Term 1

Net profit: The positive surplus of income over expenses, calculated as gross profit plus income less operating expenses.

Income tax: Tax calculated on the net profit for the year is not an expense – it is an appropriation of income. Provisional income tax: Tax paid during the financial year, six months after the beginning of the financial year.

Dividends: Distribution of a portion of the company’s net profit to shareholders, as suggested by the board of directors and approved by shareholders. For example, 5c per share.

Retained income: Portion of net profit after income tax and dividends have been appropriated, and retained by the company as a distributable reserve. The distributable reserve is available for distribution to shareholders.

Appropriation account: A final account used only on the last day of the financial year to appropriate net profit and distributable reserves.

Aspects pertaining to the financial statements

Only abridged (statutory) financial statements are published. These shortened financial statements are compiled to the minimum set of criteria as required by the Companies Act. Comparative figures are also indicated.

Income Statement (Statement of comprehensive income): A statement to measure the performance of the company in terms of income and expenses, as a profit or loss for the year.

Balance Sheet: A statement to show the financial position of a business at a specific time in terms of assets owned, liabilities owed and equity in terms of how much has been invested in the company and what the source of investment was.

Cash flow statement: A statement to provide information about the cash and cash equivalents on hand on the first day of the financial year, as well as the changes in cash and cash equivalents due to the inflow oroutflow of cash as a result of operating activities, investing activities and financing activities. This provides the cash and cash equivalents on the last day of the financial year.

Notes to the financial statements: These are explanatory notes to set out accounting procedures and policies.

Statement of changes in equity: These are explanatory notes to set out accounting procedures and policies.

Auditors’ report: The auditor provides a written report based on the external audit of the financial statements, giving an ‘audit opinion’ about whether the financial statements give a ‘true and fair’ view of the state of affairs of the organisation and operations for the period.

  • ‘True’ means that a transaction did take place and that an asset exists.
  • ‘Fair’ means that a transaction is fairly valued and that assets and liabilities are fairly stated.

Directors’ report: This contains information on the activities of the company during the past financial year, a perspective on the next financial year, as well as other important matters. Users of financial statements

Different users need the information contained in financial statements in order to satisfy different requirements:

  • Internal users are people directly involved with the management of the business.
  • External users are people ororganisations that have a financial interest in the business, but are not directly involved with the management of the business.

Investors (owners)

Investors provide capital and are concerned with the risk inherent in, and return provided by, their investments. They use information to decide whether they should buy, hold or sell their interest in the business. Shareholders use information to assess the ability of the business to pay dividends.

Board of directors and management

The financial statements provide records of assets owned, liabilities owed and money invested. They help to manage the business and provide a way to measure the effectiveness of different sections and business as a whole. They monitor activities, performance and position and help with evaluation control processes.

Employees

Employees and labour unions are interested in information about the stability and profitability of their employers. They use information to measure the ability of the business to provide remuneration, retirement benefits and employment opportunities.

Banks, suppliers and other trade creditors

  • Banks use information to determine whether loans and interest will be paid when due.
  • Suppliers and other creditors use information to determine if amounts owed to them will be paid when due.

Government, SARS and other agencies

  • SARS is interested in turnover (VAT is payable on sales), wages and salaries (income tax and PAYE are payable), import duties and profits (tax is payable on net profit).
  • Governments and their agencies are interested in the allocation of resources and the activities of businesses. They also require information to regulate the activities of businesses, determine taxation policies and to form the basis for national income and similar statistics.

The public and customers

Businesses may make a significant contribution to the local economy in many ways, including the number of people they employ and their support of local suppliers. The financial statements may provide information about trends, changes and the range of activities.Customers have an interest in the continued success of a business especially when they have a long-term association with, or are dependent on, that business.

Basic principles of accounting and financial statements (GAAP & IFRS)

Historical cost

Transactions are recorded at historical cost price. Historical cost is the amount of resources given up to acquire the asset or consume the service or the amount of liability incurred. An increase in the value of assets in following financial years is not indicated as an increase in income. A building was purchased in 2005 for R600 000. The value of the building if it is sold today is R1 000 000. Land and buildings are shown as R600 000 on the Balance Sheet.

Prudence

The elements of the financial statements are conservative to make sure that assets and income are not overstated and that liabilities and expenses are not understated. The probability exists that not all trade debtors are going to pay the full amount owed to the business. So bad debts are possible. A contra account to Trade debtors, called Provision for bad debts, is opened. This brings the Trade debtors balance to the amount that is expected to be realised and prevents assets from being overstated. Stock is valued at the lower of cost or net realisable value to ensure that the value indicated in the Balance Sheet can be derived when selling stock.

Materiality

Information is material when it has the ability to influence the decisions of users of financial statements due to the amount involved or the importance of the event. The remuneration paid to the executives and the directors is material. The accounting policies are material because they help the users to understand the figures.

Business entity

The business and its owners are seen as two separately identifiable parties and the activities of a business are kept separate from its owners.

Going concern

The business is a ‘going concern’ and it is expected to remain in operation in the foreseeable future (the next financial year). It is not foreseen that the business will be liquidated in the near future. Notice the distinctions between:

  • Fixed assets and current assets
  • Short and long-term liabilities
  • Capital and revenue expenditure.

If a company is in serious financial trouble and the Board of Directors has passed a resolution to liquidate the business, the company is not a going concern.

Matching (Accrual)

Incomes and expenses are recognised in the financial year when they occur and not when cash is received or paid. This ensures accurate net income figures. A business will realise the expense of the electricity bill during the current financial year when it is received and not during the next financial year when it is paid, because the service has already been used.

Substance over form

The financial impact of an event is measured instead of its legal form. Land and buildings are purchased at R2 000 000 during the last month of the current financial year. The registration process will only be finalised during the next financial year. The land and buildings are included in the current Balance Sheet.

Consistency and comparability

Best accounting practice involves applying IFRS principles consistently. This makes accounting information understandable, relevant, reliable and comparable. Accounting policies should only change for a valid reason. Comparable accounting information allows users to compare the current financial period with previous financial periods, as well as with other similar companies.

  • The 2014 financial statements will include the corresponding 2013 figures.
  • The 2014 financial statements of Alpha Traders Limited can be compared with the 2013 financial statements of Alpha Traders Limited to see whether the performance and position has improved or deteriorated.
  • The 2014 financial statements of Alpha Traders Limited can be compared with the 2014 financial statements of Omega Traders Limited to see the difference in the performance and position of these two companies.

Monetary unit

The currency of the country (R) is the monetary unit used as the basis of measurement. A business only accounts for those things that can be measured in terms of currency. If the business is the cause of a natural disaster (oil spill), they report the financial impact in the form of claims paid, damages paid, clean-up costs, etc.

Accounting period

Financial statements are prepared for an accounting period and the results are reported on a periodic basis (such as every 12 months). The Income Statement provides insight into the performance of the company for a period of time.

The Balance Sheet (or statement of financial position) provides a snapshot of the financial position of a business (assets, liabilities and equity) at the end of the time period.

The cash flow statement and the statement of changes in equity provide details of how the company’s financial position changed during the time period.

Published financial statements (public companies)

The board of directors

A company is managed by a board of directors. The directors are individuals elected as representatives of the stockholders in order to govern the company and look after shareholders’ interests. The owners of the company (shareholders) appoint the board.

  • The executive director is a full-time employee who has a specific decision-making role, for example, Chief Financial Officer or CFO.
  • A non-executive director is a non-working director who does not take part in the day-today management of the company.

Duties of the directors

  • Prepare the financial statements in accordance with applicable laws (company act, tax law) and regulations (IFRS & GAAP).
  • Select and apply accounting policies.
  • Present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information.
  • Provide additional disclosures, when compliance with the specific requirements in IFRS are insufficient to enable users to understand the impact of particular transactions and other events and conditions on the business’s financial position and financial performance.
  • Make an assessment of the company’s ability to continue as a going concern.
  • Take responsibility for keeping proper accounting records which disclose with reasonable accuracy the financial position of the company at any time.
  • Safeguard assets.
  • Take reasonable steps to prevent and detect fraud and other irregularities.
  • See to the preparation of a directors’ report and directors’ remuneration report.
  • Make decisions on company issues:
    • set company policy and objectives
    • employ the CEO and other executives
    • propose dividends
    • issue additional shares.

    The annual general meeting (AGM)

    Shareholders at the AGM vote according to the number of shares they own:

    • Acceptance of the audited financial statements
    • Approval of the recommended dividends
    • Appointment of board members
    • Appointment of auditors.

    South African Institute of Chartered Accountants (SAICA)

    SAICA is a professional body for chartered accountants and independent auditors:

    • It issues guidelines and statements on generally accepted accounting practice (GAAP).
    • It offers in-service training.
    • It has a Code of Conduct which all members must follow. Failure to do this will result in their names being removed from SAICA and the members not being allowed to practise as accountants or independent auditors.

    Internal control

    Internal control is a management tool. Management sets in place policy measures, methods and procedures to ensure that they can achieve the company’s objectives and goals. Examples of these are to ensure that there are no fatal accidents, that production hours are not lost, that they have procedures to curb mistakes, fraud and embezzlement.

    Reasons for internal control measures

    • Assets and income (cash) are protected from theft and fraud.
    • Workers comply with accounting policies, safety procedures, laws and regulations in the workplace.
    • Assets and resources are used effectively, efficiently and economically.
    • All employees work towards achieving the objectives of the business. Tax regulations and laws governing business should be followed.

    Fraud

    Fraud is a false representation of facts with the intent to deceive (either by words or conduct) or misleading allegations or non-disclosure.

      Occupational fraud: Misuse/misappropriation of employer’s assets or resources for personal gain.

      Embezzlement: Theft of money by means of false entries in the financial records.

      Kick-backs: These can be in the form of cash, receipts from suppliers for preferential treatment or information.

    Types of control measures

    Preventative measures prevent undesired events, errors and costs. For example storing cash in a drop safe, putting up signs for wet floors, no smoking, no cell phones.

    Detective measures investigate errors and irregularitiesafter they have occurred. For example fire alarm, security videos.

    Corrective measures repair or correct errors and the effects of undesired events. For example, have a security guard on duty after being burgled.

    Internal accounting control procedures

    • Keep accounting records up to date, neat and in proper order.
    • Do independent internal audits.
    • Authorised staff must approve journal entries.
    • Maintain and follow a current organisational chart.
    • A properly qualified professional should head up the accounting department.
    • More than one person should be responsible for the following duties (segregation of duties):
      • authorising transactions
      • recording transactions that follow on one another
      • controlling assets.
      • Rotate employees from time to time.

      Auditing

      An audit involves collecting and evaluating information on financial transactions and financial statements. Set objectives and criteria are compared with the actual results achieved. This is done by measuring and evaluating the effectiveness of existing internal controls (that concern the accounting policy of the business), and how effectively they are applied.

      Internal auditor

      The internal auditor is an employee of the company whose job is to provide independent and objective evaluations to the audit committee and board of directors

      Internal audit

      Internal audits are the responsibility of management and are done by the internal auditor.

      The following aspects are audited:

        The implementation and/or effectiveness of financial activities, accounting procedures, operational efficiencies and corporate governance to ensure that these are in place and are actually followed.

        Identifying problem areas and taking corrective action.

        Ensuring effective control and management of resources and other assets.

      External auditor

      The external auditor is a suitably qualified person with a certified accounting designation who reports independently on the state of a company’s business by providing an auditor’s report.

      External auditing

      External audits are done by independent auditors to express an unbiased opinion of the company’s financial statements. They need to assure shareholders that:

      • the financial statements are reliable and free from material error
      • the financial statements are a true and fair representation of the company’s financial results and position for the past financial year
      • the financial statements are prepared in accordance with IFRS and GAAP.

      It is important to note that the primary function of an audit is not to detect fraud. External audits may be conducted as special-purpose audits. Forensic audits are done to detect fraud or embezzlement.

    Gathering audit evidence

    The auditor includes all information obtained by means of inspection, observation, inquiry and confirmation, recalculation, performing calculations and analytical procedures. In a typical audit the auditor will identify staff involved in consecutive handling of accounting transactions, for example the person who receives cash, the person who deposits cash, the person who does the bank reconciliation, etc. The auditor will make sure of:

    • the accuracy of the source document
    • the authorisation of the transaction
    • the accuracy of recording transaction in the accounting records
    • the control measures in place to safeguard assets.

    Documents the auditor needs

    The auditor may request the following records and other documentation:

    Accounting records Petty Cash Book completely up to date to yearend
    File of invoices/vouchers for all items of expenditure
    File or book of receipts for money received
    Bank statements, deposit slips and cheque books
    Summaries and reconciliation
    statements
    Wages book and records
    General Ledger
    Summaries and reconciliation
    statements
    A Trial Balance or a summary of all receipts and
    payments
    Bank reconciliation statements
    Petty cash reconciliation statement
    Stock sheets
    Schedules Creditors list (money owed by the company)
    Debtors list (money owing to the company)
    Fixed assets register
    Other information A letter from bankers to confirm
    balances
    Minutes of Board meetings

    Statistical sampling

    The auditor will test the validity of a few transactions (samples) taken from all transactions (population). The sample is audited and if found correct it is assumed that the population will be correct. Samples can be collected by:

    • selecting all transactions
    • selecting specific items, such as all cash receipts above R200 000
    • audit sample, such as selecting 20 cash receipts by means of random selection. Audit report
    • An audit results in a report giving an ‘audit opinion’ on the financial statements. Are they a ‘true and fair’ view of the state of affairs of the organisation and operations for the period?
    • The audit report is addressed to the shareholders. It consists of:
  • an introduction stating what was audited
  • the directors’ responsibility for the financial statements
  • the auditor’s responsibility
  • the auditor’s opinion.

Examples of auditors’ opinions:

Auditor’s opinion Comment


Unqualified.
The accounts give a
true and fair view
Comment


The accounts, financial statements and
accounting procedures are
correct and complete
Qualified. Except for the effects of
. . . ,
the accounts give a true and
fair view
Specific misstatements/ issues are uncertain:
incorrect accounting policy, debtors not recoverable,
undisclosed
fraud or insider loan, some documents
not being available for
review, an internal control flaw
that could result in income not
being recorded
Adverse. The accounts do not
give a
true and fair view
So many misstatements in the accounts that they are
completely
wrong So many misstatements in the
accounts that they are completely
wrong
Disclaimer. We are not able to
express an opinion
So many missing documents or explanations that we
do not have
enough information to form an opinion

Example of an audit report:

Title of the report

Independent auditors’ report

Addressee

To the Shareholders of Alpha Limited

Introduction

We have audited the Group annual financial statements and annual financial statements of Alpha Limited, which comprise the statements of financial position at 30 June 2012, and the statements of comprehensive income, statements of changes in equity and statements of cash flows for the year then ended, and the notes to the financial statements which include a summary of significant accounting policies and other explanatory notes, and the directors’ report, as set out on pages 25 to 84.

Explanation of directors’ responsibilit

Directors’ Responsibility for the Financial Statements

The Company’s directors are responsible for the preparation and fair presentation of these financial statements in accordance with International Financial Reporting Standards and the requirements of the Companies Act of South Africa, and for such internal control as the directors determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error

Explanation of auditor’s responsibility

Auditor’s Responsibility

Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgement, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the business’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the business’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion of the auditor

Opinion

In our opinion, these financial statements present fairly, in all material respects, the financial position of Alpha Limited at 30 June 2012, and its financial performance and cash flows for the year then ended in accordance with International Financial Reporting Standards and the requirements of the Companies Act of South Africa.

Name and address of the auditors

Audits-R-Us
129 Tar Road
Somewhere Town
South Africa

AB Someone
Chartered Accountant (SA)
Registered Auditor

Date
7 December 2012


The following information appeared in the records of Johnson Traders Limited for the financial year ended on 30 June 20.1.

Information

  • Amount owed to SARS for Income tax on 30 June 20.0, R135 000.
  • The outstanding amount was paid to SARS on 28 July 20.0.
  • A first provisional income tax payment of R337 500 was made on 30 December 20.0.
  • A second provisional income tax payment of R278 100 was made on 29 June 20.1.
  • The net profit for the year ended 30 June 20.1 was calculated at R2 570 000.
  • The income tax for the year was calculated at 28% on the net profit for the year.

Instructions


The information was provided by Pacco Limited for the year ended 28 February 20.2.

  • R48 000 too much income tax was paid for the year ended 28 February 20.1.
  • This amount will be taken into account with the first provisional tax payment.
  • A provisional income tax payment was made on 31 August 20.1. The amount to be paid was calculated at R247 000. The extra R48 000 paid during the previous year was taken into account and the relevant amount was paid to SARS.
  • A second provisional income tax payment was made on 28 February 20.2.
  • The final income tax assessment for the year was R514 000.
  • At the end of the financial year Pacco Limited still owed SARS R58 000.

Instructions


The information relates to Platinum Limited for the year ended 31 October 20.3:

  • Amount owed to SARS for income tax for previous financial year paid on 16 November 20.2, R289 000
  • Provisional tax of R960 000 was made in two equal payments during the year.
  • Net profit after income tax of 28% on net profit for the year ended 31 October 2013, R2 570 400.
  • Instructions


From the financial records of Sharpco Limited on 28 February 20.4:

  • The authorised share capital of the business is 900 000 shares.
  • 740 000 shares were in issue on 28 February 20.3.
  • All shares were sold at R20 each.
  • A final dividend of 16c per share was declared on 28 February 20.3.
  • The dividend was paid on 19 March 20.3.
  • All the unissued shares were sold on 1 June 20.3 at R26 each.
  • An interim dividend of 25c per share was declared and paid on 15 June 20.3.
  • New shareholders were not entitled to the interim dividend.
  • A final dividend of 18c was declared on 28 February 20.4.

Instructions

1 Draw up the Shareholders for dividends account as well as the Ordinary share dividends account on 28 February 20.4.


This information appeared in the financial records of Samoa Limited. The company has an authorised share capital of 1 000 000 ordinary shares.

Balances on 30 June 20.4


Ordinary share capital (240c each) R920 000
Retained income/Accumulated profit R220 000
SARS:Income tax (Cr.) R116 000
Shareholders for dividends R98 000

Some transactions during the year ended 30 June 20.5:

  • The outstanding amounts was paid to SARS and the shareholders on 12 July 20.4.
  • 50 000 shares were bought back at 240c from minor shareholders on 1 August 20.4.
  • An interim dividend of 34c per share was declared and paid on 30 December 20.4.
  • Provisional tax was paid on 31 December 20.4, R105 000.
  • 150 000 shares were sold at 275c per share on 5 January 20.5.
  • The net profit for the year ended 30 June 20.5 was calculated at R830 000.
  • A final dividend of 42c per share was declared on 30 June 20.5
  • A second provisional income tax payment was made on 30 June 20.5. The income tax for the year was calculated at R232 400.

Instructions

1 Calculate the balance of the Ordinary share capital account on 30 June 20.5.

2 Calculate the total ordinary share dividends for the year.

4 Calculate the shareholders’ equity on 30 June 20.5.

5.4 Comment on the financial indicators. Will the shareholders be satisfied?

EPS:
DPS:
NAV
Conclusion:

1 Complete the following table by calculating the missing amounts (?) in the Cash Flow Statements of three companies:

3 Which company’s shareholders will be satisfied with the results for the year as shown in the Cash Flow Statements. Give a reason for your answer.

Term 2

Assets

Assets are resources the a business possesses and controls. They are expected to bring future economic benefits:

Fixed assets and concepts associated with fixed assets

A business uses fixed assets to generate income. Some fixed assets have a limited useful life. They can only be used for a certain number of years, after which they must be replaced. The cost of a fixed assets is distributed over its useful life by means of depreciation.

Cost price of an asset: The original price paid for the asset including any cost incurred in the acquisition of the asset (transport cost, registration cost, installation fee.

Depreciation: The allocation of the value of the asset over the useful life of the asset. It indicates how much of the value of the asset has been used to generate income in a specific period and which part of the cost of the asset can be used as a tax deductible expense. Depreciation is written off according to two methods:

  • fixed percentage on cost price or straight line method (fixed amount method)
  • diminished balance method or percentage on carrying value.

Accumulated depreciation: The total depreciation written off on a specific asset up to a specific date, i.e. the total value ‘used’.

Carrying value: The remaining value of an asset or the part of the cost of an asset not yet written off as an expense. The minimum carrying value to be used in the records is R1.

Carrying value = Cost price – Accumulated depreciation

Asset register: An asset register lists all the details of each asset and assists the business to keep track of each fixed asset’s correct value. It is important for the control over assets and decisions about the economic value of assets.

Example of depreciation

A vehicle was purchased on 1 March 20.1 for cash at R200 000 (financial year ending on 28 February).

Disposal of a fixed asset

Any asset can be sold, withdrawn by the owner, traded in on another asset or donated. If an asset no longer offers economic benefit to the business, it is better to sell it to prevent any unnecessary cost. The following information about the specific asset is needed:

  • the cost price of the asset (it must be removed from the records)
  • the accumulated depreciation of an asset up to the date of sale ( it must be removed from the records)
  • the amount for which the asset was sold, traded in or withdrawn (it must be recorded)
  • any profit or loss made with the transaction (it must be recorded).

Example

Transaction: A computer was purchased on 1 July 20.2 (financial year ending on 30 June).

Example

Trnascation: A computer was purchased on 1 June 20.3 (financial year ending on 30 June). Depreciation must be written off at 25% p.a. The computer is sold on 30 June 20.5 for R7 000. Show the effect of the transactions on the accounting equation.

Example

Transaction: A computer was purchased on 1 July 20.5 (financial year ending on 30 June). Depreciation is written off at 25% p.a. on cost price. The computer is sold for R7 000 cash on 1 January 20.7. Show the effect on the accounting equation.

*If the computer in the example is not sold for cash, the sales transaction will be recorded as follows ( the other entries remain the same): =

Use the information to complete the following accounts in the General Ledger of Shabangu Traders:

  • Vehicles
  • Accumulated depreciation on vehicles
  • Accumulated depreciation on equipment
  • Asset disposal
  • Depreciation.

Information

    1 The financial year of the business ends annually on 28 February.

    2 Vehicles are depreciated at 15% p.a. on carrying value (diminished balance).

    3 Equipment is depreciated at 20% p.a. on cost.

    4 A new vehicle was purchased on 30 November 20.8 at R120 000. New equipment had been purchased during the year.

    5 An old vehicle was sold for R22 000 on 1 February 20.9. The original cost of the vehicle was

R70 000 and the accumulated depreciation written off on 1 March 20.8 amounted to R46 000. No equipment was sold during the financial year.

Calculations:


The information was taken from the books of Thabo Co.

Instructions

    1 Complete the fixed asset register. Show your workings.

    2 Prepare the Asset disposal account.

    3 Use the appropriate information to complete the note for fixed assets (Land & buildings/Property and Equipment).

Information

Additional information

    1 Alterations and improvements to the store during the year came to R440 000.

    2 A new vehicle was bought on 1 November 20.8 on credit from Orapi Motors, R360 000.

    3 Depreciation on vehicles is provided for at 25% p.a. on cost price.

    4 Equipment was traded in at Africa Enterprises on 1 December 20.8 for new equipment with a cost price of R70 000. (See asset register.)

    5 New equipment was bought on credit from Mudau Equipt for R86 000 on 1 February 20.9.

    6 An account for R4 000 for the installation of the new equipment was received from Mbedzi & Son on the same day and paid.

    7 Depreciation on equipment is provided for at 20% p.a. on carrying value.

Answer sheets


Part A

Dumisani Vani is the owner of Xan Taxi Services. He started the business on 1 March 20.7. On that day he transferred Land & buildings valued at R300 000 as capital to the business and he bought three similar taxis for R330 000 (i.e. R110 000 each.) Xan Taxi Services did not buy or sell any vehicles during the first three financial years.

Information

2.10 May 31 Xan Taxi Services sold one taxi for R45 000 cash. This vehicle was purchased on

    1 March 20.7 for R110 000. The vehicle is depreciated annually at the rate of 20% p.a. on cost price.
    Aug. 31 A new taxi was purchased on credit from Marema Motors for R200 000.
    Oct. 31 A new garage was built at a cost of R160 000 and repairs were done to the roof of the office for R12 000.

2.11 Feb. 28 The policy for depreciation has not changed since Xan Taxi Services started business operations. Depreciation is calculated at 20% p.a. on cost price.

Instructions

1 Prepare the Asset disposal account in the General Ledger. Omit folio numbers.

3 Prepare the Note for Fixed assets to the Balance Sheet on 28 February 2.11.

Part B

Lulama Hono runs a taxi business called Mama’s Taxi Services. She is concerned that their revenue from taxi fares has not met the budget of R1 500 000 and that their fuel and repair costs have exceeded the budget of R710 000. Hono has taken the following information from the General Ledger, the Fixed Assets Register and other records on 28 February 2.11, the last day of the financial year.

Information

Questions

5 Consider the given information. Explain whether or not Ms Hono should be concerned about any problem or aspect relating to each vehicle. Make suggestions.


Two methods are used to calculate the cost of sales for the financial period and the value of stock on hand on the last day of the financial period.

First-in-first-out (FIFO) method

The assumption is that goods bought first are sold first:

Example

Weighted average method

Calculate the average cost per item purchased, weighted with regards to the number of units produced.

Example:

Reasons for using FIFO method

  • FIFO is simple and easy to use.
  • Closing stock is valued at realistic (current) prices.
  • Cost price is not estimated. Actual (real) prices are recorded.
  • Movement of inventory is logical: stock bought first is sold first.
  • If stock has a limited shelf life, old stock must be put at the front of the shelf and newer stock at the back.
  • FIFO is suitable for all types of businesses that sell goods of a simliar kind (homogenous goods).

Reasons for using weighted average method

  • With weighted average sporadic price increases are flattened (levelled).
  • The closing stock is valued at realistic (current) prices.
  • This is the best method to use when buying a lot of goods in small quantities.
  • The influence of a single purchase is reduced. Price changes do not dramatically affect average costs.

The owner of Boots for All buys leather boots from Namibia that they then sell to many retail outlets in South Africa. They use the FIFO method for all stock valuations and the periodic inventory system for the recording of inventory.

Information

Stock on hand (1 May 20.6)

May 1 Stock on hand: 200 pairs of boots at R1 500 each

Purchases (May 20.6)

May 3 Purchases of boots: 100 pairs of boots at R1 500 each

May 6 Return of boots: 20 pairs of boots bought on 3 May

May 13 Purchases of boots: 90 pairs of boots at R1 600 each (plus R300 courier cost for overnight delivery)

May 19 Purchases of boots: 50 pairs of boots at R1 800 each

May 26 140 pairs of boots ordered at R1 650 each. The boots will be invoiced and delivered on 1 June 20.6.

Sales (May 20.6)

May 7 90 pairs of boots at R2 040

May 14 120 pairs of boots at R2 040

May 21 110 pairs of boots at R2 040

May 28 60 pairs of boots at R2 040

May 31 Number of boots sold for the month: 380

Total sales amount: R775 200

Instructions

1 Calculate the cost of sales for the month of May 20.6 using the FIFO method.

2 Calculate the gross profit for the month of May 20.6.

3 Calculate the value of trading stock on hand on 31 May 20.6.

4 Calculate the cost of sales using the FIFO method for stock valuation and the perpetual inventory system for recording stock.

You need to calculate the price per pair of boots according to the weighted average method every time new stock was purchased due to the use of perpetual recording system:

5 The owner of Boots for All is unhappy that they decided to use the FIFO method of stock valuation for the business. He wonders if they should rather have used the weighted average method. The necessary calculations using the weighted average method are:

    Cost of sales R591 986,80

    Gross profit R183 213,20

    Value of stock on hand R62 314,40

The owner has come to you for advice. Comment on:

  • The difference the two methods will have on the financial statements.
  • The reason for the figures being different.
  • Give advice as to whether they should change the stock valuation method or not.

The information relates to Rodrigues Clothing, for the financial year ended 30 June 2.12. The business sells locally manufactured T- shirts. The business uses the Proudly South African logo in all its advertisements.

Information

    1 The business applies the perpetual inventory system and weighted average method of stock valuation.

    2 Information for the year:

3 Local manufacturers increased their prices on 15 November to R160 per unit for the Christmas season. The owner decided to buy T-shirts from street vendors at a much lower price on 30 November 2.11. He was not sure of where the vendors get their merchandise.

4 The business sold their T-shirts at R200 per T-shirt throughout the year.

5 During December 130 customers returned the T-shirts as they were of very poor quality. The street vendors did not want to take the T-shirts back. So the business donated these T-shirts to a shelter for the homeless. The business decided to sell the last 110 T-shirts of the batch, purchased on 30 November, at a price of R100

Instructions


Records of cash transactions are kept in the Cash Payments Journals (CPJ) and the Cash

Receipts Journal (CRJ) and then posted (transferred) to the Bank account in the General Ledger.

  • The balance of the Bank account in the General Ledger is checked against the balance of the Bank account as per bank statement.
  • A bank statement is a copy of the bank account as it appears in the bank’s financial records.
  • Bank statements are sent to clients to check and update their own records.

Why balance of Bank account and balance of bank statement differ

  • The information is not complete. For example, bank charges are not known to the business until they get the bank statement.
  • There is a time difference: the Bank account covers a full month (from 01/01 to 31/01) while bank statement may be from 26/01 to 25/02.
  • There may be errors either by the bank on the bank statement or by the business in the journals and/or Bank account in the General Ledger.

Why we do bank reconciliation

  • Control measure – CPJ, CRJ and bank account are updated
  • Confirms accuracy of entries in CPJ, CRJ and bank account
  • Check that bank has not made unauthorised payments or errors
  • Keep track of interest, outstanding deposits, cheques issued, RD cheques, bank charges and/0r electronic payments and deposits.

Format of the bank reconciliation statement

Procedure for doing bank reconciliation

    Step 1 Write down the format of bank reconciliation statement (BRS).

    Step 2 Enter the balance of the bank statement.

    Step 3 Check the entries on the bank statement (BS) with the Bank columns in the Cash Payments Journal (CPJ) and Cash Receipts JOurnal (CRJ) as well as with the previous month’s BRS.

    Step 4 Transaction on BS but not on CPJ or CRJ:

    • Enter outstanding transactions on debit side of BS in CPJ.
    • Enter outstanding transactions on credit side of BS in CRJ.
    • Balance bank account in the General Ledger and put balance in on BRS as last entry.

    Step 5 Transaction in CPJ or CRJ but not on BS:

    • Enter outstanding deposits and incorrect debit entries on credit side of BRS.
    • Enter cheques not presented for payment and wrong credit entries on debit side of BRS.

    Step 6 Balance BRS

Examples of entries


All transactions with debtors are recorded in the relevant journals and posted to the Debtors control account in the General Ledger, as well as to the individual debtor’s account in the Debtors Ledger:

  • Debtors Journal (DJ) for credit sales.
  • Debtors Allowances Journal (DAJ for sales returns.
  • Cash Receipts Journal (CRJ) for cash/cheques received as payment from debtors and discount allowed.
  • Cash Payments Journal (CPJ) for returned cheques received from debtors (RD cheques).
  • General Journal (GJ). Debit column shows interest charged on overdue accounts as well as other increases in debtors.
  • General Journal (GJ). Credit column shows transactions that reduce amount owed by debtors, including errors and omissions.

The balance of the Debtors control account in the General Ledger is checked against the Debtors List (which shows the balances of the debtors’ individual accounts in the Debtors Ledger).

Control account: This is a summary account in the General Ledger. The details that support the balance in the summary account are in the Debtors Control Ledger (a subsidiary ledger)

Debtors control account: This is an account in the Balance Sheet accounts section of the General Ledger. It is a current asset as the money will be received within the twelve-month period. It is a summary of all the transactions with the individual debtors.

Example

Debtors Ledger: This is a subsidiary ledger containing individual accounts for each debtor. All transactions entered in the journals are posted to the individual account of the debtor. A balance is shown after each entry.

Debtors List: The business draws up a list (normally at the end of the month or at year end) showing the money owed by debtors on that date.

Why debtors’ accounts and statements differ

  • Information is not complete (omissions). For example, debtors do not know of interest charges until the business issues a statement, invoices, payments or discounts omitted.
  • There may be a time difference. The business has not yet recorded EFT payments by the debtor.
  • Errors by either the business in the debtor’s individual account or errors on the statement issued to the debtor (such as credit sales, amounts paid or discount allowed entered incorrectly).

Why we do debtors reconciliation

  • A debtor claims that there are errors or omissions on the account.
  • As a control measure, the Debtors control account is updated.
  • It confirms accuracy of entries in DJ, DAJ, GJ, CPJ and CRJ as well as the debtor’s individual account.
  • It keeps track of credit sales, sales returned, payments received, discount allowed or interest charged on money owed by debtors.

Relationship between the Debtors List and the Debtors control account

Procedure for reconciling Debtors control account and Debtors List

    Step 1 Open the Debtors control account and the Debtors List with the given balances.

    Step 2 Correct the errors or omissions in the Creditors control account and/or in the creditor’s individual account.

    Step 3 Balance the Creditors control account and total the Creditors List. These two balances should be the same.

Procedure for reconciling debtor’s individual account and statement issued

    Step 1 Compare the debtor’s individual account with the statement issued.

    • The debit side of the statement is checked against the debit side of the account.
    • The credit side of the statement is checked against the credit side of the account.

    Step 2 Correct errors or omissions in the debtor’s individual account in the Debtors Ledger by journalising and posting entries.

    Step 3 Open the debtors reconciliation with the balance as per statement issued.

    Step 4 Correct errors or omissions in the statement issued by adding omissions and corrrecting errors.

    Step 5 You should end with the same balance as in the debtor’s account. The golden rule for reconciling debtors

    • Subtract returns from the last invoice.
    • Subtract cash received (receipts) and discount allowed from the oldest amount owed.

Debtors age analysis

This is an analysis of the amounts owed by debtors, showing the number of days that money owed to the business is outstanding.

  • As part of credit control system, the age analysis should be regularly examined. Appropriate follow-up action will include sending out statements, phoning debtors, encouraging debtors to pay outstanding debt, offering discounts to debtors to improve receipts.
  • Reviewing the debtors age analysis helps a business to keep track of the movements on debtors and to follow up on overdue accounts. Also to determine bad debts, which debtors aare not paying, and which debtors must be charged interest.
  • If money owed to the business is not managed properly, it may have to look to legal remedies, or even writing off debt. That means spending money to get money. Debtors are current assets. The business needs to take in cash to be able to pay other accounts. If debtors pay late, it places strain on the cash flow unless it is managed correctly.

All transactions with creditors are recorded in the relevant journals and posted to the Creditors control account in the General Ledger, as well as to the individual creditor’s account in the Creditors Ledger:

  • Creditors Journal (CJ) for credit purchases.
  • Creditors Allowances Journal (CAJ) for purchase returns.
  • Cash Payments Journal (CPJ) for cheques issued as payment to creditors and discount received.
  • Cash Receipts Journal (CRJ) for returned (RD) cheques.
  • General Journal (GJ). Credit interest charged on overdue accounts as well as other increases in creditors.
  • General Journal (GJ). Debit transactions that reduce amount owed to creditors, including errors and omissions.

The balance of the Creditors control account in the General Ledger is checked against the Creditors List (which shows the balances of the creditors’ individual accounts in the Creditors Ledger).

Control account: This is a summary account in the General Ledger. The details that support the balance in the summary account are in the Creditors Control lLdger (a subsidiary ledger).

Creditors control account: This is an account in the Balance Sheet accounts section of the General Ledger. It is a non-current liability as it should be paid within the twelve-month period. It is a summary of all the transactions with the individual creditors.

Example

Creditors Ledger: This is a subsidiary ledger containing individual accounts for each creditor. All transactions entered in the journals are posted to the individual account of the creditor. A balance is shown after each entry.

Creditors List: The business draws up a list (normally at the end of the month or at year end) showing the money owed to creditors on that date.

Why creditors’ accounts and statements differ

  • Information is not complete (omissions). For example, the business does not know of interest charges until they receive a statement, invoices, payments or discounts omitted.
  • There may be a time difference. The creditor has not yet recorded EFT payments by the business.
  • Errors by either the business in the creditor’s individual account or errors on the statement received from the creditor (such as credit purchases, amounts paid or discount received entered incorrectly).

Why we do creditors reconciliation

  • As a control measure, the Creditors control account is updated.
  • It confirms accuracy of entries in CJ, CAJ, GJ, CPJ and CRJ as well as the creditor’s individual account.
  • It keeps track of credit purchases, purchases returned, payments made, discount received or interest charged on money the business owes.

Relationship between the Creditors List and the Creditors control account

Procedure for reconciling the Creditors control account and Creditors List

    Step 1 Open the Creditors control account and the Creditors List with the given balances.

    Step 2 Correct errors or missions in the Creditors control account and/or in the creditor’s individual account.

    Step 3 Balance the Creditors control account and total the Creditors list. These two balances should be the same.

Procedure for reconciling the creditor’s individual account and the statement received

    Step 1 Compare the creditor’s individual account with the statement received.

  • The debit side of the statement is checked against the credit side of the account.
  • The credit side of the statement is checked against the debit side of the account.

    Step 2 Correct errors or omissions in the creditor’s individual account in the Creditors Ledger by journalising and posting entries.

    Step 3 Open the creditors reconciliation with the balance as per statement received.

    Step 4 Correct errors or omissions in the statement received by adding omissions and correcting errors.

    Step 5 You should end with the same balance as in the creditor’s account.

    Step 6 Prepare a remittance advice to send out with the cheque when you pay creditors. We use a remittance advice to inform creditors of errors and omissions on the statement they prepared.

The golden rule for reconciling creditors

  • Subtract returns from the last invoice.
  • Subtract cash payments and discount received from the oldest amount owed.

Creditors age analysis

This is an analysis of the amounts owed to creditors, showing the number of days that payments are outstanding.

  • As part of credit control system, the age analysis should be regularly examined so that appropriate follow-up action may be taken.
  • Reviewing the creditors age analysis helps a business to keep track of the movements on creditors and to follow up on overdue accounts.
  • Creditors are current liabilities. The business needs cash available to pay the accounts. This places strain on cash flow if it isn’t managed correctly. The following may happen:
  • Overpayments, when the business pays more than they owe the creditor.
  • Underpayments, when the business pays less than they owe the creditor. Interest and fines can be added to the balance not paid on time, which results in additional costs.

Lerato Khumalo, the bookkeeper at Rucco Traders, has to do the bank reconciliation for May

    2.10. She asked you to answer questions about the bank reconciliation statement on 30 April

    2.10, as well as some questions about the bank statement for May 2.10.

Questions

1 Did the Bank statement show a favourable or unfavourable balance on 30 April 2.10? Give a reason for your answer.

2 How can the deposit of R24 600 be outstanding? Give one possible reason.

3 The outstanding deposit of R24 600 includes all the receipts from 26 April to 30 April. Is it good practice to deposit cash every five days? Give a reason for your answer and make recommendations.

4 What does ‘outstanding cheques’ mean?

5 Explain to Ms Khumalo what is wrong with cheque 954 and how it should be handled in the records of Rucco Traders.

6 Between which dates can cheque 1078 be presented for payment?

7 Explain how to treat cheque 1084 when preparing the financial statements. The cheque was issued to a creditor, Gregor Limited.

8 Cheque 1086 was issued to the local soccer club, SoccerStars. They asked Rucco Traders to pay the supplier of their equipment, EquipSoc, instead of giving the money to the soccer club. Explain to Ms Khumalo in detail how to handle this request in the records.

9 Cheque 1090 was issued to one of the employees for his salary. All salaries are still paid by cheque. These cheques are issued on the 29th of each month to ensure that employees have their salaries available on the last day of the month. Is this the best method of paying salaries? Give a reason for your answer.

10 The bank statement shows an entry marked RD. What does this mean? How should this be dealt with in the cash journals?

11 Ms Khumalo is unsure about four cheques issued in May 2.10 for the same amount, payable as ‘Cash’, that must be recorded in the Cash Payments Journal. Give a possible reason for these cheques? Is it good policy to issue cash cheques? Give a reason for your answer.

12 The last part of the bank reconciliation is missing. Calculate the balance of the Bank account in the General Ledger on 30 April 2.10. Is it favourable or unfavourable?


Part A: Bank reconciliation

The following information appeared in the records of Bathabile Gifts on 30 June 20.3, the end of the financial year.

Questions

1 What does the debit balance of R1 450 as per bank statement in the bank reconciliation statement on 30 June 20.3 mean?

2 What does the debit balance of R2 600 as per bank account in the bank reconciliation statement on 30 June 20.3 mean?

3.1 Why does cheque 1554 not appear on the bank reconciliation statement of 30 June 20.3?

3.2 How did the business deal with cheque 1554 in their records?

4 Why does cheque 2435 appear on the bank reconciliation statement of 30 June 20.3?

5 Explain why cheque 2417 does not appear on the bank reconciliation statement of 30 June 20.3.

6 Study the dates of cheque 2435 (23 August 20.3) and cheque 2578 (25 June 20.3). Suggest a possible reason for the difference.

7 Cheque 2417 (1 June 20.3) appeared correctly on the May bank statement as R13 500. The cheque was issued to GlamGifts for merchandise. How should the business deal with the difference?

8 Why is it necessary to compare the bank reconciliation statement of 31 May 20.3 with the bank statement of June 20.3?

Part B: Creditors reconciliation

Khabine Crafts is one of the creditors of Bathabile Gifts.

Statement received from creditor, Khabine Crafts:

In studying the Creditors Ledger account of Khabine Crafts and the statement received from Khabine Crafts, the following errors and ommisions were discovered:

  • Invoice GG8 was received from supplier GlamGifts.
  • Cheque 2498 was issued to Khabine Crafts in settlement of the outstanding amount on 1 June 20.3. Discount of 10% was received.
  • Invoice KH289 was issued by Khabine Crafts to Bath Crafters.
  • Khabine Crafts allowed 10% trade discount on invoice KH 276.

Instructions

1 Calculate the correct balance of the account of Khabine Crafts in the Creditors Ledger of Bathabile Gifts.

2 Prepare the creditors reconciliation statement that Bathabile Gifts needs to draw up:

3.1 Show the effect of cheque 2498 issued to Khabine Crafts in settlement of the outstanding amount on 1 June 20.3, as well as the 10% discount received on the accounting equation of Bathabile Gifts.

3.2 Indicate how to record the transaction in 3.1 in the General Ledger of Bathabile Gifts by listing the accounts to debit and credit.

4 The merchandise purchased from Khabine Crafts on 23 June 20.3 will be sold for cash by Bathabile Gifts with a mark-up of 50% on cost. What will the effect of this sale be on the accounting equation of Bathabile Gifts?


Analyse the transactions for June 20.2 of Mbedzi Traders under the headings in the table.

Transactions

    1 A deposit of R9 800 appeared in the Cash Recipts Journal on 28 June 20.2 but not on the bank statement for June 20.2.

    2 A tenant deposited the rent for one month, R3 200, directly into the bank account. The amount appeared on the bank statement but not in the cash journals.

    3 The following amounts were debited on the bank statement:

    • Stop order for owner’s personal insurance premium, R 1 100.
    • Debit order for the business’s cell phone account, R685.
    • Bank charges, R245.

    4 The bank statement showed a dishonoured cheque of R900. The cheque was received from debtor F. Monti in settlement of her account of R950. The cheque was dishonoured due to insufficient funds (IF).

    5 Cheque 655, dated for 13 November 20.1, must be cancelled. This cheque was originally issued for R7 680 to Dakalo Mulaudzi for merchandise purchased. He lost the cheque. Replace the cheque with cheque 675 on 30 June 20.2.

    6 Mbedzi Traders received a cheque for R764 from a debtor. The cheque is dated for 3 July 20.2. The bookkeeper did not record it.

    7 Cheque 673 for R2 450, issued to Manley Motors, was dated for 10 July 20.2. It appeared in the Cash Payments Journal but not on the bank statement.

Examples

    a The Bank Statement showed a debit for the insurance premium of the business.

    b Cheque 354 has not been presented for payment yet, R5 600.

    c The outstanding deposit on the previous Bank Reconciliation Statement appeared on the Bank statement of this month.


Registering for VAT

Businesses with a turnover above the limit set by the VAT Act must register for VAT. Any other business can choose to register for VAT if it suits their purpose. Vendors (businesses) levy a tax on the supply of goods and services. VAT is included in the selling price and collected by vendors on behalf of the South African Revenue Service (SARS).

VAT rates

  • Standard rate.* On all items excluding exempt items, currently 14%.
  • Zero rate.* On basic goods to help less advantaged consumers, currently 0% ( brown bread, milk, eggs).
  • Exempt items. No VAT is levied on these goods (interest, rates, educational services and services provided by non-profit organisations). * The Minister of Finance can change the percentages for VAT at any time. VAT period

    The VAT period can cover one month, two, six or twelve months:

    • The standard tax period is two months, either on even months or odd months.
    • The VAT must be submitted on or before the 25th of the month following the end of the two-month period. For example, the VAT for January and February will be submitted on or before 25 March.

    VAT basis

    VAT invoice

    The following information must be included in the tax invoice:

    • The words VAT invoice or Tax invoice
    • Invoice number
    • Date
    • The name, address and VAT number of the vendor or supplier
    • The name, address and VAT number of the buyer if more than R500
    • A description of the nature and quantity of goods and/or services bought
    • The amount paid to VAT
    • The rate of VAT charged
    • The amount paid for the goods and/or services

    Calculating VAT-inclusive and VAT-exclusive amounts

    Recording VAT in the General Ledger

    A VAT amount has to be classified as either Input VAT or Output VAT.

    Follow the flow of goods and/or services as shown in the diagram above.

      Three accounts are used in the General Ledger:

    Examples

    The formats of the three VAT accounts used in the General Ledger are shown with all possible variations:


    *The opening and closing balances will depend on whether the vendor owes money to SARS or SARS owes money to the vendor.

    Ethical issues related to VAT

    • Registration as a vendor (registration when turnover limit has been reached).
    • Levying tax on exempt and zero-rated items.
    • Whether a business should issue a tax invoice when cash sales have taken place.
    • Adjusting the books in order to claim more Input VAT or pay less Output VAT.
    • Entering purchases made by the owner in the books of the business in order to claim more Input VAT.
    • Not issuing invoices until payment has been received in order to decrease VAT payable on invoice basis.

    Internal audit and control processes related to VAT

    Management has to ensure that:

    • sufficient records are kept of VAT levied on the supply of goods and/or services
    • VAT invoices are issued correctly
    • all invoices received are entered and filed
    • all cash transactions are entered and invoices and receipts are completed
    • records (source documents) are kept in a systematic order (numerical or alphabetical) so that control can take place and fraud/theft can be detected
    • all payments of VAT to SARS are approved
    • all payments to SARS take place in time
    • tax evasion does not take place.

Assume that TTA (Tumi’s Tennis Academy) is registered for VAT. Study the following information:

Questions

1 Is it compulsory for TTA to register for VAT? Give a reason for your answer.

2 Calculate the Output VAT for May 2.11.

3 Calculate the Input VAT for May 2.11.

4 Draw up the VAT control account for May 2.11.

5 Where would the balance of the VAT control account be used in the Balance Sheet for May 2.11?

6 One of Tumi’s friends suggested that Tumi charge VAT even if the business is not registered for VAT. Write a short note to Tumi explaining if this is acceptable or not.


Calculate the amount owed to SARS:

Transactions for the two-month period (including VAT unless otherwise stated)

    1 Cash sales of merchandise, R90 000 (excluding VAT).

    2 Credit sales of merchandise, R108 300.

    3 Credit purchases of merchandise and equipment, R178 980.

    4 Returns of merchandise by customers, R8 500 (excluding VAT).

    5 Returns of merchandise to suppliers, R14 136.

    6 An old vehicle with a carrying value of R50 000 was sold for R61 560.

    7 Bad debts written off, R5 597,40.

    8 Bad debts recovered, R649,80.

    9 Discount allowed to customers, R6 726.

    10 Discount received from suppliers, R15 390.

Term 3

Projected Income Statement: A statement that shows the projected income, expenses and profit for future financial periods.

Why we draw up a Projected Income Statement

  • For financial forecasting to determine future profitability when thebusiness applies for a As a control mechanism to track actual transactions against financial forecast.
  • As a managerial tool to make adjustments to income and expenses if and when necessary.

How to prepare a Projected Income Statement

    Step 1 Start with the format of the end-of-period Income Statement.

    Step 2 Add future periods.

    Step 3 Enter real projected figures for the first financial period.

    Step 4 Calculate projected figures for future financial periods:

    • Horizontal analysis: Sales increased by 10% on a year-to-year basis and it is expected that this trend will continue.
    • Predictable items: Wages will increase by 10% each year. Five new workers will be employed in 2.13 at a wage of R20 000 each.

Step:1


Frank Mason is the owner of Frank’s Furniture, a business that manufactures wooden furniture.

Part A

Indicate if the following situations will increase, decrease or have no effect on the total production cost for the financial year.

    1 The supplier of the wood informed the factory that they will increase their prices by 10% from the first day of the next month.

    2 All the workers who are directly involved in the production process have been trained to use new equipment. The workers will now be able to produce more units per day. They will meet their daily target without having to work overtime.

    3 The manager decided to sub-let a part of the factory to an artist.

    4 A new telephone system was installed in the office.

    5 The commission paid to an agent is increased from 10% to 12% of total sales.

Part B

The information was taken from the records of Frank’s Furniture for March 20.5. They produced 25 wooden tables during the month. There were no tables in production at the beginning or the end of the month. Replace the letters A to P with the correct amounts or descriptions.

Part C

The information was taken from the records of Frank’s Furniture for May 20.5.

  • Production for May: 28 tables.
  • Total fixed cost for May, R9 500.
  • Total variable cost for May, R18 312.
  • Selling price per table, R1 750.

Questions

1 What is the difference between fixed cost and variable cost?

2 Give one example each of fixed and variable costs.

3 Explain the break-even point.

4 Calculate the break-even point.


The following information relates to Woodpeckers. The business produces furniture.

Additional information

    1 An invoice for R9 700, received from Log Transport for the transport of raw materials to the factory, had not been recorded.

    2 New machinery was purchased on 1 March 2.10. Depreciation is written off as follows: 20% p.a. on cost of factory machinery and 15% p.a. on the diminishing balance method on shop and office equipment.

    3 Insurance cost is divided as follows: Factory 80%, Shop and office 20%.

    4 On 1 March 2.10 the business got quotes for maintenance from two businesses:

    • Emanuel Labor suggested that we pay him a cash amount of R17 500 every month. As he said, ‘No invoice means no VAT’. Maintenance for the factory is calculated at R15 000 a month.
    • Don Right quoted a total annual amount of R229 824 (including 14% VAT).
    • Woodpeckers accepted Emanuel Labor’s offer. All payments were made in cash during the year.

    Instructions

    1 Calculate the raw materials stock on hand on 28 February 2.11.

    2 Prepare the Factory overheads note to the Production Cost Statement for the year ended 28 February 2.11.

    3 Prepare the Production Cost Statement for the year ended 28 February 2.11.

    4.1 Calculate the total annual amount paid to Emanuel Labor in cash for maintenance.

    4.2 What type of VAT is included in the amount R229 824 quoted by Don Right?

    4.3 What effect would this type of VAT have on the amount owed to SARS for VAT?

    4.4 Calculate the amount quoted by Don Right excluding the VAT.

    4.5 Did Woodpeckers made the right decision by accepting Emanuel Labor’s offer? Give two reasons to support your answer.


The following details relate to T-Designs, a business that produces and sells T-shirts:

Additional information

    1 Consumable stores are used as follows: 60% of cost for factory, 25% of cost for shop and rest for administration.

    2 Insurance and Water & electricity are divided according to surface area: Factory is 200 m2; shop is 25 m² and office is 15 m2. The annual premium of R4 800 for one of the insurance policies was paid on 1 January 2.11.

    3 The employer’s contribution to the UIF was omitted from wages and salaries.

    4 Depreciation must be brought into account as follows:

    • On factory machinery at 20% p.a. on cost price.
    • On shop equipment at 15% p.a. on the diminishing balance.

    5 Information supplied by the shop:

    • Mark-up on cost: 50%
    • Selling price per T-shirt: R90

Instructions

Complete the following:

2 Note on fixed assets to financial statements on 30 June 2.11.

3 Notes to production cost statement for year ended 30 June 2.11:

4 Production cost statement:

5 Gross profit:


Operating cost

The total of all cost items is shown as production costs on the Production Cost Statement and as term costs on the Income statement.

Direct materials cost: The cost can be directly (exclusively) linked with a specific unit that is produced, i.e. the direct materials cost plus the direct labour cost. Ask yourself whether you can allocate cost directly to a specific product, (for example, four screws to fasten the table top to the steel frame). The rand value of materials used to manufacture a specific product, for example the value of the wood used to make a table, is recorded as the net purchase amount (purchase price on the invoice less trade discount) plus transport costs, storage costs and handling costs.

Direct labour cost: This includes the salaries and wages of workers directly involved in the production of the product, for example machine operators) and can be identified as a specific amount of time (per hour or day) or cost per unit.

Conversion cost: The cost added to raw materials cost to convert raw materials into finished goods and are calculated as the direct labour cost plus manufacturing overheads.

Manufacturing overheads cost: The part of the cost relating to the manufacturing process, but not directly identified as part of the costs of a specific product. Manufacturing overheads include the rand value of materials necessary to produce a product, but that can’t be linked to the manufacturing of a single product such as the cost of cleaning materials to clean machinery.

  • Costs incurred by the production division and offices used by the production division that can’t be easily allocated to a specific product, for example administrative expenses, rent expense for office space and factory buildings, utilities such as water, electricity and assessment rates, insurance of assets, maintenance and repairs on factory equipment and factory buildings, salary of the production manager, depreciation on office equipment and vehicles.
  • Non-manufacturing costs such as selling, marketing and administrative expenses and that relate to the financial year rather than to the number of products manufactured, i.e. they are closed off to the Profit and loss account at year end.

Indirect labour cost: Salaries and wages of workers not directly involved in the production of the product, for example supervisors and cleaners.

Variable cost (TVC & AVC): Variable cost relates to the number of units produced. This varies in direct proportion to the number of units produced: the more units produced, the higher the total variable cost will be.

T = Total for all units

Fixed cost (TFC & AFC): This is the part of the total cost that remains unchanged and does not vary depending on the number of goods produced, for example rent paid for the factory. The total fixed cost remains constant, no matter whether 1 or 10 000 units are produced.

Total cost (TC): The total cost of production equals total fixed cost (TFC) plus total variable cost (TVC).

Average cost per unit (AC): The cost per unit produced is calculated as the total cost of production (TC) divided by the number of units produced.

Production cost: The sum total of the direct materials cost plus the direct labour cost plus the manufacturing overheads.

Prime cost: The sum of direct materials cost plus direct labour cost.

Work-in-progress cost: This includes direct materials, labour and overheads of goods already in the production process, but the product is not yet finished. Calculating cost per unit (known as average cost): You can calculate any cost per unit by dividing the total cost by the number of units:

The break-even point (BEP)

The BEP indicates how many units must be sold in order to cover total fixed costs for the year. If the BEP is reached, the business will not make a loss. It is the point where the business will start to make a profit.

Calculating the breakeven point (BEPq):

Calculating contribution per unit: Contribution per unit indicates the contribution of each unit sold to pay for the fixed cost or the selling price less average variable cost.

Cost accounts in the General Ledger

  • A manufacturing business uses raw materials and processes them into finished products.
  • It takes time to process raw materials into finished products. So stock (inventory) will be in three different stages of completion. The diagram shows the flow of stock in manufacturing:

The General Ledger of a manufacturing business contains three sections:

  • The Balance Sheet accounts section
  • The Nominal accounts section
  • The Cost accounts section.

For practical purposes the financial year is 1 July 2019 to 30 June 2020.


Production Cost Statement: A statement that calculates the cost of producing finished goods.

Income Statement: A statement that calculates the net profit profit for the year.

Notes to the financial statements: The notes to the production cost statement and income statement give additional information on the cost accounts.

Examples of the statements prepared for a manufacturing business

Ethical issues related to a manufacturing business

The following ethical issues relate to a manufacturing business:

  • Product quality (you can save on costs if you use cheaper and inferior quality raw materials).
  • Product age (sell-by dates, manufacturing dates, using raw materials that have passed these dates).
  • Raw materials (sustainable usage).
  • Support for local products (using cheap imports from overseas rather than locally produced raw materials).
  • Price-fixing (where competitors decide together to increase/fix prices at certain levels).
  • Theft (control processes to curb theft by workers).
  • Fraud (control processes to curb fraud when allocating contracts to suppliers).

Internal audit and control processes related to a manufacturing business

Management has to ensure that:

  • All orders for direct and indirect material are only done by the purchasing section.
  • Orders to suppliers, invoices received and delivery notes for direct and indirect material received by the storing facility are checked for quantities, prices and shortages (backorders).
  • Direct and indirect materials may only be transferred to the factory once a requisition has been received and approved.
  • Records (source documents) must be kept in a systematic order (numerical/alphabetical) so that control can take place and fraud/theft can be detected.
  • Record are kept of all finished good transferred between the factory and the selling and distribution section.
  • Consecutive steps in the flow of materials are delegated so that different people are responsible for the receipt and issuing of stock.
  • Security measures are in place at the entry/exit to the factory and other premises.

Cash Budget: This is a projection of estimated amounts received and paid within a certain period. It is a tool to be used in management and internal control. The purpose of a budget is to:

  • ensure that the business stays within their financial limits.
  • help the business to identify risks
  • help the business to find funding, if necessary.

Projected Income Statement: Drawing up a projected Income Statement assists a business to decide whether it can continue to operate with its projected income and expenses. It is used to project future income and expenses. An Income Statement is the result of operations during the past financial year. The table represents possible receipts and payments in a cash budget:

Items that will not appear on a cash budget as they are non-cash items:

* If the owner takes stock for personal use every month, it must be replaced and will therefore be included in purchases.

You are provided with the Cash Budget and the Projected Income Statement of Top Gardens. The business sells plants, garden equipment and garden furniture, as well as providing gardening services.

Information on debtors and creditors

    1 60% of total sales are cash sales.

    2 Past trends indicate that debtors pay as follows:

    • 50% pay in the month of sale and receive 5% discount
    • 45% pay in the next month
    • 5% is written off in the second month after sale.

    3 The business receives cash for all services rendered.

    4 60% of total purchases are cash purchases.

    5 The business complies with the following terms in paying creditors: All creditors are paid in the month after purchase to receive a 5% discount.

Instructions

1 Calculate the carrying value of the equipment that was sold in April 2.11.

2 Was the equipment sold on 1 April 2.11 or 30 April 2.11? Give a reason for your answer.

3 Depreciation is written off at 20% p.a. on cost of equipment. Calculate the cost price of the equipment that was sold.

4 The total sales amount for January 2.11 was R85 000. Do a calculation to confirm this amount.

5 Does the business have a policy to maintain trading stock at a fixed stock base (they only replace what they sell)? Support your answer with a calculation.

6 Give a short explanation for the positive difference in the surplus between March and April.

7 Explain the difference between the surplus on the Cash Budget and the Net profit on the Projected Income Statement.

8 List three items that would never appear on a Cash Budget and explain why they do not appear on a Cash Budget.

9 Calculate the annual percentage interest earned on the current account.

10 Explain why the payment of the loan does not appear on the Projected Income Statement but the Interest on loan (Interest expense) does appear on the Projected Income Statement.

11 List two possible sources for the money used to repay the loan.

12 What is the main reason for the decrease in the net profit over the two months?

13 What mark-up percentage does the business use?


Kenosi Lenyalo, the owner of Lenyalo Stores, presents the following cash budget for the three months ended 31 August 20.7 to you. He asked a friend to draw up the budget but does not really understand the budget.

Instructions

Answer the questions. Support your answers with calculations, where necessary.

1 What is a cash budget and why is it important for business to have a cash budget?

2 What is the difference between cash sales and cash received from debtors in the cash budget?

3 Calculate the total sales for August 20.7.

4 Does the business receive discount from suppliers? If so, what percentage discount do they receive?

5 Lenyalo Stores allows discount to customers for prompt payment. They also write off 5% as irrecoverable in the third month after the sales. Calculate the collection policy that applies to Lenyalo Stores.

6 Will the old vehicle be sold for cash, on credit or traded in? Give a reason for your answer.

7 The business will purchase a new vehicle on 1July 20.7. According to the agreement, the business needs to pay a deposit and 20 equal payments thereafter. Calculate the cost price of the vehicle.

8 The bank granted a loan to Lenyalo Stores. The money will be received on 1 June 20.7. The business must pay a fixed amount of R18 000 every six months as well as a monthly interest payment at a fixed percentage. Calculate the interest percentage per annum.

9 Explain to Kenosi Lenyalo the difference between a surplus and a deficit.


The basic elements of the accounting equation are:

E = A – L

Equity = Assets – Liabilities

So Assets = Equity + Liabilities and Liabilities = Assets– Equity.

Asset (A): A source of scarce resources with a physical form. A tangible asset is one you can touch. For example property, plant and equipment. A non-tangible asset (such as a patent and copyright) is something that tthe business owns as a result of a transaction that happened in the past and may probably bring future economic benefit. Assets may be:

  • used in the production of goods or services to be sold by the business
  • exchanged for other assets
  • used to settle a liability
  • distributed to the owners of the business.

Liability (L): A present/current obligation is a responsibility or duty to act orperform in a certain way as a result of a transaction that happened in the past and may lead to future economic benefit flowing out of the business. Liabilities may be settled by:

  • payment of cash
  • transfer of other assets
  • provision of services
  • replacement of one obligation with another
  • conversion of the obligation to equity.

Equity (E): The remaining interest in the assets of the business after all its liabilities have been deducted, known as the interest of the owner(s) of the business.

The rule of the accounting equation:

The double entry principle

In Accounting we use the double entry principle: entries on the debit side of accounts must equal entries on the credit side of accounts. Thus the accounting equation will always balance. If the owner contributes capital to the business, the capital increases (E+-> credit entry) and bank increases (A+  debit entry).

  • If Equity decreases, the account is debited. If Equity increases, the account is credited.
  • If Assets increase, the account is debited. If Assets decrease, the account is credited.
  • If Liabilities decrease, the account is debited. If Liabilities increase, the account is credited.

Elements of the accounting equation: Assets

Assets are divided into three groups.

  • Current assets include trading stock, debtors and other receivables, as well as cash and cash equivalents. An asset is classified as current when it fulfils one or more of the following conditions:
    • the asset will be realised in the financial year or is intended for sale within that time
    • the asset is held mainly to trade
    • the asset is cash or a cash equivalent.
    • Non-current assets include land and buildings, vehicles and equipment. An asset will be classified as non-current or fixed when it does not fulfil any of the criteria of a current asset.
    • Financial assets include fixed deposits with a maturity date of more than twelve months. People sometimes make the mistake of referring to current assets as short-term assets and noncurrent assets as long-term assets. It is assumed that short-term assets will be used or sold within twelve months and that long-term assets will be used for more than twelve months.

    Elements of the accounting equation: Liabilities

    Liabilities are divided into two groups.

    • Current liabilities include creditors and other payables, bank overdraft and short-term loans. A liability is classified as current when it fulfils one or more of the following conditions:
      • the liability is intended to be settled within the financial year
      • the liability is held mainly to trade.
    • Non-current liabilities include mortgage loans on property. A liability is classified as non-current when it does not fulfil any of the criteria of a current liability.

    People sometimes make the mistake of referring to current liabilities as short-term liabilities and non-current liabilities as long-term liabilities. It is assumed that short-term liabilities will be settled within twelve months and that long-term liabilities will be settled after twelve months.

    Elements of the accounting equation: Equity

    Equity is divided into three groups:

    • Owners’ equity constitutes the interest of the owners in the business. The owners’ equity consists of the capital contribution(s) made by the owners, drawings and other reserves (i.e. the retained income of a company).

    • Income is an increase in economic benefits during the accounting period in the form of an increase in assets or a decrease in liabilities that results in an increase of equity (excluding a contribution from owners).

    • Expenses are a decrease in economic benefits during the accounting period in the form of a decrease in assets or an increase in liabilities that results in an increase of equity (excluding distributions to owners).


Analysing transactions with the accounting equation

We use the following four steps to determine which account to debit and which account to credit:

    Step 1 Identify the names of the two accounts

    Step 2 Classify the two accounts as E, A or L.

    Step 3 Identify what happens to each element of the accounting equation. Increase or decrease?

    Step4 Use the accounting equation to determine which account to debit and which account to credit.

Remember: If cash is paid or received, one of the two accounts will be Bank. If the transaction is a credit transaction, one of the accounts will be Debtors control (for credit sales) and Creditors control (for credit purchases).

The accounting cycle

The accounting cycle indicates the accounting procedure during the financial year(the things that need to be recorded). These include the entries that the accountant makes daily, at the end of each month and at the end of each financial year.

The financial year: This is an accounting period of twelve consecutive months. It can be:

  • From 1 January 20.0 to 31 December20.0
  • From 1 March 20.0 to 28 February 20.1
  • From 1 July 20.0 to 30 June 20.0
  • Or any other twelve consecutive months.

The accounting cycle stays the same for all businesses up to the point where net income has to be distributed.


A source document is a document issued or received by a business, proving that a transaction has taken place. It contains information related to the nature of the transaction that has taken place and is used to enter the transaction in the books of first entry (i.e. the journals). The following information (normally) appears on source documents:

  • the date
  • the name of the party involved (e.g. purchased from or sold to)
  • the nature of the transaction (cash or credit and terms of credit)
  • the amount.
Answers to exercises

1 Income tax account:




3 Heading in cash flow statement:

    Operating activities




Calculations:
Depreciation on vehicle sold: 15% x (70 000 – 46 000) x 11/12 = R3 300
Depreciation on remaining vehicles:
15% x [(350 000 – 70 000) – (150 000 – 46 000)]
= 15% – (280 000 – 104 000) = R26 400
Depreciation on new vehicle: 15% x 120 000 x 3 /12 = R4 500


Calculations:

Depreciation on 28 Feb. 20.8: 20% x 51 200 = R10 240
Depreciation on 1 Dec. 20.9: 20% x 40 960 x 9 /12 = R6 144

Calculations:
Depreciation on vehicles for year:
Old: 25% x 260 000 = 65 000
New: 25% x 360 000 x4/12 = 30 000
Total: R95 000
Depreciation on equipment for year:
Remaining: 20% x [(280 000 – 80 000) – (136 640 – 39 040)] = 20 480
New on 1 Dec. 20.8: 20% x 70 000 x 3/12 = 3 500
New on 1 Feb. 20.9: 20% x (86 000 + 4 000) x 1/12 = 1 500
Total: 6 144 + 20 480 + 3 500 + 1 500 = R31 624
Additions to equipment: 70 000 + 86 000 + 4 000 = 160 000
Equipment on 28 Feb 20.9: 280 000 – 80 000 + 70 000 + 86 000 + 4 000 = R360 000
Accumulated depreciation on equipment on 28 Feb 20.9: 136 640 + 31 624 – 45 184 = R123 080


Part A

1 Asset disposal account:

Part


Calculations for using weighted average stock valuation method: Cost of sales:

consistently and do not change to another system.




Part A





Part A

Increase, decrease or no effect on cost of production:

Part C

1 Fixed cost and variable cost:

    Fixed cost: Cost that does not change in relation to production. It must be paid irrespective of production levels.

    Variable cost: Cost that varies with production output. It is directly related to the levels of production.

2 Examples of fixed and variable costs:

    Fixed cost: Any factory cost or administration cost





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