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Grade 12 Accounting Case Study

Jeff Brooker 12B


1. Mr Prices business ownership type is a company as it has a share Capital section in its
financial statements which means it sells shares.
2. The concept of limited liability means that the share holders of the company are liable
for any of the companys debts. The shareholders can only contribute capital and will
not be liable to pay for the debts in the result of insolvency. This applies to a company
as a company now can entice regular individuals to invest in their companies without
the risk of having to pay for large debts.
The concept of legal personality means that the company is a legal person and is
treated the as any person. This applies to a company as the company is now taxed, can
enter contacted and have legal action against them.
3. The Companies Act. No. 71 of 2008 governs companies.
4. The JSE is the Johannesburg Stock (securities) Exchange. This is the place which
facilitates the selling and buying of Mr Price Shares to the public.
5. MR PRICE GROUP LIMITED is in the consumer services sector and the general retailers
subsector (Fin24, 2016).
6.
a. Main Components of financial Statements:
i. Independent Auditors Report
ii. Directors Report
iii. Statement of Comprehensive Income
iv. Statement of Financial Position
v. Cash Flow Statement
b. Parties interested in the publication of the financial statements:
i. Shareholders
ii. Potential Shareholders
iii. Competitors
iv. Bankers
v. Creditors
vi. Employees
7. It is important for the chairman to make a comment of this nature as it shows that the
company has had substantial growth over the last 29 years. This shows the potential
share holders that the company has grown substantially grown and it is worth investing
in the Mr Price Group. It also shows potential share holders and current share holders
that there is value in keeping your money for one periods of time and not removing
your money as the R10 000 only grew greatly because they had faith in the long term
of Mr Price.
8. The purpose of internal audit report is to provide independent assurance that an
organisation's risk management, governance and internal control processes are
operating effectively (Chartered Institute of Internal Auditors , 2015).
9. In regards to inventory, an internal provides assurance that there are no unethical or
unlawful processes happening to the stock. This report looks at the protection of the
stock (warehouse and storeroom protection), stock purchasing processes, stock
movement processes, organisation of stock, inventory methods of stock, discarding of
stock processes, owner removed stock (Drawings) and processes of a similar nature.
10.Mr Price can be happy with their internal control processes as in all of the categories
that were assessed by the internal auditor were at a very low risk level. This means
that all of their internal processes are effective and appropriate. All levels of audits
(corporate, IT and Operational) are increasing which means that there is progress in the
internal control process of the company.
11.As if the amounts are seen to be immaterial, they do not have an effect on the business
and this refers to the GAAP principle of Materiality.
12.

a. The issues stated in the extract are important as they assure the shareholders
that the business are not solely focussed on producing as much profit as possible
but they are caring for the people and environment that is producing the profit
they earn
b. King Code
c. The three Ps are people, planet and profit. In regards to people, the business
must not unfairly treat its workers. In regards to planet, the company must not
adversely impact the nature during business operation. In regards to profit, the
success of the business must not be unattainable without taking into
consideration the previous two Ps.
13.Unqualified and this means that the independent auditor has not identified any concern
relating to the fair presentation of financial statements. This is the audit report is
desired by shareholders (Hall, et al., 2013)
14.If Ernst and Young were to issue a false audit report, they would be liable for a large
fine, the auditors involved would be disaffiliated from the auditors board and would like
result in the audit of all the auditing done at the firm.
15.Current Assets: Current Liabilities
6 503 000 000: 2 633 000 000
2.47: 1
16.(Current Assets Inventory ):Current Liabilities
(6 503 000 000-1 741 000 000): 2 633 000 000
4 762 000 000: 2 633 000 000
1.81:1
17.These ratios are used to assess the liquidity of the business and these two in particular,
are to see if the business would be able to meet the demands of their creditors if they
were to ask the company to settle their debts immediately. Acid test is to see whether
the business can pay back debt under abnormal circumstances.
18. Both ratios are above the norm which means that the business is doing well and will
be able to pay its debts immediately if necessary. The ratios are also not too high
which means that they are not keeping money that is not making them more money
unnecessarily.
19.Whether they have a money market account that can be accessed in short notice. The
idea of a 2:1 norm is outdated as a 30 day call account is common in modern
businesses which means that your non-current assets can actually act as a current
asset.
20.
a. 18.1% of 17 285 000 000 = 3 128 585 000
b. Average Trading Stock/Credit Sales * 365 days
((1874000000+1673000000)/2)/3 128 585 000 * 365 = 206.91 days
c.
21.Cost of Sales / Average Trading Stock
10 186 000 000 / ((1741000000+1403000000)/2) = 6.48 Times
22.Average Trading Stock/Cost Of sales
((1741000000+1403000000)/2)/ 10
Average Trading Stock/Cost Of sales
((1741000000+1403000000)/2)/ 10

* 365
186 000 000 * 365 = 56.33 days
* 12
186 000 000 * 12= 1.85 months

23.Stock Turnover Rate and Stock holding Period are two ratios that are interlinked as they
are reciprocals of each other. These ratios are good in the case of Mr Price as in a year
there are 4 Seasons and for each season there would be a clothing line. The ratios
above prove that Mr Price is turning stock over more than once a season which means
it is selling its stock fast. This also indicates that their old stock is likely to be low.
24. With regards to inventory, net realizable value (NRV) is the estimated selling price in
the ordinary course of business minus any cost to complete and to sell the goods. NRV

is one of the amounts considered when determining the lower of cost or market for
items in inventory. (Avercamp, 2016)
25.FIFO (first In First Out) method means that the stock that is received first is sold first.
26.I would reply that the amount included was incorrect and not an accurate evaluation of
the sales. The 14% included for VAT would not be for the business and would have to
be paid over to SARS. However, they would only pay over the output VAT and exclude
the input VAT which they have already indirectly paid.
27.Total Assets: Total Liabilities
7 867 000 000: (213 000 000 + 2 633 000 000)
2.76:1
28.2.76 is very good as the norm 1:1. If they wish to expand, there is scope for additional
loans. The groups solvency ratio has increased from last years 2.49:1 which is
positive.
29.(Net profit before tax + interest on loans)/Average ((Share Capital + retained Income)+
Non-Current liabilities)
(3163000000-9000000)/ (((97000+6048000000) +213000000) +
(103000+5831000000) +220000000))/2)*100
(3154000000)/ (6156100000)*100
=51.23%
30. Making use of borrowed capital would be more favourable when the cost of borrowing
the capital (E.g. interest on Loan) is less than the return you would make. Example
being when the return on equity ratio is higher than the interest rate that is being
charged.
31.Long-term liabilities : Shareholders Equity (Hall, et al., 2013)
15 000 000: ((97000+6048000000)
0.0025:1
32.It is immaterial amount. The financial statement amounts are shown in millions and
this amount is less than one million. This is applying the materiality principle.
33.ZAR 174 per Share (Closing Figure on Friday 13 May 2016)
34.Net Profit after Tax/Number of issued Shares
2 285 000 000/ (253 183 867+11 445 081) *100 = 863.47 cents
35.368.5 cents per Share
36.DPS/EPS*100%
368.5/836.47*100=44.05%
As an investor, I would be happy with my dividend as it is just under half of the earning
per share and this is healthy as some of the earnings must be kept back as retained
income in case of emergency or for further expansion, however Mr Price in particular
has a very large retained income which should be sufficient for emergencies and
expansion therefore a slightly larger dividend could be given out.
37.Shareholders Equity/Number of issued shares*100(cents)
(92000+6048000000)/ (253 183 867+11 445 081)*100
=2285.50 Cents
38.This has to do with the basic principle of supply and demand. The actual value of the
share is less than the market price as there is a high demand for this share as
shareholder have great faith in this stock therefore they believe that the stock will only
increase so even though it is worth less than you paid for it will be a great investment
in the long term as when you sell it will be for a lot more than you bought it for.
39. Mr Price is a company that is currently expanding and they will be in need for capital
in order to further their expansion. Mr Price also would not like to have to declare for
bankruptcy if there is a dip in the clothing market, therefore the retained income will
support the group if this were to happen.
40.Yes (JSE, 2014)
41.Being listed on this index means that the company is environmentally, socially and
economically sustainable. Companies that are listed on the JSE (SRI) are usually more
in demand for shares.
42.Yes, Mr Price is socially responsible for the following reasons:

a. They are B-BBEE compliant which means they are part of the countries drive for
transformation
b. They are continually reducing their carbon footprint and are meeting their 10%
reduction medium term goals in regards to carbon footprint.
43.No as even thought they are still making a net increase in cash and cash equivalents,
the increase has dropped by almost half which is something that should be looked into.
Also their exchange losses have increased by 18 million which is a large figure in
proportion.
44.Exchange loss is the loss of cash due to sales that were invoiced at one exchange rate
and were paid at another and the difference causes a loss.
45.The highest generation of cash is from Operations
46.Mr Prices core business is sales therefore one would expect the majority of cash to
come from operations.