choosing
a word/term from the list below. Write only the word/term next to the question
number (1.1.1–.1.4) in the ANSWER BOOK.
current asset; non-current asset; income; expense;
current liability; non-current liability
1.1.1
Profit on the sale of an asset is a/an ... (2)
1.1.2
The portion of a loan that will have to be repaid within a year is
a/an ... (2)
1.1.3
Consumable stores on hand are a/an ... (2)
1.1.4
Interest on a bank overdraft is a/an ... (2)
[8]
2.1 NERO LIMITED
You are provided with the Pre-Adjustment Trial Balance of Simphiwe Limited. The
company buys and sells uniforms and they also repair uniforms for their customers,
for which they charge a fee. These fees are credited to the
Fee Income Account in the General Ledger.
2.1.1
2.1.2
Refer to Information 2J below.
Calculate the profit or loss on disposal of the computer. Show
workings. You may prepare an Asset Disposal Account to identify
the figure.
(8)
Complete the Income Statement for the year ended
30 September 2015. The notes to the financial statements are NOT
required.
(47)
34
© Gauteng Department of Education
INFORMATION:
1.
NERO LTD
PRE-ADJUSTMENT TRIAL BALANCE AS AT 30 SEPTEMBER 2015
Balance Sheet Accounts Section
Ordinary share capital
Retained income (1 October 2014)
Loan from Stay Bank
Land and buildings at cost
Vehicles at cost
Equipment at cost
Accumulated depreciation on
vehicles (1 October 2014)
Accumulated depreciation on
equipment (1 October 2014)
Debtors' control
Creditors' control
Trading stock
Bank
Petty cash
SARS – Income tax
Provision for bad debts
Nominal Accounts Section
Sales
Cost of sales
Debtors' allowances
Salaries and wages
Discount allowed
Fee income
Rent income
Insurance
Sundry expenses
Directors' fees
Audit fees
Consumable stores
Interest income
Ordinary share dividends
DEBIT
R
CREDIT
R
1 300 000
170 000
90 000
1 628 520
220 000
190 000
41 000
37 000
36 600
17 960
479 000
13 500
2 200
83 500
1 440
R
R
2 720 000
1 310 000
6 200
162 000
905
104 750
56 000
11 000
39 250
390 000
53 705
24 000
2 500
88 000
35
© Gauteng Department of Education
2.
ADJUSTMENTS:
A.
Prepaid expenses in respect of sundry expenses at the year- end,
R3 200, have not been taken into account.
B.
On 30 September 2015, R580 was received from A Ethic, whose
account had previously been written off as irrecoverable. The amount
was entered in the Debtors' Control column in the Cash Journal.
C.
The provision for bad debts must be adjusted to R1 830.
D.
There were two directors at the start of the accounting period.
Directors' fees have been paid for the first half of the accounting
period. On 1 April 2015, a third director was appointed. All three
directors earn the same monthly fee. Provide for the outstanding fees
owed to the directors.
E.
Rent has been received for 14 months.
F.
The following credit note was left out of the Debtors' Allowances
Journal for September in error. The mark-up on goods sold was 50%
on cost.
NERO LTD
CREDIT NOTE 4533
28 Sept.
2015
Credit:
Supaclean Ltd
PO Box 340, Westmead,
3610
24 Uniforms returned
Reduction on fee charged
for repair of uniforms
Unit price
Total
R400
R9 600
R 750
R10 350
G.
A physical stock count on 30 September 2015 reflected the stock of
uniforms on hand as R490 000.
The loan statement from Stay Bank reflected the following:
H.
36
© Gauteng Department of Education
Balance at beginning of financial year
Repayments during the year
Interest capitalised
Balance at end of financial year
R 150 000
R 78 000
R
?
R 90 000
I.
Depreciation on vehicles is calculated at 20% p.a. on the diminishingbalance method.
J.
Depreciation on equipment is calculated at 10% p.a. on the cost price.
Note that an item of equipment was taken over by one of the directors,
Ivor Steele, on 30 June 2015 for personal use for R800 cash. The
relevant page from the Fixed Asset Register is provided below. No
entries have been made in respect of the disposal of this asset.
FIXED ASSET REGISTER
Page 12
Item: VYE Computer
Ledger Account: Equipment
Date Purchased: 1 April 2012
Cost Price: R22 000
Depreciation Policy: 10% p.a. on cost price
Date
Depreciation calculations
2012
30 September
2013
30 September
2014
30 September
2015
30 June
K.
Current
Depreciation
Accumulated
Depreciation
R22 000 x 10% x 6/12
R1 100
R1 100
R22 000 x 10% x 12/12
R2 200
R3 300
R22 000 x 10% x 12/12
R2 200
R5 500
R?
R?
?
Income tax for the year amounts to R63 280.
37
© Gauteng Department of Education
SESSION: 2 ACTIVITY 1 SOLUTION
1.1
Give ONE word/term for each of the descriptions by choosing a
word/term from the list. Write only the word/term next to the question
number (1.1.1–1.1.4).
1.1.1
Income 
1.1.2
Current liability 
1.1.3
Current asset 
1.1.4
Expense 
8
2.1.1 Calculate the profit or loss on disposal of the computer:
No part marks

22 000
–


5 500 – 1650
–

800

= R14 050
–


(5 500 + 1650) –

800

= R14 050
OR

22 000
OR
Cost price
Accu depr (5 500  + 1 650 )
Carrying value
Disposal/Bank
Loss on sale of asset
22 000
7 150
14 850
800
14 050



Asset disposal
Equipment
22 000 Accu depr (5 500  + 1 650 )
Bank
Loss on sale of asset
Ignore details here
22 000
7 150
800
14 050
22 000
8
38
© Gauteng Department of Education
2.1.2 NERO LTD
INCOME STATEMENT FOR THE YEAR ENDED 30 SEPTEMBER 2015
Sales (2 720 000  – 6 200  – 9 600 ) –R15 800: 2
marks
Cost of Sales (1 310 000  – 6 400 ) Mark figures only
8

2 704 200

(1 303 600)
Gross Profit Check operation, COS must be deducted

1 400 600
Other operating income

157 180
Fee income (104 750  – 750 )

104 000
Rent income (56 000 – 8 000 )

48 000

580

4 600
Check operation
Bad debts recovered
12
Trading stock surplus (490 000 – [479 000 + 6 400])
Ignore workings,1 method mark for any figure
Gross operating income
1 557 780

(1 331 350)
Salaries and wages

162 000
Discount allowed

905
Insurance

11 000
Sundry expenses (39 250  – 3 200 )

36 050
585 000Directors
fees (390 000  + 390 000 + 195 000 )
Audit fees

975 000

53 705
Consumable stores

24 000

390
@
54 250

14 050
Operating Expense
Check operation, mark figure only
Provision for bad debts adjustment
22
No part marks
Depreciation (1 650  + 16 800  + 35 800 
See 4.1.1
@Any figure
Loss on sale of asset
See 4.1.1
Operating profit
226 430

Interest Income
Profit before interest expense/finance cost
Interest expense / Finance cost
If no brackets accept the figure
228 930

Profit before tax
Income Tax
5
Net Profit after tax
2 500
(18 000)
210 930
If no brackets accept the figure

(63 280)
Check operation, tax and interest
expense must be deducted

147 650
TOTAL
MARKS
47
55
39
© Gauteng Department of Education
SESSION 2: ACTIVITY 2
Class Activity 2 Completed by learners and Educator: 1hr:30 minutes
1.
SELATI LIMITED
You are provided with information for the financial year ended 30 June 2013.
REQUIRED:
1.1
Complete the Income Statement.
(54)
1.2
Prepare the note for Retained Income.
(7)
INFORMATION:
EXTRACT FROM THE TRIAL BALANCE ON 30 JUNE 2013:
Balance Sheet Accounts Section
Ordinary share capital (2 250 000 shares)
Retained income (1 July 2012)
Trading stock
Debtors' control
Provision for bad debts
Creditors' control
Loan: Puma Bank
Bank (Dr)
SARS: Income tax (Dr)
Pension fund
Unemployment Insurance Fund (UIF)
Fixed deposit: Sharp Bank
Nominal Accounts Section
Sales
Cost of sales
Salaries and wages
Directors' fees
Audit fees
Employer's contribution (Pension and UIF)
Bank charges
Sundry expenses
Bad debts
Rent income
Interest on fixed deposit
R
4 500 000
735 000
1 534 000
521 300
22 000
786 800
630 000
129 400
260 000
15 800
2 300
450 000
R
?
8 200 000
788 000
1 840 000
88 000
81 000
31 000
89 730
12 100
69 160
27 000
40
© Gauteng Department of Education
Repairs and maintenance
Packing material
Ordinary share dividends (interim)
125 600
43 900
?
ADJUSTMENTS AND ADDITIONAL INFORMATION:
1.
The auditors are owed a further R7 500.
2.
Goods are sold at a mark-up of 60% on cost price. The company held
discounted cash sales during the year to clear excess stock. The total
of trade discount given to customers was R702 000.
3.
Packing material to the value of R41 000 was used during the year
ended 30 June 2013.
4.
Interest on the bank overdraft, R2 800, is included in the bank
charges.
5.
No entries have been made for stock stolen at the beginning of June
2013. The insurance company has informed Selati Ltd that they have
transferred R32 000 into the business' bank account in respect of the
insurance claim. Selati Ltd bears 20% of any stock loss.
6.
A physical stocktaking on 30 June 2013 reflected that stock to the
value of R1 475 500 was on hand.
7.
An amount of R1 700 received from M Mpoani had been credited to
the Debtors' Control Account in June 2013. The account of M Mpoani
was written off as a bad debt during May 2013.
The provision for bad debts must be adjusted to 4% of outstanding
debtors.
8.
One employee was omitted from the Salaries Journal for June 2013.
His salary details are:
Deductions
2 020
9.
Employer's Contribution
1 610
Net salary
4 980
EZ Builders was paid R105 000 for the construction of a storeroom
(R80 000) and repairs to paving (R25 000). The entire amount was
debited to Land and Buildings in error.
41
© Gauteng Department of Education
The loan statement from Puma Bank on 30 June 2013 reflected:
10.
Balance at beginning of financial year
Repayments during the year
Interest capitalised
Balance at end of financial year
R1 470 000
840 000
?
750 000
11.
Rent income for July 2013 has already been received. The monthly
rent was increased by 10% on 1 May 2013.
12.
Depreciation is the missing figure in the Income Statement.
13.
Net profit and tax:


14.
After taking all adjustments into account, the correct net profit
after tax is R588 000.
The income tax rate is 30% of net income before tax.
Shares and dividends:



Interim dividends of 14 cents per share were declared and paid
on 31 December 2012.
250 000 shares were issued on 1 January 2013. This was
properly recorded.
Final dividends of 10 cents per share were declared on 30 June
2013.
42
© Gauteng Department of Education
SESSION NO: 2 ACTIVITY 2 SOLUTION
TOPIC: COMPANIES FINANCIAL STATEMENTS
1.
1.1
SELATI LIMITED
INCOME STATEMENT FOR THE YEAR ENDED 30 JUNE 2013
Sales (13 120 000 – 702 000)
12 418 000
Cost of sales
(8 200 000)
Gross profit
4 218 000 5
66 220
Other income
(5200 + 10%) 2 marks
Rent income (69 160– 5 720)
63 440
Bad debts recovered
Provision for bad debts adjustment
1 700
1 080
 4 284 220 11
Gross operating profit
Operating expenses
(3 348 420)
(4 980 + 2 020) 2 marks or nothing
Salaries and wages (788 000+ 7 000 )
795 000
Audit fees (88 000 + 7 500)
95 500
Employer's contribution (81 000+ 1 610)
82 610
Bank charges (31 000 – 2 800)
28 200
Sundry expenses
89 730
Bad debts
12 100
Repairs and maintenance (125 600 + 25 000)
Packing material
Loss due to stock theft (40 000 – 32 000)
Trading stock deficit (1 534 000– 40 000–1 475 500)
150 600
41 000
8 000
18 500
May be combined as
R26 500
(6 marks)
1 840 000
Directors' fees
187 180 28
Depreciation
935 800
Operating profit
27 000
Interest income
Profit before interest expense
Interest expense (2 800 + 120 000)
962 800
 (122 800)
43
© Gauteng Department of Education
840 000
Net profit before tax
 (252 000) 10
Income tax for the year
Net profit after tax
588 000
54
NOTE FOR RETAINED INCOME
Balance at the beginning of the year
735 000
588 000
Net profit after tax
Dividends
 (505 000)
Interim 2 000 000 x 14c
280 000
Final
225 000
2 250 000 x 10c
Balance at the end of the year
818 000
44
© Gauteng Department of Education
7
SESSION NO 3: CLASS ACTIVITY 1
Completed by learners and Educator: 1hr:30 minutes
BALANCE SHEET AND NOTES
3.1
You are provided with information relating to Langberg Limited for the
financial year ended 31 August 2015.
REQUIRED:
3.1.1 Prepare the following notes to the Balance Sheet:



(10)
(13)
(11)
Ordinary share capital
Retained income
Trade and other payables
3.1.2 Complete the Equity and Liability section of the Balance Sheet on
31 August 2015.
(17)
INFORMATION:
1.
The following figures were extracted from the financial records at the end of
the financial year, 31 August 2015:
Ordinary share capital (See information below)
Retained income (on 1 September 2014)
Fixed deposits at Okiep Bank
Fixed deposits at Gariep Bank
Savings Account
Mortgage Loan from Okiep Bank
Fixed/Tangible assets
Debtors’ control
Creditors’ control
Creditors for salaries
Accrued income
Trading stock
Income received in advance
Bank (favourable balance)
Consumable stores on hand
Shareholders for dividends
SARS (Income tax) provisional tax payments
SARS (PAYE)
R?
801 000
540 000
?
265 000
?
3 496 500
75 000
65 200
24 200
12 600
?
11 500
123 500
11 000
?
380 000
9 700
45
© Gauteng Department of Education
2.




The authorised share capital consists of 1 200 000 ordinary shares.
Prior to 1 September 2014, 420 000 ordinary shares had been issued to
the public at R6,00 each.
On 31 May 2015 a further 180 000 shares were issued at R7,20 per
share.
On 30 June 2015 the directors agreed to buy-back 50 000 shares at
R7,55 per share from a dissatisfied shareholder. A direct transfer of
funds was made on 31 August 2015 but has not yet been recorded in
the books.
3.
No entry has been made for income tax for the year. This was calculated to
be R408 800. The income tax rate is 28%.
4.
Dividends were as follows:

Interim dividends of 65 cents per share were paid on 28 February 2015.

Final dividends of 38 cents per share (buy-back shareholders did not
qualify) were declared on 31 August 2015.
5.
The bank reconciliation statement reflected a cheque of R62 000 which had
appeared in the Cash payments journal and was post-dated 31 October 2015.
6.
A debtor with a credit balance of R7 000 is to be transferred to the Creditors’
ledger.
7.
Interest is capitalised on the mortgage loan. The loan statement from Okiep
Bank reflected a balance of R440 000 (at the beginning of the year) and
interest of R48 600 for the year ended 31 August 2015. Monthly repayments
are R7 600 (including interest). The monthly capital repayments on the loan
will remain until the loan has been paid in full.
3.2
AUDITORS’ REPORT AND BUSINESS ETHICS
3.2.1 Who is responsible to see to it that the financial statements are drawn
up?
(2)
3.2.2 To which main group of people should the auditors address their report
and why is the report directed to this group of people?
(3)
3.2.3 The auditor’s report refers to the International Financial Reporting
Standards (IFRS). Explain why the auditors have to bring the IFRS
into account when they give their opinion.
(2)
46
© Gauteng Department of Education
3.2.4 Refer to the following extract from the independent auditors’ report of
Langberg Limited.
“According to us, the financial statements, in all material
respects, fairly present the financial position of Langberg Ltd
as at 30 June 2015, and the results of the financial operations
and cash flows for the year then ended in accordance with
International Financial Reporting Standards, and in the manner
required by the Companies Act in South Africa.”
Should the shareholders be satisfied with the auditor’s report? Give
ONE reason for your answer.
(3)
3.2.5 If the auditors neglect to fulfill their duties, it could have serious
consequences for them. Discuss TWO advantages for the
shareholders of Langberg Limited that all auditors should be members
of a professional body.
(4)
3.2.6 J. Mei, the auditor’s partner, who does the auditing at Langberg
Limited, is going to marry A. Mabote, the financial director at Langberg
Limited.

Would this influence the audit of Langberg Limited in any way?
Give a reason for you answer.

What advice will you give J. Mei?
(5)
70
47
© Gauteng Department of Education
SESSION 3 ACTIVITY 1 SOLUTION
3.1
ORDINARY SHARE CAPITAL
AUTHORISED SHARE CAPITAL
Number of authorized ordinary shares: 1 200 000
ISSUED SHARE CAPITAL
420 000
In issue at beginning of year at R6
2 520 000
180 000
Issued during the year at R7,20
1 296 000
50 000
Shares repurchased during the year
(Average issue price, R6,36 per share)
(318 000)
550 000 Shares in issue at the end of the year
3 498 000
Operation
10
RETAINED INCOME
Balance at the beginning of the year
*Net profit after tax for the year (72/28 x
408 800)
Share buy-back (50 000 x 1,19) (see average price)
Dividends (operation one part correct and in brackets)
801 000
1 051 200
(59 500)
(482 000)
Interim (420 000 x 0,65)
273 000
Final (550 000 x 0,38)
209 000
Balance at the end of the year
1 310 900
Operation
13
* (1 460 000 (2 marks) – 408 800 (1 mark))
48
© Gauteng Department of Education
TRADE AND OTHER PAYABLES
Trade creditors (65 200 + 62 000+ 7 000)
One part correct
134 200
28 800
SARS (Income tax) (408 800- 380 000)
Creditors for salaries
24 200
Income received in advance
11 500
9 700
SARS (PAYE)
208 400
Operation
3.1.2
11
LANGBERG LIMITED
BALANCE SHEET ON 31 AUGUST 2015
EQUITY AND LIABILITIES
SHAREHOLDERS’ EQUITY
(operation)
4 808 900
Ordinary share capital
(see 3.1.1)
3 498 000
Retained income
(see 3.1.1)
1 310 900
NON CURRENT LIABILITIES
354 800
Mortgage loan: Star Bank
(440 000 + 48 600 - 91 200- 42 600)
CURRENT LIABILITIES
(operation)
354 800
Trade and other payables
(see 3.1.1)
208 400
*Shareholders for dividends
(see Retained income)
209 000
(see mortgage loan)
42 600
*Current portion of loan
TOTAL EQUITY AND LIABILITIES
460 000
5 623 700
* Shareholders and current portion can be shown as Trade & other payables
17
49
© Gauteng Department of Education
3.2.1
Who is responsible to see to it that the financial statements
are drawn up?
Directors of the company.
2
3.2.2
To which main group of people should the auditors address
their report and why is the report directed to this group of
people?
Shareholders – They are the owners of the company who want
to see which recommendations the auditors will make.
3
3.2.3
The auditor’s report refers to the International Financial
Reporting Standards (IFRS). Explain why the auditors have to
bring the IFRS into account when they give their opinion?
It is a requirement of audit standards and assures that the financial
statements of a company comply with International Standards and
can thus be compared with other companies.
2
3.2.4
Should the shareholders be satisfied with the auditor’s
report? Give ONE reason for your answer.
Yes, it is said that the financial statements fairly present the
financial position of the company. It is therefore an unqualified
report.
3
50
© Gauteng Department of Education
3.2.5
If the auditors neglect to fulfill their duties, it could have
serious consequences for them. Discuss TWO advantages for
the shareholders of Langberg Limited that all auditors be
members of a professional body.
Any TWO valid advantages  




Conduct of auditors to respond with ethical code.
All auditors are CAs and bound to the professional body –
SAICA.
SAICA guarantee a high standard of professional auditors.
SAICA guarantee a high level of competence and integrity.
4
3.2.6
J. Mei, the auditor’s partner, who does the auditing at
Langberg Limited, is going to marry A. Mabote, the financial
director at Langberg Limited.
Would this influence the audit at Langberg Limited in any
way? Give a reason for your answer.
Yes,
One valid reason 



There is a conflict of interest.
It can bring the objectivity of the audit under suspicion.
It can threaten the independency of the audit.
What advice will you give J. Mei?
Any valid advice 
J. Mei must excuse him from auditing the financial results of
Langberg Limited.
5
TOTAL
MARKS
70
51
© Gauteng Department of Education
52
© Gauteng Department of Education
SESSION NO 3: CLASS ACTIVITY 2
Completed by learners and Educator: 1hr:30 minutes
3.2
BALANCE SHEET AND NOTES
You are provided with information extracted from the financial records of
Sias Limited. The financial year ends on 28 February each year.
REQUIRED:
3.2.1
3.2.2
Prepare the following notes to the Balance sheet on 28 February 2014.
 Ordinary share capital
 Retained Income
(9)
(14)
Prepare the Balance Sheet on 28 February 2014. (ALL workings must be
shown in brackets – all the notes are NOT required.)
(40)
53
© Gauteng Department of Education
INFORMATION:
1.
The following balances appeared in the General Ledger on 28 February 2014:
BALANCE SHEET ACCOUNTS SECTION
Ordinary share capital (120 000 ordinary shares)
Retained income (1 March 2013)
Long-term loan: Dineo Lenders
Fixed assets at carrying value (28 February 2014)
Trading stock
Debtors control
Provision for bad debts (1 March 2013)
Creditors control
Bank overdraft
Cash float
Fixed deposit at Morgenzon Bank
SARS: Income tax - debit
SARS: VAT
NOMINAL ACCOUNTS SECTION
Dividends on ordinary shares (interim)
FINAL ACCOUNTS SECTION
Profit and Loss Account (net profit)
2.
R
540 000
15 000
117 600
699 060
41 500
15 250
820
24 200
3 900
500
15 000
48 500
8 000
36 000
150 000
The following Information / adjustments must still be considered:
2.1 Shares and dividends:
 The company has an authorised share capital of 600 000 ordinary shares.
 The directors declared a final dividend of 8% of share capital on
27 February 2014. The dividend was declared before the shares were
repurchased.
 The company bought back 5 000 shares at R5 per share on 28 February 2014.
No entry has been made of this transaction.
2.2
The following items must be brought into account:
 Consumable goods on hand on 28 February 2014, R1 200
 Provision for bad debts at 4% of net debtors
 Advertising prepaid, R5 000
 An adjustment to the Rent Income Account (The total in the Rent Income
Account was R17 900 which included rent for March and April 2014 – rent was
increased by 8% from 1 January 2014.)
 The net profit before tax was calculated as R150 000 after taking into account the
adjustments above.
 The Income tax rate is 30% of net profit.
2.3 A loan was received from Dineo Lenders on 1 September 2012. The loan is to be
repaid in equal monthly instalments over 5 years. The first instalment was paid on
30 September 2012.
2.4 The fixed deposit expires on 30 November 2014.
54
© Gauteng Department of Education
SESSION NO 3: ACTIVITY 2
3.2.1
NOTES TO THE BALANCE SHEET ON 28 FEBRUARY 2014
ORDINARY SHARE CAPITAL
Authorised
Number of authorised ordinary shares: 600 000 shares
Issued
120 000 shares issued at beginning of year
5 000 shares repurchased during the year
(average R4,50 per share)
115 000 shares in issue at end of year
one part
540 000
 (22 500)
517 500
9
correct
RETAINED INCOME
Balance at the beginning of the year
Net profit after tax for the (150 000 – 45 000)
Repurchase of 5 000 shares 
Dividends for the year
one part correct
Interim
Final (540 000 x 8%)
one part
15 000
105 000
 (2 500)
 (79 200)
36 000
43 200
correct
13
Balance at the end of the year
operation
38 300
55
© Gauteng Department of Education
3.2.3
BALANCE SHEET OF SIAS LIMITED ON 28 FEBRUARY 2014.
ASSETS
NON-CURRENT ASSETS
Fixed assets
FINANCIAL ASSESTS
Fixed deposit at Morgenzon Bank (15000 – 15000)
699 060
699 060
-
CURRENT ASSETS
operation
Inventories (41 500+ 1 200)
Trade and other receivables
(15 250 – 610 + 3 500 + 5 000)
one part correct
Cash and cash equivalents (500 + 15 000)
81 340
42 700
23 140
15 500
780 400
TOTAL ASSETS
15
EQUITY AND LIABILITIES
ORDINARY SHAREHOLDERS’EQUITY
Ordinary share capital
Retained income
operation
555 800
517 500
38 300
5
NON-CURRENT LIABILITIES
operation
Long-term loan: Dineo Lenders (117 600 – 33 600) 5
CURRENT LIABILITIES
operation
Trade and other payables
one part correct
(24 200 + 8 000 + 2 700 + 43 200)
Bank overdraft ( 3 900 + 25 000)
Short-term loan
TOTAL EQUITY AND LIABILITIES
operation 17
84 000
84 000
140 600
42
78 100
28 900
33 600
780 400
56
© Gauteng Department of Education
SESSION 4:
TOPIC: COMPANIES FINANCIAL STATEMENTS AND FINANCIAL INDICATORS
SUGGESTIONS FOR IMPROVEMENT
(a) The Cash Flow Statement should be taught by focusing on specific aspects in
isolation in order to develop learners’ confidence in identifying specific figures
and practicing the correct use of brackets to indicate outflows. Some of these
figures are relatively easy to calculate, e.g. the difference between loans at the
beginning and end of the year will indicate the value of the cash outflow (in
brackets) or the cash inflow (without brackets). Formative tests on the specific
items would be beneficial in developing learners’ understanding. Note that
under CAPS the Cash Flow Statement could contain an outflow under
Financing Activities of the amount paid to repurchase shares from shareholders
(b) Where a bank overdraft exists, in calculating the Cash and Cash Equivalents
from the Balance Sheet figures, learners must be taught to reduce the overdraft
by the cash resources on hand (e .g . petty cash) in order to arrive at the
correct net figure.
(c) In commenting on financial indicators, learners must understand that partmarks are earned for quoting the trends in the actual figures from one year to
the next or from one company to another. However, comments should go
beyond merely quoting the trends . For example, in commenting on the returns,
earnings and dividends of shareholders, candidates should also offer a general
comment on or interpretation of the figures in order to earn full marks .
(d) In commenting on the use of loans, in order to earn full marks for a
comprehensive answer, learners must be taught to cover both the debt: equity
ratio (i .e . to assess the degree of risk) and the return on capital employed
compared to the interest rate (i .e . to assess positive or negative gearing) .
(e) In interpreting financial statements, including Cash Flow Statements, teachers
should encourage learners to adopt the concept of Materiality in order to
assess which figures are more significant or ‘material’ than others This skill can
be learnt by requiring learners to draw on personal interests or experiences, e
.g . in a Cricket match, a century scored by a player is more significant than 20
runs scored by another player.
(f) When teaching the preparation of annual financial statements in Grades 10 to
12, teachers are advised to encourage learners to question specific items and
figures that they are preparing. This can be done on a simplistic level such as
questioning whether the profit earned is satisfactory or not. This will serve to
sow the seeds of an analytical or inquisitive approach by learners .
(g) Despite the improvement noticed in the calculation of financial indicators,
weaker candidates do require additional support . Teachers must continue to
conduct formative tests on this topic at regular intervals, as this lends itself to
all sections across the curriculum . Learners must also be taught to understand
the logic underlying each financial indicator. It is a retrogressive step to expect
learners to memorize formulae because these can easily be forgotten if the
underlying logic is not understood. Also, inserting figures into a roteremembered formula serves no positive educational purpose as learners will
not be able to offer meaningful interpretations of the results . The formative
tests should therefore cover both the calculation and the purpose of the
financial indicator.
57
© Gauteng Department of Education
(h) Teachers must also ensure that other ratios and financial indicators not tested
in this examination be given the same emphasis, e .g . liquidity ratios .
LESSON FORMAT:
Completed by learners and Educator: 1hr:30 minutes
SESSION 4: ACTIVITY 1
1.
Indicate where each of the following items would be placed in the Balance
Sheet by choosing the answer from the list below. Write only the answer next
to the question number (1.1.1–1.1.4) in the ANSWER BOOK.
non-current assets; current assets; non-current liabilities; current liabilities
1.1
Current portion of a loan
(2)
1.2
Fixed deposits (maturing in two years' time)
(2)
1.3
Trade and other receivables
(2)
1.4
Bank overdraft
(2)
SECTION B: NOTES ON CONTENT
CASH FLOW STATEMENTS
1. Introduction
The cash flow statement reflects the movement of cash within an enterprise
during a specific period. The Companies Act stipulates that a cash flow
statement must be part of the company’s financial statements
2. Users of financial statements and its purpose
There are four main financial statements which companies prepare, namely:
 STATEMENT OF COMPREHENSIVE INCOME ( Income statement)
 STATEMENT OF FINANCIAL POSITION (Balance sheet)
 Cash flow statement
 Statement of changes in equity
For the purposes of the curriculum we only need to know how to prepare the first
three. We first prepare the income statement, then the balance sheet and thereafter
the cash flow statement.
58
© Gauteng Department of Education
INCOME
STATEMENT
BALANCE
SHEET
CASH FLOW
STATEMENT
The purpose of doing the cash flow statement is to:
 Determine the cash inflows for the financial period and their sources
 Determine the cash outflows for the financial period and what it was spent on
 Determine the net effect of the changes in cash
 Prepare it as part of the published financial statements of a public company
 Help assess the liquidity of the company
 How were capital developments projects financed?
 Does the company generate sufficient cash from its operations to maintain its
current operating capacity
Some users of the Cash Flow Statement:
 Management
 Directors
 Banks
 Investors
3.
Format of the cash flow statement (components)
Cash Flow Statement
Cash flows from
operating activities
Cash flows from
investing activities
The most common
source of cash for a
company. It involves
the buying and selling
of inventory, receipts
from debtors,
payments to creditors
and the paying of
expenses
Cash changes as a
result of buying and
selling of tangible /
fixed assets and any
changes in
investments i.e.
Fixed deposits
Cash flows from
financing activities
Cash changes as a
result of obtaining
financing and paying
off loans/issuing of
shares
59
© Gauteng Department of Education
Inflows
 Money received
from sales
 Money received
from other incomes
Outflows
 Money paid for stock
 Money paid for
expenses
 Money paid for tax
 Money paid for
dividends
Inflows
 Money received
from the sale of
assets
 Fixed deposits
maturing
Outflows
 Money paid for
replacing
tangible / fixed
assets
 Money paid for
buying new
assets
 Investing in fixed
deposits
Inflows
 Money received
from issuing
shares
 Money received
from obtaining
loans
Outflows
 Money used for
repaying loans
4. Preparing the cash flow statement
The Cash Flow statement consists of a face and the associated notes. These are
prepared after the Income statement and the Balance sheet for the current year have
been completed.
The following must be available before a Cash Flow Statement can be prepared
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Steps in preparing the Cash Flow Statement
1.
Calculate the cash generated from operations by considering the
following:



2.
Net profit before tax
Depreciation (non
cash item)
Interest
Expense(Financing
expense)
Information obtained from
the income statement
Calculate the changes in working capital by considering the following:
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
Changes in inventory. Increase (outflow) , decrease (inflow)

Changes in trade and other receivables. Increase (outflow) , decrease (inflow)
Exclude SARS INCOME TAX (DR BALANCE)

Changes in trade and other payables. Increase (inflow) , decrease (outflow)
Exclude SARS INCOME TAX(CR BALANCE)
SHAREHOLDERS FOR DIVIDENDS
AIULIG Assets increase utilised/ liabilities increase generated
ADGLDU Assets decreased generated/ liabilities decreased utilised
2011
Inventories
10 000
Trade & rec
30 000
Trade& pay
50 000
Cash generated
(LOVE ARROW)
2012
15 000 (5 000)
10 000 20 000 (excludes SARS INCOME TAX (DR)
40 000 (10 000)
5 000
You may use the logical method or you may do the SARS: Income tax account. The
bank amounts in this account would represent the taxation paid.
Opening balance
SARS INCOME TAX
Bank
Balance
CPJ1 140 000
c/d
20 000
160 000
B2
Balance
Income tax
b/d
60 000
100 000
160 000
Balance
b/d
20 000
Closing balance
TAXATION PAID R140 000
Expense
Calculate the amount of dividend paid.
You may use the logical method or you may do the Shareholders for dividend
and ordinary share dividend accounts. The bank amounts in these accounts
would represent the dividend paid.
INTERIM DIVIDEND PAID
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ORDINARY SHARE DIVIDENDS
Bank
Shareholders for
dividends
36 000
24 000
N2
Appropriation
60 000
60 000
60 000
LAST YEARS DIVIDEND
SHAREHOLDERS FOR DIVIDENDS
Bank
Balance
40 000
24 000
Balance
Ordinary share
dividends
64 000
Balance
c/d
B2
40 000
24 000
64 000
24 000
DIVIDENDS PAID (36 000 +40 000) R76 000
Calculate the fixed assets purchased.
INVESTING ACTIVITIES
COST PRICE METHOD
ASSET
B2
BALANCE
210 000
ASSET
DISPOSAL(CP)
BANK
200 000
Balance
360 000
410 000
Balance
410 000
360 000
ASSET DISPOSAL
ASSET
50 000
50 000
N2
ACCUMULATED
DEPRECIATION
BANK
50 000
40 000
10 000
50 000
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BALANCE
BANK
CARRYING VALUE
ASSET
B2
500 000
ASSET
DISPOSAL(CV)
DEPRECIATION
330 000
Balance
830 000
Balance
30 000
BANK
30 000



700 000
700 000
ASSET

100 000
830 000
ASSET DISPOSAL


30 000
N2
30 000
30 000
INVESTING ACTIVITIES
THE INCREASE OR DECREASE OF FINANCIAL ASSETS
FIXED DEPOSITS
FINANCING ACTIVITIES
Calculate proceeds from the issue of shares. Remember to include the
premium
Calculate proceeds from obtaining new loans.
Calculate repayment of loans.
Calculate the price of the repurchase (buy back ) of shares
FINANCIAL INDICATORS
RATIOS
A PROFITABILITY
1. GP on Cost of sales
2. GP on Turnover
3. Total Expenses on
Turnover
4. Operating profit on
turnover
5. Net Profit after Tax
on Turnover
PURPOSE




Determine the level of profitability and operating
efficiency of the business.
[How profitable is the business]
Verify the mark-up.
[Business policy on Gross Profit on Sales]
Check on control over expenses.
Check on control over stock / inventory.
[Applicable to Periodic Inventory system]
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ProfItability
Ratios/Percentages
Ratio
Comments
1. Gross Profit on Cost of
Sales
Periodic Inventory System
 Verify mark-up.
 Compare with the previous year and determine
the extent of the drop in percentage..
Gross profit X 100
Cost of Sales
1
Answer = X %
If the business uses the Periodic Inventory System
and a Fixed Mark-up and the % mark-up is lower
than as per policy, then the drop in mark-up can be
attributed to the following:
 Trade discounts were offered to bulk buyers.
 Stock was discounted during a stock clearance
sale.
 Errors in calculating mark-up.
 Theft of stock.
If the business used a variable mark-up, the result
would be an average mark-up on cost. This could be
compared with the average mark-up of the previous of
the year to see if there is an improvement or decline in
the mark-up.
Continuous Inventory System [Perpetual]
 Verify mark-up.
 Compare with the previous year and determine
the extent of the drop in percentage..
If the business uses the Perpetual / Continuous
Inventory System and a Fixed Mark-up, and the %
mark-up is lower than as per policy, then the drop in
mark-up cannot be attributed to theft of stock. It can
be attributed to the following:




2. Gross Profit on
Turnover


Trade discounts were offered to bulk buyers.
Stock was discounted during a stock clearance
sale.
Errors in calculating mark-up.
Theft of stock is not applicable.[Explain]
Check on GP policy on Turnover to see if it is
maintained.
For every R1 of sale, X % was the gross profit.
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

Gross profit X 100
Turnover
1
Answer = X %
Compare with the previous year.
A drop in % could be attributed to the same
reasons as in the case of a drop in Gross
Profit on Cost of Sales.
The Effect of Trading Stock on Gross Profit
Note: The business uses a fixed mark-up of 100% on cost.
Trading Statement
Example 1
Example 2
Opening stock
100 000
100 000
Purchases
450 000
450 000
Carriage on purchases
25 000
25 000
Customs duties
15 000
15 000
Import duties
10 000
10 000
Total Value of Goods Available for Sale
600 000
600 000
Less: Closing stock
150 000
90 000
Cost of sales
450 000
510 000
Gross profit
450 000
390 000
Sales
900 000
900 000
Gross Profit on Cost of Sales
S T O C K
100%
76,5%
C O N T R O L
Periodic Inventory System
Continuous Inventory System
Fixed Mark-Up
 Fixed mark-up will assist in
monitoring stock
 Calculation of GP on COS must
indicate must indicate whether
the mark-up is maintained.
 If the mark-up is lower it
indicates that there are stock
shortages.
Take physical stock and compare it
with the balance on the Trading Stock
Account to establish stock shortages.
Variable Mark-Up
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
Stock shortages would be by
comparing the average mark-up
with the previous year.
Other reasons for a drop in markup:
 Goods were discounted during
a period of sale.
 Goods were discounted to
promote bulk sales.
3. Total Expenses on
Turnover (sales)


Total Expenses
Turnover
X 100
1



4. Net Income after Tax
On Turnover

Net Income after Tax X 100
Turnover
1

This shows what portion of the GP on
Turnover is used for Operating Expenses.
Compare result with the previous year to see
if the % is a lower [improvement in control
over expenses] or if the % is higher [poor
control over expenses].
Identify specific expenses that need to be
curbed.
Guard against decreasing salaries and wages
to improve control over expenses. [Note that
macroeconomics is not only about making a
profit but it is also a social responsibility
insofar as creating jobs is concerned.
Advertising expenditure seen in relation to
sales.
If the drop in % from GP on turnover to Net
Profit after Tax on turnover is very high, then
the focus must be on curbing expenses
including interest expense since the cost of
financing will have an effect on this ratio. [See
ratio 3 above]
Compare result with the previous year to
assess whether there is an improvement or
deterioration in the control over expenses.
RATIOS
PURPOSE
B Liquidity Ratios
1.
2.
3.
4.
Current Ratio.
Acid Test Ratio.
Rate of Stock Turnover.
Period for which enough Stock is
on Hand.
5. Debtors’ Average Collection
To assess whether the business can pay
off its immediate debts / its short-term
obligations.
Make comparisons with the results of the
previous year and comment on:

The cause and level of improvement
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Period.
6. Creditors’ Average Payment
Period.
OR deterioration.
Points to consider when calculating
liquidity ratios:
 When calculating a ratio, the left
hand side of the ratio must be
divided by the right hand side of the
ratio. Therefore, the right hand side
of the ratio will always be equated to
1 i.e. the result would read x : 1.
 When calculating the Rate of Stock
 Turnover, the result would read ‘ x
times per year’.
 [Refer to 4, 5 and 6 below]
It is highly recommended that a
‘period’ is calculated in days and
not in months. It is easier to
comment on the exact number of
days than on a fraction of a month.
Therefore, in the calculation
multiply by
365 days to arrive at an
answer in days.
LIquidity
Ratios
Ratio
Comments

1. Current Ratio
Current Assets : Current Liabilities
▪ Inventories
▪ Payables
▪ Receivables
▪ Bank Overdraft]
▪ Cash




How much of current assets does
the business have for every R1 of
current liability.
Is the business liquid?
How does the result compare with
the previous year?
Will the business be able to pay its
short-term debts?
What can a higher ratio be
attributed to?
▪ High stock levels.
▪ Obsolete stock.
▪ Inventory is valued at prices
higher than
the realistic value.
▪ Increase in debtors through credit
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
2. Acid Test Ratio
Current Assets – inventories : Current
liabilities
[ Receivables
[Payables
Cash]
Bank Overdraft]
sales.
▪ Increase in cash through loans.
What can a lower ratio be
attributed to:
▪ Decrease in any of the current
assets
or
▪ increase in any of the current
liabilities.
The Acid Test Ratio is calculated to:
 Assess the ability of the business
to pay off its short-term debts
without having to sell its stock
[inventory].
 How much of current assets
excluding stock does the
business have for every R1 of
current liability?
 Why is stock excluded?
▪ Obsolete stock cannot be
converted to
cash quickly.
▪ Stock may be over priced
and cannot be sold
quickly.
▪ Generally stock cannot be
converted to cash quickly.
 To determine the extent to which
the business has invested in stock.
How will this be determined?
By examining the drop between
the Current Ratio and the Acid
Test Ratio.
Other factors that can affect the ratio:
▪ Cash invested in Fixed
Deposits.
▪ Debtors are taking too long
to pay.
▪ Creditors are being paid too
soon.
How does the result compare with the
previous year?
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Will the business be able to pay its shortterm debts?
3. Rate of Stock Turnover
Cost of sales
Average Stock
Answer = X times per year
The Rate of Stock Turnover is calculated to
check the liquidity and operating
efficiency of the business by determining
the number of times stock is replaced in
a year.
 A high stock turnover rate is
advantageous and would result in:
▪ Increased sales [Turnover]
▪ Increased cash sales would
improve cash flow. [Money is
available more quickly]
▪ Increase in turnover would lead
to profits
being realized more quickly.

A lower stock turnover rate could
be as a result of:
▪ Stockpiling due to ageing, poor
quality or changes in fashion.
▪ Wrong purchases
▪ Wrong purchase policy
[When must stock be replaced]
▪ Poor sales
▪ Economic circumstances.
Consequences of stock piling:
 Incur costs for storage [Rent etc].
Profits decrease.
 Cash is tied to stock that cannot be
sold easily because it is outdated.
Affects liquidity.
How does this result compare with the
previous year?
4. Period for which enough stock on
hand
Average Stock
Cost of sales
X
Answer = X days
365
1
The Period for which enough Stock is
on Hand is calculated to help the
business in planning and
replenishing stock. This process
involves:
 Adhering to the purchasing
policies.
 Timeous placing of orders.
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
Checking up on availability of
stock.
If the period is long it indicates that
more working capital is tied up in
stock.
[Working Capital = Current Assets –
Current Liabilities]
It must be noted that the type of
business will also influence the period
e.g.
 Clothing may be replaced
seasonally. Approximately four
times a year.
 Groceries and other food items
may be replaced more rapidly,
that is, daily or weekly.
5. Debtors’ average Collection period
Average Debtors
Credit Sales
Answer = X days
X
365
1
How does this result compare with
the previous year?
The debtors’ collection period is
calculated to determine whether
debtors are complying with the credit
terms policy.
If the collection period exceeds the
terms for collection in the policy it
means that the credit terms policy is
not efficient and the consequences
are as follows:
 The business would not have
sufficient cash to meet its
financial obligations for e.g.
payment to creditors, paying
salaries and other operating
expenses.
 The business would have to
borrow money as a result cash
flow constraints and would
have to pay interest on
overdraft.

Compare the result with the
previous year and if the
payment has worsened, it
means that there is a
regression in credit regulation.
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If the collection period complies with
the credit terms policy or it is shorter
than the terms for collection it means
that:
 The credit terms policy is
efficient.
 The collection period has a
positive effect on the liquidity
position of the business
because the debt is converted
to cash more quickly.
Ways of improving the Debtors’
Average Collection Period:
 Offer settlement discounts
 Charge interest on overdue
accounts.
 Regular communication with
debtors to settle their
accounts. Communicate by:
▪ Sending out monthly
statements.
▪ Following-up telephonically
or by SMS.
▪ Escalating the account to
senior the
credit controller if payment
is not
forthcoming.
N.B. The Debtors’ Collection Period
must be shorter than the Creditors’
Payment Period.
Important:
How does this result compare with
the credit terms policy?
How does this result compare with
the previous year?
6. Creditors’ average
Payment period
The creditors’ payment period is
calculated to determine the following:
 Whether there is compliance
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Average Creditors
Credit Purchases
X
365
1
Answer = X days

with the credit terms facilities
arranged with creditors.
Whether it is in keeping with
the internal payment policy of
the business so that:
▪ Settlement discounts are
received.
▪ Interest is not charged on
overdue accounts.
▪ Supplies are not halted due
to late payment.
A longer period of payment is always
better because:
 It does not create financial
constraints on
the business.
 Surplus cash could be
invested and interest could be
earned on it.
[Money Market account, 32
day call account etc.]
Important
How does this result compare with
the credit terms policy?
How does this result compare with
the previous year?
RATIO
C Solvency
[Refers to Shareholders’ Equity]
Solvency can be calculated as a ratio or as
an amount.
Ratio
PURPOSE
This ratio tests the credit worthiness
of the business and indicates whether
the business can meet all its
commitments.
= Total Assets : Total Liabilities
Amount = Total Assets - Total Liabilities
= Shareholders’ Equity
Solvency
Ratios
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Ratio
Comment
Solvency
Assets must always be greater than R1 in
order for the business to be solvent.
Total Assets : Total Liabilities
How does the Total Assets compare with
the Total Liabilities?
How does this result compare with the
previous year?
RATIO
PURPOSE
This ratio is calculated to assess the extent
to which the business is financed through
loans as against own capital raised
through the sale of shares. Hence, it
indicates the degree of financial risk of the
business.
D Gearing
Note:
 Loans are subject to a finance cost
viz. interest on loan. [Risk]
 Share capital is not subject to a
cost.
This shows the ratio between:
Borrowed Capital and Own Capital
[Non-Current Liabilities]
[Shareholders’ Equity]
▪ Loans
▪ Share Capital
▪ Share Premium
▪ Retained Income
Important:
Use this ratio to comment on loans.
Gearing
Ratios / Percentages
Ratio
Comment
Debt to Equity Ratio
Borrowed Capital : Own Capital
[Non-Current Liabilities]
[Shareholders’ Equity]
This ratio tests the credit worthiness of the
business and indicates the extent to which
the business is geared [financed] by loans
[borrowed capital].
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▪
▪
▪
▪
Loans
Share Capital
Share Premium
Retained Income
Credit providers are the interested parties:
 Banks
 Creditors
Important:
Use this ratio to comment on loans.
High Gearing
 High risk [Disadvantageous]
 Loans are high
 Costly - interest has to be paid.
Low Gearing
 Low risk [Advantageous]
 Regarded as creditworthy by banks.
Improvement in the ratio can be
attributed to:
 Increase in the number of shares
issued.
 Decrease in loans through partial
repayments
How does the ratio compare with the
previous year?
RATIOS
PURPOSE
These ratios test the efficiency of the
investment in the company.
E Return
1. Return on average
Shareholders’ Equity. [ROSHE]
2. Return on Total on Capital
Employed. [ROTCE]
3. Earnings per Share. [EPS]
4. Dividends per Share. [DPS]
5. Net Asset value per Share.
[NAV]
Return
Comparisons against other forms of
investments are crucial.
The information derived from these
percentages assist the directors and
shareholders in decision making insofar as
the investment in the company is
concerned.
Ratios / Percentages
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Ratios / Percentages
Comment
1 Return on Shareholders’ Equity
[ROSHE]
Net income after Tax
X
Ave Shareholders equity
100
1
Answer = X %
2 Return on Total Capital Employed
[ROTCE]
Net Profit before Tax + Interest X 100
Ave Capital Employed
1
This calculation is done to ascertain the
Return on Shareholders’ Equity.
[Investment in the Company]
 Check the profit on investment.
 Compare the result against the
return on alternative investments.
 Compare the result against the
previous year.
This ratio indicates whether the business
has a return on capital employed that is
higher or lower than the percentage
interest paid on loans.
Important:
Use this ratio to comment on loans.
Answer = X %
Capital employed =
Shareholders’ Equity + Non-Current
Liabilities
Consider the following:
Positive Gearing: [Favourable]
 Applies when funds are borrowed
at a relatively low interest rate in
order to earn relatively higher
returns.
Negative Gearing: [Unfavourable]
 Applies when funds are borrowed
at a relatively higher interest
rate and the difference between
return earned on Capital
Employed by utilizing borrowed
funds is relatively narrowed
down.
 Example
Interest on loan = 15% compared
against the ROTCE of 22%.
 Applies when interest rates on
loans are equal to or relatively
higher than the return earned by
the company on Capital
Employed.
3 Earnings per Share [EPS]
How does the result compare with the
previous year?
This ratio refers to the return the
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Net income after Tax
No. of Shares issued
X
100
1
Answer = X cents per share
Calculation as a percentage
EPS
Price Per Share
X
100
1
Answer = X %
4 Dividends per Share [DPS]
Total Dividends for the year
No. of Shares issued
X
100
1
Answer = X cents per share
Note:
Total Dividends = Dividends Paid
[Interim]
+ Recommended
[Final] for
the year.
Calculation as a percentage
DPS
Price Per Share
Answer = X %
X
company earned per share.
More specifically it means that this is the
amount that the company earned for
every share invested in the company.
This does not mean that the
shareholders received this amount per
share:
 Because a portion of the earnings
is Retained for further expansion
or unforeseen circumstances.
 Shareholders do not receive the
immediate benefit, that is, the
total benefit of the earning.
 This calculation is used by
shareholders to gauge the
earning per share in relation to
the market price of the share for
investment purposes.
How does the result compare with the
previous year?
This ratio indicates that portion of the
total earnings of the company that the
shareholders received.
The shareholders must compare their
earnings in the form of dividends
with:
 The results of the previous year.
 Alternative investments [%
earned]
Note:
The difference between Earnings per
share and Dividends per share is
Retained Income
EPS - DPS = RETAINED INCOME
100
1
How does the result compare with the
previous year?
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5 Net Asset Value per Share [NAV]
Ordinary Shareholders’ equity X
100
No. of shares issued
1
Answer = X cents per share
Note:
Assets = Shareholders’ Equity +
Liability
Shareholders’ Equity = Assets Liability
Shareholders’ Equity = Net Assets
Hence,
Net Assets = Shareholders’ Equity
Current curriculum stipulate FOUR values
to shares:
 Issue price
 Average price
 Market value
= The price at which the share is
trading on the Securities
Exchange
 Net asset Value
= This Ratio indicates the value of
the share according to the
accounts and financial statements
of the company, that is, according
to the books of the company.
How does the result compare with the
previous year?
How does the result compare with the
other values?
SESSION 4: ACTIVITY 2
Completed by learners and Educator: 1hr:30 minutes
CASH-FLOW STATEMENT AND RATIO ANALYSIS
The information given below was extracted from the financial statements of
Manchester Ltd, distributors of exquisite perfumes.
REQUIRED:
2.1
Prepare the following:
2.1.1
Complete the note for reconciliation between profit before taxation
and cash generated from operations.
(8)
2.1.2
Prepare the Cash-Flow Statement for the year ended
28 February 2009.
All workings must be shown in brackets to earn part-marks.
2.2
(28)
Calculate the following for 2009:
2.2.1
2.2.2
2.2.3
2.2.4
Current ratio
Acid-test ratio
Net asset value per share
Debt/Equity ratio (Gearing ratio)
(3)
(4)
(4)
(3)
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2.3
Explain why the directors decided to reduce the long-term loan significantly
during the current financial year. In your opinion, was this a wise decision?
Explain, quoting evidence (figures/financial indicators) from the question.
(6)
Comment on the return on shareholders' equity, earnings and dividends
earned by the shareholders. Quote evidence (figures/financial indicators) from
the question.
(6)
2.5
Calculate the premium at which the new shares were issued.
(5)
2.6
The existing shareholders are unhappy with the price at which the additional
shares were sold. Discuss, quoting ONE figure or financial indicator to
support your answer.
(3)
2.4
INFORMATION:
1.
2.
Extract from the Income Statement
Depreciation
Interest expense
Net profit before tax
Income tax (rate 30% of net profit)
R
33 500
164 450
844 300
?
28 February
2009
28 February
2008
3 490 885
3 440 885
50 000
3 017 500
2 967 500
50 000
320 000
251 250
60 000
1 250
7 500
231 250
110 250
76 000
45 000
0
TOTAL ASSETS
3 810 885
3 248 750
EQUITY AND LIABILITIES
Capital and reserves
Ordinary share capital
Retained income
3 120 000
2 353 970
766 030
1 443 000
1 050 500
392 500
Non-current liabilities
Loan: Enid Bank at 15% p.a.
300 000
300 000
1 525 000
1 525 000
Current liabilities
Trade creditors
390 885
209 945
280 750
220 475
BALANCE SHEET
ASSETS
Non-current assets
Fixed/Tangible assets at carrying value
Fixed deposit at PDV Bank
Current assets
Inventories
Trade debtors
Cash and cash equivalents
SARS – Income tax
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Bank overdraft
Shareholders for dividends
SARS – Income tax
TOTAL EQUITY AND LIABILITIES
3.
47 500
133 440
0
0
52 525
7 750
3 810 885
3 248 750
ADDITIONAL INFORMATION:
A.
Ordinary share capital at the beginning of the year consisted of 210
000 which were issued at R5.
Additional new shares were issued halfway through the year on 31
August 2008. at R6,30 These shares did not qualify for interim
dividends.
B.
Fixed assets were sold for R100 000 cash at carrying value.
C.
Earnings and dividends per share were as follows:
Earnings per share
Total dividends
Interim dividends
Final dividends
D.
2009
189 cents per share
72 cents per share
40 cents per share
32 cents per share
You are also provided with the following financial indicators:
% return on shareholders' equity
% return on capital employed (after tax)
Net asset value per share
E.
2008
135 cents per share
105 cents per share
80 cents per share
25 cents per share
2009
26%
24%
?
2008
21%
10%
687 cents
The price of the shares on the Johannesburg Securities Exchange
(JSE) has fluctuated between 680 cents and 780 cents over the past
year.
[70]
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SESSION 4:
1.1
ACTIVITY 1 SOLUTION
Indicate where each of the following items would be placed in
the Balance Sheet by choosing the answer from the list in the
question paper.
1.1.1
Current liabilities 
1.1.2
Non-current assets 
1.1.3
Current assets

1.1.4
Current liabilities

8
2.1.1 Reconciliation between profit before taxation and
cash generated from operations
Net profit before tax
844 300
Adjustments i.r.o.
Depreciation
33 500
Interest on borrowed funds
164 450
Operating profit before changes in working capital
1 042 250

(135 530)
Inventory

Operation 
(141 000)
Debtors

Operation 
16 000
Creditors

Operation 
(10 530)

906 720
Changes in working capital
Cash generated from operations
Check operation
Figure
Figure
Figure
Check operation
8
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2.1.2 MANCHESTER LIMITED
CASH FLOW STATEMENT FOR THE YEAR ENDED 28 FEBRUARY 2009

CASH FLOW FROM OPERATING ACTIVITIES
Check
operation
Cash generated from operations
See 5.1.1
 906 720
Figure must
correct &
outflow
 (164 450)
If one part
correct, figure
must be
outflow
 (136 565)
If one part
correct, figure
must be
outflow
 (268 540)
Check
operation
figure must
show correct
flow
 (506 885)
Interest paid
Dividends paid Mark entire line or T-account
52 525  + 217 480  –
133 440 
337 165
OR – 52 525 – 217 480 + 133 440
OR
Taxation paid
52 525 1 mark + 84 040 2 marks
Mark entire line or T-account
7 750  + 253 290  + 7 500 
OR – 7 750 – 253 290 – 7 500
CASH FLOW FROM INVESTING ACTIVITIES
Purchase of fixed assets
Mark entire line or T-account (see below)
3 440 885  – [2 967 500  – 100 000  – 33 500 ]
OR 3 440 885 – 2 967 500 + 100 000 + 33 500
If one part
correct, figure
must be -ve
 (606 885)
OR –3 440 885 + 2 967 500 – 100 000 – 33 500
 100 000
Proceeds from the sale of fixed assets
CASH FLOW FROM FINANCING ACTIVITIES
Proceeds of shares issued
Check
operation
 1 303 470
2 353 970– 1 050 000 
Repayment of long term loans
78 470
Figure 
(1 225 000)
Outflow
Net change in cash and cash equivalents
Check
operation, do
not accept
46250 or
47500 or
1250
 (91 250)
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Cash and cash equivalents at the beginning of the year
Must be +ve
45 000
Cash and cash equivalents at the end of the year
Figure must
 (46 250)
be -ve
Fixed Assets Taccount
2 967 2 967 500
500
606 885
606 885
2.2
217 480
253 290
766 030
844 300
392 500
28
Calculate the following for 2009:
2.2.1
2.2.2
2.2.3
2.2.4
2.3
APP
Current ratio


 proper method & one part correct
320 000 : 390 885 = 0,8 : 1 (accept 0,82: 1)
Must be in correct order and must be in the format x:1
3
Acid-test ratio


 proper method & one part correct
68 750 : 390 885 = 0,2 : 1 (Accept 0,18 : 1)
Must be in correct order and must be in the format x:1
4
Net asset value per share


proper method & one part
correct
R3 120 000 / 417 000 shares = 748,2 cents or R7,48
Must be in correct order and must be in cents or Rands
Debt/Equity ratio (Gearing ratio)



proper method & one part correct
300 000 : 3 120 000 = 0,1 : 1 or 0,096 : 1
Must be in correct order and must be in the format x:1
4
3
Explain why the directors decided to reduce the long-term loan
significantly during the current financial year. In your opinion, was this a
wise decision? Explain, quoting evidence (figures/financial indicators)
from the question.
Be aware of differing structures to the answer by learners. The following
components should be covered:
Explanation of directors’ decision: 
May award part marks for unclear or incomplete answers
Any one reason:
 The sale of extra shares has brought about an inflow of cash
 In the previous year the ROTCE (10%) was lower than the
interest rates (15%).
 In the previous year the company was highly geared with a very
high debt/equity ratio (> 1 : 1)
Opinion: Yes or No 
Explanation:  Evidence: 
May award part marks for unclear or incomplete answers
Any one explanation for Yes:
 The debt/equity ratio is now very low (0,1 : 1) which indicates a
low-risk situation
6
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

The saving on interest has increased the profits as indicated by
EPS from 135c to 189c or ROSHE from 21% to 26%
The company is now in a positive gearing situation with ROTCE
of 24% which is much higher than the interest rates.
Any one explanation for No:
 The directors have over-reacted because the evidence shows
that they should now consider taking out more loans (ROTCE of
24% exceeds interest rates) and debt/equity ratio of 0,1:1 is low,
indicating low risk
 The short-term liquidity is now a problem as the acid-test ratio is
now 0,2:1 and the current ratio is 0,8:1
 The net change in cash was a negative of R91 250 which has
caused short-term liquidity concerns.
2.4
Comment on the return on shareholder’s equity, earnings and dividends
earned by the shareholders. Quote evidence (figures/financial indicators)
from the question.
Returns on shareholders equity
Quote financial indicator 
ROSHE has increased from 21% to 26%
OR: ROSHE is now 26%
OR: ROSHE increased by 5% points
OR: ROSHE increased by 23,8%
Any valid specific comment
related to the indicator, e.g. 
This exceeds the returns on
alternative investments
Earnings
Quote financial indicator 
EPS has improved from 135c to 189c
OR: EPS is now 189c
OR: EPS increased by 54c or 40%
Any valid specific comment
related to the indicator, e.g. 
This compares well to the
value of the share
Dividends
Quote financial indicator 
DPS has declined from 105c to 72c
OR: DPS is now 72c
OR: DPS decreased by 33c or 31,4%
Any valid specific comment
related to the indicator, e.g.
The company is retaining more
of its profits
OR: This increases the NAV
OR: The dividend payout rate
dropped to less than 50% of
profits
OR: Increases the infrastructure
of the company
6
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2.5
Calculate the average price of the shares on 28 February 2009.
Number of shares issued = (2 353 970 – 1 050 500)/R6.30 = 206 900 shares
Number of shares at beginning of the year=210 600
Total number of shares=417 000
Value of the shares=R2 353 970/417 000=R 5.65 proper method & one
part correct
2.6
5
The existing shareholders are unhappy with the price at which the
additional shares were sold? Discuss quoting ONE figure or financial
indicator to support your answer.
Quoting of figures / financial indicator 
Comment  Part-marks may be awarded for unclear, partial or incomplete
comments
Expected responses:
 The shares were issued at a price of R6,30 which is lower than the
NAV (R6,87 or R7,48) which means that the existing shareholders
are being disadvantaged
 The shares were issued at a price of R6,30 which is lower than the
market price (R6,80 to R7,80) which means that the existing
shareholders are being disadvantaged
3
TOTAL
MARKS
70
85
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SESSION NO 4: ACTIVITY 3
Completed by learners and Educator: 1hr:30 minutes
CASH FLOW AND INTERPRETATION OF INFORMATION
4.1
Choose one word/term from the following to complete the sentences
given below:
Unqualified, qualified, limited liability, unlimited liability, interest,
directors, shareholders, dependent, independent, dividends.
4.1.1 The fact that shareholders can only lose the capital invested by
them is called …
4.1.2 The … appoint external auditors.
4.1.3 The external auditors must be … of the entity being audited.
4.1.4 The audit report states: “With the exception of a few aspects,
shareholders can rely on the figures in the financial statements.”
This will be regarded as a/an ... report.
4.2
(4)
XOLISE TRADERS LIMITED
The information was taken from the accounting records of Xolise Traders Limited.
The financial year ends annually on 28 February. The company is registered
with a share capital of 600 000 ordinary shares.
REQUIRED:
4.2.1 Complete the Reconciliation of Net Profit before Tax and Cash Generated
from Operations on 28 February 2015.
(12)
4.2.2 Calculate the tangible/fixed assets purchased during 2015.
(5)
4.2.3 Complete the Cash Flow Statement on 28 February 2015.
(12)
4.2.4 Calculate the following on 28 February 2015:
 Earnings per share
 Dividends per share
 Net Asset value per share
 Return on average capital employed
 The debt-equity ratio
(3)
(4)
(3)
(8)
(3)
4.2.5 Briefly comment on the liquidity of the company. Quote TWO financial
(4)
86
© Gauteng Department of Education
indicators (with actual figures/ratios/percentages) to support your
comment.
4.2.6 What major decisions by the directors are reflected in the Cash Flow
Statement? State TWO decisions and quote the relevant figures. Also
explain how EACH of these decisions would benefit the company in
future.
(6)
4.2.7 The company is slow in repaying the loan. Explain why this is a good
decision. Quote TWO financial indicators with figures to support your
answer.
(6)
INFORMATION:
1. Extract from the Income Statement for the year ended 28 February 2015
Net profit before tax
1 283 100
Net profit after tax
987 000
Depreciation on tangible/fixed assets
65 000
Interest paid
42 600
2. Extract from the Balance Sheet on 28 February
2015
2014
Tangible (Fixed) assets at carrying value
3 002 000
2 330 200
Current Assets
Inventory
Trade and other receivables
Cash and cash equivalents
1 347 400
850 400
489 000
8 000
1 289 600
710 800
540 200
38 600
Ordinary shareholders’ equity
Ordinary share capital
Retained income
3 534 000
3 111 400
422 600
2 880 000
2 551 400
328 600
Loan: Bid Bank (17% p.a.)
340 000
370 000
Current Liabilities
Trade and other payables
Bank overdraft
475 400
429 400
46 000
369 800
369 800
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3. Trade and other receivables
489 000
540 200
Trade Debtors
Prepaid expenses
SARS (Income Tax)
475 000
14 000
-
530 000
8 000
2 200
4. Trade and other payables
Trade creditors
Accrued expenses
SARS (Income Tax)
Shareholders for dividends
429 400
89 500
7 300
3 600
329 000
369 800
81 700
9 100
279 000
5.
Tangible/fixed assets comprise of Land and buildings, Vehicles and
Equipment. Equipment and Land and Buildings were purchased during
the year. A vehicle costing R170 000 was sold at book value. The
accumulated depreciation on the vehicle sold was R67 000.
6.
Interim dividends were not declared during the 2014 financial year.
Interim dividends paid during the 2015 financial year amounted to R564
000.
7.
On 1 March 2014 there were 400 000 ordinary shares registered on the
JSE. On 1 March 2014 they issued a further 70 000 shares.
8. Financial Indicators
Current ratio
Acid test ratio
Stock turnover rate
Earnings per share
Dividends per share
Return on total capital employed
Debt-equity ratio
Net asset value per share
Market value of the share
2015
2,83 : 1
1,04 : 1
5 times
?
?
?
?
?
758 cents
2014
3,48 : 1
1,56 : 1
3 times
158 cents
70 cents
25,4%
0,12 : 1
720 cents
620 cents
70
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© Gauteng Department of Education
SESSION 4 ACTIVITY 3 SOLUTION
4.1
Choose one word/term from the following to complete the sentences
given below:
4.1.1 Limited liability

4.1.2 Shareholders 
4.1.3 Independent 
4
4.1.4 Qualified 
4.2
XOLISE TRADERS LIMITED
4.2.1 Reconciliation of profit before taxation and cash generated by
operations
Net profit before tax
Adjustments i.r.o.
Depreciation (42 000 + 23 000)
Interest paid
Operating profit before change in working
capital
Change in working capital (check operation)
1 283 100
Increase in inventory
Decrease in Debtors
(538 000 - 489 000)
(if one part
correct)
Increase in creditors
(96 800 - 90 800)
(if one part
correct)
Cash generated by operations (check
operation)
(139 600)
65 000
42 600
1 390 700
12
4.2.2 Calculate the total tangible assets purchased
Method mark if any one part correct.
-
5
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90
© Gauteng Department of Education
91
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4.2.3 Cash Flow Statement on 28 February 2015
Cash Flow from Operating Activity
(check operation)
Cash Generated from Operations
Interest Paid
Taxation paid (296 100 – 2 200 – 3 600)
(if one part correct)
Dividends paid
 130 200
1 306 100
(42 600)
 (290 300)
Cash Flow from Investing Activities
(check operation)
Purchase of tangible assets
(see 4.2.2)
Proceeds from disposal of tangible assets
 (736 800)
 (839 800)
 103 000
Cash Flows from Financing Activities
(check
operation)
Proceeds from the issue of new shares
Repayment of loan
 530 000
Net Change in Cash and Cash Equivalents
(if one part correct)
Cash and cash equivalents at the beginning of the
year
Cash and cash equivalents at the end of the year
 (76 600)
4.2.4
(843 000)
 560 000
(30 000)
38 600
 (38 000)
12
Calculate the following on 28 February 2015
Earnings per share
(EPS)
987 000
3
Dividends per share (DPS)
(893 000)
= 190 cents
accept R1,90 do not accept 1,9 (if one part correct)
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4
93
© Gauteng Department of Education
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© Gauteng Department of Education
Net Asset Value per share (NAV)
x 100
3
The Return on average capital employed (ROTCE)
(1 325 700)
1 283 100  42 600 
x 100
000  +340 000 + 2 880 000 + 370 000)
(3 562 000)
= 37,22 %
2
(if one part correct)
8
Debt - equity ratio
3
4.2.5
Briefly comment on the liquidity of the company. Quote TWO
financial indicators to support your answer.
Any TWO
Financial indicator   Trend with figures  
 Current ratio: decreased from 3,48 : 1 to 2,83 : 1
 Acid test ratio: decreased from 1,56 : 1 to 1,04 : 1
 Rate of stock turnover: improved from 3 to 5 times per annum
4
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© Gauteng Department of Education
4.2.6
What major decisions by the directors are reflected in the Cash Flow
Statement? State TWO decisions and quote the relevant figures.
Also explain how EACH of these decisions would benefit the
company in future.
Decision and figures 

Benefit for company  
Dividends was paid, R843 000
This will attract new shareholders;
Price on the JSE could increase;
Current shareholders will be satisfied
with their dividends;
Fixed/tangible assets purchased,
R839 800
New assets will increase the efficiency
of the company. This will lead to an
increase in profits.
Fixed/tangible assets sold, R103 000
Money received from asset disposals
will improve cash flow – could be used
to finance new assets purchased.
New share issued, R560 000
Improves cash flow of the company;
Money was used to purchase new
tangible/fixed assets
6
4.2.7
The company is slow in repaying the loan. Explain why this is a good
decision. Quote TWO financial indicators with figures to support
your answer.
96
© Gauteng Department of Education
Financial indicators Figures 
Explanation 



ROTCE
Improved from 25,4% to 37,2%.
There is positive gearing of profits by 20,2% against the interest
rate of 17% p.a.



Debt/Equity ration
Is 0,1 : 1
Shows low risk (low geared)
6
70
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© Gauteng Department of Education
SESSION 5: ACTIVITY 1
Completed by learners and Educator: 1hr:30 minutes
CASH FLOW STATEMENT, INTERPRETATION AND RATIO ANALYSIS
You are provided with information relating to Neonell Hardware Ltd, a public company
whose financial year ends annually on 28 February.
REQUIRED:
4.1
Explain the difference between a Balance Sheet and a Cash Flow Statement.
(2)
4.2
Calculate the following amounts as it would appear in the Cash Flow Statement on
28 February 2015:
 Dividends paid
 Cash flow from financing activities
 Net change in cash and cash equivalents
(5)
(10)
(4)
4.3
At the AGM a shareholder stated that she is unhappy about the bank overdraft on
28 February 2015. She feels that the directors made some poor decisions that
resulted in this situation. Explain TWO such decisions, with relevant figures, to
support her opinion.
(6)
4.4
Calculate the following financial indicators for the year ended 28 February 2015:
4.4.1
4.4.2
4.4.3
4.5
4.6
4.7
Acid test ratio
Net asset value per share
Debt-equity ratio
(5)
(3)
(3)
The directors wanted to expand business operations and therefore chose to increase loans
during the current financial year, instead of issuing more shares.
Explain and quote TWO financial indicators (actual figures/ratios/percentages) that are
relevant to their choice. Explain whether this was a good choice or not.
(8)
The directors are of the opinion that the liquidity has deteriorated. Explain and quote
THREE financial indicators (with figures) to support their opinion.
(9)
The Nel family owns 740 000 shares in this company. Explain the effect that the
repurchase of shares on 31 December 2014 had on their control of the company. Give a
(5)
calculation(s) to support your answer.
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© Gauteng Department of Education
INFORMATION:
A.
Information from the Income Statement for the year ended 28 February 2015:
Depreciation
370 200
Interest on loan (capitalised)
88 500
Net profit before tax
1 575 000
Income tax
441 000
B.
Information from the Balance Sheet as at:
Fixed Assets (carrying value)
28 Feb. 2015
8 473 400
28 Feb. 2014
4 569 000
Current Assets
Inventories
Trade debtors
SARS: income tax
Cash and cash equivalents
3 337 300
818 200
2 377 600
128 000
13 500
4 641 000
641 000
1 512 000
2 488 000
Shareholders' equity
Ordinary share capital
Retained Income
8 839 000
8 700 000
139 000
7 400 000
6 600 000
800 000
908 000
508 000
2 063 700
678 700
870 000
515 000
1 302 000
700 000
480 000
122 000
Mortgage Loan: Star Bank (12,5% p.a.)
Current Liabilities
Trade creditors
Shareholders for dividends
Bank overdraft
SARS: Income tax
C.
Shareholders' register:
DATE
1 March 2014
31 March 2014
31 December 2014
28 February 2015
DETAILS
1 200 000 shares in issue
300 000 additional shares issued at R8 each
50 000 shares bought back at R9,50 each.
Average price of all shares issued to date was R6 per
share.
1 450 000 shares in issue
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© Gauteng Department of Education
D.
E.
F.
Dividends for the financial year ending 28 February 2015:
Interim dividends paid on 31 August 2014
Final dividends declared on 28 February 2015
Details regarding movement of fixed assets in 2015
New, larger premises (land and buildings) acquired
A new vehicle purchased, to replace vehicle traded in
A vehicle traded in at carrying value (after 1½ years in operation)
50c per share
R870 000
4 051 000
330 000
106 400
Some financial indicators
28 Feb. 2015
Debt-equity ratio
Net asset value per share (NAV)
Current ratio
Acid test ratio
Stock turnover rate
Debtors' collection period
Return on average capital employed (ROTCE)
?
?
1,6 : 1
?
6,8 times p.a.
40 days
18,8%
28 Feb. 2014
0,1 : 1
617 cents
3,6 : 1
3,1 : 1
5,1 times p.a.
35 days
16,4%
60
100
© Gauteng Department of Education
SESSSION 5 ACTIVITY 1 SOLUTION
4.1
Explain the difference between a Balance Sheet and a Cash Flow Statement.
Balance Sheet:
ANY explanation: 
 It reflects the net worth/financial position of a company on a particular date.
 It shows the real value of assets, equity and liabilities on a certain date.
Cash Flow Statement:
ANY explanation:
 It reflects the cash flow in and out for the past financial year.
 It shows the cash results of operating, financing and investing activities.
4.2
2
Calculate the following amounts as it would appear in the Cash Flow Statement on
28 February 2015.
Dividends paid:
(1 500 000 x 0,50)
480 000 - 870 000 + 750 000
480 000 + 1 620 000 – 870 000
OR – 480 000 – 1620 000 + 870 000
1 mark
2 marks 1 mark
5
= R1 230 000  operation, one aspect correct
operation
 2 325 000
no brackets 
 2 400 000
brackets 
 (475 000)
no brackets 
 400 000
CASH FLOW FROM FINANCING ACTIVITIES
Layout
marks;
ignore
order
Proceeds from issue of shares (300 000 x R8)
Repurchase of shares (50 000 x 9,50)
Additional long-term loan (908 000 - 508 000)
NET CHANGE IN CASH AND CASH EQUIVALENTS
operation
 (2 989 500)
Cash and cash equivalents: beginning of year
operation; one part correct
Cash and cash equivalents: end of year (- 515 000 + 13 500)
2 488 000

(501 500)
Foreign entries -1 (max - 2)
Presentation / Placement / Incorrect or incomplete details -1 (max - 2)
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© Gauteng Department of Education
10
4
4.3
At the AGM a shareholder stated that she is unhappy about the bank overdraft on
28 February 2015. She feels that the directors made some poor decisions that resulted in this
situation. Explain TWO decisions with relevant figures, to support her opinion.
Any TWO valid answers: Explanation   Figures   (3 + 3)
 Dividends paid of R1 230 000 (see 4.2) caused a large outflow of cash.
 Fixed assets bought are very high (R4 381 000 [= 4 051 000 + 330 000]) (see info E)
 The buy-back of shares (R475 000) (see 4.2) reduced cash resources /
reduced the capital base of the company.
 The vehicle was sold at book value (R106 400) (see info E) although it was
only 1½ years old.
 The directors allowed a large bank overdraft of R515 000 or R501 500 as a
result of high payments for dividends/fixed assets.
6
4.4.1
Calculate the acid test ratio.
(3 337 300 - 818 200) : 2 063 700
OR (2 377 600 + 128 000 + 13 500) : 2 063 700
2 519 100
: 2 063 700
1,22 
:
1
5
operation
4.4.2
Calculate the net asset value per share.
8 839 000 
1 450 000 
x 100
1
= 610 cents  one part correct; R or c
or 609,6 cents or R6,10
3
4.4.3
Calculate the debt-equity ratio.
908 000 :
=
0,1
:
8 839 000
1  one part correct; must be shown as ' x:1'
3
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4.5
The directors wanted to expand business operations and therefore chose to increase loans
during the current financial year, instead of issuing more shares.
Explain and quote TWO financial indicators (actual figures/ratios/percentages) that are
relevant to their choice. Explain whether this was a good choice or not.
Explain   TWO indicators   Figures quoted with each  
ROTCE 
 This is 18,8% and increased from 16,4% (more profits)
DEBT/EQUITY RATIO 
 This is 0,1 : 1  (see 4.4.3); it is the same as in 2014 (risk the same with higher
loans)
Explanation: Depends on calculation above in 4.4.2 en 4.4.3
 Positively geared, as ROTCE (18,8%) is higher than interest rate (12,5%)
 Low financial risk / Not making much use of loans (relies more on funds from
internal sources) / They are able to repay loans (0,1: 1)
 This is therefore a good choice. (one mark only)
4.6
8
The directors are of the opinion that the liquidity has deteriorated. Explain and quote
THREE financial indicators (with figures) to support their opinion.
Any THREE valid financial indicators:
Name of financial indicator   Figure and trend   
 Current ratio:
3,6 : 1 to 1,6 : 1 / decreased to 1,6 : 1
 Acid test ratio:
3,1 : 1 to 1,2 : 1 / decreased to 1,2 : 1
 Stock turnover rate:
5,1 to 6,8 times p.a./ increased to 6,8 times
 Debtors' collection period: 35 to 40 days / increased to 40 days
General comment: For 3 marks   
Not in agreement with directors' opinion, i.e.:
The liquidity has generally improved. The current ratio and acid-test ratio were too
high in 2014. They are much more efficient in 2015. Stock is now being sold more
quickly which will generate greater profit. However the debtors are paying slightly
more slowly – this trend must be rectified next year.
OR: In agreement with directors' opinion, i.e.:
Liquidity has deteriorated, as current and acid test ratio's has decreased and
debtors are taking longer to pay - less cash available, despite faster turnover rate
of stock.
One valid point per indicator OR 3 marks for overall comment:
Excellent answer = 3 marks; Good = 2; Poor =1; Incorrect =0
Increases/decreases are not comments but trends; Comment would be on improvement or not / efficiency
Expected responses for 1 mark each:
 The current ratio improved / was possibly too high in 2014 / cash was too high/ current assets
do not earn any return / they may be more efficient in 2015.
 The acid test ratio improved / is more efficient in 2015 / cash is lower
 The stock turnover rate has improved / stock increased but is being sold more quickly/ assists
liquidity and is appropriate for a hardware store.
 The debtors are paying more slowly / this trend must be rectified / brought in line with normal
credit terms of 30 days.
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4.7
The Nel family owns 740 000 shares in this company. Explain the effect that the repurchase
of shares on 31 December 2014 had on their control of the company. Give a calculation(s)
to support your answer.
Before the repurchase the family's shareholding was:
 Both figures

740 000 x 100 = 49,3%
1 500 000
1
After the repurchase the family's shareholding is:
 Both figures

740 000
x 100 = 51,0%
1 450 000
1
(Note: Shareholding increased by 1,7%; this is correct for 4 marks)
 The family is now the majority shareholder. 
For 3 marks:
 They owned less than half the shares in issue before the repurchase (1 mark)
but now own more than half the shares in issue (1 mark). The family is now the
majority shareholder (1 mark).
OR
For 3 marks:
 They owned 740 000 of 1,5million shares before the repurchase (1 mark), and
they owned 740 000 of 1,45million shares after the repurchase (1 mark). The
family is now the majority shareholder (1 mark).
5
A relevant calculation without an explanation = max 2
Q4: Total Marks
60
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SESSION: 5 NOTES ON CONTENT
Completed by learners and Educator: 1hr:30 minutes
TOPIC: CORPORATE GOVERNANCE, ETHICS AND INTERNAL CONTROL
TEACHER NOTE:
You are advised to build the following practices into the work plan for the year:
 Use of past NSC papers: Every learner should have access to past examination
papers . With the introduction of CAPS in 2014, it will be necessary for teachers
to adapt parts of certain questions so that they can be used for revision purposes
. Questions that include par value of shares and share premium will have to be
altered and adapted. To comply with CAPS, teachers should ensure that learners
have sufficient practice with questions involving repurchase (buy-back) of shares,
and cash budgets and projected income statements in the context of companies
(i .e . not simply in the context of sole traders) . Teachers should also answer
these papers themselves so as to improve their own confidence in their ability to
deal with each topic.
 Internal control and ethical issues: Teachers should teach not only the logic
and the process of each Accounting application in the curriculum, but also the
internal control measures and ethical considerations that are relevant to each
application . These aspects must be integrated into the teaching of the relevant
topics . Furthermore, as these issues are integrated in different topics in
examination questions, integration in the teaching of the different topics should
result in more effective understanding of these issues .
 Requirements of questions: Teachers must become familiar with the
requirements of typical
examination – type questions in NSC papers. For example, if a question
requires a figure to be provided in an explanation, this must be done to earn
the relevant mark . Teachers should then ensure that learners are familiar with
the basic layout of examination questions and where to look for the relevant
information .
 Time management: Learners must be trained in the art of managing their time
and to adhere to the suggested time allocations provided in the paper .
 Comments and explanations: Teachers need to train learners to express
themselves clearly and simply where comments or explanations are required . In
Accounting, the use of bullet points and short, concise sentences is acceptable .
 The importance of formative testing: Teachers should ensure that they build
up the confidence of learners in all topics through the use of short, informal
formative tests . It is more effective if learners mark these formative tests
themselves for immediate feedback and for an appreciation of how marks for
easy parts of an examination question can be obtained. This will also force
learners to take ownership of the learning process . The ‘confidence-booster’
easy sections in each of the questions in the NSC Accounting papers can be
used as formative tests that may be self-marked by learners .
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SECTION B: NOTES ON CONTENT
The INDEPENDENT auditor's report is a formal opinion, or disclaimer, issued by an
external auditor as a result of an external audit or evaluation performed on
a company. The report is subsequently provided to a “user” (such as an individual, a
group of persons, a company, a government, or even the general public, among
others) as an assurance service in order for the user to make decisions based on the
results of the audit.
An auditor’s report is considered an essential tool when reporting financial
information to users, particularly in business.
BASIC ELEMENTS OF AUDIT REPORTS
The standard report contains five basic elements:
 Heading
 Opening or introductory paragraph
 Scope paragraph
 Opinion paragraph; and
 Identity of auditor and date of report
Unqualified Opinion
 called a clean opinion, This is the best type of report a business can receive.

an unqualified opinion is an audit report that is issued when an auditor
determines that each of the financial records provided by the small business is
free of any misrepresentations.

An unqualified opinion indicates that the financial records have been
maintained in accordance with the standards known as Generally Accepted
Accounting Principles (GAAP), IFRS and the Companies Act.
Qualified Opinion
 A qualified opinion, however, will include an additional paragraph that
highlights the reason why the audit report is not unqualified.

In situations when a company’s financial records have not been maintained in
accordance with GAAP but no misrepresentations are identified, an auditor will
issue a qualified opinion.

The writing of a qualified opinion is extremely similar to that of an unqualified
opinion.
Adverse Opinion
 The worst type of financial report that can be issued to a business is an
adverse opinion.
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
This indicates that the firm’s financial records do not conform to GAAP ,IFRS.
and the Companies Act.

The financial records provided by the business have been grossly
misrepresented - although this may occur by error, it is often an indication of
fraud.

When this type of report is issued, a company must correct its financial
statement and have it re-audited, as investors, lenders and other requesting
parties will generally not accept it.
Disclaimer of Opinion
 On some occasions, an auditor is unable to complete an accurate audit report.

This may occur for a variety of reasons, such as an absence of appropriate
financial records.

When this happens, the auditor issues a disclaimer of opinion, stating that an
opinion of the firm’s financial status could not be determined.
EXAMPLE OF INDEPENDENT AUDITOR’S REPORT
INDEPENDENT AUDITOR’S REPORT FOR THE YEAR ENDED 28 FEBRUARY
2011
To the members of Pick n Pay Stores Limited
We have audited the Company and Group annual financial statements of Pick n Pay
Stores Limited, which comprise the statements of financial position at 28 February
2011, and the statements of comprehensive income, changes in equity and cash
flows for the year then ended, and the notes to the financial statements which include
a summary of significant accounting policies and other explanatory notes, and the
directors’ report, as set out from here.
Directors’ responsibility for the financial statements
The Company’s directors are responsible for the preparation and fair presentation of
these financial statements in accordance with International Financial Reporting
Standards, and in the manner required by the Companies Act of South Africa, and for
such internal control as the directors determine is necessary to enable the
preparation of financial statements that are free from material misstatement, whether
due to fraud or error.
Auditor’s responsibility
Our responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit in accordance with International Standards on
Auditing. Those standards require that we comply with ethical requirements and plan
and perform the audit to obtain reasonable assurance whether the financial
statements are free from material misstatement.
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An audit involves performing procedures to obtain audit evidence about the amounts
and disclosures in the financial statements. The procedures selected depend on the
auditor’s judgement, including the assessment of the risks of material misstatement
of the financial statements, whether due to fraud or error. In making those risk
assessments, the auditor considers internal control relevant to the entity’s
preparation and fair presentation of the financial statements in order to design audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the entity’s internal control. An audit
also includes evaluating the appropriateness of accounting policies used and the
reasonableness of accounting estimates made by management, as well as
evaluating the overall presentation of the financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to
provide a basis for our audit opinion.
Opinion
In our opinion, these financial statements present fairly, in all material respects, the
consolidated and separate financial position of Pick n Pay Stores Limited at
28 February 2011 and its consolidated and separate financial performance and
consolidated and separate cash flows for the year then ended in accordance with
International Financial Reporting Standards, and in the manner required by the
Companies Act of South Africa.
KPMG Inc.
Registered Auditor
Per Patrick Farrand
Chartered Accountant (SA)
Registered Auditor
Director
29 April 2011
MSC House
Mediterranean Street
Cape Town
8001
Source Pick n Pay - Website
DIRECTORS REPORT
The Directors' Report is a document produced by the board of directors under the
requirements of Companies Act, which details the state of the company and its
compliance with a set of financial, accounting and corporate social
responsibility standards.
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The Directors' Report arose out of a general move for greater transparency in
corporate governance. It is useful for shareholders to find out issues such as whether
the company has good finances, etc.
EXTRACT FROM A DIRECTORS’ REPORT
Directors’ report
for the year ended 28 February 2011
Nature of business
The Company, which is domiciled and incorporated in the Republic of South Africa
and listed on the JSE Limited, the recognised securities exchange in South Africa, is
an investment holding company. The Group comprises trading subsidiaries that retail
food, clothing, general merchandise, pharmaceuticals and liquor throughout southern
Africa and in New South Wales, Australia, both on an owned and franchise basis.
Subsidiary companies also on occasion acquire and develop strategic retail and
distribution sites.
General review
The Group statement of comprehensive income is presented here and reflects the
Group’s operational results.
The Group’s headline earnings from continuing operations and dividends for the year
are as follows:
%
Per share – cents
2011 decrease
2010
Headline earnings
189.35
18.3
231.71
Dividends*
142.50
18.3
174.50
*The dividend per share presented is the interim dividend paid in the current year and
the final dividend declared after
year-end, but in respect of current year profit.
Audit committee
We draw your attention to the Audit committee report where we set out the
responsibilities of the committee and how it has discharged these responsibilities
during the year.
Dividends paid and declared
A cash dividend (number 84) of 134.75 cents per share was paid to shareholders on
14 June 2010.
A cash dividend (number 85) of 37.00 cents per share was paid to shareholders on
13 December 2010.
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For further details refer to note 7.
The directors have declared a cash dividend (number 86) of 105.50 cents per share.
The last day of trade in order to participate in the dividend (CUM dividend) will be
Friday, 3 June 2011. Shares will trade EX dividend from the commencement of
business on Monday, 6 June 2011 and the record date is Friday, 10 June 2011. The
dividend will be paid on Monday, 13 June 2011. Share certificates may not be
dematerialised or rematerialized between Monday, 6 June 2011 and Friday, 10 June
2011, both dates inclusive.
As dividend number 86 was declared on 15 April 2011 it will only be accounted for in
the 2012 financial year. The declaration of this dividend will result in a charge for
secondary tax on companies of R50.6 million, which will be accounted for in the 2012
financial year.
Share capital
The issued ordinary share capital remained unchanged during the year at 480 397
321 shares.
At year-end, the Pick n Pay Employee Share Purchase Trust held 3 411 620 (2010: 6
780 488) shares in the Company and 9 103 871 (2010: 10 077 639) shares in Pick n
Pay Holdings Limited and a subsidiary company held 1 817 003 (2010: 1 784 303)
shares in Pick n Pay Holdings Limited, all of which are accounted for as treasury
shares. These shares are held to meet obligations of options granted.
Going concern
These annual financial statements have been prepared on the going-concern basis.
The Board has performed a formal review of the Group’s ability to continue trading as
a going concern in the foreseeable future and, based on this review, consider that the
presentation of the financial statements on this basis is appropriate.
Legal proceedings
In July 2010, subject to approval by the Australian competition regulator, the
Australian Competition and Consumer Commission (ACCC), we accepted an offer
from Metcash Trading Limited (Metcash) to acquire our Australian operation,
Franklins. The ACCC reviewed the proposed transaction under its informal merger
clearance process and opposed the sale to Metcash on the basis that it is likely to
have the effect of substantially lessening competition in the Australian market.
Following the ACCC’s decision, the parties announced that they proposed to proceed
with the transaction and this led the ACCC to commence legal proceedings in the
Federal Court of Australia in December 2010, seeking to prevent the parties from
completing the transaction. We and Metcash agreed with the ACCC to an expedited
hearing, which commenced in mid-March 2011. The judgement of the Court is
expected before 30 June 2011. If the Federal Court of Australia prevents the
acquisition by Metcash, we remain committed to the sale of Franklins and anticipate
selling the Franklins stores, either individually or in groups, under a competitive
tender process.
There are no other pending or threatened legal or arbitration proceedings which have
had or may have a material effect on the financial position of the Company or the
Group.
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Special resolutions
On 18 June 2010 the Company’s shareholders approved the following special
resolution:
General authority to repurchase Company shares
It was resolved that the Company or any of its subsidiaries may, in accordance with
sections 85 and 89 of the Companies Act, acquire issued shares of the Company or
its holding company, upon such terms and conditions and in such amounts as the
directors of the Company may determine from time to time. Acquisition of such
shares is subject to the Articles of Association of the Company, the provisions of the
Companies Act and the Listings Requirements of the JSE Limited (JSE), and
provided further that acquisitions by the Company and its subsidiaries of shares in
the Company may not, in the aggregate, exceed in any one financial year 5% of the
Company’s issued share capital.
Subsidiary companies’ special resolutions
100% held subsidiary company, Pick n Pay Franchise Financing (Pty) Limited
passed a special resolution to sell its business to a fellow 100% held subsidiary
company, Pick n Pay Retailers (Pty) Limited.
Directors and Secretary
In terms of the Company’s Articles of Association the directors listed here retire by
rotation and they offer themselves for re-election. Information pertaining to the
directors and the Company Secretary appear here.
Holding company
The holding company is Pick n Pay Holdings Limited.
Directors’ interest in shares
2011
%
1.4
27.6
29.0
Beneficial
Non-beneficial
Total
2010
%
1.1
27.6
28.7
The directors’ interest in shares is their effective direct shareholding in the Company
(excluding treasury shares) and their effective indirect shareholding through Pick n
Pay Holdings Limited (excluding treasury shares).
Subsidiary companies
Details of subsidiary companies are presented in note 21.
Borrowings
The Group’s overall level of debt (including bank overdrafts and overnight bank
borrowings) increased from R1 082.3 million to R1 939.7 million during the year, due
to an increased requirement to fund working capital and the Group’s capital
expenditure programme.
Subsequent events
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There have been no facts or circumstances of a material nature that have arisen
between the financial year-end and the date of this report.
Source: Pick and Pay - website
CORPORATE GOVERNANCE
In order to promote good corporate governance by businesses, the South African
government commissioned judge Mervin King to investigate the current situation in
South Africa and make recommendations.
The King Code reports:
FIRST KING CODE REPORT
King Code 1 was published in 1994.
The report recommended standards of conduct of
directors of companies and emphasize the need
for responsible corporate activities having due
regard for the society in which the business
operate.
SECOND KING CODE REPORT
King Code 11 was published in 2002.
The report contains a code of corporate practices
and conduct.
King Code 111 was published in 2009 and
came into effect on 1 March 2010.
The report focused on protecting the shareholders
of companies.
THIRD KING CODE REPORT
Stresses the fact that there is always a link
between good governance and compliances with
the law. Good governance cannot be exist
separately from the law.
However, in so far as the other enterprises are concerned, it is recommended that
enterprises comply with the seven characteristics of good corporate governance.
These seven characteristics are:
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
social responsibility

Transparency;

Accountability;

Responsibility;

Discipline;

Independence; and

Fairness.
REMEMBER: S T A R D I F!!!!!!!!!!!
PROFESSIONAL BODIES
The South Africa Institute of Certified Public Accountants (SAIPA)
The South Africa Institute of Certified Public Accountants (SAIPA) provides a home
for professionally qualified accountants in practice in commerce and industry. The
majority of members offer accounting and allied services to the public, and to
business entities, ranging from large organisations to small, owner-managed
businesses. SAIPA members also engage in commerce and industry, and in the
public sector, where their professional training and affiliation is beneficial to their
employees.
As professionals, the members are subject to rules of professional conduct and a
strict code of ethics. This protects users of their services, and helps to preserve the
integrity of the profession.
Public Accountants and Auditors Board (PAAB)
The basic purpose of the Public Accountants and Auditors Board (PAAB) is to protect
the financial interests of the people of the South African stakeholders, through
services rendered by registered accounting and auditors.
The tasks of the Public Accountants and Auditors Board (PAAB) are:


To provide the means and the regulatory framework for the education and
training of adequate numbers of competent and disciplined accountants and
auditors, to serve the needs of South Africa.
To strive constantly towards the maintenance and improvement of standards
of registered accountants and auditors.
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
To protect and support registered accountants and auditors who carry out their
duties competently, fearlessly and in good faith.
The South African Institute of Chartered Accountants (SAICA)
The South African Institute of Chartered Accountants (SAICA) is the pre-eminent
accountancy body in South Africa. It has established itself as one of the leading
Institutes in the world, playing its part in a highly dynamic business sector. It provides
a wide range of support services to its members enabling them to play a key role in
developing the rapidly changing South African economy.
The mission of SAICA is to serve the interests of the Chartered Accountancy
Profession and Society, by upholding professional standards and integrity, and the
pre-eminence of South African Chartered Accountants nationally and internationally,
by:





Delivering competent entry level members.
Providing services to assist members to maintain and enhance their
professional competence thereby enabling them to create value for their
clients and employers.
Enhancing the quality of information used in the private and public sectors for
measuring and enhancing organisational performance.
Running and facilitating programmes to transform the profession and to
facilitate community upliftment.
Fulfilling a leadership role regarding relevant business related issues and
providing reliable and respected public commentary.
AUDITOR
EXTERNAL AUDITOR
The external auditor is an audit professional who performs an audit on the financial
statements of a company, government, individual, or any other legal entity or
organization, and who is independent of the entity being audited.
Users of this financial information, such as investors, government agencies, and the
general public, rely on the external auditor to present an unbiased and independent
evaluation on such entities.
They are distinguished from internal auditors for two main reasons:
 The internal auditor's primary responsibility is appraising an entity's risk
management strategy and practices, management (including IT) controls
frameworks and governance processes, and they do not express an opinion
on the entity's financial statements.

Besides providing audit services, external auditors also provide different other
kind of services. Most common of them are reviews of financial statements
and compilation. In review auditors are generally required to tick and tie
numbers to general ledger and make inquiries of management. In compilation
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auditors are required to take a look at financial statement to make sure they
are free of obvious misstatements and errors.
The primary role of external auditors is to express an opinion on whether an
entity's financial statements are free of material misstatements. Auditor’s just wanted
to make sure that the company's financial statements are true and fair representation
of its actual position. If they come across any fraud related information, it is their
responsibility to bring it to the management's attention and consider withdrawing from
the engagement if management does not take appropriate actions. Normally,
external auditors review the entity's control procedures when assessing its overall
internal controls. They must also investigate any material issues raised by inquiries
from professional or regulatory authorities, such as the local taxing authority.
In the South Africa, Chartered Accountants (CA’s) are the only authorized nongovernmental type of external auditors who may perform audits and attestations on
an entity's financial statements and provide reports on such audits for public review.
INTERNAL AUDITOR
An internal auditor is a professional with an in-depth understanding of the
business culture, systems, and processes. The internal auditor provides
assurance that internal controls in place are adequate to mitigate the risks,
governance processes are effective and efficient, and companies’ goals and
objectives are met.
ACCOUNTING CONTROLS
Accounting controls embrace a wide range of controls which include, amongst
others, double entry bookkeeping, budgetary control, periodic operating reports
and statements, financial statements, cash flow statements, balance sheets,
statistical analyses, internal control, etc. For the purpose of our study, we shall
concentrate on the aspect of internal control only.
Internal control
It is important that proper measures should be taken to ensure that the firm is
managed in an orderly way to eliminate the possibility of fraud and theft. The
procedure followed by a firm in order to prevent fraud and theft or to detect it as
soon as it occurs, is called “internal control”.
Internal control may briefly be described as “The methods and procedures
adopted within a business to safeguard its assets, check the accuracy and
reliability of its accounting records, promote operational efficiency”.
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SESSION 5 ACTIVITY 2
Completed by learners and Educator: 1hr:30 minutes
CORPORATE GOVERNANCE
REQUIRED:
Read the following extracts from the article "TAX MORALITY" and answer the
questions that follow:
TAX MORALITY
IS HERE TO STAY SAYS SARS COMMISSIONER
Oupa Magashula / SARS
Commissioner
The importance of good corporate governance and greater transparency
has been thrown into the spotlight more than ever before by the current global
financial crisis. The failure of governance - and, in particular, the excessive risk
appetite of foreign financial institutions - plunged economies around the world
into the most severe economic crisis in living memory.
Managing tax risks should be a core aspect of corporate governance for at least
two reasons. The first is obvious. Taxes are often one of the biggest items on
the income statements of organisations. How they are managed and planned for
is a critical component of responsible corporate governance and oversight.
In SARS, we have for many years promoted the notion that there is a moral
component to tax compliance and this has seen us at odds with some tax
advisers and professionals who insist tax is simply a cost to be reduced wherever
possible.
Despite these challenges, in South Africa over the past decade tax rates have
been reduced by providing substantial tax relief of over R90 billion to
individuals and businesses. This relief - while still maintaining and expanding the
social and developmental agenda - has been made possible through economic
growth, more efficient collection of taxes and growing levels of compliance.
We need a tax system which is fair, does not place an undue burden on the
economy, but at the same time provides the necessary means to correct
imbalances, build infrastructure and stimulate economic growth - this requires
everyone to pay their fair share.
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REQUIED:
1.1
The article refers to "The importance of good governance and greater
transparency .............."
1.1.1 What is "Corporate Governance"?
(3)
1.1.2 "Transparency" is one of the seven primary characteristics of
good governance. Explain what is meant by "Transparency"?(2)
1.1.3 List 3 other primary characteristics of good governance as listed
by the King Code.
(3)
1.2
Explain the reason mentioned why "Managing tax risks" is such an important
aspect of responsible corporate governance.
(2)
1.3
What does "SARS" stand for?
1.4
List three points that explain how South Africa has, despite all challenges,
managed to provide substantial tax relief to individuals and businesses
(3)
1.5
Discuss, providing two points why it is important that all directors of companies
in South Africa adopt an approach of good corporate governance at all time
(6)
1.2
(1)
You are provided with the following extract taken from the report of the
independent auditors.
EXTRACT FROM THE REPORT OF THE INDEPENDENT AUDITORS
Paragraph 1
We have audited the annual financial statements of Simphiwe
Limited set out on pages 8 to 17 for the year ended
30 September 2009. These financial statements are the responsibility
of the company's directors. Our responsibility is to express an opinion
on these financial statements based on our audit.
Paragraph 2
An audit includes:
• Examining, on a test basis, evidence supporting the amounts in the
financial statements;
• Assessing the accounting principles used and significant estimates
made by management;
• Evaluating the overall financial statement presentation.
Paragraph 3
Audit opinion
In our opinion, the financial statements fairly present, in all material
respects,
the
financial
position
of
the
company
at
30 September 2009 and the results of their operations and cash flow
for the year then ended in accordance with International Financial
Reporting Standards, and in the manner required by the Companies
Act, 1973 (Act 61 of 1973) in South Africa.
Bailey & Nokwe, Chartered Accountants (SA) 10 Nov. 2009
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REQUIRED:
1.2.1
1.2.2
1.2.3
Explain why it is important for the independent auditor to be a
member of a professional body.
(2)
Refer to the underlined sentence in paragraph 1. Why do the
auditors include this sentence in their report? Briefly explain.
(2)
Refer to the underlined words in paragraph 2.
1.2.4
(a) Give ONE example of 'evidence' that an auditor would use.
(2)
(b) Give ONE example of the 'accounting principles' he/she would
assess as part of the audit. Explain why the auditor would
inspect this principle.
(3)
Refer to paragraph 3. Explain why you would be satisfied with this
audit opinion.
(2)
Refer to the disposal of the computer for R800 in Information 2J of
QUESTION 4.1. Another director, Sam Smith, has complained that
Ivor Steele has acted unethically in taking over the computer for
R800. Ivor disagrees.
1.2.5
(a) Give ONE opinion to support Sam.
(4)
[15]
(b) Give ONE opinion to support Ivor.
REQUIRED:
As a shareholder, why would you be concerned about this audit report?
Explain. State THREE points.
1.2
(6)
Refer to the newspaper article (Information A) and answer the following
questions:
1.2.1
Refer to paragraph 1.
Explain your opinion on the attendance of shareholders at the
AGM.
1.2.2
Refer to paragraphs 2 and 3.
Answer the following:
 What is meant by a qualified audit report? Explain.
 How does this type of report affect the company and the
shareholders? Explain.
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(3)

1.2.3
1.3
1.3.1
Why did the independent auditors issue a qualified report in
respect of this asset? Explain.
Explain why several of the shareholders would think that the longterm prospects of the company are being threatened. Mention
corporate governance in your answer.
(6)
(4)
As a shareholder of Manic Ltd, you did not attend the annual general meeting
(AGM). You notice the following article in a newspaper, The Daily Views.
Paragraph 1
Several shareholders of Manic Ltd accused the directors of
unwise decisions that in their opinion would threaten the longterm continuation of the company. Only 50 of the 6 000
shareholders of the company attended the AGM.
Paragraph 2
The company received a qualified audit report from the
auditors based on an amount of R3 million that had apparently
been spent on a residence in an elite area along the KwaZuluNatal coast.
Paragraph 3
The directors' report stated that this asset was reflected in the
company's Balance Sheet and was being used for business
purposes to accommodate business partners from overseas
countries. The Daily Views has found that this property was in
fact being used for holiday purposes by the CEO and senior
directors.
Paragraph 4
The CEO, Ben Crooke, was also criticised for accepting a
60% increase in his remuneration. Crooke defended the
decision, saying that all remuneration in the company is
reviewed by the board of directors which is appointed at the
AGM each year.
Directors, shareholders and auditors interact directly with the published
financial statements of a company. Summarize the roles played by each.
(10)
1.3.2 Match column A with the most appropriate description or answer found in
column B. Write down only the letter from column B in the answer book.
(6 x 2 = 12 marks)
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Column A
1
2
Column B
Matching Concept
A
Why was it necessary for South Africa to
bring about alignment in financial reporting
with the rest of the world?
B
3
Unqualified audit report.
C
4
External audit report
D
5
Prudence Concept
E
6
South Africa recognized the need to prepare
their financial statements in line with
international standards. What is this
international standard
called?
F
G
H
I
The independent regulatory board for
auditors [IRBA}
The auditor states that the financial
statements present the financial position
to be in conformity with GAAP except in
instances where there is a deviation or
departure from GAAP
Audit performed by the employees of the
company to evaluate the control
measures and systems of the company
to ensure the accomplishments of the
company’s goals and objectives.
Financial statements are reported in a
conservative manner.
To provide credibility to the financial
statements prepared by South African
companies in the world economy.
The auditor states that the financial
statements are presented fairly in
conformity with GAAP.
Audit performed by an independent
auditor who will examine the financial
statements of the company to determine
whether it was fairly presented and in
accordance with GAAP.
International Financial Reporting
Standard [IFRS]
If goods have been sold, the sales value
and the Cost of Sales value must be
recorded simultaneously.
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SESSION 5 ACTIVITY 2 SOLUTION
CORPORATE GOVERNANCE
1.1.1
What is "Corporate Governance"?
How a business is controlled and managed in a socially desirable manner

in order to achieve its goals. 
Any other acceptable answer
1.1.2
3
Explain what is meant by "Transparency".
Information should not be hidden from shareholders and other stakeholders
(eg. SARS) - they have legal rights to have the information. 
Any other acceptable answer
1.1.3
List 3 other primary characteristics of good governance as listed by
the King Code.
Discipline
Independence
Accountability
Fairness
Responsible management
Social issues
any 3x 
1.2
2
3
Explain the reason mentioned why "Managing tax risks" is such an
important aspect of responsible corporate governance.
Taxes are often one of the biggest items on business Income Statement
(Materiality)

2
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What does ‘SARS’ stand for?
1.3
South African Revenue Services
1

List three points that explain how South Africa has, despite all
challenges, managed to provide substantial tax relief to individuals
and businesses.
economic growth

more efficient tax collection

growing levels of compliance
1.4
3
1.5 Discuss, providing two points why it is important that all directors
of companies in South Africa adopt an approach of good corporate
governance at all times.
 Separation of ownership (by shareholders) from control by directors.

 Shareholders want security and sustainability. 
 If directors follow unethical practices company will not be supported by
customers, lenders, suppliers etc. and will not be secure/sustainable.
2 x 
6
20
1.2.1
Explain why it is important for the independent auditor to
be a member of a professional body.
Any one valid reason, e.g. 
Can award part-marks for partial, unclear or incomplete
answers
 So that readers of financial statements can have
2
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




1.2.2
confidence in his opinion
Assurance to the public that he/she is well trained on an
on-going basis
Disciplinary actions if negligent in performing duties
Aware of latest trends e.g. IFRS, Companies Act, King
Code
Act in ethical manner (integrity, observe code of
conduct)
To benchmark quality of work
Refer to the underlined sentence in paragraph 1. Why do
the auditors include this sentence in their report? Briefly
explain.
Any one valid reason, e.g. 
Can award part-marks for partial, unclear or incomplete
answers
 The auditor expresses an opinion, he/she does not
prepare the financial statements
 If the auditor has anything to do with preparing the
financial statements, he will not be able to express his
opinion (conflict of interests, he would be biased)
 The auditor only checks on a test basis – the directors
are responsible for the figures
 The directors work in the company on a daily basis –
they must be held liable for errors or fraud
 The directors cannot delegate their responsibilities for
the preparation of the financial statements.
1.2.3
2
Refer to the underlined words in paragraph 2.
(a) Give ONE example of ‘evidence’ that an auditor would
use.

any valid proof of entries in the books or values in the
books or financial statements concerning cash, fixed assets,
loans, stock e.g. bank statements, stock sheets counts,
invoices (source documents and supporting vouchers), fixed
asset register
(b) Give ONE example of the ‘accounting principles’
he/she would assess as part of the audit. Explain why
the auditor would inspect this principle.
One principle provided  Explanation of reason: 
e.g.
e.g.
Stock valuation method
Could lead to differences in
profit
Valuation of fixed assets
Could lead to differences in
(historical cost &
profit or net asset value
depreciation)
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Matching principle
Income & expenses must be
matched in correct accounting
period
Prudence principle
Results
must
be
conservatively reported
Going-concern principle
Affects valuation of assets
Any other valid principles and reasons acceptable – accept
transparency, even though it’s a King Code principle
1.2.4
Refer to Paragraph 3. Explain why you would you be satisfied
with this audit opinion.
Any valid response 
Part-marks can be awarded for unclear or incomplete answers
Possible responses, e.g.
 The auditors have stated that they are satisfied with all
aspects of the financial reporting by the directors/company
 This is a standard report – cannot expect better (fairly
presented)
 No negative comments reported – if the auditor had been
dissatisfied about anything he would have stated it here
 Complies with IFRS and Companies Act
 The auditors have not stated the report is qualified or
withheld.
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1.2.5
Refer to the disposal of the computer for R800 in Information
2J of QUESTION 4.1. Another director, Sam Smith, has
complained that Ivor Steele has acted unethically in taking over
the computer for R800. Ivor disagrees.
(a)
Give one opinion to support Sam
Any one valid opinion 
Part-marks can be awarded for unclear or incomplete
answers
 Ivor is benefiting from a very low charge on an asset that is
worth a lot more to the company and hence the shareholders
are losing as a result of this transaction (a large loss was
made on this disposal).
 This sets a bad precedent for the company / misuse of his
position as director; other employees might feel entitled to
similar benefits.
 The directors do not own the company; the shareholders are
the owners of the company.
 There is also tax implications – the director should be paying
tax on this ‘perk’.
 The transaction was not transparent – no discussion /
disclosure on the disposal in advance.
 The asset was still of use to the company; the director has no
right to take it.
(b)
Give one opinion to support Ivor.
Any one valid opinion 
Part-marks can be awarded for unclear or incomplete
answers
 The computer is already more than three years old, and
computers have a relatively short life span.
 The computer is out-dated; it will probably not be
upgradeable.
 The depreciation at 10% on cost price for computers is
unrealistic and should therefore have had a lower carrying
value.
NB: Do not accept that directors are owners.
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