Financial Management 1 (FM101) Tutorial Letter: May 2013 ... - imm
Financial Management 1 (FM101) Tutorial Letter: May 2013 examination session Dear Student Please make note of the following key areas and notes pertaining to the Financial Management 1 May Examination. You are reminded that the detail provided herein is merely a guideline for clarity and direction and you are encouraged to complete the entirety of the module content as outlined in the Learner Guide. Exam Structure The paper consists of six (6) questions resulting in an exam total of 100 marks. All questions must be attempted. Question 1 (15 marks), Question 2 (25 marks), Question 3 (10 marks), Question 4 (20 marks), Question 5 (7 marks) and Question 6 (23 marks). There are no multiple choice questions as all the questions comprise of a combination of short questions, calculations, analysis of transactions and long questions based on independent scenarios. Exam Content The paper is predominantly calculation based. However, there are theoretical components within each question from all study units. This is particularly the case with Question 6 which involves short questions involving theory based reasoning. In the past many students have neglected the basic theory, principles and concepts identified in study unit 1 as well as in all other units. Calculation focus: Stock valuation calculations, accrual adjustments, figures for the analysis of transactions, depreciation, company financial statement calculations, calculations aiding the formulation of cash budgets, selling price, mark-up, VAT and Stock control methods (EOQ, AveSL, ROL etc).
IMM (GSM) ©
1
FM101 May 2013
You are reminded to have fully grasped the following concepts amongst others in order to master the topics covered in the examination: Company financial statements and adjustments, depreciation methods and other related adjustments, the Accounting Equation, the concept of budgeting and the formats and calculation of budgets (i.e. cash budget), cost classification (fixed vs. variable etc.) and stock control and valuation concepts. Please note the Appendix on page 3 and 4 of this Tutorial Letter providing a summary on the equity structure of a company. General Time management per question must be monitored carefully. You are reminded to show your workings and calculations where necessary and ensure that they can be easily referenced. Examiners will not ‘hunt’ for substantiating workings. Number all questions CLEARLY and indicate ‘End’ when you have completed all questions in the exam. Formats of the various financial statements, cash budgets, notes and tables are important and answers that are poorly structured will be penalised. There are some questions which provide suggested formats. These are to be used as a guide and time must not be wasted on formats unnecessarily. You are also required to use answer sheet where applicable and include these in your answer books on submission. Use mark allocation as a guide as to how much information is required when formulating your responses. May we remind you that we are always available to assist with academic queries. Academic queries should be submitted in writing to: [email protected] We wish you a successful May 2013 examination session. Kind regards The IMM GSM Team
IMM (GSM) ©
2
FM101 May 2013
APPENDIX – EQUITY STRUCTURE OF A COMPANY Please be aware that the new Companies Act no longer makes provision for PAR value shares and now designates shares as Class A and Class B shares rather than ordinary and preference shares. This being said it is important to realise that many companies are in the process of converting to the new stipulations of the act so for your purposes you can refer to the company set up as set out in your text book and learner guide. In summary, a breakdown of the equity structure (in bold xx) that you should understand (as well as how each item is calculated) is given below comparing a sole trader and a company:
It is important to note that whilst a sole trader’s equity only comprised of capital a company’s equity now involves issued share capital, share premium, retained earnings (accumulated profits) and reserves. It is also important for you to understand how the balance on retained earnings is calculated as well as the distinction between preference share capital and ordinary share capital. You should have noted the following when working through the textbook questions:
When calculation dividends on ordinary shares it is done by multiplying an amount in cents (per share) by the NUMBER of shares IN ISSUE. (The shares in issue will usually have to be calculated by dividing the given issued ordinary share capital by the par value per share identified in the authorised share capital.) When calculating dividends on preference shares it is done by applying the given percentage (%) applicable to the preference shares by the RAND VALUE of preference share capital given. Authorised share capital is informative in that it gives us par value etc., whereas issued share capital relates to the equity actually recorded. Also note the theory on reserves and ordinary shares vs. preference shares.
IMM (GSM) ©
3
FM101 May 2013
The Income Statement (Statement of Comprehensive Income) does not vary significantly between the forms of ownership other than the fact that we see a separate line for ‘tax expense’ resulting in ‘profit after tax’ for a company. Please note where your textbook and learner guide show the income statement for a company they include the calculation for retained earnings at the bottom of it. It is always best to show the income statement calculating the NET PROFIT AFTER TAX for the period only (shown in the green shape below) and then to calculate the retained earnings/income and other equity items for the balance sheet separately (highlighted in red shape below). Only incomes and expenses resulting in a profit / loss for the period should be shown on the income statement. Example from the learner guide:
So remember the Income Statement (Statement of Comprehensive Income) should end off with ‘Net profit after tax’. So the bottom part of the statement should appear as follows: E.G. Profit before interest and tax (EBIT) xx Interest expense (x) Profit before tax (EBT) xx Tax expense (x) Net profit for the period (NPAT) xxx The retained earnings amount that would appear in the ‘equity’ section of the balance sheet (statement of financial position) will then be calculated separately using the profit calculated from the income statement. (Shown below.) Retained earnings: Opening balance (Accumulated profits from the previous year.) Plus profit for the period / less loss for the period Less dividends (preference and ordinary decl. and paid.) Less transfer to reserves Closing balance (Taken to the face of the balance sheet.) IMM (GSM) ©
4
xx x/(x) (x) (x) xx
FM101 May 2013
IMM (GSM) ©
1
FM101 May 2013
You are reminded to have fully grasped the following concepts amongst others in order to master the topics covered in the examination: Company financial statements and adjustments, depreciation methods and other related adjustments, the Accounting Equation, the concept of budgeting and the formats and calculation of budgets (i.e. cash budget), cost classification (fixed vs. variable etc.) and stock control and valuation concepts. Please note the Appendix on page 3 and 4 of this Tutorial Letter providing a summary on the equity structure of a company. General Time management per question must be monitored carefully. You are reminded to show your workings and calculations where necessary and ensure that they can be easily referenced. Examiners will not ‘hunt’ for substantiating workings. Number all questions CLEARLY and indicate ‘End’ when you have completed all questions in the exam. Formats of the various financial statements, cash budgets, notes and tables are important and answers that are poorly structured will be penalised. There are some questions which provide suggested formats. These are to be used as a guide and time must not be wasted on formats unnecessarily. You are also required to use answer sheet where applicable and include these in your answer books on submission. Use mark allocation as a guide as to how much information is required when formulating your responses. May we remind you that we are always available to assist with academic queries. Academic queries should be submitted in writing to: [email protected] We wish you a successful May 2013 examination session. Kind regards The IMM GSM Team
IMM (GSM) ©
2
FM101 May 2013
APPENDIX – EQUITY STRUCTURE OF A COMPANY Please be aware that the new Companies Act no longer makes provision for PAR value shares and now designates shares as Class A and Class B shares rather than ordinary and preference shares. This being said it is important to realise that many companies are in the process of converting to the new stipulations of the act so for your purposes you can refer to the company set up as set out in your text book and learner guide. In summary, a breakdown of the equity structure (in bold xx) that you should understand (as well as how each item is calculated) is given below comparing a sole trader and a company:
It is important to note that whilst a sole trader’s equity only comprised of capital a company’s equity now involves issued share capital, share premium, retained earnings (accumulated profits) and reserves. It is also important for you to understand how the balance on retained earnings is calculated as well as the distinction between preference share capital and ordinary share capital. You should have noted the following when working through the textbook questions:
When calculation dividends on ordinary shares it is done by multiplying an amount in cents (per share) by the NUMBER of shares IN ISSUE. (The shares in issue will usually have to be calculated by dividing the given issued ordinary share capital by the par value per share identified in the authorised share capital.) When calculating dividends on preference shares it is done by applying the given percentage (%) applicable to the preference shares by the RAND VALUE of preference share capital given. Authorised share capital is informative in that it gives us par value etc., whereas issued share capital relates to the equity actually recorded. Also note the theory on reserves and ordinary shares vs. preference shares.
IMM (GSM) ©
3
FM101 May 2013
The Income Statement (Statement of Comprehensive Income) does not vary significantly between the forms of ownership other than the fact that we see a separate line for ‘tax expense’ resulting in ‘profit after tax’ for a company. Please note where your textbook and learner guide show the income statement for a company they include the calculation for retained earnings at the bottom of it. It is always best to show the income statement calculating the NET PROFIT AFTER TAX for the period only (shown in the green shape below) and then to calculate the retained earnings/income and other equity items for the balance sheet separately (highlighted in red shape below). Only incomes and expenses resulting in a profit / loss for the period should be shown on the income statement. Example from the learner guide:
So remember the Income Statement (Statement of Comprehensive Income) should end off with ‘Net profit after tax’. So the bottom part of the statement should appear as follows: E.G. Profit before interest and tax (EBIT) xx Interest expense (x) Profit before tax (EBT) xx Tax expense (x) Net profit for the period (NPAT) xxx The retained earnings amount that would appear in the ‘equity’ section of the balance sheet (statement of financial position) will then be calculated separately using the profit calculated from the income statement. (Shown below.) Retained earnings: Opening balance (Accumulated profits from the previous year.) Plus profit for the period / less loss for the period Less dividends (preference and ordinary decl. and paid.) Less transfer to reserves Closing balance (Taken to the face of the balance sheet.) IMM (GSM) ©
4
xx x/(x) (x) (x) xx
FM101 May 2013
