Documents - CAAH2013 - MBA 2 Acc Dec Making Workbook Jan 2013 PDF

ACCOUNTING FOR DECISION MAKING
MBA
ENRICHMENT EXERCISES
AND
SOLUTIONS
ACCOUNTING FOR DECISION MAKING WORKBOOK

CONTENTS
ENRICHMENT EXERCISES
Page
1.
Accounting information and managerial decisions
2.
Financial statements and accounting concepts
3.
Accounting for and presentation of assets, liabilities and owners equity
4.
Income statement and cash flows
5.
Financial Analysis
18
6.
Cost-volume-profit (CVP) relationships
21
7.
Cost analysis for planning, control and decision-making
25
8.
Transfer pricing for decentralised enterprises
35
9.
Corporate governance
36
Present value tables
37
SOLUTIONS
1.
Accounting information and managerial decisions
39
2.
Financial statements and accounting concepts
41
3.
Accounting for and presentation of assets, liabilities and owners equity
45
4.
Income statement and cash flows
50
5.
Financial Analysis
60
6.
Cost-volume-profit (CVP) relationships
68
7.
Cost analysis for planning, control and decision-making
77
8.
Transfer pricing for decentralised enterprises
90
9.
Corporate governance
92
2
MANCOSA
TOPIC 1
ACCOUNTING INFORMATION AND MANAGERIAL
DECISIONS
1.
Accounting information is required by various individuals and organizations in order to

make decisions. Explain why each of the following user groups need accounting
information relating to a business.
1.1
Customers
1.2
Suppliers
1.3
Government
1.4
Owners
1.5
Lenders
1.6
Employees
1.7
Investment analysts
1.8
Community representatives
1.9
Managers
2.
Explain how external auditors and internal auditors differ as far as their main duty is
concerned.
3.
Tabulate 5 differences between management accounting and financial accounting.
4.
Whilst there are differences between the information needs of mangers and other users,
use examples to show how there could be an overlap of between the needs of managers
and other users.
3
MANCOSA
TOPIC 2
FINANCIAL STATEMENTS AND ACCOUNTING CONCEPTS
FINANCIAL STATEMENTS
1.
The income statement for Heidi Limited revealed an increase in profit of R200 000.
However, during the same financial period the bank balance declined by R120 000. How
would you explain this apparent discrepancy?
FINANCIAL STATEMENT RELATIONSHIPS
2.
Discuss how the following financial statements are integrated:
Income statement
Statement of changes in equity
Balance sheet
Statement of cash flows

ACCOUNTING CONCEPTS
3.
Critically discuss the following accounting concepts:
3.1
Materiality
3.2
Conservatism
4.
Explain the significance of the following accounting concepts in the preparation of a

balance sheet of an enterprise. Support your answer with examples.
4.1
Going concern
4.2
Full disclosure
4.3
Consistency
4
MANCOSA

ACCOUNTING EQUATION AND FINANCIAL STATEMENTS
5.
Required
5.1
Use the format of the accounting equation presented below to analyse the transactions of
Gwala Stores. Use + for an increase and for a decrease.
5.2
Thereafter prepare the:
5.2.1 Income statement the month ended 31 August 20.9.

5.2.2 Statement of changes in equity for the month ended 31 August 20.9.
5.2.3 Balance Sheet at 31 August 20.9.
5.2.4 Statement of changes in Cash Flows for the month ended 31 August 20.9.
Assets
Equipment
= Equity
Inventory
Receivables
Bank =
Capital
+ Liabilities
Income
Expenses +
Payables
TRANSACTIONS FOR AUGUST 20.9

01 T Gwala, the proprietor, transferred R90 000 from her personal banking account into a
bank account in the name of her business.
05 Purchased equipment by cheque, R50 000.
15 Bought stationery for office use on credit, R4 000.
25 The rent for August 20.9 was paid by cheque, R5 000.
31 Fees collected from customers for services rendered, R10 000.
5
MANCOSA
TOPIC 3
ACCOUNTING FOR AND PRESENTATION OF ASSETS,
LIABILITIES AND OWNERS EQUITY
1.
Pixma Limited began operations in January 20.9 with R900 000 obtained from selling
450 000 ordinary shares at a par value of R2 each. Some of the major transactions for
the year included the following:
It purchased plant and equipment for R750 000 as well as land and buildings for
R450 000, financing the purchase with a mortgage bond of R287 500, a long-term loan of
R595 000, and cash for the balance. During the year the company used cash to reduce
the mortgage bond balance by R25 000 and to repay R75 000 towards the long-term loan.
The company also invested R195 000 in short-term marketable securities. On 01 October
20.9, the company issued a further 200 000 shares at R3 each. Depreciation expense for
the year was R200 000. The net profit after tax for the year ended 31 December 20.9 was
R250 000. Dividends for the year (declared and paid) amounted to R220 000.
REQUIRED
1.1
From the information provided above, calculate the amount that should be reflected for
each of the following items in the Balance Sheet of Pixma Limited at the financial year
end 31 December 20.9:
1.1.1 Non-current assets

1.1.2 Retained earnings
1.1.3 Total owners equity
1.1.4 Non-current liabilities
1.2
Explain why it is important for Pixma Limited to consistently take advantage of cash
discounts offered by creditors for early settlement of accounts.
1.3
Explain how the shareholders of Pixma Limited can benefit from financial leverage.
6
MANCOSA

1.4
Name 2 control measures that you would recommend to prevent the following from
occurring at Pixma Limited for each of the following situations:
1.4.1 Payments made without proper authorization

1.4.2 Theft of stock from the warehouse
2.
Name 4 decisions that need to be made before calculating the depreciation expense for
an asset. Also explain what impact these decisions will have on reported profits.
3.
The first-in-first-out (FIFO), last-in-last-out (LIFO) and the weighted average cost (AVCO)
methods may be used to value inventory. Answer the following questions related to the
use of these methods during a period of rising prices:
3.1
Which method will show the highest gross profit? Why?
3.2
Which method will show the lowest gross profit? Why?
3.3
How will the valuation of inventories using the AVCO method compare with the FIFO and
LIFO methods?
3.4
Which method will show the highest closing inventory figure in the balance sheet? Why?
3.5
Which method will show the lowest closing inventory figure in the balance sheet? Why?
3.6
Comment on the closing inventory figure if the AVCO method is used.
4.
Name 4 instances when the net realizable value of inventory would be lower than the
cost price of the inventory held.
5.
What would be the effect of not taking into account the fact that a debt is bad, when
preparing the financial statements, on the reflection of financial performance and
financial position?
6.
State which of the following items would appear on the balance sheet of Jensen
Manufacturers as an asset. Explain your reasoning in each case.
6.1
R4 000 owing to Jensen Manufacturers by a customer who will never be able to pay.
6.2
The hiring by Jensen Manufacturers of a new marketing manager who is confident of

increasing profits by over 50% over the next four years.
6.3
Purchase of a machine that will save Jensen Manufacturers R30 000 per year. It is
presently being used by the business but has been acquired on credit and is not yet paid
for.
7
MANCOSA
7.
The following is a list of balances extracted from the financial records of Manhattan Ltd
on 30 November 20.9.
R
Debtors
185 000
Land and buildings
320 000
Inventories
153 000
Bank overdraft
116 000
Equipment
207 000
Loan from Kia Bank
260 000
Motor vehicles
38 000
Creditors
86 000
Required
7.1
Prepare the balance sheet of Manhattan Ltd at 30 November 20.9.
7.2
Provide an interpretation of the balance sheet by making reference to the following:
7.2.1 The liquidity of the business

7.2.2 The mix between current and non-current assets
7.2.3 The financial structure of the balance sheet (finance provided by owners and outsiders)
8
MANCOSA
TOPIC 4
INCOME STATEMENT AND CASH FLOWS
INCOME STATEMENT
1.
Edgar Limited has an authorized share capital of 300 000 ordinary shares at a par value
of R2 each. 200 000 shares have been issued at par value.
Study the Income statement of Edgar Limited for the year ended 30 September 20.9 and
answer the questions that follow:
Edgar Limited
Income statement for the year ended 30 September 20.9
(R)
Net sales
Cost of sales
Gross profit
Selling, general and administrative expenses
Income from operations
470 000
(206 800)
263 200
(163 200)
100 000
Other income/expenses
Interest expense
(6 000)
Other income
12 000
Profit on disposal of asset

Profit before tax
110 000
Income tax
(33 000)
Net profit
Earnings per share
1.1
4 000
77 000
?
The earnings per share for the year ended 30 September 2008 was 45 cents. As a
director of Edgar Limited would you satisfied with the earnings per share for the year
ended 30 September 20.9? Motivate your answer.
1.2
The interest rate on loans is 15% per annum. If there was no increase or decrease in the
loan balance during the financial year, calculate the loan balance.
9
MANCOSA

1.3
Calculate the gross profit ratio for the year ended 30 September 20.9. Thereafter state
two possible reasons why this ratio is lower than the ratio for the previous financial year.
1.4
2.
Recommend two ways in which Edgar Limited can improve its profitability.
MVP Ltd presented the income statement below for its most recent financial year.
R
Sales
743 000
Cost of sales
402 000
Gross profit
341 000
Operating expenses
145 000
Income from operations 196 000

Other income
1 100
Other expenses
26 000
Profit before tax
171 100
Income tax
Net profit
60 000
111 100
Answer the following questions:

2.1
Explain the difference between sales and other income.
2.2
MVP Ltd would like to earn a large gross profit by selling its products at a much higher
price than its cost. Describe two factors that may prevent it from doing so.
2.3
Explain how cost of sales, operating expenses and other expenses are different from
one another.
2.4
Explain why cost of sales, operating expenses, other expenses and income tax are
listed separately in the income statement rather than being lumped together as one
item?
2.5
Explain why the income statement presented above is inadequate to provide a proper
interpretation of the financial result of MVP Ltd for the financial year.
10
MANCOSA

3.
The income statement for 20.9 and 20.8 given below were extracted from the accounting
records of Afri Manufacturers Ltd:
Afri Manufacturers Ltd
Income statement for the year ended 31 December
20.9
20.8
(R)
(R)
Net sales
1 003 600
901 300
Cost of sales
(905 600)
(744 300)
98 000
157 000
(92 000)
(65 000)
6 000
92 000
Non-operating income
124 500
18 000
Interest expense
(90 500)
(57 000)
40 000
53 000
(12 000)
(15 900)
28 000
37 100
Gross profit
Selling, general and administrative expenses
Income from operations
Other income/expenses
Profit before tax

Income tax
Net profit
Required
Refer to the income statement of Afri Manufacturers Ltd for 20.9 and 20.8 and comment
on the performance of the company including the operating profit earned. Take into
account that the profit margin (percentage net profit after tax to sales) for the industry
was 4.51% for 20.8 and 2.60% for 20.9.
11
MANCOSA

CASH FLOW STATEMENT
4.
What impact would changes in the balance sheet items listed below have on the cash
position of an enterprise? Place a tick (
) in the correct column.
Change in balance sheet items
Inflow of cash
Outflow of cash
Increase in current assets other than cash

Decrease in current assets other than cash
Increase in non-current assets
Decrease in non-current assets
Increase in current liabilities
Decrease in current liabilities
Increase in non-current liabilities
Decrease in non-current liabilities
5.
Study the extracts of the Cash flow statement of Vuyo Limited for the year ended 30 June
20.9 and answer the questions that follow.
Extracts of Cash Flow Statement for the year ended 30 June 20.9
Cash flow from operating activities
100 000
Cash flow from investing activities
(300 000)
Additions to plant and equipment
(300 000)
Cash flow from financing activities

Increase in Long-term borrowings
250 000
250 000
5.1
What do you understand by Cash generated from operating activities R100 000?
5.2
Name one transaction that improves cash flow but does not increase profit.
5.3
There is a combination of a positive net cash flow from operating activities (R100 000)
and a negative cash flow from investing activities (R300 000). Is this good for the
company? Explain.
12
MANCOSA

6.
The cash flow statement for Mega Ltd is provided below:
Mega Ltd
Cash flow statement for the year ended 31 December 20.9
R
Profit before interest and tax i.e. operating profit
61 047
Adjustments to convert to cash from operations

Non-cash flow adjustments
53 418
Add: Depreciation
53 418
Profit before working capital changes
114 465
Working capital changes
(80 485)
Increase in inventory
(55 170)
Increase in receivables
(53 061)
Increase in payables
27 746
Cash generated from operations
33 980
129 767
Proceeds from sale of plant and equipment
129 767
(172 860)
Long-term borrowings redeemed
(172 860)
Net decrease in cash
(9 113)
Cash balance (31 December 20.8)
23 243
Cash balance (31 December 20.9)
14 130
Use the cash flow statement to answer the following questions:

6.1
How did the company use its cash flows from operating and investing activities?
6.2
Why were depreciation and increase in payables added to operating profit in computing
the cash flow from operating activities?
6.3
Is the cash flow statement above presented according to the direct method or indirect
method? Explain how the method used above is different from the alternative method.
6.4
Based on the cash flow information above, how does the company appear to be
performing? Explain.
13
MANCOSA
7.
Required
Study the extracts of the Cash flow statement of Siya Limited for the year ended
30 November 20.9 and state your observations.
Extracts of Cash Flow Statement for the year ended 30 November 20.9
270 000
(750 000)
Additions to plant and equipment (Property and machinery)

Sale of investments
Proceeds from issue of ordinary shares
Increase in Long-term borrowings
(1 000 000)
250 000
800 000
750 000
50 000
Net increase in cash and cash equivalents
320 000
Cash and cash equivalents at beginning of year
180 000
Cash and cash equivalents at end of year
500 000
14
MANCOSA

8.
You are provided with the following information:
Asic Ltd
INCOME STATEMENT FOR THE YEAR ENDED 31 DECEMBER 20.6
R
1 800 000
Sales
(1 125 000)
Cost of sales
Gross profit
675 000
Operating expenses
(474 000)
Directors fees
127 500
Auditors fees
67 500
Depreciation on equipment
39 750
Depreciation on vehicles
41 250
Loss on sale of asset
21 000
Other non-disclosable costs
177 000
Operating profit
201 000
Other income: Investment income
24 600
Interest expense: on debentures
(3 900)
Profit before tax
221 700
Income tax
(77 595)
Profit for the year
144 105
STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 DECEMBER 20.6
Balance on 01 January 20.6
Preference
share
capital
120 000
Issue of share capital
Ordinary
share
Retained
capital
earnings
525 000
143 775
150 000
Total
788 775
150 000
Profit for the year
144 105
144 105
Dividends:Preference
(15 450)
(15 450)
:Ordinary interim
(18 750)
(18 750)
:Ordinary final
(35 250)
(35 250)
218 430
1 013 430
Balance on 31 December 20.6
120 000
675 000
15
MANCOSA

Asic Ltd
BALANCE SHEET AS AT 31 DECEMBER
20.6
R
20.5
R
Non-current assets
996 090
858 075
Property, plant and equipment (Note 1)
790 590
699 600
85 500
60 000
120 000
98 475
Current assets
188 925
203 505
Inventories
120 690
119 700
67 335
82 305
67 335
82 305
900
1 500
900
1 500
1 185 015
1 061 580
1 013 430
788 775
Share capital
795 000
645 000
Retained earnings
218 430
143 775
Non-current liabilities
30 000
135 000
Long-term borrowings: 13% Debentures
30 000
135 000
141 585
137 805
43 185
59 805
43 185
59 805
South African Revenue Services (Income tax payable)
45 000
30 000
Shareholders for dividends
50 700
39 000
2 700
9 000
1 185 015
1 061 580
ASSETS
Financial assets: Investment Subsidiary company

Investment Listed shares (at cost)
Trade and other receivables

Trade debtors
Cash and cash equivalents
Bank
Petty cash
Total assets
EQUITY AND LIABILITIES

Equity
Current liabilities
Trade and other payables
Trade creditors
Bank overdraft
Total equity and liabilities
16
MANCOSA

Note 1
Property, plant and equipment
20.6
20.5
Land and
Land and
buildings
Equipment Vehicles buildings Equipment Vehicles
462 000
242 340
300 000
346 500
188 100 300 000
Cost
Accumulated
depreciation
Carrying value
462 000
(82 500)
159 840
(131 250)
168 750
346 500
(45 000)
143 100
(90 000)
210 000
Additional information
1.
Equipment was sold for cash, R16 500. The cost price of the equipment sold was
R39 750 and the accumulated depreciation on it to the date of sale was R2 250.
Equipment was also purchased for cash.
2.
Additions were made to the buildings for cash.
3.
Ordinary shares were issued at par value.

REQUIRED
Prepare the Cash Flow Statement for the year ended 31 December 20.6.
17
MANCOSA
TOPIC 5
FINANCIAL ANALYSIS
1.
Excerpts of financial data for Polar Enterprises are as follows:

Income statement
20.10 (R)
20.9 (R)
Sales (10% credit)
32 011 500
19 373 000
Cost of sales (10% credit purchases)
26 180 100
15 993 700
Operating profit
1 931 200
1 327 800
Profit before tax
1 831 400
1 226 420
457 850
306 600
1 373 550
919 820
20.10
20.9
Non-current assets
5 200 000
4 700 000
Current assets
2 866 530
4 974 530
Inventories
1 482 200
2 038 860
Accounts receivable
261 290
155 200
Marketable securities
326 950
2 306 440
Cash
796 090
474 030
1 088 860
588 310
Accounts payable
190 660
192 040
Other current liabilities
898 200
396 270
Tax (25%)
Net profit after tax
Balance sheet
Current liabilities
Required
1.1
Calculate the gross margin, operating margin and profit margin for 20.10 and 20.9.
1.2
Comment on your answers calculated in question 1.1.
1.3
Calculate the current ratio and acid test ratio at the end of each year. How has the
enterprises liquidity changed over this period?
1.4
Compute the following for 20.10 (ratios for 20.9 are given in brackets):
Inventory turnover (20.9: 9.04 times)
Debtors collection period (20.9: 29.24 days)
Creditors payment period (20.9: 42.40 days)
Turnover to net assets (20.9 2.13)
18
MANCOSA

1.5
What is your interpretation of the enterprises performance with respect to your

answers in question 1.4?
2.
Answer the questions below based on the following information. Income tax is
calculated at 35% of profit.
Operating profit
Vuyo Traders
20.10 (R) 20.09 (R)
400 000
320 000
Profit after tax
120 000
Non-current debt (10% p.a.)
200 000
Owners equity
800 000
100 000
Sipho Stores
20.10 (R) 20.09 (R)
420 000
380 000
140 000
80 000
80 000 1 200 000 1 000 000

720 000
300 000
280 000
Note: The enterprise has no current liabilities.

Required
2.1
Calculate the return on assets for both enterprises for 20.10.
2.2
Calculate the return on equity for both enterprises for 20.10.
2.3
Which enterprise is more profitable? Explain.
2.4
Should Vuyo Traders be satisfied with its return on assets? Explain.
3.
In 20.10, Mestle Wholesalers had R2 000 000 of assets, R200 000 of current
liabilities and R600 000 non-current liabilities. Operating profit was R500 000,
interest expense was R120 000 and the tax rate was 40%.
Required
3.1
Calculate the following ratios:
Debt to assets
Debt to equity
Interest coverage
3.2
Comment on your answers obtained in question 3.1.
19
MANCOSA

4.
The following information was extracted from the financial statements of Premier
Limited:
Income statement
20.10 (R)
20.9 (R)
10 000 000
7 500 000
500 000
300 000
1 500 000
1 100 000
Ordinary share capital (par value R2)
80 000 000
60 000 000
Ordinary share premium
20 000 000
4 000 000
Retained earnings
18 000 000
10 000 000
3.75
Profit after tax

Statement of changes in equity
Interim dividends
Final dividends
Other
Market price per share
Required
4.1
Calculate the following ratios for 20.10 (ratios for 20.9 are given in brackets):
Return on equity (10.04%)
Earnings per share (25 cents)
Dividends per share (4.67 cents)
Earnings retention (81.32%)
Price/Earnings ratio (15)
4.2
Comment on your answers obtained in question 4.1.
20
MANCOSA
TOPIC 6
COST-VOLUME-PROFIT (CVP) RELATIONSHIPS
EXPANDED CONTRIBUTION MARGIN MODEL
1.
The following budgeted details for 20.9 relate to a product manufactured by Manto Ltd:
Sales
R50 000
Variable cost per unit sold
R7.50
Total fixed cost

Sales volume
R12 500
2 500 units
Required
Consider the following situations independently:
1.1
Calculate the operating profit.
1.2
Suppose sales increase by R10 000 without changes to any costs. By what amount will
contribution margin and operating profit increase?
1.3
Suppose fixed costs increase by R3 000. By how much must sales increase if operating
profit was to remain unchanged?
1.4
Would you recommend an advertising programme costing R5 000 that would generate
an additional R10 000 of sales? Why?
1.5
Calculate the volume of sales required to achieve an operating profit of R20 000.
Consider the following situations independently and in each case motivate your
answer by doing the relevant calculations:
1.6
Should management consider a drop of R2 per unit in the selling price if sales volume is
expected to increase by 200 units?
1.7
Should management adopt the following proposal?

Decrease the selling price by R4 and increase marketing costs by R8 000 with the
expectation of an increase in sales to 5 000 units.
21
MANCOSA

2.
Rissik Limited manufactures product D. The budgeted details for 20.9 are as follows:
Selling price per unit
R12
Variable cost per unit sold
R5
Total fixed cost
R700 000
Required
Calculate the number of units that must be sold in order to earn an operating profit of
R260 000 (answer expressed to the nearest whole number).
BREAK-EVEN POINT
3.
Sepata Enterprises makes sandals. The fixed costs of operating the workshop for a
month total R5 000. Each pair of sandals requires material that cost R20. Each pair of
sandals takes 2 hours to make, and the business pays the sandal makers R12.50 an
hour. The sandal makers are all on contract and if they do not work for any reason, they
are not paid. Each pair of sandals is sold to shoe stores at R70. The business expects
to sell 350 pairs of sandals per month.
Questions
3.1
Calculate the number of pairs of sandals that the business must sell in order to break
even each month.
3.2
Why is it necessary for the management of Sepata Enterprises to know the break-even
point?
3.3
Suppose the business has an opportunity to rent a sandal-making machine. Doing so

would increase the total fixed costs of operating the workshop for a month to R9 375.
Using the machine will reduce the labour time to 1 hour for each pair of sandals. The
sandal makers will still be paid R12.50 per hour.
3.3.1
Calculate the break-even quantity if the machine is rented.
3.3.2
After considering the information given and the calculations you made, should the
machine be rented or not?
3.3.3
Calculate and comment on the margin of safety (calculated in units) for each option i.e.
without the machine and with the machine.
22
MANCOSA

4.
The following budgeted data relates to a product produced by Gnome Manufacturers and
to a similar product produced by Humpty Manufacturers for 20.9:
Gnome
Humpty
Selling price per unit
60
60
Direct material cost per unit
16
14
Direct labour cost per unit
12
Direct overhead cost per unit
Fixed factory overhead costs
10 000
20 000
5 000
10 000
Fixed administration costs
Expected sales for each manufacturer is 2 000 units.

Required
4.1
Calculate the total revenues required to break even for each manufacturer.
4.2
Which manufacturer experiences a higher operating leverage? Motivate your answer by

doing the relevant calculations.
4.3
What is the consequence of a small drop in sales to an enterprise that has a high
operating leverage? Use a calculation to support your answer.
4.4
Calculate the margin of safety (expressed as a percentage) for each manufacturer.
23
MANCOSA

5.
The following budgeted information for the year ended 31 October 20.9 is provided by
Sonke Ltd, a manufacturer of a single product called Rimex:
Sales (30 000 units X R12 per unit)
R360 000
Total variable cost (30 000 units X R5.40 per unit)
R162 000
Total fixed costs
R78 000
The sales forecast for the year ended 31 October 20.9 is 15% less than the actual sales
for the year ended 31 October 20.8. The sales director produced three proposals to
improve the position:
Proposal A involves launching an aggressive marketing campaign. This would involve a

single additional fixed cost of R18 000 for advertising. Sales commission will increase by
R1.20 per unit. Sales volume is expected to increase by 10% above the budgeted sales
of 30 000 units with no change in the unit selling price.
Proposal B involves a 10% reduction in the unit selling price. Fixed selling overheads will
also reduce by R12 000. The sales volume is expected to be 34 000 units.
Proposal C involves a 10% reduction in the unit selling price and this is estimated to bring
the sales volume back to the level as the year ended 31 October 20.8.
Required
For each of the three proposals, calculate the break-even quantity (answer expressed to
the nearest whole number).
24
MANCOSA
TOPIC 7
COST ANALYSIS FOR PLANNING, CONTROL AND
DECISION-MAKING
BUDGETS
1.
Budgets are half used if they serve only as a planning device. Comment on this
statement.
2.
What are the principal considerations involved in preparing a production budget?
3.
The following is the sales forecast (in units) of Manco Ltd that manufactures two
products viz. product X and product Y:
November 20.6
December 20.6
January 20.7
Product X
3 000
4 500
4 000
Product Y
4 000
6 000
5 000
The selling price per unit of product X is R20 and the selling price of product Y is
R30.
Required
Prepare a sales budget for the period 1 November 20.6 to 31 January 20.7.
4.
PC Solutions makes and sells computers. On 31 March 20.6, the entity had 60
computers in inventory. The companys policy is to maintain a computer inventory of
5% of the following months sales. The sales forecast of the entity for second
quarter of the year is:
April 1 200 computers
May 1 000 computers
June 900 computers
Required
Draw up a production budget for April and May 20.6.
25
MANCOSA

5.
Computek Ltd sells computers. At the beginning of May 20.9 the business had an
overdraft of R70 000 and the bank had asked that it be settled by the end of October
20.9. As a result, the directors decided to review their plans for the next 6 months and
the following is the cash budget that was subsequently drawn up for the 6 months
ending 31 October 20.9.
Computek Ltd
Cash Budget for the 6 months ended 31 October 20.9
May
R000
454
Jun
R000
630
Jul
R000
492
Aug
R000
276
Sep
R000
236
Oct
R000
216
Cash sales
454
630
492
276
236
216
Cash payments
404
528
506
328
264
240
Cash purchase of merchandise
270
360
284
188
150
132
Administration expenses
80
82
76
66
62
60
Loan repayments
10
10
10
10
10
10
Selling expenses
44
48
56
52
42
38
28
36
12
Cash receipts
Shop refurbishment
Tax payment
Cash surplus (shortfall)
44
50
102
(14)
(52)
(28)
(24)
Opening cash balance
(70)
(20)
82
68
16
(12)
Closing cash balance
(20)
82
68
16
(12)
(36)
(a)
The business maintains a minimum monthly inventory level of R80 000 of merchandise.
(b)
The gross profit margin is 40%.

Question
What problems are likely to be faced by Computek Ltd during the 6 month period May to
October 20.9? Suggest ways in which the business may deal with these problems.
26
MANCOSA

VARIANCE ANALYSIS
6.
GMX Ltd uses the standard costing system. The standards are as follows:
Standards
Material J
2kg @ R5 per kg
Labour
4 hours @ R50 per hour
Variable overheads
R11 per labour hour
Fixed overheads
R14 000
Normal production
12 000 per month
Actual information for the month October 20.8 is:

Material J used
20 050kg @ R5,20 per kg
Labour
39 500 hours @ R48 per hour
Variable overheads
R12 per labour hour
Fixed overheads
R14 500
Production
10 000 units manufactured
Required
6.1
Calculate the raw material usage variance. Also provide possible reasons for the
variance.
6.2
Calculate the direct labour rate variance.
6.3
Calculate the direct labour efficiency variance.
6.4
Calculate the variable overhead efficiency variance.
27
MANCOSA

7.
Zimba Manufacturers uses the standard costing system. The following information for
September 20.9 is available in respect of product H that it manufactures:
Budgeted figures
Variable manufacturing overheads
R32 000
Fixed manufacturing overheads
R76 800
Number of labour hours

Expected production
6 400
1 600 units
Actual results
Variable manufacturing overheads
R30 616
Fixed manufacturing overheads
R79 808
Number of labour hours worked
6 880
Actual production
1 680 units
Required
7.1
Calculate the fixed overhead spending variance.
7.2
Calculate the fixed overhead volume variance.
7.3
Calculate the variable overhead efficiency variance. Also provide possible reasons for
the variance.
28
MANCOSA

ACCEPTANCE OF A SALES OFFER
8.
Kremo Limited produces only premium ice cream. The factory has a capacity of
10 million litres but only plans to produce 8 million litres. The variable costs per litre
associated with producing and selling 8 million litres are as follows:
R
Ingredients
5.00
Packaging
1.00
Direct labour
2.00
Variable overheads
0.50
Sales commission
0.50
Total variable costs
9.00
The selling price per litre is R12 and the fixed costs for producing the ice cream is
R4 656 000.
An ice cream distributor from Gauteng not normally served by Kremo Limited has offered
to buy 2 million litres at R8.90 per unit. Since the distributor approached the company
directly, there is no sales commission.
REQUIRED
8.1
Calculate the operating profit or loss.
8.2
As the manager of Kremo Limited, would you accept or reject the offer? Substantiate
your answer by calculating the differential profit or loss from accepting the offer.
29
MANCOSA

9.
Femino Enterprises produces product Z that it sells for R63 each. The costs of
producing and selling 120 000 units of product Z are estimated as follows:
Variable costs per unit:
Direct materials
R15.00
Direct labour
R9.00
Factory overhead
R6.00
Selling and administrative expenses
R7.50
R37.50
Fixed costs:
Factory overhead
Selling and administrative expenses
R1 600 000
R600 000
To date, this year, 90 000 units have been produced and sold. An additional 22 500
units are expected to be sold on the domestic market during the remainder of the year.
Femino Enterprises received an offer from Zambesi Traders for 6 000 units of product Z
at R42 each. Zambesi Traders will market the product in Zambia under its own brand
name, and no additional selling and administrative expenses associated with the sale
will be incurred by Femino Enterprises. The sale to Zambesi Traders is not expected to
affect domestic sales of product Z and the additional units could be produced during the
current year using excess capacity.
Required
Should the proposal be accepted? Motivate your answer.
MAKE OR BUY DECISION
10.
Dubai Ltd needs a component for one of its products. It can subcontract production of
the component to a subcontractor who can provide the component at R20 each. Dubai
Ltd can produce the component internally for total variable costs of R15 per component.
Dubai Ltd has no spare capacity, so it can only produce the component internally by
reducing its output of another of its products. While it is making each component it will
lose contributions (contribution margin) of R12 from the other product.
Required
10.1
Should the component be subcontracted or produced internally? Motivate your answer.
10.2
Name two problems Dubai Ltd may experience if it decides to subcontract any of its
components.
30
MANCOSA

11.
Trike Enterprises assembles tricycles with motors. It also produces a component for
assembly. The costs of making this component for May 20.9 are as follows:
R
Direct Material
866 000
Labour and other variable costs
844 000
Fixed overheads allocated
267 000
Total cost
Number of units produced
Per unit cost
1 977 000
8 500
232.59
A recently established spare part manufacturer approached Trike Enterprises with a

proposal of supplying this component at R210.
Required
What would be your advice to Trike Enterprises?
31
MANCOSA

CAPITAL INVESTMENT APPRAISAL
NOTE: WHERE APPLICABLE, USE THE PRESENT VALUE TABLES SUPPLIED AT
THE END OF THE ENRICHMENT EXERCISES.
12.
The following information relates to two capital expenditure projects. Because of capital
rationing, only one project can be accepted.
Project A
R800 000
Project B
R920 000
5 years
5 years
R40 000
R60 000
320 000
400 000
280 000
280 000
260 000
200 000
240 000
200 000
220 000
200 000
Initial cost
Expected life
Expected scrap value
Expected net cash inflows:
End of year
The company estimates its cost of capital is 12%. Depreciation is calculated using the
straight-line method.
Required
12.1
Calculate the payback period for project B. (Answer expressed in years and months)
12.2
Calculate the accounting rate of return for project A. (Answer expressed to 2 decimal
places)
12.3
Calculate the net present value of project A. (Round off amounts to the nearest Rand)
12.4
Using your answers from questions 12.2 and 12.3, should project A be considered for
acceptance? Why?
13.
The financial manager at Reno Ltd had to choose between these two projects, Turbo
and Gusto, which have the following after-tax cash inflows:
32
MANCOSA

Year
Turbo
Gusto
R54 000
R27 750
R54 000
R54 300
R54 000
R184 500
R54 000
Both projects require an initial investment of R176 550. All cash flows take place at the
end of the year except the original investment in the project which takes place at the
beginning of the project.
Required
13.1
Calculate the net present value (NPV) for each project, using a discount rate of 12%.
Which project would you choose? Why?
13.2
Calculate the Internal Rate of Return (IRR) for both projects. Which project should be
chosen? Why?
14.
Your company has the option to invest in machinery in projects F and G but finance is
only available to invest in one of them. You are given the following projected data:
Project F
R
140 000
Project G
R
150 000
Year 1
30 000
40 000
Year 2
36 000
50 000
Year 3
40 000
50 000
Year 4
44 000
80 000
Year 5
26 000
Initial cost
Net cash inflows:
1.
All cash flows take place at the end of the year except the original investment in the
project which takes place at the beginning of the project.
2.
Project F machinery will be disposed of at the end of year 5 with a scrap value of
R20 000.
3.
Project G machinery will be disposed of at the end of year 4 with a nil scrap value.
33
MANCOSA

4.
Depreciation is calculated on a straight line basis.
5.
The discount rate to be used by the company is 14%.

Required
14.1 Calculate the payback period for project F. (Answer must be expressed in years and
months)
14.2 Calculate the accounting rate of return for project F. (Answer expressed to 2 decimal
places)
14.3 Calculate the net present value of each project. (Round off amounts to the nearest Rand)
14.4 Using the answers from question 14.3, which project should be chosen? Explain why.
15.
A machine with a purchase price of R140 000 is estimated to eliminate manual operations
by R40 000 per year. The machine will last 5 years and have no residual value at the end
of its life.
Required
Calculate the internal rate of return.
34
MANCOSA
TOPIC 8
TRANSFER PRICING FOR DECENTRALISED
ENTERPRISES
1.
Briefly discuss the use of market-based transfer price as the transfer price between
divisions of the same entity.
2.
It is possible to adopt an approach that allows divisional managers to arrive at

negotiated prices for inter-divisional transfers.
2.1
Under what circumstances would you recommend negotiated transfer prices?
2.2
Discuss the possible implications of negotiated transfer pricing on divisional

performance of a selling division that sells the whole of its output to another division.
3.
A company has two divisions. The output of Division A is product Alpha. There is a
market outside the company for product Alpha, but this product is mainly used by
Division B which has first call on Division As output. The output of division B is Product
Beta and is sold on the external market. Product Alpha has the following cost structure:
Variable cost per unit
R8
Fixed cost per unit
R2
Management has decided on a target rate of return of 12% for each division. The cost
structure of product Beta is given below:
Transfer price
Fixed cost per unit
Market price per unit
?
R15
R7
R28
Required
3.1
Determine the transfer price of product Alpha per unit using the variable cost method.
3.2
Determine the transfer price of product Alpha per unit using the cost-plus method.
3.3
Calculate the selling price of product Beta (for each of the two transfer methods).
3.4
Explain two drawbacks of using variable cost transfer prices.
35
MANCOSA
TOPIC 9
CORPORATE GOVERNANCE
1.
The King Report states that contracts of directors of companies should not extend to more
than three years and that these contracts should no longer be open-ended. Do you agree
with this recommendation? Motivate your answer.
2.
Explain how the board of directors of a company should manage the company's ethics
performance.
3.
How can the board (of directors) ensure that the company acts as a responsible
corporate citizen?
4.
Explain the role played by internal audit in a company and also explain the responsibility
of the board in this regard.
5.
What steps may be taken by a company to ensure that appropriate persons are
appointed as directors?
6.
The board is not only responsible for the companys financial bottom line, but for the
companys performance in respect of its triple bottom line. Explain what you
understand by triple bottom line.
7.
A director is a steward of the company. The ethics of governance requires that in this
stewardship role, each director be faithful to the four basic ethical values of good
corporate governance (responsibility, accountability, fairness and transparency). In
performing their stewardship role directors need to exercise the following five moral
duties: conscience, care, competence, commitment and courage. Explain what is
meant by each of these five moral duties.
8.
Explain the function of external auditors.
36
MANCOSA
APPENDIX 1
Present value of R1: PVFA (k,n) =
Number
of
Periods
1
2
3
4
5
1%
2%
3%
4%
5%
6%
7%
8%
9%
10%
11%
12%
13%
14%
15%
16%
17%
18%
19%
0.9901
0.9803
0.9706
0.9610
0.9515
0.9804
0.9612
0.9423
0.9238
0.9057
0.9709
0.9426
0.9151
0.8885
0.8626
0.9615
0.9246
0.8890
0.8548
0.8219
0.9524
0.9070
0.8638
0.8227
0.7835
0.9434
0.8900
0.8396
0.7921
0.7473
0.9346
0.8734
0.8163
0.7629
0.7130
0.9259
0.8573
0.7938
0.7350
0.6806
0.9174
0.8417
0.7722
0.7084
0.6499
0.9091
0.8264
0.7513
0.6830
0.6209
0.9009
0.8116
0.7312
0.6587
0.5935
0.8929
0.7972
0.7118
0.6355
0.5674
0.8850
0.7831
0.6931
0.6133
0.5428
0.8772
0.7695
0.6750
0.5921
0.5194
0.8696
0.7561
0.6575
0.5718
0.4972
0.8621
0.7432
0.6407
0.5523
0.4761
0.8547
0.7305
0.6244
0.5337
0.4561
0.8475
0.7182
0.6086
0.5158
0.4371
0.8403
0.7062
0.5934
0.4987
0.4190
6
7
8
9
10
0.9420
0.9327
0.9235
0.9143
0.9053
0.8880
0.8706
0.8535
0.8368
0.8203
0.8375
0.8131
0.7894
0.7664
0.7441
0.7903
0.7599
0.7307
0.7026
0.6756
0.7462
0.7107
0.6768
0.6446
0.6139
0.7050
0.6651
0.6274
0.5919
0.5584
0.6663
0.6227
0.5820
0.5439
0.5083
0.6302
0.5835
0.5403
0.5002
0.4632
0.5963
0.5470
0.5019
0.4604
0.4224
0.5645
0.5132
0.4665
0.4241
0.3855
0.5346
0.4817
0.4339
0.3909
0.3522
0.5066
0.4523
0.4039
0.3606
0.3220
0.4803
0.4251
0.3762
0.3329
0.2946
0.4556
0.3996
0.3506
0.3075
0.2697
0.4323
0.3759
0.3269
0.2843
0.2472
0.4104
0.3538
0.3050
0.2630
0.2267
0.3898
0.3332
0.2848
0.2434
0.2080
0.3704
0.3139
0.2660
0.2255
0.1911
0.3521
0.2959
0.2487
0.2090
0.1756
0.3349
0.2791
0.2326
0.1938
0.1615
0.2621
0.2097
0.1678
0.1342
0.1074
11
12
13
14
15
0.8963
0.8874
0.8787
0.8700
0.8613
0.8043
0.7885
0.7730
0.7579
0.7430
0.7224
0.7014
0.6810
0.6611
0.6419
0.6496
0.6246
0.6006
0.5775
0.5553
0.5847
0.5568
0.5303
0.5051
0.4810
0.5268
0.4970
0.4688
0.4423
0.4173
0.4751
0.4440
0.4150
0.3878
0.3624
0.4289
0.3971
0.3677
0.3405
0.3152
0.3875
0.3555
0.3262
0.2992
0.2745
0.3505
0.3186
0.2897
0.2633
0.2394
0.3173
0.2858
0.2575
0.2320
0.2090
0.2875
0.2567
0.2292
0.2046
0.1827
0.2607
0.2307
0.2042
0.1807
0.1599
0.2366
0.2076
0.1821
0.1597
0.1401
0.2149
0.1869
0.1625
0.1413
0.1229
0.1954
0.1685
0.1452
0.1252
0.1079
0.1778
0.1520
0.1299
0.1110
0.0949
0.1619
0.1372
0.1163
0.0985
0.0835
0.1476
0.1240
0.1042
0.0876
0.0736
0.1346
0.1122
0.0935
0.0779
0.0649
0.0859
0.0687
0.0550
0.0440
0.0352
16
17
18
19
20
0.8528
0.8444
0.8360
0.8277
0.8195
0.7284
0.7142
0.7002
0.6864
0.6730
0.6232
0.6050
0.5874
0.5703
0.5537
0.5339
0.5134
0.4936
0.4746
0.4564
0.4581
0.4363
0.4155
0.3957
0.3769
0.3936
0.3714
0.3503
0.3305
0.3118
0.3387
0.3166
0.2959
0.2765
0.2584
0.2919
0.2703
0.2502
0.2317
0.2145
0.2519
0.2311
0.2120
0.1945
0.1784
0.2176
0.1978
0.1799
0.1635
0.1486
0.1883
0.1696
0.1528
0.1377
0.1240
0.1631
0.1456
0.1300
0.1161
0.1037
0.1415
0.1252
0.1108
0.0981
0.0868
0.1229
0.1078
0.0946
0.0829
0.0728
0.1069
0.0929
0.0808
0.0703
0.0611
0.0930
0.0802
0.0691
0.0596
0.0514
0.0811
0.0693
0.0592
0.0506
0.0433
0.0708
0.0600
0.0508
0.0431
0.0365
0.0618
0.0520
0.0437
0.0367
0.0308
0.0541
0.0451
0.0376
0.0313
0.0261
0.0281
0.0225
0.0180
0.0144
0.0115
25
30
40
50
60
0.7798
0.7419
0.6717
0.6080
0.5504
0.6095
0.5521
0.4529
0.3715
0.3048
0.4776
0.4120
0.3066
0.2281
0.1697
0.3751
0.3083
0.2083
0.1407
0.0951
0.2953
0.2314
0.1420
0.0872
0.0535
0.2330
0.1741
0.0972
0.0543
0.0303
0.1842
0.1314
0.0668
0.0339
0.0173
0.1460
0.0994
0.0460
0.0213
0.0099
0.1160
0.0754
0.0318
0.0134
0.0057
0.0923
0.0573
0.0221
0.0085
0.0033
0.0736
0.0437
0.0154
0.0054
0.0019
0.0588
0.0334
0.0107
0.0035
0.0011
0.0471
0.0256
0.0075
0.0022
0.0007
0.0378
0.0196
0.0053
0.0014
0.0004
0.0304
0.0151
0.0037
0.0009
0.0002
0.0245
0.0116
0.0026
0.0006
0.0001
0.0197
0.0090
0.0019
0.0004
0.0001
0.0160
0.0070
0.0013
0.0003
*
0.0129
0.0054
0.0010
0.0002
*
0.0105
0.0042
0.0007
0.0001
*
0.0038
0.0012
0.0001
*
*
37
MANCOSA
20%
0.8333
0.6944
0.5787
0.4823
0.4019
25%
0.8000
0.6400
0.5120
0.4096
0.3277
APPENDIX 2
Present value of a regular annuity of R1 per period for n periods : PVFA (k,n) =
i=1
Number
of
Periods
1
2
3
4
5
1%
2%
3%
4%
5%
6%
7%
8%
9%
10%
11%
12%
13%
14%
15%
16%
17%
18%
19%
0.9901
1.9704
2.9410
3.9020
4.8534
0.9804
1.9416
2.8839
3.8077
4.7135
0.9709
1.9135
2.8286
3.7171
4.5797
0.9615
1.8861
2.7751
3.6299
4.4518
0.9524
1.8594
2.7232
3.5460
4.3295
0.9434
1.8334
2.6730
3.4651
4.2124
0.9346
1.8080
2.6243
3.3872
4.1002
0.9259
1.7833
2.5771
3.3121
3.9927
0.9174
1.7591
2.5313
3.2397
3.8897
0.9091
1.7355
2.4869
3.1699
3.7908
0.9009
1.7125
2.4437
3.1024
3.6959
0.8929
1.6901
2.4018
3.0373
3.6048
0.8850
1.6681
2.3612
2.9745
3.5172
0.8772
1.6467
2.3216
2.9137
3.4331
0.8696
1.6257
2.2832
2.8550
3.3522
0.8621
1.6052
2.2459
2.7982
3.2743
0.8547
1.5852
2.2096
2.7432
3.1993
0.8475
1.5656
2.1743
2.6901
3.1272
0.8403
1.5465
2.1399
2.6386
3.0576
0.8333
1.5278
2.1065
2.5887
2.9906
6
7
8
9
10
5.7955
6.7282
7.6517
8.5660
9.4713
5.6014
6.4720
7.3255
8.1622
8.9826
5.4172
6.2303
7.0197
7.7861
8.5302
5.2421
6.0021
6.7327
7.4353
8.1109
5.0757
5.7864
6.4632
7.1078
7.7217
4.9173
5.5824
6.2098
6.8017
7.3601
4.7665
5.3893
5.9713
6.5152
7.0236
4.6229
5.2064
5.7466
6.2469
6.7101
4.4859
5.0330
5.5348
5.9952
6.4177
4.3553
4.8684
5.3349
5.7590
6.1446
4.2305
4.7122
5.1461
5.5370
5.8892
4.1114
4.5638
4.9676
5.3282
5.6502
3.9975
4.4226
4.7988
5.1317
5.4262
3.8887
4.2883
4.6389
4.9464
5.2161
3.7845
4.1604
4.4873
4.7716
5.0188
3.6847
4.0386
4.3436
4.6065
4.8332
3.5892
3.9224
4.2072
4.4506
4.6586
3.4976
3.8115
4.0776
4.3038
4.4941
3.4098
3.7057
3.9544
4.1633
4.3389
3.3255
3.6046
3.8372
4.0310
4.1925
11
12
13
14
15
10.3676
11.2551
12.1337
13.0037
13.8651
9.7868
10.5753
11.3484
12.1062
12.8493
9.2526
9.9540
10.6350
11.2961
11.9379
8.7605
9.3851
9.9856
10.5631
11.1184
8.3064
8.8633
9.3936
9.8986
10.3797
7.8869
8.3838
8.8527
9.2950
9.7122
7.4987
7.9427
8.3577
8.7455
9.1079
7.1390
7.5361
7.9038
8.2442
8.5595
6.8052
7.1607
7.4869
7.7862
8.0607
6.4951
6.8137
7.1034
7.3667
7.6061
6.2065
6.4924
6.7499
6.9819
7.1909
5.9377
6.1944
6.4235
6.6282
6.8109
5.6869
5.9176
6.1218
6.3025
6.4624
5.4527
5.6603
5.8424
6.0021
6.1422
5.2337
5.4206
5.5831
5.7245
5.8474
5.0286
5.1971
5.3423
5.4675
5.5755
4.8364
4.9884
5.1183
5.2293
5.3242
4.6560
4.7932
4.9095
5.0081
5.0916
4.4865
4.6105
4.7147
4.8023
4.8759
4.3271
4.4392
4.5327
4.6106
4.6755
16
17
18
19
20
14.7179
15.5623
16.3983
17.2260
18.0456
13.5777
14.2919
14.9920
15.6785
16.3514
12.5611
13.1661
13.7535
14.3238
14.8775
11.6523
12.1657
12.6593
13.1339
13.5903
10.8378
11.2741
11.6896
12.0853
12.4622
10.1059
10.4773
10.8276
11.1581
11.4699
9.4466
9.7632
10.0591
10.3356
10.5940
8.8514
9.1216
9.3719
9.6036
9.8181
8.3126
8.5436
8.7556
8.9501
9.1285
7.8237
8.0216
8.2014
8.3649
8.5136
7.3792
7.5488
7.7016
7.8393
7.9633
6.9740
7.1196
7.2497
7.3658
7.4694
6.6039
6.7291
6.8399
6.9380
7.0248
6.2651
6.3729
6.4674
6.5504
6.6231
5.9542
6.0472
6.1280
6.1982
6.2593
5.6685
5.7487
5.8178
5.8775
5.9288
5.4053
5.4746
5.5339
5.5845
5.6278
5.1624
5.2223
5.2732
5.3162
5.3527
4.9377
4.9897
5.0333
5.0700
5.1009
4.7296
4.7746
4.8122
4.8435
4.8696
25
30
40
50
60
22.0232
25.8077
32.8347
39.1961
44.9550
19.5235
22.3965
27.3555
31.4236
34.7609
17.4131
19.6004
23.1148
25.7298
27.6756
15.6221
17.2920
19.7928
21.4822
22.6235
14.0939
15.3725
17.1591
18.2559
18.9293
12.7834
13.7648
15.0463
15.7619
16.1614
11.6536
12.4090
13.3317
13.8007
14.0392
10.6748
11.2578
11.9246
12.2335
12.3766
9.8226
10.2737
10.7574
10.9617
11.0480
9.0770
9.4269
9.7791
9.9148
9.9672
8.4217
8.6938
8.9511
9.0417
9.0736
7.8431
8.0552
8.2438
8.3045
8.3240
7.3300
7.4957
7.6344
7.6752
7.6873
6.8729
7.0027
7.1050
7.1327
7.1401
6.4641
6.5660
6.6418
6.6605
6.6651
6.0971
6.1772
6.2335
6.2463
6.2402
5.7662
5.8294
5.8713
5.8801
5.8819
5.4669
5.5168
5.5482
5.5541
5.5553
5.1951
5.2347
5.2582
5.2623
5.2630
4.9476
4.9789
4.9966
4.9995
4.9999
38
MANCOSA
20%
TOPIC 1
ACCOUNTING INFORMATION AND MANAGERIAL
DECISIONS
1.1
Customers: To assess the ability of the business to continue in business and satisfy the
needs of customers.
1.2
Suppliers: To assess the ability of the business to pay for the goods and services
provided.
1.3
Government: To assess the amount of tax the business should pay.
1.4
Owners: To assess how effectively the business is managed and to make judgements
about likely levels of risk and return in the future.
1.5
Lenders: To assess the ability of the business to pay interest and the principal sum lent.
1.6
Employees: To assess the ability of the business to provide employment and to reward
them for their labour.
1.7
Investment analysts: To assess the possible risks and returns associated with the
business in order to determine its investment potential so that they could advise their
clients accordingly.
1.8
Community representatives: To assess the ability of the business to continue to

provide employment for the community and use community resources, to engage in
corporate social responsibility projects etc.
1.9
Managers: To assist them in making decisions and plans for the business and to help
them to exercise control to ensure that plans succeed.
2.
The main duty of external auditors is to report to shareholders and others whether, in
their opinion, the financial statements show a true and fair view, and comply with
statutory, regulatory and accounting standard requirements.
The role of internal auditors is to provide an independent appraisal function within an
organisation to examine and evaluate its activities as a service to the organisation with
the aim of assisting members of the organisation in the effective discharge of their
responsibilities.
39
MANCOSA

3.
Management accounting
Financial accounting
User groups
Internal users: Managers
External: Owner(s); Lenders,

Creditors; Investors
Nature of reports
Reports tend to be specific usually
Reports tend to be general-purpose
with some decision in mind.
useful to a wide range of users.
Legal
Management accounting reports are
Financial reports are required by law
requirements
not required by law since they are for
and are also regulated in terms of
internal use only.
content and format.
Management accounting reports are
Financial reports must conform to the
not subject to the practices and
practices and principles set by
principles of GAAP (Generally
GAAP.
GAAP
Accepted Accounting Practice).

Time focus
The emphasis is on the future but
It reflects on the financial result and
also provides information on past
financial position for the past period.
performance.
Nature of
Information used may be less
Objective and verifiable information
information
objective and verifiable.
is needed to prepare reports.
Frequency of
Reports are produced as often as
Reports are produced annually
reporting
required by managers even on a
although some businesses prepare
weekly basis.
half-yearly or even quarterly reports.
Focus on the
Focuses on parts of the business
Focuses on the performance of the
whole or parts of
e.g. a certain department as well as
business as a whole.
the business
the business as a whole.
4.
Managers will at times be interested in the historic overview of business operations of

the sort provided to other users. Equally, other users would be interested in receiving
information relating to the future e.g. profit forecasts, non-financial information such as
product innovations.
Etc
40
MANCOSA
TOPIC 2
FINANCIAL STATEMENTS AND ACCOUNTING CONCEPTS
1.
Due to the practice of adhering to the recognition of revenue concept, accrual concept
and matching concept, revenue and expenses are not the same as cash received and
cash paid and the net profit does not normally reflect the net cash flows for the period.
Although making a profit will increase wealth, cash is only one form in which wealth may
be held. Wealth may also be held in other forms such as inventory, land and buildings,
equipment etc.
2.
The net profit in the income statement also appears in the statement of changes in
equity as an addition to retained earnings. The net profit also affects the retained
earnings component of equity in the balance sheet.
The statement of changes in equity and balance sheet are integrated. The retained
earnings also appear as part of equity in the balance sheet.
The balance sheet and the statement of cash flows are also integrated. The cash that
appears in the balance sheet also appears as the end of the financial year cash in the
statement of cash flows.
3.
3.1
Materiality
The materiality principle urges one to disclose significant matters in the financial reports
and to eliminate trivial details. What may be significantly material in one instance to
warrant full disclosure may not justify complete reporting in another circumstance. For
instance, an item involving R1 000 may be material enough to justify full disclosure for a
small business, but would probably not justify disclosure as a separate item for a
company as large as, say, Samsung. No objective test of materiality exists. Deciding
what is material or not depends largely on management policy.
41
MANCOSA

3.2
Conservatism
This principle calls for a conservative approach on the part of the accountant in his/her
estimations, opinions and selection of procedure. Losses should be recognized and
reflected in the financial statements if a reasonable likelihood exists that they may occur.
On the other hand, anticipated gains and other financial benefits should not be realized.
A drawback of this principle is that it may make the business appear to be in a more
unfavourable position than is actually the case.
4.
4.1
Going concern
The balance sheet is prepared on the assumption that the entity will continue to operate in
the future. If for example the entity is aware of its intention to liquidate, the amounts
shown in the balance would now have to show the liquidation values.
4.2
Full disclosure
Lack of full disclosure by not including all the necessary information in the balance sheet
may result in its users being misled or making inappropriate decisions. For example
certain explanations or notes about investments may be omitted.
4.3
Consistency
This concept is important when making trend comparisons of the balance sheet for
several years. For example, the change in the valuation method of inventories would
make trend comparison difficult.
42
MANCOSA

5.
5.1
Assets
Equipment Inventory Receiv.
Bank =
+90 000
+50 000
Equity
=
Capital
+ Liabilities
Income Expenses +
+90 000
-50 000
-4 000
-5 000
+50 000
Payables
+4 000
-5 000
+10 000
+10 000
+45 000
+90 000 +10 000
-9 000
+4 000
5.2.1
Gwala Stores
INCOME STATEMENT FOR THE MONTH ENDED
31 AUGUST 20.9
R
Revenue
10 000
Expenses
(9 000)
Net profit
1 000
5.2.2
Gwala Stores
STATEMENT OF CHANGES IN EQUITY FOR THE
MONTH ENDED 31 AUGUST 20.9
Opening balance
Additional capital contributed
Net profit
Closing balance
0
90 000
1 000
91 000
43
MANCOSA

5.2.3
Gwala Stores
BALANCE SHEET AT 31 AUGUST 20.9
ASSETS
Non-current assets:
Property, plant and equipment
50 000
Current assets:
Cash
45 000
Total assets
95 000

Equity
91 000
Current liabilities:
Accounts payable
4 000
95 000
5.2.4
Gwala Stores
STATEMENT OF CHANGES IN CASH FLOWS FOR THE MONTH ENDED
31 AUGUST 20.9
R
Cash flows from operating activities
5 000
Net profit
1 000

Increase in accounts payable
4 000
Cash flows from investing activities
(50 000)
Purchase of plant, machinery and equipment
(50 000)
Cash flows from financing activities
90 000
Capital contributed
90 000
Net increase in cash for the year
45 000
Cash (opening balance)

Cash (closing balance)
0
45 000
44
MANCOSA
TOPIC 3
ACCOUNTING FOR AND PRESENTATION OF ASSETS,
LIABILITIES AND OWNERS EQUITY
1.1.1 NON-CURRENT ASSETS
Land and buildings

Plant and equipment
Less: Depreciation
450 000
750 000
(200 000)
550 000
1 000 000
1.1.2 RETAINED EARNINGS

Balance (31 December 20.8)
Net profit
Dividends
Balance (31 December 20.9)
1.1.3 TOTAL OWNERS EQUITY
R
0
250 000
(220 000)
30 000
Ordinary share capital (900 000 + 400 000) 1 300 000

Share premium
Retained earnings
200 000
30 000
1 530 000
1.1.4 NON-CURRENT LIABILITIES
Mortgage bond (287 500 25 000)
262 500
Long-term loan (595 000 75 000)
520 000
782 500
45
MANCOSA

1.2
The percentage cash discount, when converted to an annualised return on

investment, can be a very attractive return.
The creditworthiness of a company, when evaluated by credit rating agencies and
credit grantors, is affected by its consistent use of cash discounts.
Etc.
1.3
If Pixma Limited can borrow money at an interest rate of, say, 12% and use the
money to purchase assets that realise a return that is greater than 12%, then the
shareholders will get a greater return on investment than if they provided the
funding.
1.4
1.4.1 Cheques must be signed by two persons.
Payments should only be made when supported by authorized vouchers.
Etc
1.4.2 Proper records must be kept of all stock received and issued.
Requests for stock from the warehouse must be authorised.
Security cameras may be installed.
Etc
2.
Four decisions
*The cost of asset (e.g. whether to include interest charges or not)
*The expected residual or disposal value of the asset
*The expected useful life of the asset
*The choice of the depreciation method
*The percentage per annum
Effect on reported profits
Making different choices for the above matters will result in a different pattern of
depreciation charges over the life of the asset and therefore a different pattern of
reported profits.
46
MANCOSA

3.1
FIFO will show the highest gross profit because sales are matched with the earlier (and
cheaper) purchases.
3.2
LIFO will show the lowest gross profit because sales are matched with the more recent
(costlier) purchases.
3.3
The AVCO method will usually give a figure which is between these two extremes.
3.4
The closing inventory figure in the balance sheet will be highest with the FIFO method.
This is because the cost of inventory still held will be based on the more recent (and
costlier) purchases.
3.5
The closing inventory figure in the balance sheet will be lowest with the LIFO method.
This is because the cost of inventory still held will be based on the earlier (and cheaper)
purchases.
3.6
4.
The AVCO method will usually give a figure between these two extremes.
*The inventory is damaged or deteriorated.

*The inventory is obsolete.
*The market price of the inventory has fallen.
*The inventory item is being used as a loss leader.
5.
The effect would be to overstate the assets (debtors/accounts receivable) in the balance
sheet and to overstate profit in the income statement as the loss/expense (which has
been recognized) will not result in any future benefits.
6.
6.1
The amount owing by any customer is typically shown as an asset (accounts receivable).
However, since the debtor is unable to pay, the item cannot provide future benefits and
the R4 000 owing would not be regarded as an asset.
6.2
The hiring of a new marketing manager cannot be considered as an acquisition of an

asset. One reason is that the business does not have exclusive rights of control over
that manager (perhaps only to his/her services). Furthermore the value of the manager
cannot be measured in monetary terms with any degree of reliability.
6.3
The machine can be considered as an asset even if it has not yet been paid for. Once
the business has agreed to purchase the machine and has accepted it, the machine is
legally owned by the business even if payment is still outstanding.
47
MANCOSA

7.
7.1
Manhattan Ltd
Balance Sheet at 30 November 20.9
ASSETS
Non-current assets
565 000
Land and buildings
320 000
Plant and equipment
207 000
Motor vehicles
38 000
Current assets
338 000
Inventories
153 000
Accounts receivable
185 000
Total assets
903 000

Equity
441 000
260 000
Loan from Kia Bank
260 000
202 000
Accounts payable
86 000
Bank overdraft
116 000
903 000
7.2.1
The liquidity of the business

Liquid assets amounting to R338 000 (R153 000+R185 000) is available to meet the
short-term obligations of R202 000 (R86 000+R116 000). Whilst the liquid assets are
greater, none of it is cash and furthermore it is not easy to convert inventories to cash at
short notice. Also, a large amount is tied up in accounts receivable and if debtors do not
abide by the credit terms and/or if credit terms are greater than 30 days, the business
may experience liquidity problems.
48
MANCOSA

7.2.2 The mix between current and non-current assets
Current assets total R338 000 whilst the non-current assets equal R565 000. When too
much of funds are tied up in non-current assets, the business could be vulnerable to
business failure. This is because non-current assets are typically not easy to turn into
cash in order to meet short-term debts. Converting many non-current assets into cash
may lead to substantial losses as such assets are not always worth in the open market
what the business paid for them or what they may be worth to the business.
7.2.3 The financial structure of the balance sheet

The own capital (equity) is 1.70 times greater than the outside capital (long-term liability).
However, the long-term liability of R260 000 brings with it the obligation to pay interest
and make large capital repayments at regular intervals.
49
MANCOSA
TOPIC 4
INCOME STATEMENT AND CASH FLOWS
1.
Edgar Limited
1.1
Earnings per share =
R77 000
X 100c
200 000
= 38.5 cents
No. EPS has dropped by 6.5 cents.
1.2
R6 000 = 15%
Loan balance = R6 000 X 100 15
= R40 000
1.3
Gross profit ratio =
Gross profit
X 100
Net sales
=
R263 200
X 100
R470 000
= 56%
- Goods may have been sold below the normal selling price.
- Monthly or seasonal sales may have been held.
- Some goods may have been incorrectly priced (lower).
1.4
- Negotiate with suppliers for higher discounts, to reduce costs.

- Seek alternative suppliers for better deals.
- Use substitute materials but do not compromise quality.
- Reduce administrative expenses by cutting down on overtime.
- Pay off the loan as soon as possible to reduce interest expense.
50
MANCOSA

2.
MVP Ltd
2.1
Sales reflect the amount an enterprise earns by selling its products. It is

revenue generated through the enterprises primary operating activities.
Other income is not directly related to the enterprises primary operating
activities. They are considered non-operating items and are reported
separately on the income statement, example interest on investment.
2.2
Competition is one factor that will prevent it from doing so.

The products must be also be priced at amounts that customers are willing
to pay.
2.3
Cost of sales refers to the cost to the enterprise of goods sold to customers.
It is an expense linked directly with the revenue generated through sales.
Operating expenses are costs of resources incurred as part of operating
activities that are not directly associated with specific goods.
Other expenses are expenses not directly related to the enterprises
primary operating activities. They are considered non-operating items.
2.4
A separate disclosure is required as each item is relevant to various decision

makers (concept of materiality). If they were grouped together it would
diminish the ability of decision-makers to make important economic
decisions. The separate listing also distinguishes expenses that result from
the enterprises primary operating activities.
2.5
The income statement of the previous year is not provided to enable one to
make a comparison of the performance of the enterprise over the past year.
Income statements of the previous years will enable users to do a trend
analysis.
51
MANCOSA

3.
Afri Manufacturers Ltd

The performance of the company in 20.9 appears lacklustre compared to 20.8. The
profit after tax dropped from R37 100 to R28 000. Since profit is a function of turnover,
lets examine the profits of both years in relation to their respective turnovers. The ratio
of profit to sales (profit margin) for 20.9 was 2.79% whilst that of 20.8 was 4.12%. The
previous year performance appears better. However, when one compares the profit
margins achieved to the industry average, one finds that the companys performance in
20.8 was below the industry average of 4.51% whereas in 20.9 the performance was
better than the industry (2.60%). Operating profit on sales decreased from 10.21% to
0.60%.
Etc
4.
Change in balance sheet items
Inflow of cash
Increase in current assets other than cash

Decrease in current assets other than cash

Increase in non-current assets

Decrease in non-current assets
Increase in current liabilities

Decrease in current liabilities

Increase in non-current liabilities
Decrease in non-current liabilities
Outflow of cash

5.
Vuyo Limited
5.1
The operating activities the company yielded a positive inflow of funds of R100 000.
It has sufficient funds to finance its day-to-day activities.
5.2
A debtor pays an amount owed.

A bank loan is received.
Additional capital is raised.
Etc
52
MANCOSA

5.3
Yes.
It is a sign of both good performance and growth.
The excess cash from operating activities is available for the purchase of plant
and equipment.
The value of the company increases as it grows.
As the company expands by purchasing additional assets, more products are
produced and sold, which in turn improves profitability and operating cash flows.
6.
Mega Ltd
6.1
Cash flows from operating and investing activities were used to redeem longterm borrowings.
6.2
Depreciation expense does not require the payment of cash (non-cash item) and
is thus added to profit to determine cash flows.
An increase in payables implies that resources have been used but payment has
not been made. Increase in payables is added to profit to calculate operating
cash flow.
6.3
The indirect method is used.

The indirect method explains cash flows from operating activities by explaining
the change in each of the non-cash operating accounts in the balance sheet.
The direct method explains how much cash was received or paid during the
year for each item reported. It thus reflects (as operating activities) cash
received from customers, cash paid to merchandise suppliers, cash paid to
employees and cash paid for operating expenses.
6.4
The company does not appear to be performing well.

Its cash flow from operations (R33 980) is significantly lower that its operating profit
(R61 047).
The increase in merchandise suggests that the company was not selling the inventory it
was purchasing fast enough.
The increase in receivables suggests that the company was experiencing difficulty in
collecting from its customers.
The increase in payables implies that the company was having difficulty in paying its
suppliers.
53
MANCOSA

The sale of plant and equipment to generate cash is a sign of poor financial
performance.
The cash from operating activities was inadequate to meet its obligations resulting in the
sale of assets to raise cash.
In the long-term the company cannot continue selling assets to repay debt.
7.
Siya Limiteds operations appear to be quite profitable (Cash generated from operating
activities is R270 000). The company appears to be on an expansion spree. The
companys expansion is most likely funded by the issue of shares (R750 000) and the
divestment of non-current investment (R250 000) although funds were available from
operations
(R270 000) and long term borrowings (R50 000). The company seems to be building up
a large cash balance. One needs to explore the reasons for increasing the cash
balance.
54
MANCOSA

8.
Asic Ltd
CASH FLOW STATEMENT FOR THE YEAR ENDED 31 DECEMBER 20.6
R
Cash flows from operating activities
200 715
Profit before interest and tax (Operating profit) (a)
201 000
Adjustments to convert to cash from operations

Non-cash flow adjustments
Add: Depreciation (b)
Loss on disposal of asset (c)
102 000
81 000
21 000
303 000
(2 640)
Increase in inventory (d)
(990)
Decrease in receivables (e)
14 970
Decrease in payables (f)
(16 620)
Cash generated from operations
300 360
Interest paid (g)
(3 900)
Investment income (h)
24 600
Dividends paid (i)
(57 750)
Income tax paid (j)
(62 595)
(240 015)
Investment in listed shares (k)
(21 525)
Investment in subsidiary company (l)
(25 500)
Non-current assets purchased (m)
(209 490)
Proceeds from sale of equipment (n)
16 500
45 000
Proceeds from issue of ordinary shares (o)

Long-term borrowings redeemed (p)
150 000
(105 000)
5 700
Cash and cash equivalents at beginning of year (q)
(7 500)
Cash and cash equivalents at end of year (r)
(1 800)
55
MANCOSA

Calculations and explanatory notes:
(a)
Profit before interest and tax

This amount is obtained from the Income statement (operating profit).
(b)
Depreciation
The amount is obtained from the Income statement.
(c)
Loss on disposal of asset

(d)
Increase in inventory
The increase is calculated by comparing the inventory figures for both years:
R120 690 R119 700 = R990 (The amount is bracketed as it represents a use of cash.)
(e)
Decrease in receivables
The decrease is calculated by comparing the Trade and other receivables figures for
both years:
R82 305 R67 335 = R14 970 (The amount represents a source of cash.)
(f)
Decrease in payables
The decrease is calculated by comparing the Trade and other payables figures for both
years:
R59 805 R43 185 = R16 620 (The amount is bracketed as it represents a use of cash.)
(g)
Interest paid
(h)
Investment income
56
MANCOSA

(i)
Dividends paid
The amount paid is calculated as follows:
Dividends due on 31 December 20.5
(39 000)
Dividends for the year
(69 450)
Dividends due on 31 December 20.6
50 700
(57 750)
Note:
Dividends due on 31 December 20.5/20.6 is obtained from the item Shareholders for
dividends in the Balance sheet.
Dividends for the year are obtained from the Statement of changes in equity:
R13 200 + R21 000 + R35 250 = R69 450
(j)
Income tax paid

The amount paid is calculated as follows:
Income tax due on 31 December 20.5
(30 000)
Income tax for the year
(77 595)
Income tax due on 31 December 20.6
45 000
(62 595)
Note:
Income tax due on 31 December 20.5/20.6 is obtained from the item South African
Revenue Services in the Balance sheet.
Income tax for the year is obtained from the Income statement.
(k)
Investment in listed shares

The amount is calculated by comparing the figures for Investment Listed shares (in
the Balance sheet) for both years:
R120 000 R98 475= R21 525 (The amount is bracketed as it represents a use of
cash.)
57
MANCOSA

(l)
Investment in subsidiary company

The amount is calculated by comparing the figures for Investment Subsidiary
company (in the Balance sheet) for both years:
R85 500 R60 000= R25 500 (The amount is bracketed as it represents a use of cash.)
(m)
Non-current assets purchased

The amount is obtained by using the figures for both years for Land and buildings and
Equipment in the Balance sheet and after consideration was given to the additional
information:
Land and buildings purchased: R462 000 R346 500 = R115 500
Equipment purchase is calculated as follows:
Carrying value of equipment on 31 December 20.5
143 100
Additions (Purchase of equipment)
*93 990
Disposals at carrying value (Cost R39 750 Acc. dep. R2 250)
(37 500)
Depreciation (R45 000 R2 250) (R82 500)
(39 750)
Carrying value of equipment on 31 December 20.6
159 840
*Purchase of equipment is calculated as follows:

(R143 100 R37 500 R39 750) (R159 840) = R93 990
Non-current assets purchased = R115 500 + R93 990 = R209 490
(n)
Proceeds from sale of equipment

The amount is calculated by using figures from the Income statement (Loss on sale of
equipment) and after consideration was given to the additional information:
Carrying value of equipment sold is :
Cost R39 750 Acc. dep. R2 250 = R37 500
However, the equipment was sold at a loss of R21 000. Therefore the proceeds from
the sale of equipment is R16 500 (R37 500 R21 000).
(o)
Proceeds from issue of ordinary shares

The amount is obtained from the Statement of changes in equity.
58
MANCOSA

(p)
Long-term borrowings redeemed

The amount is obtained by comparing the figures for both years for 13% Debentures
(Long-term borrowings) in the Balance sheet:
R135 000 R30 000 = R105 000 (The amount is bracketed as it represents a use of
cash.)
(q)
Cash and cash equivalents at beginning of year

This is calculated by using the figures for Cash and cash equivalents and Bank overdraft
as at 31 December 20.5:
(r)
1 500
Bank overdraft
(9 000)
Net unfavourable balance
(7 500)
Cash and cash equivalents at end of year

This is calculated by using the figures for Cash and cash equivalents and Bank overdraft
as at 31 December 20.6:
900
Bank overdraft
(2 700)
Net unfavourable balance
(1 800)
Other calculations

R201 000 + R102 000 = R303 000
Cash generated from operations:

R303 000 R2 640 = R300 360
Cash flows from operating activities:

R300 360 R3 900 + R24 600 R57 750 R62 595 = R200 715

This amount can be calculated by comparing the cash balances of 20.5 and 20.6 i.e. a
net unfavourable balance of R7 500 (20.5) turned into a net unfavourable balance of
R1 800 (20.6) resulting in a net increase in cash and cash equivalents of R5 700.
The net increase can be verified as follows:
R200 715 R240 015 + R45 000 = R5 700
59
MANCOSA
TOPIC 5
FINANCIAL ANALYSIS
1.1
20.10
Gross margin =
20.9
Gross profit
Sales
Gross margin =
X 100
1
R5 831 400
R1 931 200
R32 011 500
Operating margin
X 100
1
X 100
Operating profit
Sales
R1 327 800
R19 373 000
X 100
1
X 100
1
= 6.85%
20.10
20.9
Profit margin
Profit margin
= Net profit after tax X 100

Sales
R1 373 550
R32 011 500
= Net profit after tax X 100
1
X 100
1
= 4.29%
1.2
20.9
= 6.03%
X 100
= 17.44%
Operating margin
R19 373 000
20.10
Sales
R3 379 300
= 18.22%
Operating profit
X 100
Sales
X 100
R32 011 500
Gross profit
Sales
=
R919 820
R19 373 000
1
X 100
1
= 4.75%
Gross margin has increased marginally while operating margin and profit margin
showed a slight decrease. The cost of sales is high in relation to sales. It thus
appears that Zebcom Enterprises is operating on very low profit margins. Operating
expenses does appear to be high as there is a large difference between the gross
margin and profit margin.
60
MANCOSA

20.10
1.3
20.9
Current ratio
=
Current ratio
Current assets
Current liabilities
=
Current assets
Current liabilities
R2 866 530
R4 974 530
R1 088 860
=
R588 310
2.63:1
20.10
20.9
Acid test ratio

=
Acid test ratio
Current assets Inventory
Current assets Inventories
Current liabilities
=
8.46:1
R2 866 530 R1 482 200
Current liabilities
=
R4 974 530 R2 038 860
R1 088 860
= 1.27:1
R588 310
= 4.99:1
The liquidity has deteriorated considerably from the previous year. However, one
could say that high liquidity ratios for 20.9 may point towards slack management in
respect of the inventories and idle cash. The ratios for 20.10 have dropped to more
acceptable levels.
20.10
1.4
Inventory turnover
=
Cost of sales
Average inventory
R26 180 100

R1 760 530
14.87 times
N.B. Average inventory = (R1 482 200 + R2 038 860) 2 = R1 760 530
61
MANCOSA

20.10
Debtor collection period
= Accounts receivable X 365
Credit sales
=
R261 290
X 365
R3 201 150
= 29.79 days
20.10
Creditor payment period
= Accounts payable X 365
Credit purchases
=
R190 660
X 365
R2 562 344
= 27.16 days
Note: Credit purchases are calculated as follows:

R
Cost of sales
Add: Closing inventory
26 180 100
1 482 200
27 662 300
Less opening inventory
(2 038 860)
Total purchases
25 623 440
Credit purchases = 10% of R25 623 440 = R2 562 344
62
MANCOSA

20.10
Turnover to net assets
Sales
Net assets
=
R32 011 500

R8 066 530 R1 088 860
R32 011 500

R6 977 670
= 4.59:1
1.5
Inventory turnover has increased from 9.04 times to 14.87 times per annum
suggesting that the enterprise sold inventory at a faster rate. Debtors collections
seem to be good with the outstanding debt expected to be collected within 30 days.
Creditors accounts are being settled earlier than the previous year and the
enterprise should not settle accounts earlier than required unless a discount for early
settlement is forthcoming. The sales generated by each rand of net assets have
increased greatly from R2.13 to R4.59. This also indicates that the net assets
required to support a level of sales have decreased.
2.1
Vuyo Traders
Sipho Stores
Return on assets
=
Return on assets
Operating profit
X 100
Total assets
=
R400 000
R1 000 000
40%
N.B.
Operating profit
X 100
1
X 100
Total assets
=
R420 000
R1 500 000
X 100
1
= 28%
Total assets = R200 000 + R800 000
= R1 000 000 (Vuyo Traders)
Total assets = R1 200 000 + R300 000 = R1 500 000 (Sipho Stores)
63
MANCOSA
2.2
Vuyo Traders
Return on equity
=
Profit after tax
X 100
Owners equity
=
R120 000 X 100

R800 000
= 15%
Sipho Stores
Return on equity
=
Profit after tax
X 100
Owners equity
=
R140 000 X 100

R300 000
= 46.67%
2.3
Sipho Stores. It achieved a return of 46.67% compared to Vuyo Traders return of

15%.
2.4
Yes. A 40% return is greater than the cost of borrowing funds (10%). It is also
greater than the inflation rate and the return that one could get from alternative
investments e.g. fixed deposits.
3.1
20.10
Debt to assets
=
Total debt
Total assets
=
R800 000
R2 000 000
100
1
100
1
= 40%
64
MANCOSA

20.10
Debt to equity
=
Non-current debt
X 100
Owners equity
=
R600 000
1
X 100
R1 200 000
= 50%
N.B. Owners equity = R2 000 000 R600 000 R200 000= R1 200 000
20.10
Interest coverage
=
Operating profit
Interest expense
R500 000
R120 000
= 4.17 times
3.2
The debt to assets ratio indicates that 40% of Mestle Wholesalers assets come from
borrowed funds.
The debt to equity ratio indicates that the creditors supply Mestle Wholesalers with
50 cents for every Rand supplied by the owners.
Mestle Wholesalers earned its interest obligations 4.17 times over in 20.10; or one
could say that profit before interest and tax was 4.17 times as large as interest. The
business can therefore meet its interest obligations
65
MANCOSA

4.1
Return on equity
=
Profit after tax
X 100
Owners equity
=
R10 000 000
X 100
R118 000 000
= 8.47%
Earnings per share

=
Net profit after tax

Number of ordinary shares issued
R10 000 000
X 100
40 000 000
= 25 cents
Dividend per share

=
Dividends for the year

Number of ordinary shares issued
R2 000 000
X 100
40 000 000
= 5 cents
Earnings retention ratio

= Earnings per share Dividend per share X 100
Earnings per share
=
25 cents 5 cents
25 cents
1
100
1
20 cents
25 cents
= 80%
OR
66
MANCOSA

Earnings retention ratio
=
Retained earnings for the year
X 100
Profit due to ordinary shareholders

=
R10 000 000 R2 000 000

R10 000 000
R8 000 000
R10 000 000
X 100
1
X 100
1
= 80%
20.9
Price earnings ratio
= Market price per share
Earnings per share
=
400 cents
25 cents
= 16 times
4.2
Return on equity has decreased slightly (from 10.04% to 8.47%). A comparison with
alternative investments of a similar risk would indicate whether the profitability is low
or not. Earnings per share remained stable and there was a slight drop in the
dividends per share. The company retains a high percentage of the net profit (over
80%) which may not please all shareholders. The price earnings ratio has increased
from (15 to 16 times) indicating greater investor confidence in the company.
Investors are willing to pay 16 times earnings for the shares.
67
MANCOSA
TOPIC 6
COST-VOLUME-PROFIT (CVP) RELATIONSHIPS
1.
Per unit
1.1
Sales
Variable costs
Contribution margin
Volume
Total
20.00
2 500
50 000
7.50
2 500
18 750
12.50
2 500
31 250
Fixed costs
12 500
Operating profit
18 750
62.5%
1.2
Contribution margin and operating profit will increase by R6 250 (R10 000 X 62.5%).
1.3
Contribution margin must increase by the same amount if operating profit was to remain
the same. Sales must increase by R4 800 (R3 000 62.5%).
1.4
Yes.
The increase in contribution margin would be R6 250 (R10 000 X 62.5%) which is
R1 250 more than the cost of the advertising (R5 000).
Per unit
1.5
Sales
Variable costs
Contribution margin
Volume
Total
32 500
20.00
7.50
12.50
2 600
Fixed costs
12 500
Operating profit
20 000
62.5%
Work to the middle to obtain the required sales volume (R32 500 R12.50 = 2 600 units)
68
MANCOSA

OR
1.5
Target sales volume =
Fixed costs + Target profit

Contribution margin per unit
= R12 500 + R20 000

R12.50
= 2 600 units
Per unit
1.6
Sales
Variable costs
Contribution margin
Volume
Total
28 350
18.00
7.50
10.50
2 700
Fixed costs
12 500
Operating profit
15 850
No. They should reject the proposal. Contribution margin and operating profit will
decrease by R2 900.
Per unit
1.7
Sales
Volume
Total
42 500
16.00
Variable costs
7.50
Contribution margin
8.50
5 000
Fixed costs
20 500
Operating profit
22 000
Yes. Operating profit increases from R18 750 to R22 000 i.e. by R3 250.
69
MANCOSA
Per unit
2.
Sales
Volume
Total
960 000
12
Variable costs
Contribution margin
137 143
Fixed costs
700 000
Operating profit
260 000
Work to the middle to obtain the required sales volume (R960 000 R7 = 137 143 units)
OR
2.
Target sales volume
Fixed costs + Target profit

= R700 000 + R260 000

R7.00
= 137 143 units
3.
Workings
Per unit
Sales
R70
Variable costs
R45
Contribution margin
R25
Volume
350
350
Total
24 500
R8 750
Fixed costs
(5 000)
Operating profit
R3 750
Note: Variable costs include material cost of R20 per unit and labour cost of R25 per unit
(R12.50 X 2 hours).
70
MANCOSA
3.1
Break even quantity
Fixed costs
= R5 000
R25
= 200 units
3.2
It makes it possible to compare the expected volume of activity (350 units) with the
break-even point (200 units) and so make a judgement about risk.
Planning to operate slightly above the break-even point is risky as a small drop in
volume of activity could lead to loss.
3.3
Workings
Per unit
Sales
R70
Variable costs
R32.50
Contribution margin
R37.50
Volume
Total
350
350
24 500
R13 125
Fixed costs
(9 375)
Operating profit
R3 750
Note: Variable costs include material cost of R20 per unit and labour cost of R12.50 per
unit (R12.50 X 1 hour).
3.3.1
Break even quantity
Fixed costs
= R9 375
R37,50
= 250 units
71
MANCOSA
3.3.2
With both options, a profit of R3 750 is expected. However, the break-even point
differs.
Without the machine, the actual volume of sales could drop by 43.86% (from 350 to
200) before the business will fail to make a profit.
With the machine a 28.67% drop in sales (from 350 to 250) would be enough to cause
the business to fail to make a profit.
On the other hand, for each additional pair of sandals above the expected 350, an
additional profit of only R25 would be made without the machine whereas R37.50
would be made with the machine.
3.3.3
Margin of safety =
Without the machine
With the machine
350 200 = 150 units
350 250 = 100 units
The option of not renting the machine might be preferable since the margin of safety
between the expected volume of activity and the break-even point is greater.
For the same level of activity, the risk will be lower without renting the machine.
However, ones attitude towards risk is important. As pointed out previously, sales
above 350 units mean a higher profit per unit with the use of the machine.
72
MANCOSA
4.
Workings -Gnome
Per unit
Volume
Total
Sales
60
120 000
Variable costs
36
72 000
Contribution margin
24
2 000
Fixed costs
48 000
40%
15 000
Operating profit
R33 000
Workings Humpty
Per unit
Volume
Total
Sales
60
120 000
Variable costs
24
48 000
Contribution margin
36
2 000
Fixed costs
72 000
60%
30 000
Operating profit
R42 000
4.1
Gnome
Total revenues at break even =
Total fixed cost

Contribution margin ratio
= R15 000
40%
= R37 500
73
MANCOSA

Humpty
Total revenues at break even =
Total fixed cost

Contribution margin ratio
= R30 000
60%
= R50 000
Note: Alternative method is to calculate break even quantity and then multiply by selling
price per unit.
Gnome
4.2
Operating leverage =
Contribution margin
Operating profit
R48 000
R33 000
= 1.45:1
Humpty
Operating leverage =
Contribution margin
Operating profit
R72 000
R42 000
= 1.71:1
The above calculations show that Humpty Manufacturers has a higher operating
leverage.
4.3
Humpty Manufacturers has a higher operating leverage. Suppose that its sales drop by
10%. Let us see by what percentage operating profit will fall.
74
MANCOSA

R
Sales (1 800 X R60)
108 000
Variable costs (1 800 X R24) (43 200)

Contribution margin
64 800
Fixed costs
30 000
Operating profit
34 800
Operating profit dropped from R42 000 to R34 800, a percentage decrease of 17.14%.
One can therefore see that the consequence of a small drop in sales is a relatively larger
percentage decrease in operating profit.
4.4
Gnome
Margin of safety = Sales Break even sales
Sales
=
R120 000 R37 500

R120 000
X 100
X 100
= 68.75%
Humpty
Margin of safety = Sales Break even sales
Sales
=
R120 000 R50 000

R120 000
X 100
X 100
= 58.33%
75
MANCOSA

5.
A
(R)
12.00
B
(R)
10.80
C
(R)
10.80
Variable cost
6.60
5.40
5.40
Marginal income
5.40
5.40
5.40
Sales
Fixed cost
96 000 66 000 78 000
PROPOSAL A
Break-even quantity
Total fixed cost

Marginal income per unit
= R96 000
R5.40
= 17 778 units
PROPOSAL B
Break-even quantity
Total fixed cost

= R66 000
R5.40
= 12 222 units
PROPOSAL C
Break-even quantity
Total fixed cost

= R78 000
R5.40
= 14 444 units
76
MANCOSA
TOPIC 7
COST ANALYSIS FOR PLANNING, CONTROL AND
DECISION-MAKING
BUDGETING
1.
A budget is a planning device as it guides executives to anticipate the influence and

impact of a given set of events on the firms business and its resources. A budget also
serves as an effective tool for managerial control by providing a proper yardstick for the
evaluation of actual performance.
Etc.
2.
Quantity required to meet projected sales.

Opening and closing levels of inventories.
Maximum production capacity of the firm.
Available storage facilities.
Amount of investment required.
Etc.
3. Sales budget
Product
November
Units/price
Product X 3 000@R20
December
R
Units/price
60 000 4 500@R20
January
R
Units/price
90 000 4 000@R20
80 000
Product Y 4 000@R30 120 000 6 000@R30 180 000 5 000@R30 150 000
180 000
270 000
230 000
4.
Production budget
April
May
Sales forecast (in units)
1 200
1 000
50
45
1 250
1 045
(60)
(50)
1 190
995
Desired closing inventory of finished goods

Total budgeted production needs
Opening inventory of finished goods
Required production
77
MANCOSA
5.
Problems:
The company will not be able to achieve the requirement of settling the overdraft by
the end of October.
Although the initial overdraft is expected to be eliminated in June, a study of the
closing cash balance each month thereafter suggests that the cash balance is
expected to get worse each month.
Except for the first 2 months, a cash shortfall is expected for the rest of the budgeted
period.
The company expects a decline in sales each month from July to October.
Dealing with the problems:
The shop refurbishment could be postponed.
The company could obtain funds from the shareholders or other investors.
It may try to stimulate sales in some way.
Ways could be found to reduce overhead expenses.
Sales were declining, yet selling expenses are high investigate this.
6.1
Raw material usage variance

(Actual quantity Standard Quantity) X Standard price
= (20 050 20 000) X R5
= R250 (unfavourable)
Possible reasons for the variance:
Poor control over materials
Faulty standards
Changes in the quality of material supplied
Etc
6.2
Direct labour rate variance

(Actual rate Standard rate) X Actual hours
= (R48 R50) X 39 500
= R79 000 (favourable)
78
MANCOSA

6.3
Direct labour efficiency variance

(Actual time worked Standard time allowed) X Standard rate
= (39 500 hrs 40 000 hrs) X R50
6.4
Variable overhead efficiency variance

(Actual hours Standard hours) X Standard rate
= (39 500 40 000) X R11
7.1
Fixed overhead spending variance

Actual fixed overheads Budgeted fixed overheads
= R79 808 R76 800
= R3 008 (unfavourable)
7.2
Fixed overhead volume variance

Budgeted fixed overheads Standard fixed overheads
= R76 800 (1 680 units X 4 hrs X R12)
= R76 800 R80 640
Note:
Standard fixed overheads =
Number of units produced X Standard time to make 1 product X Standard rate per hr
Standard time to make 1 product = 6 400 hrs 1 600 units = 4 hours
Standard rate per hour = Standard fixed overheads standard number of labour hrs
= R76 800 6 400
= R12
79
MANCOSA

7.3
Variable overhead efficiency variance

(Actual hours Standard hours) X Standard rate
= (6 880 6 720) X R5
= R800 (unfavourable)
Note
Standard hours
= Number of units produced X Standard time to make 1 product

= 1 680 X 4 hours
= R6 720
Standard rate
= R32 000 6 400 hours = R5
Possible reasons for the variance:

Absenteeism
Efficiency of employees
Working conditions
Etc
8.1
Sales (8 000 000 X R12)
Variable costs (8 000 000 X R9)
96 000 000
(72 000 000)
Contribution margin
24 000 000
Fixed costs
(4 656 000)
Operating profit
19 344 000
8.2
Differential revenue from accepting the offer (2 000 000 X R8.90)
17 800 000
Differential cost by accepting the offer (2 000 000 X [R9 R0.50])
(17 000 000)
Differential profit from accepting the offer
800 000
Accept the offer as a differential profit of R800 000 is expected.
80
MANCOSA

9.
A comparison of the sales offer of R42 with the selling price of R63 indicates that the
offer should be rejected. However, Femino Enterprises has excess capacity and one
should focus on the relevant cost, which in this case is the variable cost. The
differential profit from accepting the offer is calculated as follows:
Differential revenue from accepting the offer:
6 000 units @ R42
R252 000
Differential cost by accepting the offer:

6 000 units @ R30 (R15+R9+R6)
(R180 000)
Differential profit from accepting the offer.
R72 000
The offer should therefore be accepted.

10.
10.1
The relevant cost of internal production of each component is:

Variable cost of production of the component
R15
Opportunity cost of lost production of the other product R12

R27
It is obviously more costly (R27) than the R20 per component which will have to be
paid to the subcontractor. Dubai Ltd should therefore subcontract the component.
10.2
Loss of control of quality

Potential unreliability of supply
Etc.
11.
The relevant cost is the variable cost per unit which is calculated as follow:
R
Direct Material
866 000
Labour and other variable costs
844 000
Total variable costs

Number of units produced
1 710 000
8 500
81
MANCOSA

(R1 710 000 8 500)
R201.18
The variable cost of making the component (R201.18) is cheaper than buying it
(R210). Trike Enterprises should therefore make the component in its plant.
Project A
12.1
Investment
(920 000)
Year 1 Cash flow
400 000
(520 000)
Year 2 Cash flow
280 000
(240 000)
Year 3 Cash flow
200 000
(40 000)
Year 4 cash flow
200 000
Payback period is 3 years 3months

Note:
R40 000_ X 12 mths
R200 000
= 2.4 months
12.2
Accounting rate of return (Project A)

=
Average annual profit
Average investment
= R104 000
100
1
R420 000
100
1
= 24.76%
Note:
Depreciation
R800 000 R40 000

5
R760 000
5
= R152 000 per year
82
MANCOSA

Calculation of accounting profit
Cash
Depreciation/Scrap value
= Accounting
flow
profit
320 000
(152 000)
R168 000
280 000
(152 000)
128 000
260 000
(152 000)
108 000
240 000
(152 000)
88 000
220 000
(152 000)
28 000
*(40 000)
R520 000
*(40 000) is scrap value
=
R520 000
5 years
= R104 000
Project A
12.3
Year
1
Cash inflow Discount

Factor
320 000
0.8929
280 000
0.7972
223 216
260 000
0.7118
185 068
240 000
0.6355
152 520
220 000
0.5674
124 828
Total PV
Investment
NPV (positive)
12.4
Present
value
285 728
971 360
(800 000)
171 360
Yes.
ARR is higher than the cost of capital.
NPV is positive.
83
MANCOSA

13.
Project Turbo
13.1
Year
1
Cash inflow Discount Present

Factor
Value
0
0,8929
0
R27 750
0.7972
R22 122
R54 300
0,7118
R38 651
R184 500
0,6355
R117 250
Total PV
Investment
NPV (positive)
R178 023
(R176 550)
R1 473
Project Gusto
Net inflow
R54 000
Discount factor
X 3,0373
Total Present value

Investment
NPV (negative)
R164 014
(R176 550)
(R12 536)
Project Turbo should be chosen since the NPV is positive. The NPV for project Gusto is
negative and is therefore rejected.
84
MANCOSA

Project Turbo
13.2
Step 1
We notice that the NPV is positive, and above zero, but not by a large margin.
Step 2
We now pick a higher rate e.g. 13%. (Trial-and-error is used to obtain the higher
rate.)
Project Turbo
Year
Cash
inflow
Discount
Factor
12%
0,8929
R27 750
0.7972
0,7831
R22 122
R21 731
R54 300
0,7118
0,6931
R38 651
R37 635
R184 500
0,6355
0,6133
R117 250
R113 154
R178 023
R172 520
(R176 550)
(R176 550)
R1 473
(R4 030)
Total PV
Investment
NPV
Discount
Factor
13%
0,8850
Present
value
12%
0
Present
value
13%
0
Step 3
Interpolation:
The IRR is between 12% and 13%.
IRR = 12% +
1 473
1 473 + 4 030
= 12% +
1 473
5 503
= 12.27%
85
MANCOSA

Project Gusto
Step 1
We notice that the NPV is negative.
Step 2
We now pick a lower rate e.g. 10%. (Trial-and-error is used to obtain the higher rate.)
Cash
inflow
p.a.
R54 000
Present
value
10%
171 175
Present
value
9%
174 944
Present
value
8%
178 853
Investment
176 550
176 550
176 550
NPV
(R5 375)
(R1 606)
R2 303
Year
1-4
Disc.
Factor
10%
3,1699
Disc.
Factor
9%
3,2397
Disc.
Factor
8%
3,3121
Step 3
Interpolation: The IRR is between 8% and 9%.
IRR = 8% +
2 303
1 606 + 2 303
= 8% +
2 303
3 909
= 8.59%
Decision: Project Turbo should be chosen as the IRR is greater.
86
MANCOSA

14.
Payback period (Project F)
14.1
Investment
(140 000)
Year 1 Cash flow
30 000
(110 000)
Year 2 Cash flow
36 000
(74 000)
Year 3 Cash flow
40 000
(34 000)
Year 4 Cash flow
44 000
Payback period is 3 years 10 months

Note:
R34 000 X 12 mths
R44 000
= 9.27 months
14.2
Accounting rate of return (Project F)

= Average annual profit
X 100
Average investment
= R7 200
X 100
R80 000
= 9%
Note:
Depreciation =
R140 000 R20 000

5
R120 000
5
= R24 000 per year
87
MANCOSA

Calculation of accounting profit
Cash flow
Depreciation/Scrap
= Accounting profit
value
30 000
(24 000)
R6 000
36 000
(24 000)
12 000
40 000
(24 000)
16 000
44 000
(24 000)
20 000
26 000
(24 000)
(18 000)
*(20 000)
R36 000
*(20 000) is scrap value
=
R36 000
5 years
= R7 200
Average investment
= [140 000+20 000] 2
= R80 000
14.3
Project F
Year
1
30 000
Discount
Factor
0.8772
36 000
0.7695
27 702
40 000
0.6750
27 000
44 000
0.5921
26 052
26 000
0.5194
13 504
Total PV
Investment
NPV (negative)
Cash inflow
Present
value
26 316
120 574
(140 000)
(19 426)
88
MANCOSA

Project G
Year
Cash inflow
40 000
Discount
Factor
0.8772
50 000
0.7695
38 475
50 000
0.6750
33 750
80 000
0.5921
47 368
Total PV
Present
value
35 088
154 681
Investment
(150 000)
NPV (positive)
4 681
14.4
Choose project G. The NPV is positive.
15.
Use trial and error method

Year
1-5
Cash Discount Discount

inflow
Factor
Factor
p.a.
13%
14%
3.5172
3.4331
R40 000
Investment
NPV
IRR = 13% +
Present
value
13%
140 688
Present
value
14%
137 324
140 000
140 000
R688
(R2 676)
688
688 + 2 676
= 13% +
688
3 364
= 13.20%
89
MANCOSA
TOPIC 8
TRANSFER PRICING FOR DECENTRALISED
ENTERPRISES
1.
These are the actual prices that the supplying division sells the product to external
clients for or they may the prices a competitor is offering. If a perfectly competitive
market exists, the current market price is the most suitable basis for setting the
transfer price. The supply of transfer goods at market prices usually results in
optimal profits for the entire enterprise.
In a perfectly competitive market, the supplying division should supply as much as is
required by the receiving division at the current market price. If the receiving
divisions demand is greater then the supplying division can meet, additional
supplies must be obtained from an outside supplier at market price.
If the supplying division cannot sustain a profit in the long term at the current outside
market price, then the enterprise will be better off not producing the product
internally. It should rather purchase from outside suppliers
2.
2.1
Negotiated prices is suited to circumstances where there is an external market for

the goods supplied by the buying and selling divisions and where divisional
managers are free to accept or reject offers made by other divisions.
Negotiated transfer prices are also appropriate when there are market imperfections
for the product.
2.2
By not being able to sell outside the enterprise, the selling division is likely to be in a
weak bargaining position and the transfer price may result in an under-par divisional
performance. The inability of the manager of the selling division to negotiate with
authority would affect the divisions profitability negatively.
90
MANCOSA

3.
3.1
The transfer price of product Alpha using the variable cost method would be R8.
3.2
R8.00
Fixed cost per unit
R2.00
Total cost
Profit (12%)
Transfer price
3.3
R10.00
R1.20
R11.20
Using variable cost method

Transfer price
Fixed cost per unit
Total cost
R8.00
R15.00
R7.00
R30.00
Profit (12%)
R3.60
Selling price
R33.60
Using cost plus method

Transfer price
R11.20
R15.00
Fixed cost per unit

Total cost
3.4
R7.00
R33.20
Profit (12%)
R3.98
Selling price
R37.18
The biggest problem with this method is that the receiving division will generate a profit
at the expense of the supplying division.
Quite often supplying divisions are reluctant to transfer their products at variable costs.
Another problem is that variable cost per unit may not be constant over the entire range
of output as increases may occur.
Where the division is operating at full capacity, variable cost transfers will mean that
inter-divisional sales will be less profitable than sales to external customers.
91
MANCOSA
TOPIC 9
CORPORATE GOVERNANCE
1.
Yes.
Directors often abused their powers with regard to the duration of their contracts.
Directors remained in their posts even though company performance was poor.
Etc
or
No.
Directors want job security.
May lead to instability in the company.
Etc
2.
Good corporate governance requires that the board takes responsibility for creating and
sustaining an ethical corporate culture in the company.
The establishment and maintenance of an ethical corporate culture requires the
governance of ethics, that is, that the board should ensure that the company has a well
designed and properly implemented ethics management process consisting of the
following four aspects:
Ethics risk and opportunity profile: The board should ensure that an ethics risk profile is
compiled, reflecting the company's negative ethics risks (threats) as well as
its positive ethics risk (opportunities).
Code of ethics: The board should ensure that a company code of ethics is developed,
stipulating the ethical values or standards as well as more specific guidelines guiding the
company in its internal and external stakeholders.
Integrating ethics: The board should ensure that the company's ethical standards (code
of ethics and related ethics policies) are integrated into the company's strategies and
operations. This requires, among others, ethical leadership, management practices,
structures and offices, education and training, communication and advice, and
prevention and detection of misconduct for example, through whistle-blowing.
92
MANCOSA

Ethics performance reporting and disclosure: The board should assess the company's
ethics performance, and report and disclose findings to internal and external
stakeholders.
An ethical corporate culture will require that:
-ethical practices for directors is a non-negotiable requirement;
-the stewardship of a director is firstly towards the company and its shareholders.
-sound moral values and ethics are propagated by the conduct of individuals;
-the effectiveness of free enterprise and the market economy demands responsibility and
it is important that business activity is directed by people with integrity, fairness and
vision;
-because fair competition is fundamental to the free enterprise system directors support
laws regulating restraints of trade, unfair practices, abuse or the unscrupulous use of
economic power and avoidance of collusion; and
-ethics can never become an excuse for poor performance
3.
The board should ensure that the company, as a responsible corporate citizen, does not
undermine the sustainability of its social and natural environments, but rather protects
and enhances them. Responsible corporate citizenship is necessary to protect the
sustainability of the company and to ensure the ability of future generations to meet their
needs. The interests of shareholders and stakeholders coincide over the long term.
4.
Internal audit plays an important role in providing assurance to the management and the
board regarding the effectiveness of internal controls.
The board should ensure that assurance of internal control procedures provides reliable,
valid and timely information for purposes of monitoring and evaluating the management
and company performance.
Internal controls should be established not only over financial matters but also
operational, compliance and sustainability matters to manage the risks facing the
company.
The board should ensure that the internal audit plan is risk-centric, and that the internal
audit function has given the audit committee a written assessment of the adequacy of the
internal controls.
93
MANCOSA

This assessment should be discussed by the audit committee, which should report the
outcomes of that discussion to the board.
5.
Boards should ascertain whether potential directors are competent to be appointed and
can contribute to the business decisions to be made by the board. Prior to their
appointment, their backgrounds should be investigated along the lines of the approach
required for listed companies by the JSE. It is also important to ensure that new
directors have not been declared delinquent nor are serving probation in terms of section
162 of the Act. The nomination committee should play a role in this process.
6.
This means that the board should report to its shareholders and other stakeholders on
the companys economic, social and environmental performance. Although a company
is an economic institution, it remains a corporate citizen and therefore has to balance
economic, social and environmental value.
The triple bottom line approach enhances the potential of a company to create economic
value. It ensures that the economic, social and environmental resources the company
requires to remain in business are treated responsibly. By looking beyond immediate
financial gain, the company ensures that its reputation, its most significant asset, is
protected. There is growing understanding in business that social and environmental
issues have financial consequences.
The triple bottom line performance approach recognises the effect of the modern
company on society and the natural environment. It acknowledges that companies need
to act with economic, social and environmental responsibility. It is unethical for
companies to expect society and future generations to carry the economic, social and
environmental costs and burdens of its operations. Business itself needs to ensure that
its impact on society and the natural environment is socially and environmentally
sustainable. Good corporate citizenship is the establishment of an ethical relationship of
responsibility between the company and the society in which it operates. As good
corporate citizens of the societies in which they do business, companies have, apart
from rights, also legal and moral obligations in respect of their social and natural
environments.
94
MANCOSA

The company as a good corporate citizen should protect, enhance and invest in the
wellbeing of society and the natural ecology. Corporate citizenship and sustainability
require business decision makers to adopt a holistic approach to economic, social, and
environmental issues in their core business strategy. Only a holistic approach will allow
for the effective management of business opportunities and risks.
The expectation that business has an important role to play in responding to social and
environmental challenges has become widely accepted. The debate on the need for
voluntary business action or government regulation is being superseded by an
understanding that an appropriate mix of both approaches is important.
7.
Conscience: A director should act with intellectual honesty in the best interest of the
company and all its stakeholders in accordance with the enlightened shareholder value
approach. Conflicts of interest should be avoided. Independence of mind should prevail
to ensure the best interest of the company and its stakeholders is served.
Care: A director should devote serious attention to the affairs of the company. Relevant
information required for exercising effective control and providing innovative direction to
the company needs to be acquired.
Competence: A director should have the knowledge and skills required for governing a
company effectively. This competence should be developed continuously. Willingness
to be regularly reviewed is a prerequisite for ensuring competence
Commitment: A director should be diligent in performing directors duties. Sufficient time
should be devoted to company affairs. Effort needs to be put into ensuring company
performance and conformance.
Courage: A director should have the courage to take the risks associated with directing
and controlling a successful sustainable enterprise, but also the courage to act with
integrity in all board decisions and activities.
95
MANCOSA

8.
External audit is an independent assurance function performed primarily for the benefit of
the shareholders.
The objective of an audit of financial statements is to enable the auditor to express an
opinion as to whether the financial statements fairly present, in all material respects, the
financial position of the company at a specific date and the results of operations and
cash flow information for the period ended on that date, in accordance with an identified
financial reporting framework and/or statutory requirements.
The auditors opinion enhances the credibility of the financial statements, but does not
guarantee the future viability of the company or the effectiveness or efficiency with which
the management has conducted the affairs of the company.
96
MANCOSA

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ACCOUNTING FOR DECISION MAKING

ACCOUNTING FOR DECISION MAKING WORKBOOK

Accounting information and managerial decisions

Financial statements and accounting concepts

Accounting for and presentation of assets, liabilities and owners equity

Income statement and cash flows

Cost-volume-profit (CVP) relationships

Cost analysis for planning, control and decision-making

Transfer pricing for decentralised enterprises

Present value tables

Accounting information and managerial decisions

Financial statements and accounting concepts

Accounting for and presentation of assets, liabilities and owners equity

Income statement and cash flows

Cost-volume-profit (CVP) relationships

Cost analysis for planning, control and decision-making

Transfer pricing for decentralised enterprises

ACCOUNTING FOR DECISION MAKING WORKBOOK

Accounting information is required by various individuals and organizations in order to

Tabulate 5 differences between management accounting and financial accounting.

ACCOUNTING FOR DECISION MAKING WORKBOOK

Discuss how the following financial statements are integrated:

Statement of changes in equity

Statement of cash flows

Critically discuss the following accounting concepts:

Explain the significance of the following accounting concepts in the preparation of a

ACCOUNTING FOR DECISION MAKING WORKBOOK

Thereafter prepare the:

5.2.1 Income statement the month ended 31 August 20.9.

TRANSACTIONS FOR AUGUST 20.9

ACCOUNTING FOR DECISION MAKING WORKBOOK

1.1.1 Non-current assets

ACCOUNTING FOR DECISION MAKING WORKBOOK

1.4.1 Payments made without proper authorization

Which method will show the highest gross profit? Why?

Which method will show the lowest gross profit? Why?

Comment on the closing inventory figure if the AVCO method is used.

The hiring by Jensen Manufacturers of a new marketing manager who is confident of

ACCOUNTING FOR DECISION MAKING WORKBOOK

Land and buildings

Loan from Kia Bank

Prepare the balance sheet of Manhattan Ltd at 30 November 20.9.

Provide an interpretation of the balance sheet by making reference to the following:

7.2.1 The liquidity of the business

ACCOUNTING FOR DECISION MAKING WORKBOOK

Profit on disposal of asset

ACCOUNTING FOR DECISION MAKING WORKBOOK

Income from operations 196 000

Profit before tax

Answer the following questions:

Explain the difference between sales and other income.

ACCOUNTING FOR DECISION MAKING WORKBOOK

Profit before tax

ACCOUNTING FOR DECISION MAKING WORKBOOK

Increase in current assets other than cash

Cash flow from operating activities

Cash flow from investing activities

Additions to plant and equipment

Cash flow from financing activities

ACCOUNTING FOR DECISION MAKING WORKBOOK

The cash flow statement for Mega Ltd is provided below:

Adjustments to convert to cash from operations