SECONDARY SCHOOL IMPROVEMENT
PROGRAMME (SSIP) 2015
GRADE 12
SUBJECT:
ACCOUNTING
LEARNER NOTES
(Page 1 of 73)
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TABLE OF CONTENTS
SESSION
TOPIC
5
Fixed Assets
PAGE
3 - 12
6
Inventory Valuation
13 - 25
7
Consolidation
26 - 38
8
Consolidation
38 - 47
9
Consolidation
47 - 58
10
Reconciliations
59 - 73
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© Gauteng Department of Education
SESSION NO: FIVE
TOPIC: FIXED ASSETS
SUGGESTIONS FOR IMPROVEMENT
Learners should be given question papers from the beginning of the year. Question
papers to be used frequently in class instead of only using textbooks. Teach a
section and assess learners using past exam papers so that they can become
familiar with the exam questions. The most important is the marking of the
assessment and the discussion with learners. Assessment task (SBA) should be
examination related. The grade 11 curriculum must be thoroughly mediated so as to
ensure that learners are thoroughly prepared for the sections that are continued in
grade 12.
The applications involved in valuing fixed assets and stock require regular practice
and continual reinforcement at appropriate times . These can be integrated into other
Grade 12 topics such as Companies, Manufacturing and Projected Income
Statements to eliminate the need to devote additional revision time to these topics .
Teachers should ensure that the opportunities are used to include these applications
in class tasks and tests on a regular basis .
Teachers must ensure that the procedures of calculating depreciation and drawing
up asset disposal accounts and fixed asset notes are properly addressed by the end
of Grade 11.
SECTION A: TYPICAL EXAM QUESTIONS
QUESTION 6: FIXED ASSETS, INVENTORY VALUATION AND INTERNAL CONTROL
(24 marks; 18 minutes)
1.1
FIXED ASSETS
You are provided with details of the fixed assets of Ulwazi Ltd. The financial
year ends on 31 March 2013.
REQUIRED:
1.1.1
1.1.2
1.1.3
Calculate the missing figures indicated by A, B and C in the Fixed
Assets Note below.
(9)
Prepare the Asset Disposal Account for the computer sold on
31 January 2013.
(11)
You are the internal auditor. State TWO concerns that you would
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voice in respect of the fixed assets with the board of directors. Explain
in EACH case why you are concerned.
INFORMATION:
1.
Fixed Assets Note:
Carrying value (1 April 2012)
Cost
Accumulated depreciation
Movements:
Additions (cost)
Disposals (carrying value)
Depreciation
Carrying value (31 March 2013)
Cost
Accumulated depreciation
2.
Land and
buildings
3 000 000
3 000 000
(
)
Equipment
184 000
258 000
Vehicles
560 000
780 000
(220 000)
360 000
A
B
2 100 000
2 100 000
(
)
240 000
1 140 000
C
Unused land was sold for cash at cost to solve cash-flow problems.
This property was bought by Pedoma (Pty) Ltd. The majority
shareholder in this company is Betty Benson, the CEO's wife.
Information 3.
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(4)
3.
A computer (equipment) was sold for R800 cash to the CEO, Ben
Benson, on 31 January 2013.
FIXED ASSET REGISTER
Item:
IT3 Laptop
Cost:
R18 000
Date purchased:
1 October 2010
Rate of depreciation:
25% p.a. on cost
31 March 2011
31 March 2012
31 January 2013
1.2
E22189
DEPRECIATION
ACCUMULATED
DEPRECIATION
CARRYING
VALUE
R2 250
R4 500
?
R2 250
R6 750
?
R15 750
R11 250
?
4.
A new vehicle costing R360 000 was purchased on 30 June 2012.
5.
Depreciation is written off on Vehicles at 20% p.a. on the
diminishing-balance method.
MASTER LIMITED
You are provided with information relating to Master Ltd for the financial year
ended 30 June 2012.
REQUIRED:
1.2.1
Use Information 2 to complete the Note for Fixed/Tangible Assets
by filling in the missing figures indicated by an *
(17)
INFORMATION:
1.
Note to the Balance Sheet on 30 June 2012
FIXED/TANGIBLE ASSETS
Carrying value – 1 July 2011
Cost
Accumulated depreciation
Movements
Additions at cost
Disposal at carrying value
Depreciation
Carrying value – 30 June 2012
Cost
LAND AND EQUIPMENT
BUILDINGS
R 930 000
R 220 000
930 000
561 000
0
(341 000)
*
0
0
1 580 000
1 580 000
*
0
*
*
616 000
VEHICLES
R 519 200
814 000
(294 800)
0
*
(98 890)
*
*
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Accumulated depreciation
2.
0
*
*
Details of fixed assets
 Land and buildings were bought during the year and are not depreciated.
 New equipment was bought for R55 000 halfway through the financial
year. This transaction has been correctly recorded.
 Provide for depreciation on equipment at 10% p.a. on cost price.
 A vehicle was sold for cash at carrying value on 31 March 2012. This has
been properly recorded. The details of the asset sold from the Fixed Asset
Register were as follows:
- Cost price, R165 000
- Accumulated depreciation at beginning of financial year, R66 000
- Depreciation rate of 20% p.a. on the diminishing-balance method
 Depreciation on all the vehicles is R98 890 for the year.
SECTION B: NOTES ON CONTENT
5.1
FIXED ASSETS/TANGIBLE ASSETS
TANGIBLE ASSETS
Tangible/Fixed assets such as land and buildings, vehicles and equipment are those
assets of material value which:
 are used in the business to generate income
 are of long life
 are not purchased for the purpose of resale, in the normal course of business
activities.
 have actual physical existence
DEPRECIATION
These tangible assets lose their value as a result of wear and tear. The loss of the
value of the asset must be brought into account at the end of the financial year as an
expense. This loss of value is known as depreciation.
This is done in accordance with the matching concept, i.e. all expenses relating to
the accounting period must be matched with the accounting period under review.
Depreciation is an imputed expense. The cost of a tangible asset (e.g. motor
vehicle) must be distributed fairly over the whole life of the asset.
The methods of accounting for depreciation are:


Fixed installment method (percentage on cost)
Diminishing balance method (percentage on carrying value/ book value)
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The above methods were dealt with in detail in grade 10 and 11.
Wear and tear can be calculated on a straight-line basis provided the taxpayer
complies with certain requirements:
• adequate records must be maintained
• the method must be applied to all assets in the same class
• the taxpayer must be able to provide a detailed schedule of assets disposed
of, including date of acquisition, tax value in the previous tax year, the price on
disposal or scrapping, the final written down value of the asset to be reflected
at R1, the records must be maintained so that each asset’s value can be
established at any point in time
• The asset must be used in the taxpayer’s trade.
The following, amongst others, rates for wear and tear allowances are allowed by
SARS:
WEAR AND TEAR ALLOWANCES
Wear and tear can be calculated on a straight-line basis provided the taxpayer
complies with certain requirements:
•
adequate records must be maintained
•
the method must be applied to all assets in the same class
•
the taxpayer must be able to provide a detailed schedule of assets disposed
of, including date of acquisition, tax value in the previous tax year, the price
on disposal or scrapping, the final written down value of the asset to be
reflected at R1, the records must be maintained so that each asset’s value
can be established at any point in time
The asset must be used in the taxpayer’s trade.

The most common of which are:
Item Number of years
Asset
Cellular telephones
Computers (mainframe or servers)
Computers (personal computers)
Delivery vehicles
Fax machines
Furniture & fittings
Office equipment – mechanical
Office equipment – electronic
Passenger cars
Years
2
5
3
4
3
6
5
3
5
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Photocopying equipment
Trucks (heavy-duty)
Trucks (other)

5
3
4
Assets costing R7 000 or less can be written off in full in the year of
acquisition.
The wear and tear may be claimed on either the diminishing balance method or on
cost, in which certain requirements apply.
LIFESPAN OF ASSETS
If the estimated life of an asset extends beyond the current financial year, future
financial periods will benefit from the use of the asset. Thus, the need for
depreciation arises. Depreciation is the process of systematic distribution of the cost
of the asset over its useful life.
The life span of the asset cannot be determined with accuracy. It must therefore be
estimated. It may be measured in terms of time, production or service.
Factors in a business which play a part to determine the life span are:
 experience with similar assets in the past
 current condition of the asset
 policy with regard to replacement of fixed assets
The wear and tear allowances table as provided by SARS will assist the business to
determine the life span of the asset, when the usefulness of the asset comes to an
end and what measures must be taken to dispose and/or replace the asset
concerned.
AGE OF ASSETS
The age of an asset will be influenced by the recommendations from SARS. It would
be useful for the company to determine the age by looking at the rate of depreciation
by SARS. The method of depreciation will also influence the age of the asset.
However, an asset will still be useful after it has been written off. For example, SARS
recommends 33, 33% depreciation rate p.a. for computers, fax machines, etc. It
means the asset has a useful life of 3 years. After 3 years the computer may still be
used, and at a profit if it is sold. The sale will be recorded as a profit on sale of asset.
REPLACEMENT RATE
This is also linked to the above explanation. It will be advisable for businesses to use
the rate of depreciation recommended by SARS as shown under 5.3. An asset
should be replaced after provision has been made for the accumulated depreciation.
This process also assists the business in the budgeting process. The accountant will
provide for the replacement in the budget over a period to cushion the actual
purchase when the replacement time falls due.
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CARRYING VALUE OF ONE RAND
When Accumulated Depreciation exceeds the cost of the asset than the carrying
value must equal R1, 00 (One rand) e.g.
Cost
= R100 000
Accumulated depreciation at beginning = R 98 000
Depreciation = current year
= R 5 000
Accumulated depreciation
= R103 000
∴Carrying value
= R –3 000 (Cannot be negative)

Annual depreciation must be reduced to R1 999 so that the carrying value
will be R1,00

The accumulated depreciation must be shown as R99 999.
Cost
Accumulated depreciation
Carrying value (closing date)
R100 000
R 99 999
R
1
DISPOSAL OF TANGIBLE ASSETS
Tangible assets are possessions with a relatively long lifespan which are not
purchased for the purpose of resale, in the normal course of business activities.
Tangible assets, such as vehicles, equipment and buildings are purchased for use by
the business.
However, the business may find that they no longer require a particular asset, e.g. an
old vehicle and may thus decide to sell the asset. These disposals can take place at
any time during the accounting period. (The financial year).
Before disposal, proper authorisation is required for the sale of the asset. In the case
of a sole trader, the owner himself would conclude the transaction and he has the
required authority to enter into the transaction.
The asset can be disposed in one of the following ways:
 On credit
General Journal
 For cash
Cash Receipts Journal
 Trade-in (for new asset)
General Journal
 For personal use
General Journal
 Given away as donation
General Journal
This disposal can take place at
 The beginning of the accounting period
 The end of the accounting period
 During the accounting period
THE ABOVE HAS BEEN DEALT WITH IN GRADE 11
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SECTION C:
HOMEWORK QUESTIONS
QUESTION ONE
You are provided with information relating to PK Limited, a public company.
The financial year – end is on 30 June 2010.
REQUIRED:
Study the information provided and answer the questions that follow.
1.1
Prepare the Asset Disposal Account on 31 December 2009 in the
General Ledger.
(9)
1.2
Complete the Note for Fixed (Tangible) Assets on 30 June 2010.
(15)
INFORMATION:
1.
Equipment bought on 30 June 2007 for R40 000 was sold for cash on
31 December 2009 at carrying value. New equipment was purchased on
1 February 2010 for R160 000. Depreciation on equipment is written off at
15% p.a. on cost price.
2.
The following totals were extracted from the financial statements on
30 June 2010:
Balance Sheet
Land and buildings
Equipment at cost
Accumulated depreciation on
equipment
2010
2 764 000
420 000
?
2009
4 139 000
300 000
135 000
QUESTION TWO
2
2.1
You are provided with the Pre-adjustment Trial Balance of Khachwee Limited
for the year ended 30 June 2011.
REQUIRED:
Prepare the Asset Disposal Account to record the sale of vehicles.
See information G and H under Adjustments below.
(9)
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INFORMATION:
1.
KACHWEE LTD
EXTRACT FROM THE PRE-ADJUSTMENT TRIAL BALANCE AS AT
30 JUNE 2011
Balance Sheet Accounts Section
Land and buildings
Vehicles
Equipment
Accumulated depreciation on vehicles
Accumulated depreciation on equipment
2.
DEBIT
R
2 097 000
814 000
616 000
CREDIT
R
294 800
341 000
ADJUSTMENTS:
A.
A vehicle was sold on credit for R90 000 on 31 December 2010. The
fixed-asset register revealed the following regarding this vehicle:
Cost price
Accumulated depreciation on 1 July 2010
R
235 000
105 750
This transaction has not yet been recorded by the bookkeeper.
B.
Make provision for depreciation as follows:


Vehicles at 15% p.a. on cost price
Equipment at 10% p.a. on the diminishing balance method.
NOTE: New equipment to the value of R48 000 was purchased on 1
September 2010. This has been correctly recorded.
SECTION D:
SOLUTIONS FOR SECTION A
QUESTION
1.1
FIXED ASSETS
1.1.1
Calculate the missing figures indicated by A, B and C in the
Fixed Asset Note:
CALCULATION
ANSWER
9
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A
R3 000 000 – R2 100 000
R112 000 
B
+ R54 000 
20% x (780 000 – 220 000)
Any one part correct
R166 000
360 000 x 20% x 9/12
C
1.1.2
All or nothing
R900 000
If B + 220 000
Operation
 R386 000
LEDGER OF ULWAZI LTD
ASSET DISPOSAL ACCOUNT
2013
Jan
31
Equipment 
18 000
2013
Jan
31
Accu depr on
equipment 
6 750+ 3 750
One part of
workings
correct
10 500
Bank 
Loss on
disposal
18 000
 800
Operation
6 700
May be a profit, depending
on figures
18 000
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1.1.3
You are the internal auditor. State TWO concerns that you would
voice in respect of the fixed assets with the board of directors.
Explain in EACH case why you are concerned.
Reason must correspond to the concern
CONCERN Any TWO 
REASON Any TWO 
Land and buildings were sold at
cost price
Should have been sold at its
current market value
Unreasonable purchase price for a A loss of R6 700 has been incurred /
computer (R800) taken by CEO he should be charged the fair market
value / unethical
Nepotism shown by the CEO
Land and buildings being used
to solve a cash flow problem
Vehicles were bought
Land and buildings were not sold
at its current market value / was
not advertised to public / Deal
has been finalised with his wife /
Corruption
Land and building normally
appreciate in value (loss of
possible profits)
These might not be necessary
4
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(R360 000)
1.2
MASTER LIMITED
1.2.1 NOTE TO THE BALANCE SHEET ON 30 JUNE 2012
FIXED/TANGIBLE ASSETS
Carrying value – 1 July 2011
Land and
Buildings
930 000
Cost
Accumulated depreciation
Movements
Additions at cost
Disposal at carrying value
Equipment
Vehicles
220 000
519 200
930 000
0
561 000
(341 000)
814 000
(294 800)
650 000
0
 55 000
0
0
 ( 84 150)
(165 000 - 66 000 - 14 850)
operation one part
correct
80 850
Depreciation
(E: 2 750  + 56 100 )
0
( 58 850)
(98 890)
operation one part
correct
Inspect reasonable
Inspect reasonable
Carrying value – 30 June 2012
1 580 000
 216 150
 336 160
Cost
Accumulated depreciation
1 580 000
0
616 000
 (399 850)
 649 000
 (312 840)
Inspect reasonable
Inspect reasonable
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SESSION NO: SIX
TOPIC: INVENTORY VALUATION
IMPORTANT ASPECTS TO BE CONSIDERED BY EDUCATORS







Revision on the perpetual and periodic stock systems.
Discuss the different methods of stock valuation:
Specific identification.
FIFO.
Weighted average.
LIFO – not covered in the curriculum.
GAAP, IFRS and ethical issues
SECTION A: TYPICAL EXAM QUESTIONS
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QUESTION 1: CONCEPTS, INVENTORY
1.1
(45 marks;30 minutes)
CONCEPTS
REQUIRED:
Indicate whether the following statements are TRUE or FALSE:
1.2
1.1.1
The FIFO method of stock valuation is based on the assumption
that stock acquired last is the first merchandise to be sold.
1.1.2
Under the perpetual stock system carriage on goods bought is
debited to the Trading Stock Account.
1.1.3
Under the periodic stock system, when goods are sold, the cost of
sales is recorded at the same time.
1.1.4
All businesses in South Africa must charge value-added tax on all
goods that they sell and all services that they provide.
1.1.5
When the owner of a clothing business takes clothing for personal
use at cost price, VAT is levied on these goods.
(10)
INVENTORY VALUATION
You are provided with information relating to Quality Building Suppliers for
April 2012. They buy boxes of floor tiles and sell them to retailers around
Hazyview. They use the weighted-average method for stock valuation and the
periodic inventory system. Refer to the table below.
1.2.1
Calculate the total value of the opening stock (A).
(3)
1.2.2
Calculate the value of the tiles received on 25 April 2012 (B).
(4)
1.2.3
Calculate the value of the closing stock using the weightedaverage method.
(6)
INFORMATION
Opening stock (1 April 2012)
Boxes of tiles purchased
during the month
10 April 2012
20 April 2012
25 April 2012
Boxes of damaged tiles returned
to supplier (these tiles were
originally delivered on 25 April)
BOXES
OF TILES
ON HAND
600
VALUE
PER UNIT
CARRIAGE
ON
PURCHASES
(A)
R85,00
3 160
1 000
1 200
960
100
TOTAL
VALUE
?
R90,00
R95,00
R120,00
?
R4 500
R5 700
R5 760
R94 500
R119 700
(B)
?
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1.3
Sales for the month
2 510
Closing stock (30 April 2012)
1 150
R160,00
R401 600
?
?
INVENTORY VALUATION AND INTERNAL CONTROL
You are provided with information relating to Fast Save Traders owned by
Mohammed Khan. The business sells school shirts. Their financial year ends
on 31 July 2013. The business uses the FIFO (first in first out) method to
value stock. The periodic inventory system is used.
1.3.1
1.3.2
Calculate the value of closing stock according to the FIFO method
on 31 July 2013.
Calculate:


1.3.3
(7)
Mark-up percentage (%) achieved on cost
Stock holding period (use average stock in your calculation)
(4)
(4)
The business aims at a mark-up of 30% on cost.
As the internal auditor, what would you investigate? Explain.
State TWO points.
1.3.4
(4)
The stock holding period for 2012 was 30 days.
Should Mohammed be satisfied with the stock holding period for
2013? Explain.
(3)
INFORMATION:
1.
Sales and cost of sales for the year:
Sales (3 600 shirts at R140 each)
Cost of sales
2.
TOTAL
R504 000
R415 500
Inventories of shirts:
1 August 2012
31 July 2013
NUMBER
OF UNITS
600
970
PRICE PER UNIT
R80
?
TOTAL
R48 000
?
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3.
Purchases and returns:
NUMBER
OF UNITS
Purchases:
12 October 2012
18 December 2012
6 March 2013
24 June 2013
Returns:
7 March 2013
24 June 2013
NET TOTAL
PRICE PER UNIT
TOTAL
750
1 900
680
880
4 210
R110
R130
R100
R120
R82 500
R247 000
R68 000
R105 600
R503 100
(60)
(150)
4 000
R100
R120
(R6 000)
(R18 000)
R479 100
SECTION B: NOTES ON CONTENT
INTRODUCTION
The proper valuation of stock is very important as it influences the financial
statements, and also because the investment in stock normally constitutes a large
percentage of total assets. Millions of rand are invested in raw materials, work-inprocess and finished goods. It is therefore important for a company to decide which
method of stock valuation to use.
STOCK VALUATION METHODS
There are generally 3 methods used to valuate stock. The 3 methods are:



FIFO - First in first out
Weighted average method
Specific identification method
FIRST IN, FIRST OUT METHOD (FIFO)
Sale of goods is based on First in, first out basis, i.e. goods bought first are the first to
be issued for sale.
The following transactions were concluded in respect of boots bought and sold by
Jonnie Boots Traders for the year ended 31 December 20.9
EXAMPLE
INSTRUCTION
Use the FIFO method to determine the following:
 The number of boots on hand at the end of the year.
 Value of stock on hand at the end of the period
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


The closing stock
Gross profit
Cost of sales
INFORMATION:
Extracted from invoices, delivery notes and stock control records for 20.9
Details
Month
Quantity
Price
Bought
January
120 boots
at R120 each
June
80 boots
at R140 each
November
40 boots
at R160 each
Sold for the year
168 boots
Stock on hand at year end
at R100 each
?
STOCK REGISTER
Date
20.9
Jan
20.9
June
20.9
Nov
Total
Quantit
y
Unit
price
120
R120
80
R140
40
R160
240
Total
168
R200
sold
Cost
R32 000 –
of
R10 880=
sales
Amoun
t
R14
400
R11
200
Quantit
y sold
Stoc Value of
k on unsold
hand
stock
Cumulati
ve value
of
unsold
stock
120
NIL
0
48
32
R4 480
R6 400
-
40
R6 400
R10 880
R32
000
168
72
R10 880
R10 880
Profit
R33
600
R21
120
Stoc
k on
hand
R12 480
*72
R10 800
* 120 + 80 + 40 = 240 – 168 = 72
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
Trading stock account to determine closing stock and gross profit
Trading account
nil Sales
32 000 Closing stock
Opening stock
Purchases
Profit and loss
(Gross profit)

12 480
44 480
44 480
Cost of sales and Gross profit
 COST OF SALES
120 boots at R120 each
48 boots at R140 each
Cost of sales

33 600
10 880
 GROSS PROFIT
Sales
Cost of sales
Gross Profit
14 400
6 720
21 120
33 600
(21 120)
12 480
Value of Stock on hand
Details
Month
Quantity
Bought
January
120 boots at R120
each
80 boots at R140
each
40 boots at R160
each
June
November
Price
Sold for the year
168 boots at R200
each
Stock on hand at year
end
72 boots
Amount
Stock on
hand
14 400
nil
11 200
32
6 400
40
33 600
?
72
Calculation:
QUANTITY BOUGHT
120 boots bought – all sold
80 boots bought
sold 48
on hand 32 X R140
40 boots bought
sold nil
on hand 40 X R160 = R6 400
Value of Stock on hand
Cost of stock
nil
R4 480
R6 400
R10 880
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© Gauteng Department of Education
WEIGHTED AVERAGE METHOD
The weighted average method does not take quantities into account but average
price into account. With the receipt of goods the average cost of each item is
recalculated or calculated at the end of the financial year.
The following transactions were concluded in respect of boots bought and sold by
Jonnie Boots Traders for 20.10
INSTRUCTION:
Use the Weighted Average method to determine the following:





The no. of boots on hand at the end of the period
Value of stock on hand at the end of the period
The closing stock
Gross profit
Cost of sales
INFORMATION:
Details
Bought
Quantity
120 boots
80 boots
40 boots
Price
at R120 each
at R140 each
at R160 each
Sold for the year
168 boots
at R100 each
Stock on hand at year end
72 boots
Date
20.9
Jan
20.9
June
20.9
Nov
Total
Average
Month
January
June
November
Value
of
unsol
d
stock
Cumulativ
e value of
Profit
unsold
stock
Quan
tity
Unit
price
Amount
Quantit
y sold
Stoc
k on
hand
120
R120
R14 400
120
NIL
0
80
R140
R11 200
48
32
R4 480
40
R160
R6 400
-
40
R6 400
R10 880
R32 000
168
72
R10
880
R10 880
240
R32 000 divide by 240
19
© Gauteng Department of Education
Cost
price
= R133,33
Total
sold
168
R200
R33 600
Stock
on hand
Cost
of
sales
*72
R32 000 –
R9 599,76=
72XR133,33 =R9 599,76
R22 400
,24
R124
80
* 120 + 80 + 40 = 240 – 168 = 72

Trading account to determine closing stock and gross profit
Opening stock
Purchases
Profit and loss
(Gross profit)
 COST OF SALES
120 boots at R133,33 each
48 boots at R133,33 each
Cost of sales


Trading account
nil Sales
32 000 Closing stock
33 600
9 600
11 200
43 200
43 200
15 999,60
6 399.84
22 399,44
 GROSS PROFIT
Sales
Cost of sales
Gross Profit
33 600
(22 400)
11 200
Cost of sales and gross profit

22 400 (rounded off)
COMPARISON
FIFO
Closing Stock value
Gross Profit
Cost of sales
WEIGHTED
10 880
12 480
21 120
9 600
11 200
22 400
Specific identification method of inventory valuation
You are provided with information relating to AA Car Dealers. The business uses
the specific identification method of valuing stock.
The following items are in stock at the beginning of May 2013:
20
© Gauteng Department of Education
Description
Item 1
Item 2
Item 3
Item 4
Audi A1
engine)
Audi A3
engine)
Audi A6
engine)
Audi A8
engine)
Cost price
(1.2
litre
R170 000
Published
selling
price
R215 000
(2.0
litre
R270 000
R324 000
(1.8
litre
R330 000
R380 000
(3.0
litre
R580 000
R650 000
Items 1 and 3 are sold for cash during May 2013 at their published selling prices..
Required:
(a)
Calculate the following:
 Value of trading stock on 31 May 2013
 Gross profit earned during May 2013
(b)
Explain why it would be unreasonable for this business to value its stock
items on the basis of FIFO or Weighted Average.
(c)
Explain why it would be unreasonable for certain other businesses to use
the specific identification method e.g. a fruit shop which sells apples.
(d)
AA Car Dealers do not want the cost prices of stock items to be public
knowledge. What strategies could they use to keep the cost prices
confidential?
Solution:
(a)
Value of trading stock on 31 May 2013 = R270 000 + R580 000 =
R850 000
Gross profit earned during May 2013
= Sales – Cost of sales
= (215 000 + 380 000) – (170 000 +
330 000)
= R95 000
(b)
Explain why it would be unreasonable for this business to value its
stock items on the basis of FIFO or Weighted Average.
They sell discrete (separate) items (i.e. cars) that are very different from
each other in terms of price and character. It would be inappropriate to
value the cars based on the last two items bought or the weighted
average because the cost prices vary considerably. Also they sell low
volumes of these large articles. This makes it easier to identify the
specific cost on each car.
21
© Gauteng Department of Education
(c)
Explain why it would be unreasonable for certain other businesses
to use the specific identification method e.g. a fruit shop which
sells apples.
Apples comprise numerous similar articles sold at similar prices. Cost
prices might change from day to day, or from supplier to supplier, the
articles would all be placed in containers for customers to select. Difficult
to apply a specific price to any one apple.
(d)
AA Car Dealers do not want the cost prices of stock items to be
public knowledge. What strategies could they use to keep the cost
prices confidential?



Keep the cost prices in a catalogue which can be secured in the
manager’s office.
Secret cost code e.g. a 10-letter word such as BLACKHORSE where
B=1, L=2 etc.
Allocate separate product numbers to each item and record them on
the computer system together with the specific cost prices.
SECTION C:
HOMEWORK QUESTIONS
QUESTION 1: INVENTORY VALUATION
1.1
(30 marks; 20 minutes)
INVENTORY VALUATION
Speedy Traders sells one type of bicycle to major retail stores around South
Africa. They make use of the FIFO method for stock valuation and use the
periodic inventory system. The business is owned by Steve Martin.
REQUIRED:
1.1.1
What do the letters FIFO stand for?
(2)
1.1.2
Calculate the value per bicycle on hand on 1 July 2010.
(2)
1.1.3
Calculate the value of the closing stock on 30 June 2011 according
to the FIFO method.
(4)
1.1.4
Calculate the gross profit on 30 June 2011.
(6)
1.1.5
The owner and the accountant disagree on the method of stock
valuation. Steve, the owner, wants to continue using the FIFO
method, because he says it is easier to calculate. Bongi, the
22
© Gauteng Department of Education
accountant, wants to use the weighted-average method, because
she says the profit will be lower, and therefore the income tax will
be lower.
As internal auditor, what would you say to Steve and Bongi? State
TWO points.
(4)
INFORMATION:
The information below appeared in the records of Speedy Traders for the year ended
30 June 2011. The business used a fixed selling price of R6 750 per bicycle.
INFORMATION ON STOCK
Bicycles on hand on 1 July 2010
Bicycles bought during the year
September 2010
January 2011
May 2011
Bicycles returned from January
purchases
Bicycles sold during the year
Bicycles on hand on 30 June 2011
1.2
NUMBER
OF
BICYCLES
60
630
250
200
180
VALUE
PER
BICYCLE
?
TOTAL
VALUE
R3 800
R4 500
R4 200
R240 000
R2 606 000
R950 000
R900 000
R756 000
5
R4 500
R22 500
450
235
R6 750
?
R3 037 500
?
PROBLEM-SOLVING
Quick Bikes sells one brand of scooters. The owner, Doctor Zulu, has three
branches operating in Riverside, Valley View and Mountain Rise. The three
branches are managed by Robby, Vusi and Melanie, respectively.
Doctor Zulu has obtained the annual figures from the three branches for the
financial period ending 28 February 2011.
REQUIRED:
Identify ONE problem in relation to each branch, quoting figures to support
the problem. In each case, offer Doctor Zulu advice on how to solve the
problem.
INFORMATION:
23
© Gauteng Department of Education
(12)
RIVERSIDE
(ROBBY)
VALLEY VIEW
(VUSI)
MOUNTAIN
RISE
(MELANIE)
Number of scooters
available for sale
470
300
190
Number of scooters
sold during the year
380
75
190
Physical count on
28 February 2011
72
225
Nil
Cost price per scooter
R7 500
R7 500
R7 500
Selling price per
scooter
R11 500
R11 500
R11 500
R15 000
R30 000
per month
R40 000
R30 000
per month
R60 000
R30 000
per month
Advertising per year
Salary of manager
30
SECTION D:
SOLUTIONS FOR SECTION A
QUESTION 1
1.1
1.2.1
Indicate whether the statements are TRUE or FALSE.
1.1.1
False

1.1.2
True

1.1.3
False

1.1.4
False

1.1.5
True

Accept T or F instead of
True or False
10
Calculate the total value of the opening stock (A).
600  x R85  = R51 000  operation one part correct; accept without R sign
3
24
© Gauteng Department of Education
1.2.2
Calculate the value of the tiles received on 25 April 2012 (B).
960  x R120  + R5 760  = R120 960  operation one part correct
R115 200 (2 marks)
accept without R sign
4
1.2.3
Calculate the value of closing stock using the weighted average
method.
214 200
if 1.2.2 + 94 500 + 119 700 Inspect reasonable
see 1.2.1
51 000  + 335 160  – 12 000 (or 12 600) x 1 150 
3 660 
=
374 160 (or 373 560) x 1 150
3 660
= R117 563,93  operation one part correct or R117 563,92 or R117 564
OR
R102,23 x 1 150 = R117 564,50 or R117 565
R102,07 x 1 150 = R117 380,50 or R117 380 or R117 381
(4 marks)
(1 mark)
(1 method mark)
6
1.3
1.3.1
Value of closing stock according to the FIFO method
#
730 
If 970 – #
240 
OR 48
R87 600
x R120 
000 + 503 100 – 18 000 – 6 000 – 415
500
1 mark
1.3.2

R24 000
One part correct
Operation
x R100 
1 mark
1 mark
1 mark
Operation
R111 600
7
2 marks
Calculation of mark-up percentage (%) achieved on cost
504 000 – 415 500 (2 or nothing)

88 500
R415 500

Any one part correct
x 100 = 21,3% or 21,29% 
Calculation of stock holding period (use average stock in your calculation)
See 6.2.1 must be added to 48 000 to get the method mark
Award 2 marks for average stock if correct (see 6.2.1).
79 800
½ (R48 000 + R111 600 )
R415 500
x 365
1
= 69,35 days or 70 days or 2,3 months 
8
Operation, one part correct, shown in days or months
25
© Gauteng Department of Education
1.3.3
The business aims at a mark-up of 30% on cost. As the internal auditor, what
would you investigate? Explain. State TWO points.
See 6.2.2 above. Points below will depend on MU% calculated.
Any TWO   Good answer = 2 marks; part answer = 1 mark





Excessive trade discounts offered to customers
Incorrect mark-up calculations
Too many items sold at seasonal sales (discounts)
Excessive stock on hand leading to clearance sales
Theft of cash / stock
Counter competitors’ prices

OR:
 Will have to increase selling (marked) prices in future
 Buy in bulk
 Cheaper supplier
1.3.4
4
The stock holding period for 2012 was 30 days. Should Mohammed be
satisfied with the stock holding period for 2013? Explain.
See 6.2.2 above. Points below will depend on stock period calculated.
Yes/No: 
Explanation:  Good answer = 2 marks; part answer = 1 mark
Explanation for NO:
 The stock holding period has increased (from 30 days to 70 days).



This is not good as money is tied up in stock
Stock might not be sold if it deteriorates
More chance of stock theft
Explanation for YES:


Stock levels too low in 2012 and now less likely to run out of stock
Better prices through bulk purchases.
3
SESSION NO: SEVEN
TOPIC: CONSOLIDATION
SECTION A: TYPICAL EXAM QUESTIONS
QUESTION 1
Companies: Financial Statements and Interpretation (85 marks ; 51 minutes)
A
Financial Statements and Interpretation
You are provided with information from the accounting
records of Meera Traders LTD.
The financial year-end is 28 February 2013. The company is
registered with an authorised share capital of R700 000.
26
© Gauteng Department of Education
REQUIRED:
1.1
1.1.1
1.1.2
Briefly explain the GAAP principle that relates to doing adjustments at
the end of the financial year.
(2)
Taking into account the additional information (adjustments), complete
the Income Statement for the year ended 28 February 2013.
(23)
1.2
Prepare the Note for Trade and Other Receivables.
Complete the partially completed Balance Sheet.
1.3
Refer to the table of indicators provided.
1.3.1
(a)
(b)
(7)
(18)
Calculate the CURRENT RATIO and the ACID TEST RATIO for
2013.
(7)
Comment on the liquidity position of this business. Quote TWO
financial indicators/figures to support your argument.
(6)
1.3.2 Shareholders were not happy with the dividends they received.
 Calculate the dividend per share (DPS) and the earnings per share
(EPS) for the current year.
 Use your findings above (as well as other financial indicators
provided) to explain why the shareholders are unhappy.
1.4
(7)
(4)
The company intends issuing all unissued shares in the next
financial year.
One of the shareholders approached a director and requested
that he be allowed to purchase the shares before they are offered
to the public. Should the director be allowed to do this? Explain.
(3)
INFORMATION:
1.
Balances and Totals from the Pre-adjustment Trial Balance on 28 February
2013.
Ordinary Share Capital (110 000 shares)
Retained income (1 March 2012)
Loan: Sandy Bank (12,5%)
Fixed Deposit: BB Bank
Tangible Assets (carrying value on 28 February 2013)
Trading stock
Debtors control
Provision for bad debts (1 March 2012)
Creditors Control
Bank (overdraft)
550 000
70 055
135 000
50 000
700 380
32 800
17 530
1 075
22 360
9 900
27
© Gauteng Department of Education
Cash float
Petty cash
SARS: Income Tax
Gross Profit on 28 February 2013
Salaries
Discount allowed
Audit fees
Directors’ fees
Consumable stores
Interest on investment
Rent Income
Profit on sale of asset
Insurance
Stationery
Sundry expenses
Ordinary share dividends
2.
(Dr)
2 500
1 000
20 000
314 000
83 200
1 450
5 500
142 000
7 330
4 125
51 300
470
6 400
7 220
18 400
13 200
Additional Information:
(a)
Stock count at the end of the financial year revealed the following stock on
hand:
 Trading stock:
R29 300
 Consumable stores:
R1 130
(b)
The account of X. Payi (a debtor), must be written off as a bad debt, R830.
(c)
R400 received from Y. Bother (a debtor whose account was previously
written off) was posted to the Debtors Control Account. This must still be
corrected.
(d)
After taking into account the adjustments involving debtors, the provision
for bad debts must be adjusted to 5% of debtors.
(e)
Rent income for February 2013 was not yet received. Take into account
that the rent increased by R360 per month from 1 September 2012.
(f)
Half the insurance paid relates to the next financial year.
(g)
Interest on fixed deposit for the last quarter of the financial year was not
received. Note that the R50 000 was invested on 1 March 2012.
(h)
Interest on loan is capitalised on 28 February 2013. The current year’s
interest is included in the loan balance above. Note that R18 000 of the
loan is repayable on 1 March each year. No other payments were made.
(i)
Depreciation of R34 375 must be taken into account.
28
© Gauteng Department of Education
3
(j)
Income tax for the year amounts to R22 475.
(k)
A final dividend of R8 800 was declared. There were no additional shares
issued in this financial year neither were any shares bought back.
Financial Indicators:
Current ratio
Acid test ratio
Debtors average collection period
Creditors average payment period
EPS (Earnings per share)
DPS (Dividends per share)
% return on shareholders’ equity
Current interest rate on investments
B
28 FEB 2013
?
?
38 days
42 days
?
?
30%
10%
28 FEB 2012
1,5 : 1
0,9 : 1
41 days
40 days
26 cents
23 cents
37%
Auditing and Professional Bodies
The audit report received from the independent auditors
highlighted the following:
1.
The financial statements are the responsibility of the company’s
directors.
Their responsibility is to express an opinion on the financial
statements based on the audit performed.
2.
The audit includes, on a test basis, evidence supporting the
amounts in the financial statements and assessing the
accounting principles used.
3.
It stated that the financial statements fairly present, in all
material respects, the financial position of the company, and
that it is in accordance with IFRS as well as the Companies
Act of South Africa.
QUESTIONS:
1.5
Explain why it is important for the independent auditor to be a member of a
professional body such as SAICA.
(2)
1.6
Give an example of the evidence that auditors would use in compiling an
audit report.
(2)
1.7
What does “on a test basis” imply? Explain.
(2)
29
© Gauteng Department of Education
1.8
Explain why the company should be satisfied with the audit report.
(2)
8
SECTION B:
HOMEWORK QUESTIONS
QUESTION 1
COMPANY REPORTING
1.1
(65 marks; 30 minutes)
INCOME STATEMENT
You are provided with information relating to Samora Sports Limited. The company
sells sports equipment and repairs equipment for their customers.
REQUIRED:
Prepare the Income Statement for the year ended 30 June 2008 after taking all the
adjustments and additional information into account.
(50)
INFORMATION:
1.
Figures extracted from the Pre-Adjustment Trial Balance on 30 June 2008:
Ordinary share capital (R5 Issue price)
Fixed deposit
Trading stock
Debtors control
Equipment (for office and shop)
Accumulated depreciation on office and shop
equipment
Mortgage loan from Credbank
Sales
Debtors allowances
Cost of sales
Service fee income (in respect of repair services)
Rent income
Interest income
Salaries and wages
Employers' contributions to Pension Fund and UIF
Audit fees
Directors fees
Consumable stores
Bank charges
Sundry expenses
R 1 200 000
160 000
215 000
39 090
224 000
130 000
281 200
1 703 200
17 000
?
297 140
105 000
11 200
234 750
53 200
30 000
230 000
51 100
5 240
?
30
© Gauteng Department of Education
2.
Adjustments and additional information:
The auditors have identified the following errors or omissions:
2.1
The auditors are owed a further R28 000 after completing the audit.
2.2
Bank charges of R310 reflected on the June 2008 bank statement have
not yet been entered in the books.
2.3
A credit note issued to a debtor, A Mona, dated 28 June 2008 was not
recorded in the books. The credit note was for:
 Goods returned by A Mona, R 6 200 (the cost was R4 800)
 Price reduction on unsatisfactory repair of a tennis racket, R540
2.4
The stock count on 30 June 2008 revealed the following on hand:
 Trading stock, R202 000
 Consumable stores, R900
2.5
An employee was left out of the Salaries Journal for June 2008. The details
from his pay-slip were:
Gross salary
PAYE deduction (18%)
Pension deduction (7,5%)
UIF
Net salary
R6 000
(1 080)
(450)
(60)
R4 410
The business contributions were:
 Pension Fund: 10,5% of gross salary
 UIF: Rand-for-rand basis
2.6
The tenant paid the July and August rent in June 2008. The rent was
increased by R700 per month on 1 January 2008.
2.7
Provide for depreciation on office and shop equipment at 10% p.a. on the
diminishing-balance method. Note that new shop equipment costing
R30 000 was purchased half-way through the financial year (this was
properly recorded).
2.8
Interest on the loan was capitalised. The loan statement from Credbank on
30 June 2008 reflects the following:
CREDBANK
Loan statement on 30 June 2008
Balance on 1 July 2007
Interest charged
Monthly payments to Credbank in terms of the loan
agreement (12 months x R4 300)
Balance on 30 June 2008
R332 800
?
R 51 600
R326 000
The interest expense for the year has not yet been entered in the books.
31
© Gauteng Department of Education
2.9
1.2
Use the following percentages to calculate the missing figures:

Mark-up % achieved: 60% on cost

Operating profit on sales: 20%

Income tax rate: 30% of net profit
CORPORATE GOVERNANCE AND AUDITING
The following audit report was issued by the auditors of Samora
Sports Ltd:
Audit opinion – To the shareholders:
In our opinion, the financial statements fairly present, in all material
respects, the financial position of the company and the group at 30 June
2008 and the results of their operations and cash flows for the year ended,
in accordance with International Financial Reporting Standards, and in the
manner required by the Companies Act in South Africa.
I.M. Wright & Associates
Chartered Accountants (SA)
Registered Accountants and Auditors
Pretoria 10 August 2008
1.2.1 Why does the Companies Act make it a requirement for public
companies to be audited?
(2)
1.2.2 Although this audit opinion is addressed to the shareholders,
other interested persons will also want to read it.
Name ONE other person who would be interested in this audit
opinion, and give a reason for his/her interest in the opinion.
(3)
1.2.3 At the AGM, one of the shareholders says that he is not happy
with the words 'fairly present' in the audit report. He wants the
auditors to say that the financial statements are 'correct in all
respects'.
What explanation should be given to this shareholder? State
ONE point.
(3)
1.2.4 The directors are not happy with the high audit fees reflected
in the Income Statement.
Explain why improvement in internal control will have a
positive effect on the external auditors' fees. State ONE point.
(3)
1.2.5 SAICA is one of the main professional bodies governing
accountants in this country.
Explain TWO of the main roles performed by SAICA.
© Gauteng Department of Education
(4)
32
SECTION C:
SOLUTIONS FOR SECTION A
QUESTION 1
Companies: Financial Statements and Interpretation (85 marks ; 51 minutes)
A
Financial Statements and Interpretation
1.1.1
Briefly explain the GAAP principle that relates to doing
adjustments at the end of the financial year.
Matching concept 
Any valid response. 
 Income and expenses are recognised and recorded in the period in which
they apply.
 Expenses must be matched against the income earned in a specific
financial year
33
© Gauteng Department of Education
1.1.1 INCOME STATEMENT FOR THE YEAR ENDED 28 FEBRUARY 2013
GROSS PROFIT
Other Income
Rent Income
314 000
57 250
(51 300  + 4 860 )
56 160
470
Profit on sale of asset
Bad Debts Recovered
Provision for Bad Debt Adjustment
(1 075 – 855)
GROSS INCOME
Operating Expenses
Stationery
Sundry Expenses
( 7 330  – 1 130 )
(6 400  – 3 200 ) or 6 400/2
Bad Debts
(28 000 + 6 375) given
Trading Stock deficit
220

83 200
1 450
5 500
142 000
7 220
18 400
Directors’ fees
Depreciation

(305 875)
Audit fees
Insurance
400
371 250
Salaries
Discount Allowed
Consumable Stores

(32 800 – 29 300)
6 200

3 200

830

34 375

3 500
OPERATING PROFIT
4
Interest Income
(4 125  + 1 375 ) or 4 125 x /3
65 375
NET PROFIT BEFORE INTEREST EXPENSE
70 875
Interest Expense (135 000 x
5 500
12,5
/112,5)
(15 000)
NET PROFIT BEFORE INCOME TAX
Income Tax
55 875



(22 475)
NET PROFIT FOR THE YEAR
33 400

23
-1 each for foreign entries (balance sheet accounts) max -2
Misplaced items must be marked wrong.
34
© Gauteng Department of Education
1.2: MEERA TRADERS LTD
BALANCE SHEET AS AT 28 FEBRUARY 2013
NOTES
ASSETS
NON-CURRENT ASSETS
750 380
Tangible Assets
700 380
Financial Assets: Fixed Deposit
50 000
CURRENT ASSETS
59 610 
Inventories
30 430 
(29 300  + 1 130 )
Trade and other receivables
25 680 
Check transfer
Cash and cash equivalents
3 500
(2 500 + 1 000)
TOTAL ASSETS
(5)
809 990
EQUITY AND LIABILITIES
SHAREHOLDERS EQUITY
631 455
Ordinary share capital
550 000
35 555
Share premium
Retained income
45 900 
34 500  + 33 400  – (13 200 + 8 800) 
117 000
NON-CURRENT LIABILITIES
Loan: Sandy Bank
(135 000  – 18 000 )
CURRENT LIABILITIES
117 000
inspect
Trade and other payables (Creditors)
22 360 
Accept various combinations for Trade and other payables
SARS: (Income Tax)
61 535 
(22 475 – 20 000)
2 475 
Shareholders for dividends
8 800 
Short term portion of loan
18 000 
9 900 
Bank overdraft
TOTAL EQUITIES AND LIABILITIES
(13)
809 990
8
Note the general rules when awarding method marks.
-1 for foreign items (max -3) Balance Sheet accounts misplaced are
not foreign. Award the marks (-1 for each misplaced item)
35
© Gauteng Department of Education
TRADE AND OTHER RECEIVABLES
Trade Debtors (17 530  – 830  + 400 )
17 100
Provision for Bad Debts

(855)
Accrued Income (1 375 + 4 860 )
6 235
Prepaid expenses

3 200
25 680
7
1.3.1
(a) Calculate the CURRENT RATIO and the ACID TEST RATIO for 2013.
CURRENT RATIO

Check amounts transferred from
QUESTION 1.2 59 610 : 61 535 
0,97 : 1 
ACID TEST RATIO


(59 610 – 30 430) : 61 535 Check
QUESTION 1.2
29180
Or (25 680 + 3 500)
0,47 : 1 
7
(b) Comment on the liquidity position of this business.
Quote TWO financial indicators/figures to support your
argument.
Must mention two of Current Ratio, Acid Test Ratio, Debtors
Collection period and/or Creditors Payment period. 
-1 for any other ratios mentioned (if more than three ratios listed)
 for quoting figures
 for an explanation each
 Current ratio and the Acid Test ratio have decreased and are well below
efficient levels.
 Debtors take too long to settle their accounts (30 days)
 Creditors are paid well within the normal 60 days allowed
6
36
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1.3.2 Shareholders were not happy with the dividends they received.
 Calculate the dividend per share (DPS) and the earnings per share (EPS)
for the current year.
DPS
22 000
13 200  + 8 800 x 100
110 000 
= 20 cents 

EPS

33 400 x 100
110 000 
= 30 cents (30,3) 
Use your findings above (as well as other financial indicators
provided) to explain why the shareholders are unhappy.
Two valid explanation  
 The shareholders received a lower DPS than last year, although the EPS increased.
 The business chose to retain income rather than distribute dividends.
 Further, the ROSHE is much higher than interest on alternative investments (meaning that
they should be pleased) yet the DPS is reduced.
7
4
1.4 The company intends issuing all unissued shares in the next
financial year. One of the shareholders approached a director and
requested that he be allowed to purchase the shares before they are
offered to the public. Should he be allowed to do this? Explain.
Any valid explanation 
No. 
It is unethical and against the Company’s Act.
All shares must be advertised and the general public must have access to
them.
(Transparency).
The Shareholders become members of the public and must compete for the
new shares in the market.
(award part marks for incomplete/partial answers)
B
3
Auditing and Professional Bodies
1.5 Explain why it is important for the independent auditor to be a
member of a professional body such as SAICA.
Any valid response 
Assurance of knowledge of accounting and auditing
principles/ensures uniformity or standardisation of treatment of
financial information
Continuous professional training/bound by a professional code of
conduct/cannot be negligent in his duties
2
37
© Gauteng Department of Education




1.6 Give an example of the evidence that auditors would use in
compiling an audit report.
Any valid response 
Any one of:
asset register;
stock register;
record of debtors and creditors;
journals and documents, etc.
2
1.7 What does “on a test basis” imply? Explain.
Any valid response 
Auditors do random sampling (they do not check every document or
procedure)
they give an
opinion based on the sample they tested.
2
1.8 Explain why the company should be satisfied with this audit report.
Any valid response 
The report is unqualified. No material errors/problems detected/auditors are
satisfied that fair presentation is noted/the statements are reliable.
QUESTION 1 TOTAL:
85
SESSION NO: EIGHT
TOPIC: CONSOLIDATION
SECTION A: TYPICAL EXAM QUESTIONS
QUESTION 1
COMPANY
Marvin Traders Limited has a registered authorised share capital of 500 000 ordinary
shares. Their financial year ends on the last day of February each year. New shares
were issued on 1 April 2011.
REQUIRED: (for the 2012 financial year ended 29 February 2012)
1.1
1.1.1
Prepare the following
29 February 2012:
notes
to
the
Cash
Flow
Statement
on
Reconciliation between net profit before taxation and cash
38
© Gauteng Department of Education
2
generated by operations
(14)
1.1.2
Dividends paid
(7)
1.1.3
Income tax paid
(7)
1.2
Calculate the average price of the shares on 29 February 2012.
1.3
Study the following ratios and explain what this means for the business:


1.4
(4)
2012
1,18 : 1
0,57 : 1
Current ratio
Acid-test ratio
2011
0,85 : 1
0,31 : 1
(6)
Calculate the debt equity ratio (shareholders' equity) ratio for the 2012
financial year.
(5)
Calculate the creditor's payment period (in months) for the 2012 financial
year.
(5)
Calculate the number of days the company had to wait in the 2012 financial
year before debtors settled their debts.
(5)
Outline TWO ways in which management could encourage debtors to pay
their debts earlier.
(4)
1.8
Calculate the net asset value per share on 29 February 2012.
(5)
1.9
Calculate the return on average shareholders' equity (after tax) for 2012.
(4)
1.10
Do you think that the return average shareholders' equity calculated in
QUESTION 1.9 is acceptable? Give a brief explanation for your answer.
(4)
1.5
1.6
1.7
INFORMATION:
1.
EXTRACTS FROM THE INCOME STATEMENT:
Sales (this includes credit sales of R640 000 for 2012)
Cost of sales
Interest on loan
Depreciation: Equipment
Vehicles
Income tax
Net profit after tax
EXTRACT FROM THE BALANCE SHEET:
Interim dividends declared and paid
2012
960 000
600 000
9 750
28 000
34 140
73 500
136 500
2011
840 000
560 000
12 000
8 000
16 000
54 180
100 620
98 000
30 000
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© Gauteng Department of Education
2.
EXTRACTS FROM THE POST-CLOSING TRIAL BALANCE ON
29 FEBRUARY:
2012
Ordinary shareholders' equity
600 000
Ordinary share capital
450 000
Retained income/Accumulated profit
150 000
Long-term liabilities (15% p.a.)
60 000
Fixed assets at carrying value
632 210
Current assets
178 960
Trading inventory
93 450
Debtors' control
63 290
Cash and cash equivalents
22 220
Current liabilities
151 170
Bank overdraft
Creditors' control
94 000
Accrued expenses
560
South African Revenue Service (Income tax)
7 410
Shareholders for dividends
49 200
2011
401 500
300 000
101 550
90 000
511 420
116 000
73 350
42 650
135 920
8 500
93 000
280
6 140
28 000
ORDINARY SHARE CAPITAL
The ordinary share capital on 1 March 2011 consisted of:
 40 000 ordinary shares issued in the 2009 financial year at R4,00 per share


20 000 ordinary shares issued in the 2010 financial year at R7, 00 per share.
The new shares were sold at R10 per share
70
SECTION B:
HOMEWORK QUESTIONS
QUESTION 1
CASH FLOW AND INTERPRETATION OF A COMPANY
You are provided with information relating to Glebo Limited for the year ended
30 June 2008. Glebo Limited is a public company listed on the JSE Securities
Exchange. They are based in Pretoria and they sell office stationery.
The directors of Glebo Limited decided to open new branches in Bloemfontein and
Witbank halfway through the year.
Note:

Answer the questions below.

Where you are asked to comment on financial indicators you must quote
the name of the relevant indicator as well as the figure, which is provided
or calculated in the question for that indicator.
40
© Gauteng Department of Education
REQUIRED:
1.1
Calculate the following financial indicators for 2008:
1.1.1
1.1.2
1.1.3
1.1.4
1.1.5
1.2
Solvency and liquidity:
1.2.1 Briefly explain the difference between solvency and liquidity.
1.2.2
1.2.3
1.3
1.6
Comment on the liquidity of this business. Quote the financial
indicators and the changes (trends) from the previous year to
support your opinion.
(2)
(3)
(10)
Comment on the earnings, dividends and % return. Quote
financial indicators and the changes (trends) from the previous
year to support your opinion.
(6)
You have been a shareholder since the company started many
years ago. The price of the share on the JSE is now 350 cents
which is a 6% increase over the past year. Would you be satisfied
with the performance of the share price? Comment and compare
this to a financial indicator from the question to support your
opinion.
(4)
Calculate the missing figures in the Cash Flow Statement. The missing
figures are indicated (a) to (e).
(12)
The Cash Flow Statement highlights some significant (important)
decisions taken by the directors over the past year. Explain TWO of
these significant decisions. Quote figures to support your answer. Also
explain how these decisions would benefit the company and the
shareholders.
(8)
1.3.2
1.5
Comment on the solvency of this business. Quote a financial
indicator from the question to support your opinion.
(3)
(4)
(4)
(4)
(4)
Returns and share price:
1.3.1
1.4
Debt/Equity ratio
Acid-test ratio
Stock turnover rate
% return on average shareholders' equity (after tax)
Net asset value per share
At the AGM, the directors announce that the company will:
Conduct training of all employees in terms of morals and ethics
Donate funds towards cleaning up the environment
Explain why this is necessary although this will cost the company a lot of
money each year. State THREE points.
(6)
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GLEBO LIMITED
BALANCE SHEET AS AT 30 JUNE 2008
2008
2007
4 626 000
4 326 000
300 000
2 209 000
1 489 000
720 000
Current assets
Inventories (all trading stock)
Trade and other receivables (all trade
debtors)
SARS (Income tax)
Cash and cash equivalents
2 557 000
1 640 000
2 508 000
1 510 000
810 000
0
107 000
960 000
18 000
20 000
TOTAL ASSETS
7 183 000
4 717 000
EQUITY AND LIABILITIES
Ordinary shareholders' equity
Ordinary share capital (sold @ R2 each)
Retained income
4 123 000
2 200 000
1 923 000
2 640 000
1 600 000
1 040 000
Non-current liabilities
Mortgage loan: Jozi Bank (13% p.a.)
1 980 000
1 980 000
700 000
700 000
Current liabilities
Trade and other payables (all trade
creditors)
SARS (Income tax)
Shareholders for dividends
Bank overdraft
Current portion of loan
1 080 000
1 377 000
705 000
32 000
275 000
0
68 000
819 000
0
240 000
250 000
68 000
TOTAL EQUITY AND LIABILITIES
7 183 000
4 717 000
ASSETS
Non-current assets
Fixed assets
Financial assets
42
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GLEBO LIMITED
EXTRACT FROM INCOME STATEMENT FOR THE YEAR ENDED 30 JUNE
2008
2008
2007
Sales (70% of sales were on credit)
9 000 000
7 000 000
Cost of sales
5 625 000
4 070 000
Operating profit
1 423 200
947 600
Income tax
426 000
270 000
Net profit after tax
904 000
630 000
FINANCIAL INDICATORS:
The following financial indicators were calculated for the past two years:
Debt/Equity ratio
Total assets to total liabilities
Current ratio
Acid-test ratio
Stock-turnover rate
Debtors collection period
Creditors payment period
% return on average shareholders' equity (after tax)
% return on total capital employed (before tax)
Net asset value per share
Dividends per share
Earnings per share
2008
2007
?
2,2:1
2,4:1
?
?
51 days
49 days
?
43,3 %
?
57 cents
95,2 cents
0,27:1
2,3:1
1,8:1
0,7:1
2,4 times
72 days
67 days
23,9 %
39,7 %
330 cents
65 cents
78,8 cents
GLEBO LIMITED
CASH-FLOW STATEMENT FOR THE YEAR ENDED 30 JUNE 2008
Cash effects of operating activities
Cash generated from operations
Interest paid
Dividends paid
Income tax paid
(a)
Cash effects of investing activities
Purchase of fixed assets for new branches
Proceeds of sale of fixed assets
Cash effects of financing activities
Proceeds of issue of shares
Proceeds of increase in mortgage loan
Proceeds of financial assets matured
Net change in cash equivalents
Cash equivalents – beginning of year
Cash equivalents – end of year
744 000
?
(134 000)
(496 000)
?
(3 217 000)
(3 357 000)
140 000
(b)
(c)
(d)
(e)
2 810 000
?
?
420 000
?
(230 000)
?
43
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70
SECTION C:
SOLUTIONS FOR SECTION A
QUESTION 1
1.1.1 RECONCILIATION BETWEEN PROFIT BEFORE TAXATION AND
CASH GENERATED BY OPERATIONS
Profit before taxation (136 500 + 73 500)
Depreciation
(28 000 + 34 140)
210 000

62 140

9 750

Interest paid
281 890
Changes in working capital
(39 460)

Increase in stock

(20 100)

Increase in debtors

(20 640)

1 280


Increase in creditors
Cash generated
242 430
14
14
1.1.2 DIVIDENDS PAID
Amount as per retained income note
(98 000) *
Amount at the beginning
(28 000)

49 200

(76 800)

Amount at the end
OR
(48 800 + 28 000 = 76 800
* Accept T - accounts /linear calculations
7
7
44
© Gauteng Department of Education
1.1.3 INCOME TAX PAID
Amount as per income statement
Amount at the beginning
Amount at the end
(73 500)

(6 140)

7 410

(72 230)

* Accept T - accounts /linear calculations
7
7
1.2 Calculate the average price of the shares on 29 February 2012.
160 000+140 000+150 000/75 000 =



R6

4
4
1.3
COMMENT ON THE FOLLOWING RATIOS:
Current ratio
Improve from 0,85:1 to 1,18:1
Could struggle to settle the short-term liabilities

Any acceptable answer
Acid test ratio
Improve from 0,31:1 to 0,57:1
Could struggle to settle the short-term liabilities because the inventory figure is too high
Any acceptable answer

Improve  and mention ratio/figures  and comment on effect to business
6
6
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© Gauteng Department of Education
1.4
CALCULATE THE DEBT EQUITY RATIO FOR 2012.
60 000
0,1
 :
:
600 000

1

5
5
1.5
CALCULATE THE CREDITORS' PAYMENT PERIOD IN MONTHS FOR 2012.
93 500  x
12
600 000 
1
= 1, 87 / 1, 88 months  If final answer rand or % no final mark allocated.
=
5
5
1.6 CALCULATE THE NUMBER OF DAYS THE COMPANY HAD TO WAIT IN 2012
BEFORE DEBTORS SETTLED THEIR DEBTS.
=
52 970__
 x 366
640 000

1
= 30,29/30,3 days 
If final answer rand or % no final mark allocated.
5
5
1.7 TWO WAYS IN WHICH MANAGEMENT COULD ENCOURAGE DEBTORS TO
PAY THEIR DEBTS EARLIER.
Allow discount
Charge interest on overdue accounts
Promotions
Any acceptable answer


4
4
46
© Gauteng Department of Education
1.8
CALCULATE THE NET ASSET VALUE FOR 2012.
600 000_

75 000

800 cent / R8

x 100
1
5
5
1.9 CALCULATE THE RETURN ON AVERAGE SHAREHOLDERS' EQUITY FOR 2012.
136 500

½ (600 000  + 401 500  )
136 500
x 100
500 750
1
27,3 % 
x
100
1
4
4
1.10 DO YOU THINK THAT THE AVERAGE RETURN ON SHAREHOLDERS’ EQUITY
CALCULATE IN (1.9) IS ACCEPTABLE? GIVE A BRIEF EXPLANATION FOR YOUR
ANSWER.
Yes / No

A safe investment such as an fixed deposit raises between 5% - 10% which is
less than the 27,3%

/Interest on loan is 15% . Can borrow more money to expand the business which is
realising 27,3%
Any acceptable answer
4
4
TOTAL MARKS
70
70
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© Gauteng Department of Education
SESSION NO: NINE
TOPIC: CONSOLIDATION
SECTION A: TYPICAL EXAM QUESTIONS
QUESTION 1
The following information relates to the trading activities of Micro Traders for the financial year
ended 29 February 2008. The business is owned by BA Crooke. The business sells only one
type of microwave oven and has decided to keep the selling price constant throughout the
year. Mr Crooke is keen to secure a loan from the bank. He wants to ensure that the profit in
the financial statements creates a very favourable impression with the bank. The business
uses the periodic inventory system and the FIFO method of valuing stock.
INFORMATION:
Number of units
Sales
?
Stock on hand on 1 March 2007
Purchases during the year
40 units
Unit price
R
Total
R
1 400
252 000
950
38 000
210 units
170 000
June
2007
30 units
900
27 000
October
2007
80 units
850
68 000
January
2008
100 units
750
75 000
48
© Gauteng Department of Education
REQUIRED:
1.1
Explain the difference between the periodic and perpetual inventory systems.
Also explain the advantage of each system.
(4)
1.2
Calculate the total number of microwave ovens sold during the year.
(3)
1.3
Calculate the total number of microwave ovens on hand at
29 February 2008.
(3)
1.4
1.5
The business uses the FIFO valuation method.
1.4.1
Calculate the closing stock using the FIFO method.
(3)
1.4.2
Calculate the gross profit for the year ended 29 February 2008 using
the FIFO stock valuation method. You may draft the Trading Account
to calculate this figure.
(5)
In order to secure the loan the owner, BA Crooke, wants to change the stock
valuation method to the weighted average method.
1.5.1
1.6
Calculate the value of the closing stock by using the weighted average
stock valuation method on 29 February 2008.
(5)
1..5.2 Calculate the gross profit for the year ended 29 February 2008 using
the weighted average stock valuation method. You may draft the
Trading Account to calculate this figure.
(3)
In your opinion, will it be ethical for Mr Crooke to change the method of stock
valuation? Give ONE reason for your answer.
(4)
30
QUESTION 2
INVENTORY VALUATION
Laser Stores sell television sets to the public. The financial year ends on
28 February 2009.
They are unsure which method to use in valuing their stock. The cost price of the
product has changed significantly during the current year.
The owner Larry Laser has decided to keep selling the same model of TV set
(Mabona TV sets, Model XC456), despite the fact that other shops are selling newer
models.
REQUIRED:
2.1.1 Calculate the value of closing stock using the FIFO (first-in-first-out)
method.
(6)
49
© Gauteng Department of Education
2.1.2 Calculate the value of closing stock using the weighted average
method.
(7)
2.1.3 Which method of stock valuation would you advise the owner to use?
Explain a reason for your answer.
(3)
2.1.4 Calculate the gross profit on TV sets for the year based on the stock
valuation method you advised in QUESTION 5.1.3.
(4)
INFORMATION:
The following information appeared in the records of Laser Stores for the year ended
28 February 2009. The business used a fixed selling price of R16 000 per TV set.
Information on stock of
Mabona TV sets Model XC456
Number of
TV sets
TV sets on hand on 1 March 2008
50
TV sets bought during the year
750
Value per
unit
R11 000
Total value
R550 000
R8 090 000
May 2008
300
R12 000
R3 600 000
September 2008
250
R11 560
R2 890 000
February 2009
200
R8 000
R1 600 000
Subtotal
800
R8 640 000
TV sets sold during the year
440
R16 000
R7 040 000
TV sets on hand on 28 February 2009
360
?
?
2.2
CONTROL OF INVENTORY
Apart from TV sets, Laser Stores also sell other products. You are provided with
information taken from their stock records on 28 February 2009. The owner Larry
Laser is uncertain if he should be satisfied with control of all of these items.
REQUIRED:
Comment on the stock control of each item, quoting figures to support your
comment. In each case, offer Larry practical advice for the future.
(9)
50
© Gauteng Department of Education
INFORMATION:
Item
Number of
units sold
during the
year
Number of
units on
hand per
stock
records at
year-end
Number of
units per
physical
count at
year-end
Selling
price per
unit
Period of
stock on
hand
440
360
360
R16 000
?
2 250
150
100
R1 200
15 days
120
10
9
R100
27 days
Mabona
TV sets
Khuluma
Cellphones
Lalela
Radios
SECTION B:
HOMEWORK QUESTIONS
QUESTION 1
RECONCILIATIONS AND INTERNAL CONTROL
You are provided with three examples of reconciliations done by employees in the
accounting department of Soweto Stationers.
REQUIRED:
Study the information provided and then answer the questions that follow.
INFORMATION:
EXAMPLE
A
BANK RECONCILIATION STATEMENT ON 29 FEB. 2008
R
Balance per Bank Statement
Outstanding deposit
Outstanding cheques:
No. 1040 dated 13 Feb. 2008
No. 1052 dated 18 Aug. 2008
No. 1055 dated 28 Feb. 2008
Balance per Ledger Account
Credit 8 000
3 000
2 200
10 000
4 300
?
51
© Gauteng Department of Education
EXAMPLE
B
CREDITORS' RECONCILIATION STATEMENT ON 29 FEB. 2008
ACE WHOLESALERS
Balance per Creditors' Statement on 25 Feb. 2008
Invoice not reflected on statement:
Invoice No. 225
Invoice on statement but not in Creditors Ledger:
Invoice No. 187
Payment not reflected on statement:
Dated 23 Feb. 2008
Returns not reflected on statement:
Debit note No. 44
Balance per Creditors Ledger Account on 29 Feb.
2008
R
Debit 5 000
18 400
3 100
9 000
1 100
?
QUESTIONS:
1.1
Briefly explain:
 What you understand by the term internal control
 Why it important to apply internal control in a business
 Why preparing reconciliations is important for internal control.
(2)
(3)
(2)
According to the Bank Statement, does this business have a favourable bank
balance or a bank overdraft? Give a reason for your choice.
(2)
Calculate the bank balance in the Ledger of Soweto Stationers on
29 February 2008. State whether this is a favourable or unfavourable balance.
(3)
List FOUR steps you would follow when preparing a Bank Reconciliation
Statement.
(4)
When preparing the financial statements of Soweto Stationers at the end of
February 2008, what amount would you reflect under Cash and Cash
Equivalents on the Balance Sheet?
(2)
1.6
Calculate the correct amount owed to Ace Wholesalers by Soweto Stationers.
(4)
1.7
Briefly explain what action should be taken over the difference of R1 900
reflected in Example C.
(3)
1.2
1.3
1.4
1.5
25
52
© Gauteng Department of Education
QUESTION 2
BANK RECONCILIATION AND INTERPRETATION
You are provided with information relating to Rover Jewellers.
REQUIRED:
2.1
2.2
2.3
Explain why it is important for a business to prepare a Bank
Reconciliation Statement each month.
(2)
Calculate the correct totals for the Cash Receipts Journal and the
Cash Payments Journal for May 2009.
(12)
Calculate the Bank Balance on 31 May 2009. (You may prepare a
ledger account in order to do so). State whether this is a favourable or
unfavourable balance.
(6)
2.4
Prepare the Bank Reconciliation Statement on 31 May 2009.
2.5
Refer to Information 3 below.
The fixed deposit of R84 000 matures next month. What advice would
you offer the owner in this regard? Explain TWO points quoting
appropriate figures to support your answer.
2.6
(10)
(4)
Refer to Information 4 below.


Explain why the internal auditor should be concerned about the
outstanding deposit of R20 295.
Explain how cheque No. 674 should be dealt with when the
financial statements are prepared on 31 May 2009. Give a
reason for your answer.
(3)
(3)
INFORMATION:
1.
At the end of the previous month, 30 April 2009, the following items were
reflected in the Bank Reconciliation Statement:
 Favourable balance in the ledger of Rover Jewellers, R6 325
 Favourable balance on the Bank Statement, R12 545
 Outstanding deposit (dated 30 April 2009), R12 000
 Outstanding cheques:
No. 261 (dated 3 November 2008), R5 000
No. 519 (dated 14 April 2009), R8 920
No. 543 (dated 12 May 2009), R4 300
NOTE:
Cheque No. 261 and 519 did not appear on the May Bank Statement
either.
2.
On 31 May 2009, the provisional totals in the journals were:
53
© Gauteng Department of Education


CRJ
CPJ
R70 600
R105 320
3.
The following items were reflected on the Bank Statement but not in the
journals for May 2009:
 Direct deposit by a debtor, K Kwela, R2 400
 Bank charges, R520
 Interest on fixed deposit for May, R700
 Interest on overdraft for May, R810
 Stop-order in favour of Rama Insurance Co., R660
 Dishonoured cheque on 30 May 2009, originally presented by a debtor,
M Maduna, R6 200
4.
The following differences were noticed:
 Cheque No. 565 for repairs was shown in the CPJ as R1 570, but on
the May Bank Statement as R1 750. The Bank Statement is correct.
 A deposit of R12 000 appeared on the Bank Statement on 1 May 2009,
but did not appear in the May CRJ.
 A deposit of R20 295, dated 20 May 2009, appeared in the May CRJ,
but not on the May Bank Statement.
 The following cheques appeared in the May CPJ, but not on the Bank
Statement:
No. 654 (dated 23 May 2009), R2 800
No. 674 (dated 29 August 2009), R2 520
40
54
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SECTION C:
SOLUTIONS FOR SECTION A
QUESTION 1
1.1 Explain the difference between the periodic and perpetual inventory
systems. Also explain the advantage of each system.
Difference
 For periodic inventory system the value of the stock is determined
periodically by a physical stock taking. 
 Perpetual inventory system the records of trading stock is continually
updated. 
Advantage
 Periodic – this is a simpler and cheaper method to use since the cost of sale
is not continually calculated. 
 Perpetual – It is easier to detect and correct losses since the balance of the
trading stock account should always be equal to the value of the physical
stock taking records. 
1.2 Calculate the total number of microwave ovens sold during the year.
Microwave ovens sold = 252 000 /1 400  = 180 
1.3 Calculate the total number of microwave ovens on hand at 29 February
2008.
Microwave ovens available on 28 February 2008
250  – 180  = 70 
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1.4 The business uses the FIFO valuation method.
1.4.1 Calculate the closing stock using the FIFO method.



70 units at R750 = R52 500
1.4.2 Calculate the Gross profit for the year ended 29 February 2008
using the FIFO stock valuation method. You may draft the Trading
account to calculate this figure.
Trading Acc (FIFO
Opening stock
 38 000 Sales
 252 000
Purchases
 170 000 Closing stock
@ 52 500
Gross Profit
 96 500
304 500
304 500
1.5
In order to secure the loan, the owner, B A Crooke, wants to change the
stock valuation method to the weighted average method.
1.5.1
Calculate the value of the closing stock by using the weighted
average stock valuation method on 29 February 2008
Total value of stock available x 70
Total items available
38 000  + 170 000  x 70 
250 
or
832 x 70
=R58 240 
1.5.2
Calculate the gross profit for the year ended 29 February 2008 using
the weighted average stock valuation method.
Opening
stock
Purchases
Gross Profit
Trading Acc (WA)
38 000 Sales
170 000 Closing stock
 102
240
310 240
252 000
 58
240
310 240
OR: 96 500 + (58 240 – 52 500) = 96 500 + 5 740 = R102 240 
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1.6
In your opinion will it be ethical for Mr. Crooke to change the method of stock
valuation? Give one reason for your answer.
Yes or No 
Any one valid reason mentioned 


2.1.1
Cannot change the stock system to increase the gross profit in order to secure
a loan from the bank.
Must be properly disclosed in the notes of the financial statements so that the
readers can make their own decision.
QUESTION 2
Calculate the value of closing stock using the FIFO method.
200 x R8 000
=
160 x R11 560 =
2.1.2
Calculate the value of closing stock using the weighted average method.
WA value per unit
= R8 640 000  / 800 
= R10 800 
Value of closing stock
2.1.3
R1 600 000 
R1 849 600 
R3 449 600 *
=
=
360  x R10 800  see above
R3 888 000*
Which method of stock valuation would you advise the owner to use?
Explain a reason for your answer.
Decision  Reason
FIFO because TV sets are discrete units and it is easy to identify the
cost price of each TV set.
Or:
Weighted average method because the gross profit will be higher or there is
no need to track the cost price on each TV set.
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2.1.4
Calculate the gross profit on TV sets for the year based on the stock
valuation method you advised in QUESTION 2.1.3.

FIFO:
R7 040 000 – (R8 640 000 – R3 449 600) = R1 849 600
Weighted Average:
R7 040 000 – (R8 640 000 – R3 888 000) = R2 288 000
2.2
Comment on the stock control of each item, quoting figures to support your
comment. In each case, offer Larry advice for the future.
One mark; quoting figures: one mark; advice: one mark.
Stock item
Mabona
TV sets
Comment and advice
The stock is not selling well because new models are
on the market. Too much stock on hand (360 units)
compared to stock sales for the year (440 units).
Advice: Reduce the price to clear the stock (cost is
now
R8 000) and stock new models. 
Khuluma
Cellphones
The cellphones are selling well (2 250 sold) and the
stock is relatively low (15 days). The control of stock
is a problem (50 cellphones missing).
Advice: Institute procedures to safeguard the stock
e.g. special cabinets with one person controlling the
keys. 
The radios are not selling well (only 10 per month) and
they are low-profit items (R100 selling price).
Lalela
Radios
Advice: Discontinue selling the radios. It is not worth
it. 
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SESSION NO: TEN
TOPIC: RECONCILIATIONS
IMPORTANT CONCEPTS TO CONCENTRATE ON:








Bank statement
Bank reconciliation statement
Cash journals
Debtors control account
Debtors list
Creditors control account
Creditors list
Creditors reconciliation
statement






Analysis and interpretation of
accounts
Analysis and interpretation of
statements
Creditors statements
Bank charges
Electronic banking
Internet and telephone banking

Grade 11 content under CAPS includes the reconciliation of a Creditors’
Ledger account (in the Creditors’ Subsidiary Ledger) to the statement of
account received from a creditor.

Grade 12 content stipulates analysis and interpretation of Creditors’
Reconciliations. As 20% of any examination paper may include relevant
content from a previous grade, preparation applications in respect of Creditors’
Reconciliations are examinable in Grade 12.

Similar reasoning applies to Bank and Debtors’ Reconciliations.
SECTION A: TYPICAL EXAM QUESTIONS
1.1
DEBTORS' RECONCILIATION
You are the internal auditor of Rose's Boutique. The Debtors' Control account
and the Debtors' List for September 2013 were prepared by the bookkeeper,
but there are some errors and omissions.
REQUIRED:
1.1.1
Indicate the corrections that must be made to the Debtors' Control
account in the General Ledger by showing the amounts with:
+ for increase; – for decrease OR write 'no change'.
1.1.2
(7)
Prepare the correct Debtors' List on 30 September 2013.
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Show workings with the relevant amounts in brackets to earn
part-marks.
(10)
INFORMATION:
1.
Pre-adjustment figures on 30 September 2013
Debtors' Control account balance
Debtors' List total from Debtors' Ledger
2.
Debtors' List on 30 September 2013
T Stoffels
E Khune
S Mashele
M Devnarain
3.
Debit
3 800
7 400
R
20 100
19 900
Credit
1 900
10 600
21 800
1 900
Errors and omissions:
A
The total of the Debtors' Journal was overcast by R1 800.
B
Interest of R200 must be charged on the overdue account of
E Khune.
C
An amount of R3 200 received from T Stoffels was incorrectly
recorded as R2 300 in the Cash Receipts Journal and posted
accordingly to the Debtors' Ledger and the General Ledger.
D
Merchandise returned by M Devnarain, R800, was posted to
the wrong side of his account in the Debtors' Ledger.
E
No entry was made for an invoice issued to S Mashele,
R1 400.
17
QUESTION 2: BANK RECONCILIATION AND DEBTORS' AGE ANALYSIS
(30 marks; 20 minutes)
2.1
REQUIRED:
Complete the following sentences in your own words:


2.2
It is important to prepare a Bank Reconciliation Statement each month
because …
It is important to prepare a Debtors' Age Analysis each month because …
(2)
(2)
You are provided with information relating to Cravenby Traders.
REQUIRED:
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2.2.1
2.2.2
Refer to Information B. The bookkeeper has decided to write off the
amount of R40 000.
 Which GAAP principle will the bookkeeper apply in this case?
Briefly explain this principle.
 The bookkeeper wants to prevent a problem such as this in
future. Give TWO solutions to improve internal control in this
regard.
(3)
Prepare the Bank Reconciliation Statement on 31 May 2012.
(13)
(4)
INFORMATION:
A
The following balances were identified in the books of the business and
the Bank Statements:
30 APRIL 2012
Bank account in Ledger
R12 720
Bank Statement
R24 700
B
2.3
31 MAY 2012
?
R19 310 (overdraft)
Items appearing in the Bank Reconciliation Statement on 30 April 2012:
 A deposit of R40 000, dated 2 April 2012, does not appear on any
Bank Statement. This money cannot be traced and the cashier has
disappeared.
 Cheque No. 962, for R2 340, dated 10 April 2012, appeared on the
Bank Statement on 2 May 2012.
 Cheque No. 967, for R4 790, dated 20 April 2012, has still not been
presented at the bank by the payee, S Smit.
C
The Bank Statement for May reflected bank charges, R1 850 and interest
on an overdraft, R920.
D
Items appearing in the Cash Journals but not in the Bank Statement:
 Cheque No. 1122 for R4 650, dated 18 May 2012
 Cheque No. 1129 for R8 540, dated 25 August 2012
 A deposit of R11 550, dated 31 May 2012
E
The bank overcharged on the bank charges for May by R960. The bank
has agreed to correct the error during June 2012.
You are provided with the Debtors' Age Analysis of Cravenby Traders on
31 May 2012.
REQUIRED:
Identify TWO different problems shown by the Age Analysis and quote
evidence from the question to support your answer. In each case suggest an
internal control measure to correct the problem.
(6)
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INFORMATION:
DEBTORS' AGE ANALYSIS ON 31 MAY 2012
Credit Policy:
 Debtors will be given 30 days in which to settle their debts.
NAME
CREDIT
LIMIT
TOTAL
CURRENT
MONTH
30 DAYS
J Arrakal
P Fakude
J Martin
H Howard
P Pomani
R5 000
R3 500
R1 500
R1 500
R2 000
60 DAYS
R2 100
R4 200
R2 004
R1 500
R700
R10 504
R1 000
R500
R1 200
R704
R700
R1 700
R2 404
R4 700
R1 700
100%
16%
23%
45%
16%
R600
R1 800
R1 300
R1 000
60
DAYS+
R1 200
R500
30
SECTION B: NOTES ON CONTENT
BANK RECONCILIATION
In the business world, control of cash is facilitated by depositing cash sales and other
receipts intact into the current bank account and ensuring that all payments are
made by cheque. This makes it easy to verify the balance on the bank statement (an
external document) with the bank account, (internal record)
Regular checking of accounting entries is essential to ensure that records are
accurate. The reconciliation procedure can be summarized as follows:


All deposits and cheque payments are checked manually against the bank
statement.
The bank columns of the CRJ and CPJ (our records) should therefore
correspond with the columns in the bank statement (bank’s records)
Note the following two viewpoints. The business regards each transaction from its
own point of view, while the bank regards it from an opposite point of view: these two
viewpoints represent a debtor-creditor relationship. This can be illustrated by
studying the following examples:

OUR RECORDS
We have money with the bank.

(favourable) – debit balance

Asset in our records
BANK RECORDS
The bank owes us the money – credit
balance.

Liability in the banks’ records
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
We owe the bank money (overdraft) –

We are debtors to the bank – asset

Deposits are credited because they
liability

Deposits (into the bank account) are
debits – they increase assets

Cheque payments decrease our
assets- (credit entry)
increase the banks’ liability

Cheque payments decrease the banks
liability – (debit entry)
From the above we can see clearly that the business’s entries and the bank’s
entries are mirror images of each other.
It is necessary for us to compare these separate records to ensure that errors or
omissions (either by the business or the bank may be corrected).
DIFFERENCES IN BALANCE BETWEEN THE BANK ACCOUNT AND BANK
STATEMENT
The difference between the balance of the bank account and the bank statement is
caused by the following items:
1. Bank charges:
 Service fees.
 Cash deposit fee:
 Deposit books.
 Duty
 Commission (levy) on credit card sales.
These five items constitute bank charges. They appear separately on the bank
statement. The business can identify these charges only upon receipt of the bank
statement. As soon as the business receives its bank statement, the different bank
charges are added together and entered as one amount in the Bank column of the
CPJ as Bank Charges’. A Bank Charges account is also opened in the General
Ledger and this account is debited with the total of the bank charges. The source
document for this transaction is the bank statement.
2. Interest on an overdraft
3. Deposits outstanding
4. Cheques not presented for payment
5. Dishonoured cheques
6. Stop orders and debit orders
7. Direct bank deposits made by debtors/tenants
8. Interest on a current account
9. Errors
10. Internet/telephone and cellphone banking
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PROCEDURE IN RECONCILING THE BANK STATEMENT AND THE CASH
JOURNALS (CRJ AND CPJ)
Before the CRJ and CPJ are closed off, entries in these journals must be compared
with entries on the bank statement for that month. The following procedure should be
adopted for the process of reconciliation.
1. Credit entries (credit column) in the bank statement must be compared with the
entries in the bank column of the CRJ. Tick off or mark the entries that appear in
both.
2. Debit entries (debit column) in the bank statement must be compared with the
entries in the bank column of the CPJ. Tick off or mark entries that appear in both.
3. The unmarked entries in the bank statement reflect transactions that have not yet
been recorded in the Cash Journals. These must now be recorded in the CRJ and
CPJ.
All unmarked items in the debit column of the bank statement must be recorded in
the CPJ. Examples of such transactions are bank charges, dishonoured
cheques and stop orders.
All unmarked items in the credit column of the bank statement must be recorded
in the CRJ. An example of such a transaction is a direct deposit by a debtor.
4. Now cast and cross-cast the Cash Journals and post the totals to the Bank
account in the Ledger. Balance this account.
5. The unmarked entries in the Cash Journals are used to draw up a Reconciliation
Statement.
A Reconciliation Statement is a calculation that proves that although the balances
of the bank statement and the bank account differ, they are nevertheless in
agreement. They must reconcile.
SUMMARY
No
1
Bank Document
Bank statement
Transaction
Bank charges:
Service fees
Cash deposit fee
Deposit book
Cheque book
Government levy (duty)
Levy on credit card
Transactions
Entry in cash journals
CPJ:
Bank charges
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2
Stop order/
Debit order/
Bank statement
Direct payments by bank to
third parties, e.g. insurance
premium, rates, etc.
3
Bank statement
Interest on overdraft
4
Bank debit note/
Bank statement
5
Bank statement
6
Bank statement/
duplicate deposit
slip
Bank statement/
duplicate deposit
slip
Bank statement
Direct deposit by debtor
Bank statement
and cheque
counterfoil number
(verification)
ERROR in CPJ
- amount undercast
- amount overcast
7
8
9
10 Duplicate Deposit
Slip
No
Bank Document
CPJ:
Insurance, Rates, etc.
CPJ:
Interest on overdraft
Debtor's cheque dishonoured CPJ:
Name of debtor/Debtors
control
Interest earned on current
account credit balances
CRJ:
Interest on current account
Direct deposit by tenant
Cancellation (reversal)
Stop Payment
Stale Cheque
Deposit not yet credited by
Bank. (CRJ)
Transaction
CRJ:
Name of debtor
CRJ:
Rent income
CRJ:
The contra account
e.g. Trading Stock
CPJ:
The contra account
e.g. Trading stock,
Stationery, etc.
CRJ:
The contra account
e.g. Creditors control
ENTRY IN THE BRS
Cr. Outstanding Deposit
Entry in cash journals
11 Cheque Counterfoil Outstanding cheques not
yet presented for payment
ENTRY IN THE
(CPJ) including
BRS
* Post-dated cheques issued
Dr. Outstanding
to creditors
Cheques
* Un-cashed Salary cheque
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12 Verification/Auditing Error on the bank statement
* wrongly debited
* wrongly credited
ENTRY IN THE BRS
Cr. Error made by bank
Dr. Error made by bank
13 Bank Statement and Cancel in the CRJ and recheque counterfoil issue a new
cheque and record in the
CPJ.
CREDITORS RECONCILIATION
RECONCILIATION OF CREDITORS ACCOUNT WITH STATEMENT OF
ACCOUNT
At the end of each month a statement is received from creditors. The statement
shows the transactions that have taken place during the month. This statement must
be compared to the creditors ledger account to ensure that the details of all invoices
and other transactions reflected on it are correct before payment can be made.
Procedure to follow:
Compare the monthly statement against the creditors ledger account in the Creditors
Ledger.
The debit column of the statement is compared to the credit side of the ledger
account and the credit column on the statement is compared with the debit side of
the ledger account.
If there are any errors or omissions in the books of the business receiving the
statement, they must be corrected. (It is important to verify the entry before
recording)
If the creditor made any errors (arithmetical, omissions), the business receiving the
statement must notify the creditor so that the necessary corrections can be made by
the creditor. The can arrive at the correct balance by preparing a Creditors
Reconciliation Statement.
Differences that can arise:
 The creditor may have prepared the statement on a different date from the
date on which the business receiving the statement.
 Invoices omitted/entered incorrectly
 Credit/Debit notes omitted/ entered incorrectly
RECONCILIATION OF DEBTORS
Debtors represent amounts owing to the business. The collection of amounts due
must be evaluated. The recoverability weakens as debtor’s age.
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The credit policy must be strictly adhered to and the management must keep an eye
on aging debtors’ accounts and thus avoid possible losses (bad debts). Analysis of
every debtor must be done by way of ageing debtors must be done regularly.
AGE ANALYSIS OF DEBTORS
Customers are not allowed to remain in the business books as debtors indefinitely. It
cost the business more money to carry the customer as a debtor for periods in
excess of one year without taking action, legally or otherwise with the customer.
The aging of debtors is controlled by company policy. The credit control department
implements the policy and takes action against defaulting debtors, by writing letters
of demand before taking legal action.
Prepare an ageing-schedule in the following format for the accounts given below.
The terms offered to customers are 30 days.
UZI TRADERS
DEBTORS AGE ANALYSIS AT 31 DECEMBER 2014
Period in arrear
Amount
Curren
DEBTORS
1
2
3
Due
t
month month
month
A.Ash
R2 000
R1 000
R500
R500
P.Pine
R3 600
R1 800
R500
R500
R800
C.Crabtree
R3 000
R1 500
R500
R500
R500
D.Daniel
R2 500
R1 250
R500
R500
R250
E.Edgar
R1 000
R12 100
R5 550 R2 000 R2 000 R1 550
% Total
100%
46%
17%
17%
13%
+90
days
R1 000
R1 000
7%
The credit control department can make use of the above information to:
 Sent out statements
 Determine bad debts
 Determine provision for bad debts
 Charge interest on outstanding accounts
 Encourage debtors to pay accounts promptly and offer discounts
SECTION C:
HOMEWORK QUESTIONS
QUESTION 1: RECONCILIATIONS
1.1
(35 marks; 20 minutes)
BANK RECONCILIATION
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You are provided
September 2011.
with
information
relating
to
Ace
Traders
for
REQUIRED:
1.1.1
1.1.2
1.1.3
1.1.4
Indicate whether the following statements are TRUE or FALSE:
(a) An internal auditor will want to inspect the Bank Reconciliation
Statement at the end of each month.
(2)
(b) A debit balance on the Bank Statement reflects an
unfavourable balance.
(2)
(c) Service fees and interest on an overdraft will be recorded as
Bank Charges in the Cash Payments Journal.
(2)
(d) A post-dated cheque issued by Ace Traders in
September 2011, but dated February 2012, will only be
entered in the Cash Payments Journal of Ace Traders in
February 2012.
(2)
Calculate the correct bank balance of Ace Traders on
30 September 2011, using figures that should be entered in the
Cash Journals. Show ALL workings.
(5)
Use the information below to prepare the Bank Reconciliation
Statement of Ace Traders on 30 September 2011.
(7)
Refer to the outstanding deposit of R43 000, dated
11 September 2011. Why should the internal auditor be
concerned? State TWO points.
(4)
INFORMATION ON 30 SEPTEMBER 2011:

Balances prior to doing the bank reconciliation:
Balance of the Bank Account in the Ledger on
30 September 2011
Balance per Bank Statement on 30 September 2011
Difference

R60 000 Favourable
R17 600 Favourable
R42 400
Individual differences noticed between the books of Ace Traders and
the Bank Statement for September 2011:
1.
2.
3.
4.
5.
6.
DETAILS
AMOUNT
Cheque No. 657, dated 2 March 2011, still not reflected in Bank
Statement
R2 000
Deposit, dated 11 September 2011, not reflected in Bank Statement
R43 000
Dishonoured cheque, originally received from a debtor on
15 September 2011, reflected in Bank Statement but not in
Journals
R9 500
Cheque No. 931, dated 18 September 2011, not reflected in Bank
Statement
R4 800
Cheque No. 936, dated 30 October 2011, not reflected in Bank
Statement
R10 200
Deposit, dated 28 September 2011, not reflected in Bank Statement
R5 700
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7.
1.2
Bank charges in Bank Statement, but not in Journals
R1 200
CREDITORS' RECONCILIATION
A statement received from a creditor, Kairo Suppliers, on 28 February 2011,
reflects that Ace Traders owes them R11 390. According to Ace Traders, the
amount outstanding is only R7 910.
REQUIRED:
Use the table in the ANSWER BOOK to indicate the differences that were
discovered when comparing the account in the Creditors' Ledger with the
statement received from Kairo Suppliers.
Write only the amounts in the appropriate column and a plus (+) or minus (-)
sign to indicate an increase or decrease in the balance. Calculate the correct
balance/total at the end.
INFORMATION:
On investigation, it was found that:
1.
A cheque for R3 000 issued by Ace Traders has not yet been
recorded in the statement received from Kairo Suppliers.
2.
The cheque in settlement of the January account was not received by
Kairo Suppliers within 7 days; therefore the discount of R500 recorded
by Ace Traders in the Creditors' Ledger must be cancelled.
3.
Returns recorded as R810 in the Creditors' Ledger of Ace Traders
were recorded as R900 in the statement received from Kairo
Suppliers. Ace Traders had miscalculated the cost of goods returned.
4.
An invoice received from Kairo Suppliers was correctly recorded as
R7 700 by Ace Traders. However, in the statement received from
Kairo Suppliers it was incorrectly recorded as R770.
5.
An invoice for R3 500 received from Kairo Suppliers was incorrectly
recorded as a credit note by Ace Traders.
35
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(11)
SECTION D:
1.1
SOLUTIONS FOR SECTION A
DEBTORS' RECONCILIATION
Accept ledger account format; If both formats are done mark the given format
only
1.1.1 CORRECTIONS TO THE DEBTORS' CONTROL ACCOUNT
Current Debtors' Control Account balance
20 100
A. Accept brackets or Decrease or Credit
-1 800 
B Accept Increase or Debit
+ 200 
C. Accept brackets or Decrease or Credit
- 900 
D. Do not accept a blank; Accept 0 or – with no
figure
No change 
E. Accept Increase or Debit
+1 400 
Correct Debtors' Control Account balance
19 000 
7
Must include R20 100, Inspection, reasonable or see 1.3.2
1.1.2
DEBTORS' LIST ON 30 SEPTEMBER 2013
-3 200+2 300 (1 mark)
T Stoffels
(3 800 - 900 )
2 900
E Khune
(7 400 + 200 )
7 600
S Mashele
(-1 900 + 1 400 )
 (500)
-1 600 (2 marks)
M Devnarain (10 600 - 800  - 800 ) One part correct
 9 000
19 000 
Correct total of Debtors' List
10
Inspection, reasonable or see 1.1.1
TOTAL
MARKS
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QUESTION 2
2.1
Complete the following sentences in your own words:
Any valid explanation in each case 

One mark for mentioning internal control without any further
explanation.
Two marks for explaining internal control measures (need not
mention the words ‘internal control’).
It is important to prepare a Bank Reconciliation Statement each
month because it is an important part of internal control which
enables a business to check its bank balance to a document (the
bank statement) received from the bank / to correct errors &
omissions / identify outstanding cheques & deposits / detect fraud.
It is important to prepare a Debtors' Age Analysis each month
because it is an important part of internal control which enables a
business to identify debtors who are not complying with the credit
terms / to ensure credit policies are followed / decide on action to be
taken against certain debtors.
2.2.1
4
Which GAAP principle will the bookkeeper apply when writing
off the amount of R40 000? Briefly explain this principle.
Principle of prudence 
part-marks for partial answer
Explanation (must show understanding of prudence): 
Possible responses for 2 marks:
 To treat transactions conservatively
 There is no guarantee that the money will be recovered and
therefore it is treated as if it will not be recovered
 To make provision for possible losses in future.
3
The bookkeeper wants to prevent a problem such as this in
future? Give TWO solutions to improve internal control in this
regard.
Two separate points 
 part-marks for partial answers
Possible responses for 2 marks:
 Division of duties
 Rotation of duties / employees to take leave
 Divide duties amongst employees so that the one can act as a
check on the other
 Responsible staff members to check / make the deposits
 The person issuing receipts should not be the same person
doing the deposits
4
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




Regular and timely checks / monitor all large transactions
Outstanding deposits must be investigated promptly
Encourage EFT payments by customers / debtors
Ask bank to send confirmation of deposits (e.g. sms)
All cash received must be deposited daily (deposit slip must
agree to receipts)
 Take strong disciplinary action over culprits (e.g. dismissal).
Do not accept preparation of bank reconciliation as a solution in this
case.
Do not accept security cameras.
2.2.2
BANK RECONCILIATION STATEMENT ON 31 MAY 2012
If 2-column method is used, assign appropriate headings to assist
marking
Debit
 Balance as per bank statement
 Outstanding cheques:
 967
 1122
 1129
 Outstanding deposit
 Correction of error / wrongly entered
 Balance as per bank account
Credit
 19 310



4 790
4 650
8 540
operation –
balancing
figure;
debit or
credit
37 290
 11 550

960
 24 780
37 290
-1 for foreign items (max -2) e.g. R40 000, R2 340, R1 850, R920.
Inspect operation to award marks
Balance as per Bank Statement
(19 310)
Outstanding cheques:
 967
(4 790)
 1122
(4 650)
 1129
(8 540)
Outstanding deposit
11 550
Correction of error
960
Balance as per bank account
(24 780)
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2.3
Problem 1
Problem 2
Identification of TWO different
problems, with evidence from
the question
Identify problem (credit limits) 
Mention evidence 
Figures not necessary
Problem: Certain debtors are
exceeding their credit limits
Evidence: Fakude (exceeds by
R700) or Martin (exceeds by
R504).
Internal control
measure to correct
each problem
Any valid advice 
Identify problem (credit periods) 
Mention evidence 
Figures not necessary
Problem: Most of the debtors are
paying over periods longer than 30
days
Evidence: 61% or R6 400 are
taking longer / 39% within 30 days
/ Fakude & Howard exceed 60
days
Any valid advice 
Do not sell on credit to
debtors who are likely
to exceed their limits /
ensure that they settle
previous month’s debt
before buying on credit
Charge interest on
overdue accounts/offer
discounts for early
payment/consider legal
action against problem
debtors
6
TOTAL
MARKS
30
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