ASSIGNMENT 1 SEMESTER : FINANCIAL ACCOUNTING (FA ... - imm
Page 1 of 11
ASSIGNMENT 1ST SEMESTER :
FINANCIAL ACCOUNTING (FA)
STUDY UNITS COVERED
: :
STUDY UNITS 1 - 4 CHAPTERS 1 - 6
DUE DATE
:
3:00 p.m. 19 MARCH 2013
TOTAL MARKS
:
100
MATERIAL SUPPLIED
:
ANNEXURE A
INSTRUCTIONS TO CANDIDATES FOR COMPLETING AND SUBMITTING ASSIGNMENTS The complete ‘Instructions to Students for Completing and Submitting Assignments’ must be collected from any IMM GSM office, the relevant Student Support Centre or can be downloaded from the IMM GSM website. It is essential that the complete instructions be studied prior to commencing your assignment. The following points highlight only a few important notes. 1.
You are required to submit ONE assignment per subject.
2.
The assignment will contribute 20% towards the final examination mark, and the other 80% will be made up from the examination, however the examination papers will count out of 100%.
3.
Although your assignment will contribute towards your final examination mark, you do not have to earn credits for admission to the examinations; you are automatically accepted on registering for the exam.
4.
Number all the pages of your assignment (page 1 of 4) and write your name and surname, student number and subject at the top of each page.
5.
The IMM GSM requires assignments to be presented on plain A4 paper. You must show all working calculations, including and where appropriate multiple choice working calculations.
6.
A separate assignment cover, which is provided by the IMM GSM, must be attached to the front cover of each assignment.
7.
Retain a copy of each assignment before submitting, in case the original does not reach the IMM GSM.
8.
The assignment due date refers to the day up to which assignments will be accepted for marking purposes. The deadline is 3:00 p.m. on 19 March 2013. Late assignments will be accepted, but 25 marks will be deducted from the maximum mark, if received after 3:00 p.m. on 19 March 2013 and up to 5:00 p.m. the following day after which no assignments will be accepted.
9.
If you fail to follow these instructions carefully, the IMM Graduate School of Marketing cannot accept responsibility for the return of the assignment. It may even result in your assignment not being marked. Results will be available on the IMM GSM website: www.immgsm.ac.za, on Friday, 3 May 2013.
Assignment 1st Semester 2013
© IMM Graduate School of Marketing FA
Page 2 of 11
ANSWER ALL THE QUESTIONS QUESTION 1 – Theoretical concepts
[20]
Brave Brands Marketing is a well-renowned marketing organisation with a strong workforce of dedicated employees. However, the CEO has recently identified that many of his staff members have a poor understanding of financial statements and difficulty in interpreting financial data as their tertiary education has not exposed them to such information. As an IMM GSM graduate and flourishing marketing manager, you have been asked to do research which will enable you to answer the following questions in preparation for the training course that you will perform internally for the company. 1.1
In a brief but comprehensive response, define the role of accounting. (You are required, amongst others, to address accounting information, users of financial information, the accounting process and the role of financial accounting vs. management accounting.) (½ x 12) (6)
1.2
You have identified, as a marketer, that whilst you are not directly responsible for preparing financial statements you are certainly required to perform financial analysis. Discuss the purpose of and need for financial analysis. (½ x 8) (4)
1.3
In general, explain what the statement of comprehensive income (income statement) and statement of financial position (balance sheet) portray about a business entity and briefly discuss what is contained in each statement. (4)
1.4
The statement of comprehensive income is said to be prepared (as per IAS 1 of the International Financial Reporting Standards) using the accrual basis whereas the statement of cash flows is prepared using the cash basis. Briefly discuss the difference between the cash basis and accrual basis of accounting using the example of rent of R24 000 being paid in advance by Company A for 12 months from 1 September 2012. Company A has a December year end. (4)
1.5
The CEO has described an item in the financial statements of Brave Brands Marketing as “…a present obligation, arising from a past event, the settlement of which is expected to result in an outflow from the enterprise of resources embodying economic benefits.” State what element of the accounting equation the CEO is referring to and give any example of the said element. (2)
Assignment 1st Semester 2013
© IMM Graduate School of Marketing FA
Page 3 of 11
QUESTION 2 – Current and non-current assets
[15]
Sunshine Sail Cruises (SSC) is a company which owns a fleet of cruise ships and offices and specialises in providing exotic cruises across various locations. PART A SSC has realised that the value of its tangible assets (property, plant and equipment) is a material item in its financial statements and thus takes great care in faithfully representing the figures. The CEO knows that accounting for the consumption of economic benefits inherent in the items or use thereof through depreciation is very important. He has learnt that the definition of depreciation is “the systematic allocation of an asset’s depreciable amount over its economic useful life.” He is struggling to account for a new cruise ship that was purchased for R196 000 000 on 12th May 2012. R122 000 000 was spent on finalising the cabins, painting the ship in the company colours and getting professional fitters to get the ship in a condition as was intended for its use. After approximately 17 days the ship was ready to be used for its first cruise from the 1st June 2012. On the 16th June 2012 the ship’s hull was damaged by a passing tug boat and R52 000 was spent on repairing the damage. The ship was expected to be used (from the 1st June 2012) for 16 years after which it could be sold for R118 000 000. The accountant has suggested that a diminishing balance rate of 6% per annum could also be applied. SSC has a February year end. 2.1
TWO methods of depreciation are available to SSC. Identify these two methods and briefly explain the differences between the two methods. (2)
2.2
Identify which ONE of the methods identified above would be most applicable for the SSC cruise ship and briefly explain why you have chosen that method. (2)
2.3
Using the information provided, calculate the initial/capitalised cost of the asset that would be recognised and depreciated from the 1st June 2012. (2)
2.4
Using the information provided, calculate the depreciation for the year ended 28th February 2013 if the straight line method is selected for depreciation. (2)
2.5
Show the effect of the amount, calculated in 2.4, on the elements of the accounting equation. (You are required to show the amount and a + OR – to indicate an increase or decrease.) Use the following headings as a guide: (1) ASSETS
2.6
OWNERS’ EQUITY
LIABILITIES
Using the information provided, calculate the depreciation for the year ended 28th February 2013 if the reducing balance method is selected for depreciation. (2)
Assignment 1st Semester 2013
© IMM Graduate School of Marketing FA
Page 4 of 11
PART B One of the ‘duty-free’ fragrance stores ‘Smell-IT’ on board one of the cruise ships is having some issues relating to the control of its stock. Declining sales of one of the brands ‘Higo Loss’ has been as a result of customers seeing it as outdated and too common as a result of poor marketing efforts. There are 20 bottles of Higo Loss on the shelves currently selling for R360 each (cost price of R 150 each). It is estimated that each bottle could be sold for one third of its original selling price. The owner of Smell-IT is unsure of how to measure her inventory and has asked for your assistance. 2.7
Calculate the net realisable value of the 20 bottles of Higo Loss.
2.8
Calculate the total cost price of the 20 bottles of Higo Loss and indicate what amount the Higo Loss stock should be held at, explaining your reasons for stating the amount calculated. (2)
QUESTION 3 – Accounting statements and adjustments
(2)
[40]
Linda Mphosi, being a driven entrepreneur, opened her own Laundromat at the beginning of March 2012, trading as ‘Linda’s Laundry’. Her specialty lies in repairing and servicing broken coats and shoes along with the mandatory cleaning of laundry. She also stocks some cleaning and other useful products, mostly from one supplier ‘Laund-Right’. As Linda is quite inexperienced in bookkeeping and with the accounting requirements as per the International Financial Reporting Standards, she has asked for your assistance in accounting for all the transactions. The following is a list of transactions which have occurred during her first year of trading, ended 28th February 2013. 1.
2. 3. 4.
On the 3 March 2012 Linda contributed R150 000 cash to the business as her capital contribution. In addition to the cash she also transferred her old Renault Scenic into the business’s name to be used as a delivery car. The fair value of the car at that date was R96 000. During April Linda repaired 5 pairs of shoes and charged the customer R25 per pair. The customer settled the amount owing up front in cash. Linda purchased, on credit, more Laund-Right products for resale from her supplier. The goods cost R2 250 and related to 30 items. Linda started to find running the business and being the sole employee to be very stressful. As a result, at the end of April she hired a friend to help her serve customers. She agreed to pay her friend R82 200 per year. Linda correctly accounted for the salary to her friend each month. However, on the 28 February she got caught up in month-end processes and forgot to process the payroll accounts and payments. As a result she will only be able to pay her friend in March 2013.
Assignment 1st Semester 2013
© IMM Graduate School of Marketing FA
Page 5 of 11
5.
6. 7.
8.
9. 10. 11.
12.
13.
14. 15. 16. 17.
In May Linda wanted to buy new cleaning equipment in order to make her operations more efficient. In order to do so she applied for a loan from Grant Bank and was granted a facility of R250 000. The money was deposited into the business’s current account on the 3rd of May. The loan will be repaid in full in 2016 and earns simple interest of 15% per annum. The interest had been accounted for correctly and was paid on a monthly basis at month end. Linda bought the cleaning equipment on the 5th May and paid R250 000 cash for it. Linda took out business insurance in the company’s name on the 28th May that will cover the business from 1st June 2011. The monthly premiums (at R1 200 per month), that are deducted via a debit order, were all correctly accounted for except for that of February 2012. It was discovered that a bank error caused the debit order to lapse. Linda will pay the premium manually to the insurance company on the 12th March 2012. In order to gain exposure, Linda approached a marketing organisation. She was motivated by their ideas and on the 5th June 2012 she paid them R12 000 cash for an advertising campaign that would run for 12 months from that date. During July Linda’s Laundry sold 12 Laund-Right products to customers. All items were sold for cash at R160 per item. (Cost price R75 per item.) In August, Linda took two Laund-Right products to give to her sister to sample. On the 1st of September 2012 Linda’s Laundry received commission income in cash from Laund-Right suppliers because she stocks its product exclusively. This is a once off payment of R150 000 by them to cover a contract period for a year from the 1st of September where Linda is required to continue selling its product. Other operating expenses incurred by Linda’s Laundry for the period ended 28th February 2013 included: Telephone R 1 300 Rent R12 500 Machine repairs R 3 200 Various services performed on credit for customers over the period amounted to R88 000. And miscellaneous cash and credit sales of products amounted to R6 500 over the period. (Cost of sales R3 200.) Depreciation on the equipment was correctly calculated at R20 800 for the period. Further cash purchases of Laund-Right products amounted to R5 400. Mrs Jones, a credit customer, was declared insolvent during the period and as a result her account of R800 should be written off as irrecoverable. Ignore VAT. Assume that Linda’s Laundry uses a perpetual inventory system. P.T.O for Required
Assignment 1st Semester 2013
© IMM Graduate School of Marketing FA
Page 6 of 11
Required: 3.1
Using a table such as the one below, show the effect (either + / -) as well as the accounts affected by transactions 1, 3 and 6 only. (A random example is given below for your reference as to how to lay out your answers.) (4)
E.G.:
3.2
ASSETS + 2 000 Bank
OWNERS’ EQUITY + 2 000 Rent income
LIABILITIES 0
Refer to transaction 8: a)
Process the journal entry that would have been processed on the 5th June 2012. (Assume that Linda accounts for the whole amount as an expense when paid.) (2)
b)
3.3
Process the internal/adjusting journal entry that would be required on the 28th February 2013 relating to the prepayment in the transaction. (2) Refer to transaction 5: a)
Process the journal entry to account for the cash proceeds received from the loan. (2)
b)
Process the journal entry that would have taken place each month to account for the interest incurred and paid for. (Show all workings.) (3)
3.4
Prepare a complete and correctly accounted for statement of comprehensive income (income statement) for the period ended 28 February 2013. (19)
3.5
Show an extract of the statement of financial position (balance sheet) as at 28th February 2013, showing the equity and liabilities section only. (8)
NOTE: IT IS RECOMMENDED THAT YOU USE THE SUGGESTED FORMATS PROVIDED FOR THIS QUESTION IN ANNEXURE A AT THE END OF THE QUESTION PAPER.
Assignment 1st Semester 2013
© IMM Graduate School of Marketing FA
Page 7 of 11
QUESTION 4 – Financial analysis
[25]
This question consists of TWO unrelated parts. PART A The following information relating to XXY Ltd is to be used in answering questions 4.1 - 4.3. R ASSETS Property and plant
592 000
Inventory
?
Trade receivables
?
Bank
50 000
TOTAL ASSETS
864 000
EQUITY AND LIABILITIES Share capital
600 000
Reserves
?
Non-current liabilities
120 000
Current liabilities
?
XXY Ltd has a current ratio of 4:1 and an inventory turnover ratio of 10.5 times. Assume the average inventory equals the ending inventory and the cost of sales expense for the year amounts to R1 470 000. Required: 4.1
Calculate XXY’s closing inventory balance, represented by a ‘?’ in the information provided. (2)
4.2
Calculate XXY’s current liabilities, represented by a ‘?’ in the information provided. (2)
4.3
Calculate the quick ratio for XXY Ltd from the provided/calculated. (Round your answer to 2 decimal places.)
4.4
When analysing financial information, state one relevant benchmark against which you could compare the above results. (1)
information (2)
NOTE: FOR THE PURPOSES OF THIS QUESTION, ASSUME THE FOLLOWING:
Inventory turnover =
Assignment 1st Semester 2013
Cost of sales Average inventory
© IMM Graduate School of Marketing FA
Page 8 of 11
PART B
The following are extracts from the statement of comprehensive income and the statement of financial position of Hits and Hammers Limited in respect of the June 2012 and 2013 financial years. You are required to use the information to answer the questions on the next page. Hits and Hammers Limited Extract from the statement of comprehensive income R’000
R’000
2013 Sales
2012
1 290 000
980 000
Cost of sales
853 500
588 000
Finance cost
20 000
25 000
204 750
135 100
Profit after tax
Hits and Hammers Limited Extract from the statement of financial position R’000
R’000
2013
2012
Share capital
292 000
150 000
Retained income / Accumulated profit (opening balance)
425 000
275 000
Long-term loan (10% p.a.)
200 000
250 000
Inventory
200 000
160 000
Trade receivables (debtors)
193 800
167 200
44 000
38 000
214 750
120 000
1 131 750
795 000
Bank Trade payables Non-current assets (at carrying value) Industry averages for the year ended June 2013 Current ratio
1.75:1
Quick ratio
1.25:1
Debt to equity ratio
52%
Average days inventory on hand
65 days
Average debtors collection period
80 days
Gross margin
32%
Additional information
2013
Market price of shares
R15.75
R12.80
38 cents
40 cents
146 000 shares
140 000 shares
Dividends per share Number of ordinary shares in issue
2012
Assume 75% of total sales relate to credit sales. All purchases are on credit.
Assignment 1st Semester 2013
© IMM Graduate School of Marketing FA
Page 9 of 11
Required: (You are NOT required to use averages. You are required to round your answers to 2 decimal places and to the nearest whole day where applicable.) 4.5
Calculate the percentage change in sales between 2012 and 2013.
(1)
4.6
4.6.1 Calculate the gross profit percentage on sales for 2012 and 2013. (2) 4.6.2 Provide ONE possible reason for the change calculated between the two years in 4.6.1. (1)
4.7
Calculate the following for the 2013 year: 4.7.1 Average days inventory on hand. (1) 4.7.2 Average debtors collection period. (1) 4.7.3 Briefly comment on the ratios calculated above. You are required to briefly describe what you understand about the ratios as well as compare them to any relevant figures provided. (4 x ½) (2)
4.8
Calculate the total asset turnover ratio for 2013 and briefly explain what this ratio represents. (3)
4.9
4.9.1 Calculate the earnings per share for 2013. 4.9.2 Calculate the price earnings ratio for 2013. 4.9.3 Briefly explain what the PE ratio indicates about the perception the market has of the business.
4.10
(1) (1) (1)
The following ratios have been correctly calculated for Hits and Hammers: 2013
2012
Current ratio
2.04 : 1
3.04 : 1
Quick ratio
1.11 : 1
1.71 : 1
Debt to equity Times interest earned/interest cover
28%
59%
15.63 times
8.72 times
4.10.1 Taking the above into account, as well as any additional information, comment briefly on the short-term liquidity of Hits and Hammers. (2) 4.10.2 Comment on the gearing and long-term solvency in terms of Hits and Hammers. (2) ASSIGNMENT TOTAL: 100
Assignment 1st Semester 2013
© IMM Graduate School of Marketing FA
Page 10 of 11
ANNEXURE A – Suggested format for answers to Question 3 3.1 Trans.
ASSETS
OWNERS’ EQUITY
LIABILITIES
1
3 6
3.2 and 3.3 (a)
Details/Account
Debit
Credit
(b)
3.4 Statement of comprehensive income for the year ended 28 February 2013
R Sales Cost of sales Gross profit Laundry service income Other income
Operating expenses
Finance cost
Profit/loss for the period
Assignment 1st Semester 2013
© IMM Graduate School of Marketing FA
Page 11 of 11 th
3.5 Extract from the statement of financial position as at 28 February 2013
R EQUITY AND LIABILITIES Equity
Liabilities Non-current liabilities
Current liabilities
Total equity and liabilities
Assignment 1st Semester 2013
© IMM Graduate School of Marketing FA
ASSIGNMENT 1ST SEMESTER :
FINANCIAL ACCOUNTING (FA)
STUDY UNITS COVERED
: :
STUDY UNITS 1 - 4 CHAPTERS 1 - 6
DUE DATE
:
3:00 p.m. 19 MARCH 2013
TOTAL MARKS
:
100
MATERIAL SUPPLIED
:
ANNEXURE A
INSTRUCTIONS TO CANDIDATES FOR COMPLETING AND SUBMITTING ASSIGNMENTS The complete ‘Instructions to Students for Completing and Submitting Assignments’ must be collected from any IMM GSM office, the relevant Student Support Centre or can be downloaded from the IMM GSM website. It is essential that the complete instructions be studied prior to commencing your assignment. The following points highlight only a few important notes. 1.
You are required to submit ONE assignment per subject.
2.
The assignment will contribute 20% towards the final examination mark, and the other 80% will be made up from the examination, however the examination papers will count out of 100%.
3.
Although your assignment will contribute towards your final examination mark, you do not have to earn credits for admission to the examinations; you are automatically accepted on registering for the exam.
4.
Number all the pages of your assignment (page 1 of 4) and write your name and surname, student number and subject at the top of each page.
5.
The IMM GSM requires assignments to be presented on plain A4 paper. You must show all working calculations, including and where appropriate multiple choice working calculations.
6.
A separate assignment cover, which is provided by the IMM GSM, must be attached to the front cover of each assignment.
7.
Retain a copy of each assignment before submitting, in case the original does not reach the IMM GSM.
8.
The assignment due date refers to the day up to which assignments will be accepted for marking purposes. The deadline is 3:00 p.m. on 19 March 2013. Late assignments will be accepted, but 25 marks will be deducted from the maximum mark, if received after 3:00 p.m. on 19 March 2013 and up to 5:00 p.m. the following day after which no assignments will be accepted.
9.
If you fail to follow these instructions carefully, the IMM Graduate School of Marketing cannot accept responsibility for the return of the assignment. It may even result in your assignment not being marked. Results will be available on the IMM GSM website: www.immgsm.ac.za, on Friday, 3 May 2013.
Assignment 1st Semester 2013
© IMM Graduate School of Marketing FA
Page 2 of 11
ANSWER ALL THE QUESTIONS QUESTION 1 – Theoretical concepts
[20]
Brave Brands Marketing is a well-renowned marketing organisation with a strong workforce of dedicated employees. However, the CEO has recently identified that many of his staff members have a poor understanding of financial statements and difficulty in interpreting financial data as their tertiary education has not exposed them to such information. As an IMM GSM graduate and flourishing marketing manager, you have been asked to do research which will enable you to answer the following questions in preparation for the training course that you will perform internally for the company. 1.1
In a brief but comprehensive response, define the role of accounting. (You are required, amongst others, to address accounting information, users of financial information, the accounting process and the role of financial accounting vs. management accounting.) (½ x 12) (6)
1.2
You have identified, as a marketer, that whilst you are not directly responsible for preparing financial statements you are certainly required to perform financial analysis. Discuss the purpose of and need for financial analysis. (½ x 8) (4)
1.3
In general, explain what the statement of comprehensive income (income statement) and statement of financial position (balance sheet) portray about a business entity and briefly discuss what is contained in each statement. (4)
1.4
The statement of comprehensive income is said to be prepared (as per IAS 1 of the International Financial Reporting Standards) using the accrual basis whereas the statement of cash flows is prepared using the cash basis. Briefly discuss the difference between the cash basis and accrual basis of accounting using the example of rent of R24 000 being paid in advance by Company A for 12 months from 1 September 2012. Company A has a December year end. (4)
1.5
The CEO has described an item in the financial statements of Brave Brands Marketing as “…a present obligation, arising from a past event, the settlement of which is expected to result in an outflow from the enterprise of resources embodying economic benefits.” State what element of the accounting equation the CEO is referring to and give any example of the said element. (2)
Assignment 1st Semester 2013
© IMM Graduate School of Marketing FA
Page 3 of 11
QUESTION 2 – Current and non-current assets
[15]
Sunshine Sail Cruises (SSC) is a company which owns a fleet of cruise ships and offices and specialises in providing exotic cruises across various locations. PART A SSC has realised that the value of its tangible assets (property, plant and equipment) is a material item in its financial statements and thus takes great care in faithfully representing the figures. The CEO knows that accounting for the consumption of economic benefits inherent in the items or use thereof through depreciation is very important. He has learnt that the definition of depreciation is “the systematic allocation of an asset’s depreciable amount over its economic useful life.” He is struggling to account for a new cruise ship that was purchased for R196 000 000 on 12th May 2012. R122 000 000 was spent on finalising the cabins, painting the ship in the company colours and getting professional fitters to get the ship in a condition as was intended for its use. After approximately 17 days the ship was ready to be used for its first cruise from the 1st June 2012. On the 16th June 2012 the ship’s hull was damaged by a passing tug boat and R52 000 was spent on repairing the damage. The ship was expected to be used (from the 1st June 2012) for 16 years after which it could be sold for R118 000 000. The accountant has suggested that a diminishing balance rate of 6% per annum could also be applied. SSC has a February year end. 2.1
TWO methods of depreciation are available to SSC. Identify these two methods and briefly explain the differences between the two methods. (2)
2.2
Identify which ONE of the methods identified above would be most applicable for the SSC cruise ship and briefly explain why you have chosen that method. (2)
2.3
Using the information provided, calculate the initial/capitalised cost of the asset that would be recognised and depreciated from the 1st June 2012. (2)
2.4
Using the information provided, calculate the depreciation for the year ended 28th February 2013 if the straight line method is selected for depreciation. (2)
2.5
Show the effect of the amount, calculated in 2.4, on the elements of the accounting equation. (You are required to show the amount and a + OR – to indicate an increase or decrease.) Use the following headings as a guide: (1) ASSETS
2.6
OWNERS’ EQUITY
LIABILITIES
Using the information provided, calculate the depreciation for the year ended 28th February 2013 if the reducing balance method is selected for depreciation. (2)
Assignment 1st Semester 2013
© IMM Graduate School of Marketing FA
Page 4 of 11
PART B One of the ‘duty-free’ fragrance stores ‘Smell-IT’ on board one of the cruise ships is having some issues relating to the control of its stock. Declining sales of one of the brands ‘Higo Loss’ has been as a result of customers seeing it as outdated and too common as a result of poor marketing efforts. There are 20 bottles of Higo Loss on the shelves currently selling for R360 each (cost price of R 150 each). It is estimated that each bottle could be sold for one third of its original selling price. The owner of Smell-IT is unsure of how to measure her inventory and has asked for your assistance. 2.7
Calculate the net realisable value of the 20 bottles of Higo Loss.
2.8
Calculate the total cost price of the 20 bottles of Higo Loss and indicate what amount the Higo Loss stock should be held at, explaining your reasons for stating the amount calculated. (2)
QUESTION 3 – Accounting statements and adjustments
(2)
[40]
Linda Mphosi, being a driven entrepreneur, opened her own Laundromat at the beginning of March 2012, trading as ‘Linda’s Laundry’. Her specialty lies in repairing and servicing broken coats and shoes along with the mandatory cleaning of laundry. She also stocks some cleaning and other useful products, mostly from one supplier ‘Laund-Right’. As Linda is quite inexperienced in bookkeeping and with the accounting requirements as per the International Financial Reporting Standards, she has asked for your assistance in accounting for all the transactions. The following is a list of transactions which have occurred during her first year of trading, ended 28th February 2013. 1.
2. 3. 4.
On the 3 March 2012 Linda contributed R150 000 cash to the business as her capital contribution. In addition to the cash she also transferred her old Renault Scenic into the business’s name to be used as a delivery car. The fair value of the car at that date was R96 000. During April Linda repaired 5 pairs of shoes and charged the customer R25 per pair. The customer settled the amount owing up front in cash. Linda purchased, on credit, more Laund-Right products for resale from her supplier. The goods cost R2 250 and related to 30 items. Linda started to find running the business and being the sole employee to be very stressful. As a result, at the end of April she hired a friend to help her serve customers. She agreed to pay her friend R82 200 per year. Linda correctly accounted for the salary to her friend each month. However, on the 28 February she got caught up in month-end processes and forgot to process the payroll accounts and payments. As a result she will only be able to pay her friend in March 2013.
Assignment 1st Semester 2013
© IMM Graduate School of Marketing FA
Page 5 of 11
5.
6. 7.
8.
9. 10. 11.
12.
13.
14. 15. 16. 17.
In May Linda wanted to buy new cleaning equipment in order to make her operations more efficient. In order to do so she applied for a loan from Grant Bank and was granted a facility of R250 000. The money was deposited into the business’s current account on the 3rd of May. The loan will be repaid in full in 2016 and earns simple interest of 15% per annum. The interest had been accounted for correctly and was paid on a monthly basis at month end. Linda bought the cleaning equipment on the 5th May and paid R250 000 cash for it. Linda took out business insurance in the company’s name on the 28th May that will cover the business from 1st June 2011. The monthly premiums (at R1 200 per month), that are deducted via a debit order, were all correctly accounted for except for that of February 2012. It was discovered that a bank error caused the debit order to lapse. Linda will pay the premium manually to the insurance company on the 12th March 2012. In order to gain exposure, Linda approached a marketing organisation. She was motivated by their ideas and on the 5th June 2012 she paid them R12 000 cash for an advertising campaign that would run for 12 months from that date. During July Linda’s Laundry sold 12 Laund-Right products to customers. All items were sold for cash at R160 per item. (Cost price R75 per item.) In August, Linda took two Laund-Right products to give to her sister to sample. On the 1st of September 2012 Linda’s Laundry received commission income in cash from Laund-Right suppliers because she stocks its product exclusively. This is a once off payment of R150 000 by them to cover a contract period for a year from the 1st of September where Linda is required to continue selling its product. Other operating expenses incurred by Linda’s Laundry for the period ended 28th February 2013 included: Telephone R 1 300 Rent R12 500 Machine repairs R 3 200 Various services performed on credit for customers over the period amounted to R88 000. And miscellaneous cash and credit sales of products amounted to R6 500 over the period. (Cost of sales R3 200.) Depreciation on the equipment was correctly calculated at R20 800 for the period. Further cash purchases of Laund-Right products amounted to R5 400. Mrs Jones, a credit customer, was declared insolvent during the period and as a result her account of R800 should be written off as irrecoverable. Ignore VAT. Assume that Linda’s Laundry uses a perpetual inventory system. P.T.O for Required
Assignment 1st Semester 2013
© IMM Graduate School of Marketing FA
Page 6 of 11
Required: 3.1
Using a table such as the one below, show the effect (either + / -) as well as the accounts affected by transactions 1, 3 and 6 only. (A random example is given below for your reference as to how to lay out your answers.) (4)
E.G.:
3.2
ASSETS + 2 000 Bank
OWNERS’ EQUITY + 2 000 Rent income
LIABILITIES 0
Refer to transaction 8: a)
Process the journal entry that would have been processed on the 5th June 2012. (Assume that Linda accounts for the whole amount as an expense when paid.) (2)
b)
3.3
Process the internal/adjusting journal entry that would be required on the 28th February 2013 relating to the prepayment in the transaction. (2) Refer to transaction 5: a)
Process the journal entry to account for the cash proceeds received from the loan. (2)
b)
Process the journal entry that would have taken place each month to account for the interest incurred and paid for. (Show all workings.) (3)
3.4
Prepare a complete and correctly accounted for statement of comprehensive income (income statement) for the period ended 28 February 2013. (19)
3.5
Show an extract of the statement of financial position (balance sheet) as at 28th February 2013, showing the equity and liabilities section only. (8)
NOTE: IT IS RECOMMENDED THAT YOU USE THE SUGGESTED FORMATS PROVIDED FOR THIS QUESTION IN ANNEXURE A AT THE END OF THE QUESTION PAPER.
Assignment 1st Semester 2013
© IMM Graduate School of Marketing FA
Page 7 of 11
QUESTION 4 – Financial analysis
[25]
This question consists of TWO unrelated parts. PART A The following information relating to XXY Ltd is to be used in answering questions 4.1 - 4.3. R ASSETS Property and plant
592 000
Inventory
?
Trade receivables
?
Bank
50 000
TOTAL ASSETS
864 000
EQUITY AND LIABILITIES Share capital
600 000
Reserves
?
Non-current liabilities
120 000
Current liabilities
?
XXY Ltd has a current ratio of 4:1 and an inventory turnover ratio of 10.5 times. Assume the average inventory equals the ending inventory and the cost of sales expense for the year amounts to R1 470 000. Required: 4.1
Calculate XXY’s closing inventory balance, represented by a ‘?’ in the information provided. (2)
4.2
Calculate XXY’s current liabilities, represented by a ‘?’ in the information provided. (2)
4.3
Calculate the quick ratio for XXY Ltd from the provided/calculated. (Round your answer to 2 decimal places.)
4.4
When analysing financial information, state one relevant benchmark against which you could compare the above results. (1)
information (2)
NOTE: FOR THE PURPOSES OF THIS QUESTION, ASSUME THE FOLLOWING:
Inventory turnover =
Assignment 1st Semester 2013
Cost of sales Average inventory
© IMM Graduate School of Marketing FA
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PART B
The following are extracts from the statement of comprehensive income and the statement of financial position of Hits and Hammers Limited in respect of the June 2012 and 2013 financial years. You are required to use the information to answer the questions on the next page. Hits and Hammers Limited Extract from the statement of comprehensive income R’000
R’000
2013 Sales
2012
1 290 000
980 000
Cost of sales
853 500
588 000
Finance cost
20 000
25 000
204 750
135 100
Profit after tax
Hits and Hammers Limited Extract from the statement of financial position R’000
R’000
2013
2012
Share capital
292 000
150 000
Retained income / Accumulated profit (opening balance)
425 000
275 000
Long-term loan (10% p.a.)
200 000
250 000
Inventory
200 000
160 000
Trade receivables (debtors)
193 800
167 200
44 000
38 000
214 750
120 000
1 131 750
795 000
Bank Trade payables Non-current assets (at carrying value) Industry averages for the year ended June 2013 Current ratio
1.75:1
Quick ratio
1.25:1
Debt to equity ratio
52%
Average days inventory on hand
65 days
Average debtors collection period
80 days
Gross margin
32%
Additional information
2013
Market price of shares
R15.75
R12.80
38 cents
40 cents
146 000 shares
140 000 shares
Dividends per share Number of ordinary shares in issue
2012
Assume 75% of total sales relate to credit sales. All purchases are on credit.
Assignment 1st Semester 2013
© IMM Graduate School of Marketing FA
Page 9 of 11
Required: (You are NOT required to use averages. You are required to round your answers to 2 decimal places and to the nearest whole day where applicable.) 4.5
Calculate the percentage change in sales between 2012 and 2013.
(1)
4.6
4.6.1 Calculate the gross profit percentage on sales for 2012 and 2013. (2) 4.6.2 Provide ONE possible reason for the change calculated between the two years in 4.6.1. (1)
4.7
Calculate the following for the 2013 year: 4.7.1 Average days inventory on hand. (1) 4.7.2 Average debtors collection period. (1) 4.7.3 Briefly comment on the ratios calculated above. You are required to briefly describe what you understand about the ratios as well as compare them to any relevant figures provided. (4 x ½) (2)
4.8
Calculate the total asset turnover ratio for 2013 and briefly explain what this ratio represents. (3)
4.9
4.9.1 Calculate the earnings per share for 2013. 4.9.2 Calculate the price earnings ratio for 2013. 4.9.3 Briefly explain what the PE ratio indicates about the perception the market has of the business.
4.10
(1) (1) (1)
The following ratios have been correctly calculated for Hits and Hammers: 2013
2012
Current ratio
2.04 : 1
3.04 : 1
Quick ratio
1.11 : 1
1.71 : 1
Debt to equity Times interest earned/interest cover
28%
59%
15.63 times
8.72 times
4.10.1 Taking the above into account, as well as any additional information, comment briefly on the short-term liquidity of Hits and Hammers. (2) 4.10.2 Comment on the gearing and long-term solvency in terms of Hits and Hammers. (2) ASSIGNMENT TOTAL: 100
Assignment 1st Semester 2013
© IMM Graduate School of Marketing FA
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ANNEXURE A – Suggested format for answers to Question 3 3.1 Trans.
ASSETS
OWNERS’ EQUITY
LIABILITIES
1
3 6
3.2 and 3.3 (a)
Details/Account
Debit
Credit
(b)
3.4 Statement of comprehensive income for the year ended 28 February 2013
R Sales Cost of sales Gross profit Laundry service income Other income
Operating expenses
Finance cost
Profit/loss for the period
Assignment 1st Semester 2013
© IMM Graduate School of Marketing FA
Page 11 of 11 th
3.5 Extract from the statement of financial position as at 28 February 2013
R EQUITY AND LIABILITIES Equity
Liabilities Non-current liabilities
Current liabilities
Total equity and liabilities
Assignment 1st Semester 2013
© IMM Graduate School of Marketing FA
