Accounting Spring School 2011 3 - 7 October Learner's Guide: RD TH

Accounting Spring School 2011 3rd 7th October Learners Guide
Accounting Exam Revision Learners Guide Spring School October 2011 www.learnxtra.co.za
Introduction Have you heard about Mindset? Mindset Network, a South African non-profit organisation, was founded in 2002. We develop and distribute quality and contextually relevant educational resources for use in the schooling, health and vocational sectors. We distribute our materials through various technology platforms like TV broadcasts, the Internet (www.mindset.co.za/learn) and on DVDs. The materials are made available in video, print and in computer-based multimedia formats. At Mindset we are committed to innovation. In the last two years, we successfully ran a series of broadcast events leading up to and in support of the NSC examinations Now we are proud to announce our 2011 edition of Matric Exam Revision, which began with our Winter School in July. Weve expanded the broadcast to support you in seven subjects Mathematics, Physical Sciences, Life Sciences, Mathematical Literacy, English 1 st Additional Language, Accounting and Geography. During our Spring School, you will get exam overviews, study tips on each of the topics we cover, detailed solutions to selected questions from previous examination papers, short question and answer sessions so you can check you are on track and live phone in programmes so you can work through more exam questions with an experienced teacher. Getting the most from Spring School Before you watch the broadcast of a topic, read through the questions for the topic and try to answer them without looking up the solutions. If you get stuck and cant complete the answer dont panic. Make a note of any questions you have. When watching the Topic session, compare the approach you took to what the teacher does. Dont just copy the answers down but take note of the method used. Make sure you keep this booklet for after Spring School. You can re-do the exam questions you did not get totally correct and mark your own work by looking up the solutions at the back of the booklet. Remember that exam preparation also requires motivation and discipline, so try to stay positive, even when the work appears to be difficult. Every little bit of studying, revision and exam practice will pay off. You may benefit from working with a friend or a small study group, as long as everyone is as committed as you are. Mindset believes that the 2011 Spring School programme will help you achieve the results you want. If you find Spring School a useful way to revise and prepare for your exams, remember that we will be running Exam School from 15th October to 22nd November as well. Join us on Saturday 15th and 22nd October to go over your Prelim exam questions.
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Programme Outline The Mindset Winter School is designed to focus on two subjects each day. For each subject you will find the following sessions: Examination Overview This is a 15 minute session that gives details of what you can expect in each examination paper. Practical guidelines are also given on how to prepare for the day of the exam. Topics Tips In this session you will be given a 15 minutes summary of the key ideas you need to know, common errors and study hints to help you prepare for your exams. Topic Session An expert teacher will work through specially selected questions from previous exam papers. Live Phone-in This is your chance to ask your own questions. So submit your question to the Help Desk and we might call you back to help you live on TV. All questions you submit will be answered within 48 hours as normal.
Spring School Broadcast Schedule

Monday 3rd October 09h30 13h00 13h30 Maths Literacy: Shape and Space Maths Paper 1: Linear Programming Maths Literacy: Data Handling Accounting: Manufacturing Accounts English FAL: Paper 3 Accounting: Cash Flow and Interpreting Statements English FAL: Paper 1 Accounting: Financial Statements Maths Paper 1: Calculus Tuesday 4th October English FAL: Paper 2 Wednesday 5th October Physical Sciences Paper 1: Waves, Sound and Light Lunch Life Sciences Paper 1: Evolution Geography: Climatology Maths Paper 2: Trigonometry Equations and Identities Geography: Geomorphology Maths Paper 2: Coordinate Geometry and Transformations Geography: Mapwork Life Sciences Paper 2: Environmental Studies Physical Sciences Paper 2: Organic Chemistry Life Sciences Paper 2: Life Processes Physical Sciences Paper 2: Rates and Chemical Equilibrium Life Sciences Paper 2: Reproduction Thursday 6th October Maths Paper 2: Trigonometry Graphs and Solving 3D Problems Friday 7th October Physical Sciences Paper 2: Electrochemistry
17h00
Physical Sciences Paper 1: Mechanics
19h00
Life Sciences Paper 1: DNA & RNA Physical Sciences Paper 1: Electricity and Magnetism Life Sciences Paper 1: Genetics Broadcast Ends
21h00
Maths Paper 1: Functions Maths Literacy: Financial Maths
23h00 01h00
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Topic Tips for Cash Flow Statement and Analysis of Ratios Overview
Cash Flow Statement and Notes Interpretation of Financial Statements Summary of Ratios
Cash Flow Statement and Notes

Key Concepts Objective of the Cash Flow Statement TO PROVIDE USERS OF FINANCIAL STATEMENTS WITH INFORMATION OF ALL FINANCIAL RESOURCES DURING THE PERIOD - IN PARTICULAR DETAILS OF CASH GENERATED OR UTILISED BY OPERATING, INVESTING AND FINANCING ACTIVITIES Operating Activities Cash effects of operating activities are the most common source of cash for a company. It does not only involve the buying and selling of inventory, but also includes transactions such as payments to creditors, receipt from debtors and paying expenses. Investing Activities Cash effects of investing activities involve the changes to fixed assets such as the buying and selling of land, buildings, equipment and vehicles and financial assets (matured / placed) Financing Activities Cash effects of financing activities involve the changes in funding of the growth and development of the company This includes raising capital, raising loans and the repayment of loans.
Information for the three activities is sourced from the Income Statement/Balance Sheet and notes
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THE THREE ACTIVITIES AS REFLECTED IN THE FINANCIAL STATEMENTS INCOME STATEMENT Sales XX Cost of Sales (XX) Gross Profit XX Other operating income XX X xx X xx Gross operating income XX Operating expenses (XX) Operating Activities X xx X xx Depreciation Operating profit XX Interest income X Profit before interest expense XX Interest expense / financing cost (X) Net profit before tax XX Taxation (XX) Net profit after tax for the year XX
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Accounting Exam Revision Learners Guide Spring School October 2011 www.learnxtra.co.za BALANCE SHEET ASSETS Non - current assets
Tangible assets Financial assets-Fixed Deposit
Notes
20.2 XX XX XX XX XX XX XX XX
20.1 XX XX XX XX XX XX XX XX Investing activities Investing activities
Current Assets
Inventories (Stock) Trade and other receivables (Debtors) Cash and cash equivalents 4 5 7
Operating activities operating activities Flow of cash
Total assets EQUITY AND LIABILITIES Share capital and reserves Ordinary share capital Share premium Retained Income Non- current liabilities Mortgage loan Loan Current Liabilities Trade and other payable (Creditors) Bank overdraft ( if overdrawn) Total equity and liabilities
7 8
XX XX XX XX XX XX XX XX XX XX XXX
XX XX XX XX XX XX XX XX XX XX XX
Financing activities
Operating Activities - dividends
Financing activities Financing activities
Operating Activities Flow of cash
Note 1 - Reconciliation between profit before taxation and cash generated from operations Calculation for the purchase and sale of fixed assets Common Errors When to bracket and not to bracket the amounts Calculation of: Purchase/sale of asset Net profit before tax for note1 Increase/decrease of Inventories/debtors/creditors Increase in share capital Proceeds/repayment of loans Study Hints Know the format of the Financial Statements (Income Statement and Balance sheet) to source information to complete the Cash Flow Statement Know the format of the Cash Flow Statement and Notes If Net Profit before tax is not given draw up an Appropriation account CASH FLOW STATEMENT Brought to you by Page 6
Name of company___________________________________
CASH FLOW STATEMENT FOR THE YEAR ENDED. Notes Cash effects of operating activities Cash generated/utilised from operations Interest paid Dividends paid Income tax paid Cash effects of investing activities Purchase of fixed assets Proceeds from sale of fixed assets Investments matured/placed Cash effects of financing activities Proceeds from shares issued Proceeds from long term loans Payment of long term loans Net change in cash and cash equivalents Cash and cash equivalents at beginning of the year Cash and cash equivalents at end of the year 2 2 2 1 3 4
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NOTES TO THE CASH FLOW STATEMENT 1. Reconciliation between profit before taxation and Cash generated from operations Profit before taxation Adjustments i.r.o. Depreciation Interest expense Operating profit before changes in working capital Cash effects of changes in working capital
Changes in inventory Changes in debtors Changes in creditors
Cash generated/utilised from operations 2. Cash and cash equivalents Bank * Cash float Petty cash * Bank overdraft ( ) bracket 3. Dividends paid Dividends for the year as reflected in financial statements Balance at the beginning of year Balance at the end of current year Dividends paid Taxation paid Income Tax for the year as reflected in financial statements Balance at the beginning of year Balance at the end of current year Taxation paid Tangible assets purchased / Fixed assets purchased / Property, plant and equipment purchased Land and buildings Equipment Vehicles Net change Year 2 Year 1
4.
5.
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Interpretation of Financial Statements

Key Concepts Calculations done to determine Operating efficiency Profitability Liquidity Returns Solvency Risk Know all the formulae and also know how to apply them to a given question Common Errors Applying the wrong formulae/amounts to given questions Where comments are required, the comments are not appropriate or incorrect Study Hints Know all the formulae and also know how to apply them to a given question When answering the question Show the formula Show calculations Obtain the result/answer from the calculation Comment on your answer /result
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SUMMARY OF RATIOS
1. Gross Profit % on Sales
Gross Profit Sales 100 1
Profitability/Operating efficiency
2.
Gross Profit % on Cost of Sales

Gross Profit Cost of Sales
100 1
3.
Net Profit % before Tax on Sales X

100 1
Net Profit before Tax Sales
4.
Net Profit % after Tax on Sales X

100 1
Net Profit after Tax Sales
5. Operating expenses % on Sales 100 Operating expenses Profitability/Operating efficiency X

Sales 1
6.
Current Ratio
Current Assets : Current Liabilities
Liquidity/Operating efficiency Liquidity/Operating efficiency
7.
Acid test Ratio

Current Assets - Inventory : Current Liabilities
8.
Rate of Stock Turnover

Cost of Sales Average Stock
Liquidity/Operating efficiency
9.
Number of Months stock on hand

Average Stock Cost of Sales
12 1
Liquidity/Operating efficiency
10.
Average Debtors collection period X

365 1
Average debtors Credit Sales
Liquidity/Operating efficiency/Risk
11.
Average Creditors payment X

365 1
Average Creditors Credit Purchases
Liquidity/Operating efficiency/Risk
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Accounting Exam Revision Learners Guide Spring School October 2011 www.learnxtra.co.za 12. 13. Net Current assets
Current Assets Current Liabilities
Profitability/Solvency Profitability/Solvency
Solvency Ratio
Total Assets : Total Liabilities
14.
Solvency Amount (NET ASSETS)
Total Assets - Total Liabilities
Profitability/Solvency
X
100 1
15.
Profitability on total assets

Net Profit after Tax Total assets
Profitability/
Operating efficiency/Returns
16.
Return on Shareholders Equity (ROSHE) X

100 1
Net Profit after Tax Average Shareholders equity
Profitability/Operating efficiency/ Returns
17.
Return on average capital employed (ROTCE) X

100 1
Net Profit before Tax + Interest on Loan Average Capital employed
Profitability/
18.
Earnings per share X

100 1
Net Profit after Tax Number of issued shares
Profitability/
19.
Dividends per share X

100 1
Dividends paid and declared Number of issued shares
Profitability/
20.
Gearing Ratio/Debt Equity ratio
Non current Liabilities : Shareholders Equity
Risk
21.
Net Asset value per Share X

100 1
Shareholders Equity Number of issued shares
Profitability/
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Topic 1:
Cash Flow Statement and Analysis of Ratios
QUESTION 1 Cash Flow Statement and Interpretation (Adapted from March 2010 Question 5) (70 marks; 45 minutes) You are provided with information relating to Zee Limited, a public company. The company issued additional shares half-way through the year, 31 August 2009. REQUIRED: Study the information provided and answers the question which follows: 1.1 1.2 1.3 Prepare the Appropriation Account on 28 February 2010. Complete the Cash 28 February 2010. Flow Statement for the year ended (23) (4) (3) (5) (11)
Calculate the following for 2010: 1.3.1 Rate of stock turnover 1.3.2 Debt Equity ratio 1.3.3 % Return on average shareholders equity The Cash Flow Statement reflects some important decisions that have been taken by the directors during the current financial period. Explain three of these decisions and their effect on the company. Explain whether these decisions are good ones or not and quote figures to support your answer.
1.4
(9)
1.5
One of the directors is of the opinion that the company should make more use of loans. Do you agree? Quote two relevant financial indicators to support your answer. The directors feel that the shareholders should be satisfied with performance of the company. Do you agree? Comment on dividends, earnings and % return earned by the shareholders in 2010 financial year. Quote financial indicators (actual ratios percentages) to support your comments. The following financial indicators were calculated: Earnings per share Dividends per share Return on Average Capital Employed Return on Average Shareholders Equity Net Asset value per share Debt Equity ratio 2010 23 cents 35 cents 31,7% ? 61,43cents ? 2009 40 cents 25 cents 35% 55% 119 cents 0,5:1 the the the or
(5)
1.6
(10)
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Accounting Exam Revision Learners Guide Spring School October 2011 www.learnxtra.co.za INFORMATION: 1. EXTRACT FROM THE INCOME STATEMENT FOR THE YEAR ENDED 28 FEBRUARY 2010 Cost of Sales Depreciation Disposal of fixed assets (book value R1 047 000) Interest expense Net profit before tax Income tax 2. R1 330 000 56 000 0 (78 750) 747 000 224 000
EXTRACT FROM THE BALANCE SHEET ON 28 FEBRUARY 2010 2010 R Ordinary shareholders equity Ordinary share capital (par value 50 cents) Share premium Retained Income Long Term liabilities (15% p.a.) Investment in fixed deposit Inventories Debtors Creditors Bank (favourable balance) Bank overdraft Fixed/tangible Assets SARS Income Tax Shareholders for Dividends 1 966 000 1 600 000 200 000 166 000 125 000 80 000 210 000 140 000 142 100 ? 1 928 600 45 000 Dr 320 000 2009 R 768 000 700 000 0 68 000 940 000 330 000 175 000 112 000 82 250 922 000 2 937 600 17 500 Cr 175 000
70
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Learner Answer book

QUESTION 1 1.1 General Ledger of Zee Limited Final Accounts Section
APPROPRIATION ACCOUNT
11
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Accounting Exam Revision Learners Guide Spring School October 2011 www.learnxtra.co.za 1.2 ZEE LIMITED CASH-FLOW STATEMENT FOR THE YEAR ENDED 28 FEBRUARY 2010 Cash effects of operating activities Cash generated from operations (Note 1) Interest paid Dividends paid
Cash effects of investing activities Purchase of fixed assets Proceeds of sale of fixed assets
Cash effects of financing activities
Net change in cash equivalents Cash equivalents beginning of year Cash equivalents end of year (922 000)
23
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Accounting Exam Revision Learners Guide Spring School October 2011 www.learnxtra.co.za NOTES TO THE CASH FLOW STATEMENT 1. Reconciliation between profit before taxation and Cash generated from operations Profit before taxation Adjustments i.r.o. Depreciation Interest expense Operating profit before changes in working capital Cash effects of changes in working capital
Changes in inventory Changes in debtors Changes in creditors
Cash generated/utilised from operations 2. Cash and cash equivalents Bank * Cash float Petty cash * Bank overdraft ( ) bracket 3. Dividends paid Dividends for the year as reflected in financial statements Balance at the beginning of year Balance at the end of current year Dividends paid Taxation paid Income Tax for the year as reflected in financial statements Balance at the beginning of year Balance at the end of current year Taxation paid Tangible assets purchased / Fixed assets purchased / Property, plant and equipment purchased Land and buildings Equipment Vehicles Net change Year 2 Year 1
4.
5.
3.
Fixed assets / Tangible assets / Property, plant and equipment Brought to you by
Land and
Vehicles
Equipment
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buildings
Cost Accumulated depreciation Carrying value end of previous year Movements Additions at cost Disposals at carrying value Depreciation for the year Carrying value end of current year Cost Accumulated depreciation Carrying value end of current year
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Topic Tips for Financial Statements Overview

Income Statement Balance Sheet
Income Statement
Key Concepts Income vsExpenses Profit / Loss GAAP (Genarally accepted accounting principles) matching Common Errors Incorrect format Foreign items i.e. assets and liabilities Calculations not shown in brackets
Balance Sheet
Key Concepts Assets = Owner's equity + Liabilities Non - current assets VS Current assets Non - current liabilities VS Current liabilities GAAP Common Errors Incorrect format Foreign items i.e. Income statement items Study Hints Begin with the given information from the Pre-adjustment trial balance. (nominal accounts) Time limit per adjustment.
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Topic 2:
Financial Statements
Question 1 Balance Sheet

Adapted from March, 2011, Paper 1, Question 5 QUESTION 1: FINANCIAL STATEMENTS OF A COMPANY You are provided with information relating to Headwork Limited for the year ended 30 September 2010. REQUIRED: 1.1 1.2 Prepare the SARS (income tax) Account in the General Ledger. Prepare the following on 30 September 2010: 1.2.1 Notes to the Balance Sheet for: Retained Income Trade and other payables Equity and Liabilities section of the Balance Sheet (10) (8) (21) (12)
1.2.2
1.3 1.3.1 1.3.2 1.4
Calculate the following on 30 September 2010: Net asset value per share Debt-equity ratio You were one of the original shareholders who bought shares at the par value of R3,00 when the company was established many years ago. You are also aware that the price of the shares on the JSE is currently R5,75. Refer to Information 2B below. Would you be happy with the issue of the new shares on 1 April at a premium of R2,80? Explain TWO points, quoting figures or financial indicators to support your answer. (3) (3)
(7)
1.5
Comment on risk and gearing of the company. Explain TWO points, quoting figures or financial indicators to support your answer Apart from the financial indicators calculated above, you are also informed of the following: Return on total capital employed 23% Interest rate on loans 13% to 15% (6)
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Accounting Exam Revision Learners Guide Spring School October 2011 www.learnxtra.co.za INFORMATION: Extract from the financial records of Headwork Ltd on 30 September 2010: Balance Sheet accounts section Retained income (1 October 2009) Creditors' control Expenses payable (accrued) Bank overdraft Nominal accounts section Interest on loan Rent income Ordinary share dividends 2. Adjustments and additional information: A. The income tax details are as follows: The amount owed to SARS on 1 October 2009 R11 000 The amount owed to SARS in respect of the previous financial year was paid on 30 October 2009. The total tax assessment for the 2010 financial year R243 600 First provisional tax payment made on 31 March 2010 R115 000 Second provisional tax payment made on 28 September 2010 ? Amount owing to SARS on 30 September 2010 R19 400
R 960 000 87 500 50 400 ?
103 600 105 980 112 000
B. 800 000 shares have been issued before 1 October 2009 (all of these shares were issued at the par value of R3,00). On 1 April 2010, 100 000 new shares were issued at a premium of R2,80 per share. C. D. Net profit after tax for the year is R626 400. The loan statement received from City Bank reflected the following: Balance at the beginning of the year Interest capitalised Monthly payments to City Bank Balance at the end of the year R880 000 R103 600 for the year R 15 800 per month ?
In terms of the loan agreement, fixed monthly repayments of capital plus interest is to be paid until the loan is settled. E. Rent income for October 2010 was received in September 2010. The rent was increased by R820 per month on 1 July 2010. F. H. A final dividend of 20 cents per share was declared at the end of the year. G. The total current assets amounted to R846 900. The current ratio for 2010 is 1,8 : 1. Page 20
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Learner Answer Book

1.1
1.2.1
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Accounting Exam Revision Learners Guide Spring School October 2011 www.learnxtra.co.za 1.2.1
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Question 2 Income Statement

Adapted from November, 2008, Paper 1, Question 4 COMPANY REPORTING 2.1 INCOME STATEMENT
You are provided with information relating to Samora Sports Limited. The company sells sports equipment and repairs equipment for their customers. REQUIRED: Prepare the Income Statement for the year ended 30 June 2008 after taking all the adjustments and additional information into account. (50) INFORMATION: 1. Figures extracted from the Pre-Adjustment Trial Balance on 30 June 2008: Ordinary share capital (R5 par value) Fixed deposit Trading stock Debtors control Equipment (for office and shop) Accumulated depreciation on office and shop equipment Mortgage loan from Credbank Sales Debtors allowances Cost of sales Service fee income (in respect of repair services) Rent income Interest income Salaries and wages Employers' contributions to Pension Fund and UIF Audit fees Directors fees Consumable stores Bank charges Sundry expenses R 1 200 000 160 000 215 000 39 090 224 000 130 000 281 200 1 703 200 17 000 ? 297 140 105 000 11 200 234 750 53 200 30 000 230 000 51 100 5 240 ?
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Accounting Exam Revision Learners Guide Spring School October 2011 www.learnxtra.co.za 2. Adjustments and additional information:
The auditors have identified the following errors or omissions: 2.1 The auditors are owed a further R28 000 after completing the audit.
2.2 Bank charges of R310 reflected on the June 2008 bank statement have not yet been entered in the books. 2.3 2.4 A credit note issued to a debtor, A Mona, dated 28 June 2008 was not recorded in the books. The credit note was for: Goods returned by A Mona, R 6 200 (the cost was R4 800) Price reduction on unsatisfactory repair of a tennis racket, R540 The stock count on 30 June 2008 revealed the following on hand: Trading stock, R202 000 Consumable stores, R900
2.5 An employee was left out of the Salaries Journal for June 2008. The details from his pay-slip were: Gross salary PAYE deduction (18%) Pension deduction (7,5%) UIF Net salary The business contributions were: Pension Fund: 10,5% of gross salary UIF: Rand-for-rand basis 2.6 The tenant paid the July and August rent in June 2008. The rent was increased by R700 per month on 1 January 2008. R6 000 (1 080) (450) (60) R4 410
2.7 Provide for depreciation on office and shop equipment at 10% p.a. on the diminishing-balance method. Note that new shop equipment costing R30 000 was purchased half-way through the financial year (this was properly recorded).
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Accounting Exam Revision Learners Guide Spring School October 2011 www.learnxtra.co.za 2.8 Interest on the loan was capitalised. The loan statement from Credbank on 30 June 2008 reflects the following: CREDBANK Loan statement on 30 June 2008 Balance on 1 July 2007 Interest charged Monthly payments to Credbank in terms of the loan agreement (12 months x R4 300) Balance on 30 June 2008
R332 800 ? R 51 600 R326 000
The interest expense for the year has not yet been entered in the books. 2.9 Use the following percentages to calculate the missing figures: Mark-up % achieved: 60% on cost Operating profit on sales: 20% Income tax rate: 30% of net profit
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Learner Answer Book

2.1 SAMORA SPORTS LIMITED INCOME STATEMENT FOR THE YEAR ENDED 30 JUNE 2008
Sales Cost of sales Gross profit Other income Service fee income Rent income
Operating expenses Salaries and wages Employer's contributions Audit fees Director's fees Consumable stores Bank charges Sundry expenses
Operating profit
Net profit before tax Income tax Net profit after tax
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Topic Tips for Manufacturing Accounts Overview of LEDGER ACCOUNTS

Direct / Raw Material stock Work in Process stock Finished Goods stock Consumable stores stock STOCK ACCOUNTS
Direct Material Factory Overheads Direct Labour Selling & Distribution Administration
COSTS ACCOUNTS
HEEDAS MANUFACTURERS NOTES TO THE FINANCIAL STATEMENTS 1. Direct material costs Opening stock Net purchases Carriage on purchases Custom duties Closing stock Direct material cost 2. Direct labour costs Factory wages Pension Fund Contributions Medical Aid Contributions UIF Contributions Direct labour cost 3. Factory overhead costs Indirect material Indirect labour Depreciation: factory plant Insurance Unemployment Insurance fund contributions Salaries ETC
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Accounting Exam Revision Learners Guide Spring School October 2011 www.learnxtra.co.za 4. Cost of finished goods sold Opening stock of finished goods Cost of finished goods produced during the year Debtors Allowances / Sales returns Closing stock of finished goods Cost of finished goods sold
HEEDAS MANUFACTURERS PRODUCTION COST STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2010
Notes Direct costs Direct material costs Direct labour costs Factory overhead costs Total manufacturing costs Work-in-process at beginning of the year Work-in-process at end of the year Cost of production of finished goods Key Concepts Direct materials Direct labour Factory Overheads Ratios Theory Common Errors Foreign items e.g. selling and distribution and admin costs Not apportioning the various expenses Adding the work in process at the end of year No calculations shown Study Hints Make sure you understand your ledger accounts Always show calculations Look at floor space when apportioning expenses Make sure you learn your ratios. Break even point Brought to you by 1 2 3
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Topic 3: Manufacturing Accounts Question 1 MANUFACTURING

1.1 (50 marks; 30 minutes) Gauteng department of education Prelim 2009 Question 3 PRODUCTION COST STATEMENT & PERIODIC STOCK
You are provided with information relating to Shaids Shoe Manufacturers for the financial year ended 31 December 2008. The business makes shoes, and sells these at a mark-up of 50% on cost. They use the perpetual inventory system for finished goods and periodic system for raw materials and indirect materials. REQUIRED: 1.1.1 Prepare the notes to calculate the Direct materials cost and factory overhead cost 1.1.2 Prepare the Production Cost Statement for the year ended 31 December INFORMATION: 1. The following balances appeared, amongst others, in the ledger at the beginning and end of the financial year. 1 January 2008 Raw materials stock 360 000 Work-in-process stock 68 200 Finished goods stock 750 000 Factory Indirect materials stock 64 000 31 December 2008 ? ? 110 000 27 000
(24) (12)
2.
Transactions during the year: Raw materials purchased on credit, R490 000 Raw materials purchased for cash, R356 000 Raw materials issued for production, R540 000 Raw materials donated by the factory to the local school, R10 000 Cost of transporting raw materials to the factory, R29 500 Factory indirect materials bought for cash, 79 000 Factory indirect materials returned to suppliers, R12 000 Wages paid to factory workers who make the shoes, R756 000 Salary paid to employees, R478 000 Included in this amount is the salary of the factory foremen R120 000 Commission on sales, R90 000 all sales are subject to a commission of 3%) Page 29
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Accounting Exam Revision Learners Guide Spring School October 2011 www.learnxtra.co.za Maintenance of factory equipment paid, R23 000 Water & electricity paid, R49 000 (this is to be split between the factory ,office and sales sections in the ratio 4:2:1 respectively) Rent paid, R157 200 (this is to be split across the various departments according to floor area - the factory accounts for 70% out of the total area) The rent for January 2009 was paid in advance and the lease agreement provides for an annual 10% increase of rental effective from 1 January each year. Shaids Shoe Manufacturers complies with the lease agreement. Depreciation on factory equipment amounts to R72 400. Bad debts, R34 000
1.2 You are provided with information relating to Gcenaphi Heaters, a business which manufactures only one type of heater REQUIRED: Use the information to 1.2.1 1.2.2 Calculate the gross profit Explain why it is important for a manufacturing business to calculate unit costs and a break -even-point each month Calculate the variable cost per unit for 2008 (4) 1.2.4 Calculate the break-even point for 2008 (4) (3)
(3)
1.2.3
INFORMATION: 1. There was no work-in-process at the beginning or end of the financial year 2. 3. 4. 5. 6. 7. 8. All heaters were sold at a fixed price of R114 each in 2008. Direct material cost per heater, R25. Prime cost per heater, R55. Total cost of production of finished heaters, R760 000. Number of heaters completed during the year, 10 000.
Number of heaters sold during the year, 10 000. Number of unsold heaters at the beginning of the financial year?? (The cost per unit of these heaters were the same as those that were produced this year.) 9. Administration costs for the year amounted to R240 000. 10. Selling and distribution costs for the year amounted to R117 000. 11. Number of unsold heaters at the end of the financial year, 300. Gcenaphi Heaters use the FIFO method of valuation of finished goods [50] Brought to you by Page 30
Accounting Exam Revision Learners Guide Spring School October 2011 www.learnxtra.co.za Learner Answer Book
Question 1 MANUFACTURING
1.1.1. CALCULATION OF RAW MATERIALS COST
(50 marks; 30 minutes)
CALCULATION OF FACTORY OVERHEAD COST
16 1.1.2 SHAIDS SHOE MANUFACTURERS PRODUCTION COST STATEMENT FOR YEAR ENDED 31 DECEMBER 2008
12
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Question 2
(45 marks; 25 minutes) Adapted from November 2008 Gauteng prelim Question 5 2.1 NERD MANUFACTURERS (32 marks) Nerd Manufactures makes school tracksuits and sell these at a mark up of 50 % on cost. REQUIRED: 2.1.1 Prepare the Production Cost Statement of NERD Manufacturers for the year ended 31 August 2008. Only the note for factory overhead costs is required. Workings must be shown in brackets where notes are not required so that part marks can be awarded. (28) 2.1.2 The owner, D. Dunn, is of the opinion that employees are not using the raw materials very effectively or track suits are being stolen in the factory. Recommend TWO internal control measures that could be implemented by management to solve these problems. INFORMATION: NERD MANUFACTURERS Balances on 1 September 2007: Factory plant Accumulated depreciation on factory plant Stocks on hand : Raw materials Work in progress Finished goods Consumable stores stock Transactions for the year ended 31 August 2008: Factory wages: Direct Indirect Purchases: Raw materials Factory plant purchased ( 1 February 2008 ) Rent Factory foremans salary Carriage on raw materials purchased Insurance Consumable stores purchased on credit Other Factory overheads
Manufacturing
(4)
260 000 84 000 14 700 3 400 4 200 1 600
156 000 9 200 136 000 140 000 24 000 86 000 5 800 5 600 5 900 25 200
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Accounting Exam Revision Learners Guide Spring School October 2011 www.learnxtra.co.za ADDITIONAL INFORMATION 1. Inventory on hand at 31 August 2008 is as follows: Raw materials R 6 000 Finished goods R12 600 Work in progress R10 870 Consumable stores R 2 100 2. 3. The factory plant is depreciated at 15% p.a. on the carrying value. 80% of the consumable stores is used in the factory and the balance used in sales The rent must be apportioned as follows: Factory 60% and the rest equally between sales and administration. Insurance must be divided among the factory, sales and office in proportion to the floor area which is currently in the ratio 4:2:1 respectively.
4.
5.
2.2 SOWETO SHOE FACTORY (13 marks) SOWETO SHOE FACTORY manufactures sport shoes. The factory produced 36 000 pairs of shoes during the year and all were sold. There was no work in progress stock either at the beginning or at the end of the year. REQUIRED: 2.2.1 Calculate the unit cost of production. (3) 2.2.2 Calculate the number of pairs of shoes that must be produced and sold to break even. INFORMATION extracted from the Production Cost Statement for the year ended 29 February 2008. Direct material cost R1 980 000 Direct labour cost 2 592 000 Factory overheat cost 864 000 Total cost of production 5 436 000 Information from the Income Statement for the year ended 29 February 2008 Sales R8 964 000 Cost of sales 5 436 000 Administration cost (all fixed costs) 540 000 Selling and distribution cost (all Variable costs) 792 000 Net profit for the year 2 196 000
(10)
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Solutions to Topic 1 Cash Flow Statement and Analysis of Ratios

QUESTION 1 1.1 General Ledger of Zee Limited Final Accounts Section
APPROPRIATION ACCOUNT 2010 Feb 28 2010 Income Tax 224 000 Feb 28 Profit and Loss 747 000
Ordinary share dividends Retained Income
425 000 166 000
Retained Income
68 000
815 000
815 000
11
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Accounting Exam Revision Learners Guide Spring School October 2011 www.learnxtra.co.za 1.2 ZEE LIMITED CASH-FLOW STATEMENT FOR THE YEAR ENDED 28 FEBRUARY 2010 Cash effects of operating activities Cash generated from operations (Note 1) Interest paid Dividends paid (175 000 + 425 000 320 000) Income tax paid (17 500 + 224 000 + 45 000 ) Cash effects of investing activities Purchase of fixed assets
(56 000 + 1 928 600 + 1 047 000 2 937 600 )
233 350 878 600 (78 750) (280 000)
(286 500) 1203 000 (94 000) 1 047 000
Proceeds of sale of fixed assets Proceeds of financial assets matured

(330 000 80 000 )
250 000
Cash effects of financing activities Proceeds of issue of shares (1 800 000 700 000 ) Repayment of long-term loan (940 000 125 000 )
285 000 1 100 000 (815 000)
Net change in cash equivalents Cash equivalents beginning of year Cash equivalents end of year
1 721 350 (922 000) 799 350
23
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Accounting Exam Revision Learners Guide Spring School October 2011 www.learnxtra.co.za 1.3.1 Rate of stock turnover Cost of Sales Average Stock 1 330 000 (210 000 + 175 000)/2 61,43 1.3.2 Debt/Equity Ratio Non-current liabilities: Shareholders Equity 125 000 : 1 966 000 = 0,06:1 1.3.3 % Return on average shareholders equity Net profit after tax Average shareholders equity 747 000 224 000 (1 966 000 + 768 000) / 2 523 000 x 1 367 000 38,25% 1.4
Excellent explanation with figures = 3 marks; good/satisfactory explanation with figures= 2 marks; satisfactory explanation with no figure = 1 mark; incorrect explanation = 0 marks
x 100 1
x 100 1
100 1 5
Issued shares generated R1 100 000 in order to repay loan and eliminate bank overdraft Sold fixed assets generated R1 047 000 in order to repay loan and eliminate bank overdraft Used cash generated from issuing of shares and sale of fixed assets to repay loan R815 000 to improve cash flow 9
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Accounting Exam Revision Learners Guide Spring School October 2011 www.learnxtra.co.za 1.5 Yes Two relevant financial indicators
The debt : equity ratio decreased from 0,5:1 to 0,06:1 (shareholders equity greatly exceeds long-term debts) Return on capital employed is 31,7% which exceeds the interest rate of 15% indicating positive gearing. The risk has been reduced. 5
1.6
Yes/No Earnings per share decreased from 40 cents 23 cents (7 cents) Dividends increased from 25 cents 35 cents (10 cents). This year dividends were 12 cents higher than the earnings which indicate that the dividends are being supported by accumulated funds and that less funds are being retained for the future. % return on shareholders equity decreased substantially from 55% to 38,25%. The return still exceeds returns on alternative investments. 10
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Solutions to Topic 2: Financial Statements Question 1 Balance Sheet

1.1 General Ledger of Headwork Limited Sars(Income tax) 2009 2009 Oct 30 Bank 11 000 Oct 1 Balance Bank 2010 115 000 Sept 30 Income tax Bank 109 200 Balance c/d 19 400 254 600 2010 Oct 1 Balance b/d 254 600 19 400
b/d 11 000 243 600
1.2.1 NOTES TO THE BALANCE SHEET Note 1. Retained income Balance at the beginning of the year Net profit after tax Dividends for the year Interim Final (900 000 x 20c) Balance at the end of the year Note 2. Trade and other payables Trade creditors Expenses payable (accrued) Income received in advance (Deferred income) SARS (Income tax) Shareholders for dividends
960 000 626 400 (292 000) 112 000 180 000 1 294 400
87 500 50 400 8 720 19 400 180 000 346 020
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Accounting Exam Revision Learners Guide Spring School October 2011 www.learnxtra.co.za 1.2.2 BALANCE SHEET ON 30 SEPTEMBER 2010 ASSETS Fixed assets Current assets R 4 606 000 846 900
TOTAL ASSETS
5 452 900
EQUITY AND LIABILITIES Shareholders' equity Ordinary share capital 900 000 x R3,00 Share premium 100 000 x R2,80 Retained income Note 1 4 274 400 2 700 000 280 000 1 294 400
Non-current liabilities Loan from City Bank 880 000 + 103 600 189 600 86 000 Current liabilities Note 2 Trade and other payables Current portion of loan (may be shown in Note 2) Bank overdraft TOTAL EQUITY AND LIABILITIES
708 000 708 000
470 500 346 020 86 000 38 480 5 452 900
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1.3.1 Net asset value per share. R4 274 400 / 900 000 shares = 474,9 cents 1.3.2 Debt-equity ratio. R708 000 : R4 274 400 = 0,16 : 1 or 0,2 : 1 OR R794 000 : R4 274 400 = 0,19 : 1 or 0,2 : 1 1.4 Yes / No: Yes Quote figures
Explanation: TWO points Any TWO valid points e.g.
The issue price of R5,80 is higher than the value of the share according to the books (NAV of R4,75) this enhances the value of the share in the books. The issue price of R5,80 is approximately the same as the market price of R5,75 the directors have sold the new shares at a realistic value. The shareholders who bought the shares when the company started took a risk at a value of R3,00 the public is now prepared to pay R5,75 for those shares this is fair to the existing shareholders because the new shareholders are paying a realistic price without taking the initial risk.
1.5 TWO points Quote figures Any TWO valid points e.g. The debt-equity ratio of 0,2 : 1 is low, which indicates the company is not heavily funded by equity which means it is in a low-risk position. The ROTCE of 23% exceeds the interest rates of between 13% and 15% which means that the company can gear up its returns to shareholders by making use of borrowed funds.
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Question 2 Income Statement

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

1.1.1. CALCULATION OF RAW MATERIALS COST Opening stock Purchases(490 000+356 000-10 000) Carriage on purchases Closing stock Raw materials issued to production
(50 marks; 30 minutes)
360 000 836 000 29 500 1 225 500 685 500 540 000
CALCULATION OF FACTORY OVERHEAD COST Factory indirect materials (64 000+79 00012 000-27 000 Factory maintenance Salary to factory foreman Water & electricity (/7 x 49 000 ) Factory rent (144 000 x 70%) Depreciation on factory equipment -1 for salesmen's commission/bad debts 16
104 000 23 000 120 000 28 000 100 800 72 400 448 200
1.1.2 SHAIDS SHOE MANUFACTURERS PRODUCTION COST STATEMENT FOR YEAR ENDED 31 DECEMBER 2008 Prime / Direct cost Direct materials cost Direct labour cost Factory overhead cost Total manufacturing costs Work-in-process at the beginning of the year Work-in-process at the end of the year Cost of production of finished goods 1 296 000 540 000 756 000 448 200 1 744 200 68 200 1 812 400 452 400 1 360 000 see DMC see FOC 12
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1.2 1.2.1 Calculate the gross profit Sales(10 000xR114) Cost of sales(10 000x R76) Gross profit for the year 1 140 000 760 000 380 000
1.2.2
Any valid explanation Good answer=3 Satisfactory=2 poor=1 Incorrect=0 To make comparisons To identify potential problem cost items in advance To assess whether it is practical for the business to achieve the desired production that will result in a profit 3
1.2.3
Calculate the variable cost per unit Direct material+ direct labour + selling and distribution =R25 + R30 + R11,70 =R66,70
4 1.2.4 F/C/contribution per unit = 450 000/(114-66,7) =450 000/47,3 =9513 OR 9514 Brought to you by
accept if same as 3.2.3 4 Page 43
Question 2 Manufacturing
QUESTION 2 NERD MANUFACTURERS Production Cost Statement for the year ended 31 August 2008. DIRECT COSTS 306 500 Direct material costs 150 500 (14 700 + 136 000 + 5 800 6 000 ) Direct labour costs 156 000 Factory overhead costs 180 970 Total manufacturing cost 487 470 Work in progress at the beginning of the year 3 400 490 870 Work in progress at the end of the year (10 870) Cost of production of finished goods Note to Financial Statements Factory overhead costs Consumable stores (1 600 + 5 900 2 100 ) X 80% Indirect labour Rent ( 24 000 X 60% ) Foremans salary Insurance (5 600 X 4/7 ) Other Factory overheads Depreciation (26 400 + 12 250) 480 000
4 320 9 200 14 400 86 000 3 200 25 200 38 650 180 970 28
2.1.2
Two control measures Possible answers:
Regular stock counts of raw materials and finished goods and compare to the ledger. Supervise the usage of raw materials by obtaining correct cutting of fabric measurements minimising wastage/ off cuts. Train employees to use raw materials economically. Supervisor monitors the number of units cut from the raw materials. Supervisor to monitor the number of units made by each employee and make them answerable for shortages. Completed stock should be securely kept in a stock room and not lying around on the factory floor. Proper stock records must be maintained.
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Accounting Exam Revision Learners Guide Spring School October 2011 www.learnxtra.co.za 2.2 2.2.1 Soweto Shoe Factory Calculate the unit cost of production. 5 436 000 / 36 000 =R151 3 2.2.2 Calculate the number of pairs of shoes that must be produced and sold to break even. Fixed costs / selling price per unit variable cost per unit = (864 000 + 540 000 ) / (249 149 ) = 1 404 000 / 100 = 14 040 units
SP per unit = 8 964 000 / 36 000 = R249 VC per unit = (1 980 000 + 2 592 000 + 792 000) / 36 000 = 5 364 000 / 36 000 = R 149 10
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Accounting Spring School 2011 3 - 7 October Learner's Guide: RD TH

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Accounting Spring School 2011 3 - 7 October Learner's Guide: RD TH

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Accounting Spring School 2011 3rd 7th October Learners Guide

Spring School Broadcast Schedule

Physical Sciences Paper 1: Mechanics

Maths Paper 1: Functions Maths Literacy: Financial Maths

Cash Flow Statement and Notes

20.1 XX XX XX XX XX XX XX XX Investing activities Investing activities

Operating activities operating activities Flow of cash

Financing activities Financing activities

Operating Activities Flow of cash

Interpretation of Financial Statements

Gross Profit % on Cost of Sales

Net Profit % before Tax on Sales X

Net Profit before Tax Sales

Net Profit % after Tax on Sales X

Net Profit after Tax Sales

5. Operating expenses % on Sales 100 Operating expenses Profitability/Operating efficiency X

Liquidity/Operating efficiency Liquidity/Operating efficiency

Acid test Ratio

Rate of Stock Turnover

Number of Months stock on hand

Average Debtors collection period X

Average debtors Credit Sales

Average Creditors payment X

Average Creditors Credit Purchases

Solvency Amount (NET ASSETS)

Total Assets - Total Liabilities

Profitability on total assets

Return on Shareholders Equity (ROSHE) X

Net Profit after Tax Average Shareholders equity

Profitability/Operating efficiency/ Returns

Return on average capital employed (ROTCE) X

Net Profit before Tax + Interest on Loan Average Capital employed

Earnings per share X

Net Profit after Tax Number of issued shares

Dividends per share X

Dividends paid and declared Number of issued shares

Gearing Ratio/Debt Equity ratio

Non current Liabilities : Shareholders Equity

Net Asset value per Share X

Shareholders Equity Number of issued shares

Cash Flow Statement and Analysis of Ratios

Learner Answer book

Cash effects of financing activities

Topic Tips for Financial Statements Overview

Question 1 Balance Sheet

1.3 1.3.1 1.3.2 1.4

R 960 000 87 500 50 400 ?

103 600 105 980 112 000

Learner Answer Book

Question 2 Income Statement

R332 800 ? R 51 600 R326 000

Learner Answer Book

Topic Tips for Manufacturing Accounts Overview of LEDGER ACCOUNTS

Topic 3: Manufacturing Accounts Question 1 MANUFACTURING

(50 marks; 30 minutes)

CALCULATION OF FACTORY OVERHEAD COST

260 000 84 000 14 700 3 400 4 200 1 600

Solutions to Topic 1 Cash Flow Statement and Analysis of Ratios

Ordinary share dividends Retained Income

425 000 166 000

233 350 878 600 (78 750) (280 000)

(286 500) 1203 000 (94 000) 1 047 000