SECONDARY SCHOOL IMPROVEMENT PROGRAMME (SSIP) 2015

Transcription

1 1 SECONDARY SCHOOL IMPROVEMENT PROGRAMME (SSIP) 2015 GRADE 12 SUBJECT: ACCOUNTING LEARNER NOTES (Page 1 of 97)

2 2 TABLE OF CONTENTS SESSION TOPIC PAGE NO 11 Manufacturing Cash Budgets Projected Income Statements VAT Consolidation Consolidation Consolidation 87-97

3 3 SESSION NO: ELEVEN TOPIC: MANUFACTURING SECTION A: TYPICAL EXAM QUESTIONS QUESTION 1: MANUFACTURING (35 marks; 20 minutes) 1.1 COST ACCOUNTS REQUIRED: Choose a cost category from COLUMN B that matches a description in COLUMN A. Write only the letter (A D) next to the question number ( ) in the ANSWER BOOK. COLUMN A Raw materials used in the factory Advertising expenses Office telephone account Salary of the factory foreman A B C D COLUMN B direct labour cost factory overhead cost selling and distribution cost administration cost E direct material cost (4 x 2) (8) 1.2 PROTEA MANUFACTURERS Protea Manufacturers make one style of uniforms (overalls). The financial year ends on 31 August REQUIRED: Provide the missing figures in the: Production Cost Statement Note for Factory Overhead Cost (8) (5) The internal auditor is not satisfied with the direct labour cost for the year. Explain the problem relating to the direct labour cost and quote figures to support your explanation. (3)

4 Give TWO possible solutions to this problem. (4) 4 INFORMATION: 1. Production Cost Statement for the year ended 31 August 2013 Direct material cost? Direct labour cost Prime cost? Factory overhead cost Total manufacturing cost? Work-in-process (1 September 2012) ? Work-in-process (31 August 2013)? Cost of production of finished goods? 2. Direct material cost Fabric was issued from storeroom to factory using the weightedaverage method. Quantity Cost per Total cost (metres) metre Stock on 1 September m R 9,00 R Purchases of fabric m 12, m Issued to factory m?? Stock on 31 August m?? 3. Direct labour cost Hours Rate Workers Total Normal time R32,00 10 R Overtime 880 R64,00 10 R Employer's contributions R R

5 5 INFORMATION: 4. Allocation of cost items Refer to the relevant cost statements below. 4.1 Factory rent is divided among factory, sales and administration in the ratio 5 : 2 : % of the water and electricity expense must be allocated to the factory and the rest is an administration expense. 5. Factory overhead cost Indirect material Indirect labour Depreciation of factory plant Rent expense? Water and electricity? Sundry expenses? Administration cost Rent expense Insurance Water and electricity Stationery Sundry expenses Production and sales overalls were produced and sold during the financial year. The cost of production of finished goods was R65,00 per unit. 1.3 SALLY'S STATIONERY BAGS Sally Venter makes fabric stationery bags, which she sells to learners. REQUIRED: Calculate the number of units that Sally needed to produce in order to break even in (4) Comment on the number of bags she is producing. Quote figures or financial indicators to support your answer. Refer to the break-even calculation in your answer. (3)

6 6 INFORMATION: 1. During the year, units were produced and sold. 2. The selling price per unit was R30, Variable and fixed costs: Variable costs: TOTAL PER UNIT PER UNIT Direct material R R10,00 R12,20 Direct labour ,00 7,00 Selling and distribution ,00 3,80 R R22,00 R23,00 Fixed costs: Factory overheads R R6,00 Administration ,50 R R7,50 [35] QUESTION 2: MANUFACTURING (55 marks; 35 minutes) 2.1 CAPE CHOCOLATES You are provided with information relating to Cape Chocolates for the financial year ended 30 June The business is owned by Mary Muller. REQUIRED: Prepare the following for the year ended 30 June 2012: Factory Overhead Note to the Production Cost Statement (20) Production Cost Statement (Where notes are not required, show calculations in brackets.) (16) INFORMATION: 1. Stock balances: 30 JUNE JULY 2011 Direct-/Raw-material stock R R Work-in-process stock? R Indirect material stock R7 500 R7 200

7 7 2. Transactions for the year: A Raw materials: Purchased raw materials during the year, R Raw materials not ordered were returned to the supplier, R Cost of transportation of raw material was an additional R B Factory rent paid, R C Advertising paid, R D E F Factory maintenance paid, R Repairs to the amount of R1 300 were completed in June 2012, but will only be paid in July Water and electricity paid, R (this amount is to be split between the factory, 70% and the office, 30%). Indirect material purchased, R Note that stocks are on hand at the end of each year (see Information 1 above). 80% of the indirect materials were used in the factory and the rest in the office. G Depreciation written off: Office equipment, R9 500 Factory machinery, R H I Sundry expenses paid, R This must be allocated according to floor space used. The ratio of the space used by the factory, office and sales department is 4 : 2 : 1. Salary and wages: Wages paid to the cleaner, R (She spends 50% of her time cleaning the factory.) Three factory workers were employed. They each work hours normal time during the year at R40 per hour. They each worked 300 hours overtime during the year at a rate of 50% more than the normal rate. The factory foreman has been paid a salary R This includes his salary for July Note that he received an increase of R650 per month with effect from 1 January He has been employed all year. Salary paid to the office assistant, R for the year. J The cost of production of chocolates for the year is R

8 8 2.2 BELINO MANUFACTURERS REQUIRED: You are provided with information relating to Belino Manufacturers which consists of two factories producing different products: Belino blankets and Belino towels. The owner of the business, Benny Belino, has compared the profit he has earned over the past two years (2011 and 2012) and has found that it has decreased by more than R3 million. He asks for advice in reversing this disturbing trend. Note that the inflation rate is 7% and that Benny was able to keep the fixed costs unchanged over the past year Refer to the accountant's calculations of variable costs per unit: Identify the production cost that caused the biggest problem in making the blankets and the towels. Explain and quote figures to support your answer. In each case, give a possible practical solution for Benny. (6) Benny does not know how to calculate the break-even point. Give the workings to prove that the 2012 break-even point of units for blankets is in fact correct. (4) Refer to the number of blankets produced and sold in 2012, and the break-even point for blankets. Explain why these figures should be of concern to Benny. Quote figures to support your answer. (4) Benny has decided to increase the prices of either the blankets or the towels by R15,00 in the next financial year. Which product should Benny increase in price by R15,00? Explain and quote figures to support your answer. In this case, estimate how much extra net profit he could earn next year assuming that his level of production and sales will remain unchanged. Give a calculation to support your answer. (3) (2) INFORMATION: The accountant has identified the following information: BELINO BLANKETS BELINO TOWELS General information: Total fixed costs (factory overhead costs and R R R R administration costs) Net profit R R R R Calculation of variable unit costs: Direct material cost per unit R34,00 R35,00 R27,00 R20,00

9 Direct labour cost per unit R75,00 R65,00 R16,00 R16,00 Selling and distribution cost per unit R12,00 R9,00 R3,00 R5,00 Total variable costs per unit R121,00 R109,00 R46,00 R41,00 9 Additional information/calculations: Selling price per unit charged by Belino R430,00 R500,00 R110,00 R90,00 Selling price of competitors R410,00 R450,00 R130,00 R105,00 Number of units made and sold units units units units Break-even point units units units units [55] SECTION B: NOTES ON CONTENT SUMMARY OF TRANSACTIONS COMPLETED IN GRADE 11 No Transaction Account Debit Fol Account Credit Fol 1 Purchase of Raw Material Purchase of Raw Raw Material Bank/ Creditors B Material Stock Control B Carriage on Raw Raw Material Bank/ Creditors B Materials Stock Control B Transfer of Materials issued to cost Cost of raw materials Direct materials issued cost C1 Raw materials stock B Transfer of Direct materials cost to Work-in-process Transfer of Direct Work-in-process Materials Cost stock B Direct materials cost C1 No Transaction Account Debit Fol Account Credit Fol 2 Expenses Direct wages Direct Wages Direct labour cost C2 Bank B UIF contributions Direct labour cost C2 UIF contributions N Medical Aid Medical Aid Direct labour cost C2 Contributions Contributions N Transfer of Direct wages to Work-in-process Transfer of Direct Work-in-process Wages stock B Direct labour cost C2

10 10 3 Expenses Factory overheads Indirect labour Indirect labour N Bank B Indirect materials Indirect materials N Bank B Factory insurance Factory insurance N Bank B Factory Salaries Factory Salaries N Bank B Factory Rent Factory Rent N Bank B Electricity and water Electricity and water N Bank B Sundry factory Sundry factory N Bank B expenses Depreciation on Factory plant expenses Depreciation on Factory plant N Accumulated Depreciation On Factory Plant Transfer of expenses to cost Indirect labour Factory overhead Indirect labour N C3 cost Indirect materials Factory overhead C3 Indirect materials N cost Factory Salaries Factory overhead C3 Factory Salaries N cost Factory Rent Factory overhead C3 Factory Rent N cost Factory insurance Factory overhead C3 Factory insurance N cost Electricity and water Factory overhead C3 Electricity and water N cost Sundry factory Factory overhead C3 Sundry factory N expenses cost expenses Depreciation on Factory overhead C3 Depreciation on N Factory plant cost Factory plant Transfer of Factory overhead cost to Work-in-process Transfer Work-in-process Factory overhead B stock cost C3 4 Finished goods produced Finished goods stock Finished goods Work-in-process B B stock stock Transfer of Cost of Finished goods sold Transfer Cost of sales N Finished goods stock B No Transaction Account Debit Fol Account Credit Fol 5 Expenses Administration and general Office rent Office rent N Bank B General salaries General salaries N Bank B B

11 Rates and taxes Rates and taxes N Bank B Depreciation on office Depreciation on Accumulated B equipment office equipment N Depreciation on office equipment Transfer of administration and general to cost Office rent Administration cost C4 Office rent N General salaries Administration cost C4 General salaries N Rates and taxes Administration cost C4 Rates and taxes N Depreciation on office Administration cost Depreciation on N C4 equip office equipment Transfer of Administration cost to Profit and loss Transfer Profit and loss F2 Administration cost C4 11 No Transaction Account Debit Fol Account Credit Fol 6 Expenses Selling and distribution Carriage on sales Carriage on sales N Bank B Advertising Advertising N Bank B Commission on sales Commission on Bank B N sales Transfer of selling and distribution to cost Carriage on sales Selling and Carriage on sales N C5 distribution cost Advertising Selling and Advertising N C5 distribution cost Commission on sales Selling and Commission on N C5 distribution cost sales Transfer of selling and distribution cost to Profit and loss Transfer Profit and loss F2 Selling and distribution cost C5 7 Determine Gross profit/net profit Transfer of sales Sales N Trading account F1 Transfer cost of sales Trading account F1 Cost of sales N Transfer of Gross profit Trading account F1 Profit and loss F2

12 12 THE PRODUCTION COST STATEMENT The Work-in-process stock account is used to prepare the Manufacturing Statement or Production Cost Statement and will determine the cost of production of finished goods. Dr WORK-IN-PROCESS STOCK B9 Cr Finished goods stock Balance Mar Feb Feb 28 Direct materials cost Balance Direct labour cost Factory overhead cost Mar 01 Balance FORMAT OF THE PRODUCTION COST STATEMENT Name of Manufacturer:.. PRODUCTION COST STATEMENT FOR THE YEAR ENDED 28 FEBRUARY 2009 NOTE R Direct materials cost Direct labour cost Prime cost Factory overheads cost Total cost of production Add: Work-in-process at the beginning of the year Less: Work-in-process at the end of year Cost of production of finished goods for the year

13 13 Notes to the Production Cost Statement The Direct Material Cost account is used to complete the Direct Materials Cost note. (NOTE: 1) Dr DIRECT (RAW) MATERIALS STOCK B8 Cr 2008 Mar 01 Balance b/d Feb 28 Direct materials cost Feb 28 Bank Balance c/d Creditors control Bank-Carriage Mar 01 Balance b/d NOTES TO THE PRODUCTION COST STATEMENT AND INCOME STATEMENT 1. DIRECT (RAW) MATERIALS COST R Balance at the beginning of the year Purchases (net) Carriage inwards/carriage On Purchases Custom duties Less: Balance at the end of the year The Direct Labour Cost account is used to complete the Direct Labour Cost note. (NOTE: 2) Dr DIRECT LABOUR COSTS N14 Cr 2009 Feb 28 Bank Feb 28 Work-inprocess stock Pension contributions Medical aid contributions

14 2. DIRECT LABOUR COST R Direct wages Pension contributions Medical aid contributions The Factory overheads Cost account is used to complete the Factory Overheads Cost note. (NOTE: 3) Dr FACTORY OVERHEAD COSTS N16 Cr 2009 Feb 28 Indirect Feb 28 Work-inprocess stock materials Indirect labour Factory rent Insurance Sundry factory expenses Electricity & water Depreciation Telephone Salaries Maintenance Delivery expenses FACTORY OVERHEADS COST R Indirect materials Indirect labour Factory rent Insurance Sundry factory expenses Electricity & water Depreciation Telephone Salaries Maintenance Delivery expenses

15 15 THE INCOME STATEMENT The following ledger accounts will be used for this purpose. Trading account Selling and distribution cost account Administration account Profit and loss account FORMAT OF THE INCOME STATEMENT Name of Manufacturer:.. INCOME STATEMENT FOR THE YEAR ENDED 28 FEBRUARY 2009 NOTE R Sales Less: Cost of Sales * Gross Profit Administration cost 4 (49 490) Selling and distribution cost 5 (67 290) Net Profit *The finished Stock Account is used to determine the cost of sales amount. Dr Finished goods stock B11 Cr 2008 Mar 01 Balance Feb 28 Work-inprocess stock Feb 28 Cost of sales Balance Mar 01 Balance The Trading account and the Profit and Loss accounts are used to complete the Income Statement. Dr Trading account F1 Cr Feb 28 Cost of sales Feb 28 Sales Profit & loss (Gross profit)

16 Dr Profit & loss account F 2 Cr Trading Feb 28 Administration Feb account cost (Gross profit) Selling and distribution costs Capital (Net profit) The Administration Cost account is used to complete the Administration Cost note to the Income Statement (NOTE: 4) Dr ADMINISTRATION COST N17 Cr Feb 28 Cleaning 500 Feb 28 Profit & loss material Rent Insurance 180 Telephone 270 Electricity & 900 water Delivery expenses Salaries Interest on loan Depreciation Sundry admin expenses ADMINISTRATION COST R Cleaning material 500 Rent Insurance 180 Telephone 270

17 Electricity & water 900 Delivery expenses Salaries Interest on loan Depreciation Sundry administration expenses The Selling and Distribution Cost account is used to complete the Selling and Distribution note to the Income Statement (NOTE: 5) Dr SELLING and DISTRIBUTION COST N16 Cr Feb 28 Advertising Feb 28 Profit & loss Bad debts Packing material Rent Delivery expenses Electricity & 900 water Salaries Insurance 180 Telephone 270 Commission on sales SELLING AND DISTRIBUTION COST R Advertising Bad debts Packing material Rent Delivery expenses Electricity & water 900 Salaries Insurance 180 Telephone 270 Commission on sales

18 18 SECTION C: HOMEWORK QUESTIONS QUESTION 1: MANUFACTURING (30 marks; 15 minutes) 1.1 COST CONCEPTS REQUIRED: For each item below, indicate the appropriate category. Choose your answers from the following options: direct labour; indirect labour; direct materials; indirect materials Cost of the raw material used in the production process Salary of the factory foreman The cleaning material used in the factory (2) (2) (2) 1.2 SLEEPWELL MANUFACTURERS REQUIRED: Complete the Production Cost Statement for the year ended 30 September Some of the details have been entered for you. You have to complete the missing details and figures. (10) INFORMATION: The information below was extracted from the financial records of Sleepwell Manufacturers on 30 September 2011, the end of the financial year. Finished goods (1 October 2010) Work-in-process (1 October 2010) Administration cost Direct/Raw material cost Direct labour cost Factory overhead cost Selling and distribution cost Cost of production of finished goods Sales Cost of sales? Finished goods (30 September 2011) Work-in-process (30 September 2011)? R

19 PIES GALORE This business produced pies for the year ended 30 June REQUIRED: Calculate the direct material cost per unit for Calculate the break-even point for the year ended 30 June Should the business be satisfied with the number of units that they are currently producing? Briefly explain. (3) (5) (3) The direct-material cost per unit for 2010 amounted to R3,80. The owner (Cathy) feels that, in order to make more profit, she will have to cut her costs or increase her selling price. She considers the option to cut her costs by using fewer ingredients in the filling, but keeping the selling price the same. Should she carry on with her plan? Give ONE valid reason for your decision. (3) INFORMATION: The following information was extracted from the books: TOTAL PER UNIT Sales R R14,50 Total variable cost R R8,50 Total fixed cost R R5,80 Direct-material cost R79 050? [30] SECTION D: SOLUTIONS FOR SECTION A QUESTION Choose a cost category from COLUMN B that matches a description in COLUMN A. Write only the letter (A E) next to the question number ( ) E (Direct material) C (Selling and distribution) D (Administration) B (Factory Overhead) 8

20 PRODUCTION COST STATEMENT FOR THE YEAR ENDED 31 AUGUST 2013 OR (1 mark) (1 mark) OR x ( ) Direct material cost ( x 11,25 ) Direct labour cost PRIME COST Operation DMC+DLC, more than Factory overhead cost TOTAL MANUFACTURING COST Operation PC+FOHC Work-in-process (1 September 2012) Work-in-process (31 August 2013) Operation; Accept positive figure depending on above COST OF PRODUCTION OF FINISHED GOODS (R65 x ) (17 000) FACTORY OVERHEAD COST Indirect material Indirect labour Depreciation of factory plant Rent Expense x Water and Electricity x 75 / Sundry factory expenses Operation

21 The internal auditor is not satisfied with the direct labour cost for the year. Explain the problem relating to the direct labour cost and quote figures to support your explanation. Any valid response Good answer with figures = 3 marks; good answer without figures = 2 marks; part answer = 1 mark; incorrect = 0 Expected responses: The workers are earning more through overtime (R ) than they are from normal time (R ). The workers worked hours normal time compared to 880 hours overtime / DLC is 71% of total costs. Overtime accounts for 57% of the total direct labour cost. Normal time is too low possible due to disruption, absenteeism or poor supervision (relevant figures required e.g. 49 weeks x 40 hours = 1 960). 3 Give TWO possible solutions to this problem. Any TWO valid and separate solutions Good answer = 2 marks; part answer = 1 mark; incorrect = 0 Expected responses for 2 marks: Set production targets that must be completed (time and motion studies). Better supervision to ensure workers are on duty during normal working hours / rotate supervisors if necessary to prevent abuse. Set limits on overtime hours and ensure foreman controls this. Reconsider conditions of service e.g. minimum normal hours, overtime rate. Employ more workers at normal rate for a full working day throughout the year, then discontinue overtime (cheaper to pay for normal time). Anticipate disruption to normal time production (e.g. power cuts, strikes) have contingency plans in place. Expected responses for 1 mark: More normal time to be worked /Less overtime to be worked (same point) Train workers 4

22 Calculate the number of units that Sally needed to produce in order to break even in Could be answered in equation form R = ,25 or or R30 R22 R8,00 (2 marks) Any one part correct, no R or % signs Comment on the number of bags she is producing. Quote figures or financial indicators to support your answer. Refer to the break-even calculation in your answer. Comparison to BE calculation = 1 mark; Favourable/Unfavourable=1 mark; Figures = 1 mark. This is good as she will make a profit as production is (803 / 804) more than the break-even number of units. ( produced; BEP / ) See for figures use consistently 3 TOTAL MARKS QUESTION CAPE CHOCOLATES NOTE TO THE PRODUCTION COST STATEMENT FOR THE YEAR ENDED 30 JUNE 2012 FACTORY OVERHEAD COST 35 Factory indirect material mark one row only 80% x ( ) 80% (1 mark) x (3 marks) (1 mark) (2 marks) (1 mark) operation one part correct Factory rent Factory maintenance ( ) operation one part correct Water and electricity two marks or nil Depreciation / machinery one mark or nil Sundry expenses two marks or nil Wages of cleaner one mark or nil *

23 23 Indirect salary ( ) operation one part correct *Could be combined as R Total factory overhead cost operation one part correct * foreign entries to a maximum of -2 in the case of additional entries added into the note e.g. R23 500, R9 500, R CAPE CHOCOLATES PRODUCTION COST STATEMENT FOR THE YEAR ENDED 30 JUNE 2012 Mark for details applied if placement correct Direct/Raw materials cost be aware of permutations ( ) (2 marks) (2 marks) (3 marks) Direct labour cost ( ) (3x 1600 x 40) + (900 x 60) Prime cost operation adding Factory overhead cost see Total cost of production accept / operation one part correct one part correct Work-in-process on 1 July Work-in-process on 30 June 2012 check operation work back from COP of FG This figure must work out to be a negative figure - check (41 060) Cost of production of finished goods foreign entries to a maximum of -2 in the case of additional entries added in to the PCS 16

24 Mark sections independently Blankets Which production Direct labour cost cost caused the biggest problem? Explanation and Increased by R10 figures to support (from R65 to R75; or your opinion 15%) Possible solution Train workers to work for Benny more efficiently / Work less overtime / Control working hours / Limit increases to inflation rate / Increase mechanisation / Pay according to productivity Towels Direct material cost Increased by R7 (from R20 to R27; or 35%) Secure a cheaper supplier / Ensure that workers do not waste raw materials / Improve security over DM Benny does not know how to calculate the break-even point. Give the workings to prove that the 2012 break-even point of units for blankets is in fact correct. R = R = units (R430 R121) R309 OR (one mark) (one mark) (one mark) (one mark) R = 82/0 (rounding off) ( x R430) ( x R121) R = 82/0 (rounding off) Refer to the number of blankets produced and sold in 2012, and the break-even point for blankets. Explain why these figures should be of concern to Benny. Quote figures to support your answer. Explanation on decline of number of units produced and sold Quoting of figures Explanation on increase in BEP Quoting of figures Expected responses for 4 marks (award part-marks for partial answers): They produced units above the BEP. He is concerned because it is only 30% above the BEP. The number of blankets produced and sold has decreased by units (from to ). The BEP has increased by 4

25 units (from to ). In units contributed to the profit (61%) in comparison to 2012 when only units contributed to the profit (23%). This is of concern because he earns less profit on fewer units (probably because he is charging more than his competitors). The BEP is now 26% higher than it was; which means that he has to produce 26% more units before he starts making a profit Which product should Benny increase in price by R15,00? Towels Explain and quote figures to support your answer. Explanation Quoting of figures Expected responses for 2 marks: If he increases the price of towels to R125 it is still lower than the price of R130 charged by his major competitor (still R5 lower than competitor). He cannot increase the price of blankets because his price of R430 is already higher than the R410 charged by his major competitor (already R20 more). In this case, estimate how much extra net profit he could earn next year assuming that his level of production and sales will remain unchanged. Give a calculation to support your answer x R15 = R1,2 m (1 mark if no calculation & answer is between R1m & R1,4m) Could carry error through from above (e.g. focus on blankets approx R ) 5 TOTAL MARKS 55

26 26 SESSION NO: TWELVE TOPIC: CASH BUDGETS SECTION A: TYPICAL EXAM QUESTIONS QUESTION 1: CASH BUDGET (40 marks; 25 minutes) You are provided with the Debtors' Collection Schedule and an extract from the Cash Budget of Leboni Traders for the three months ending 31 March The owner is Peter Leboni. REQUIRED: 1.1 Complete the following sentences by filling in the missing word(s). Write only the word(s) next to the question number ( ) in the ANSWER BOOK The main purpose of preparing the Cash Budget is... (2) ONE item in the Cash Budget that will not be reflected in a Projected Income Statement is... (2) ONE item that will appear in a Projected Income Statement but not in a Cash Budget is... (2) 1.2 Refer to Information 1 to 7 below. Calculate the missing figures in the Debtors' Collection Schedule and the Cash Budget indicated by A to H. (22) 1.3 Explain what you would say to Peter about each of the following items at the end of November, and give ONE point of advice in EACH case: NOVEMBER 2013 BUDGET ACTUAL Telephone R1 000 R5 500 Sundry expenses R3 000 R3 000 Rent income R6 500 R3 000 (6) 1.4 In order to increase sales and the number of customers, Peter intends to advertise that credit limits for all credit customers will be increased to R and that new customers are welcome to open accounts during April. Give THREE points of advice to Peter in this regard. (6) INFORMATION: 1. Sales, purchases and cost of sales: Total sales expected: 2014 January February March R R R % of sales are on credit, the rest are for cash. The business uses a mark-up of 100% on cost at all times. Stock is replaced monthly. 20% of all purchases are for cash, the rest are on credit.

27 27 Creditors are paid TWO months after the purchase of stock. 2. Debtors' collection: The credit limit for each debtor is R In the past, debtors have settled their accounts as follows. Leboni Traders prepares its budget on this basis: 20% of debtors settle accounts in the month of the sale to receive a 5% discount. 30% settle in the 1 st month following the sales month (30 days). 5 40% settle in the 2 nd month (60 days). 10% are written off in the 3 rd month. 3. Debtors' Collection Schedule: Actual Expected Credit January sales R R November February R March December January A February March B C 4. Extract from the Cash Budget: 2014 January February March R R R RECEIPTS: Cash sales D Receipts from debtors C Rent income Loan from KZ Bank (12%) PAYMENTS: Cash purchases Payments to creditors E Interest on loan F Repayment of loan Wages G Advertising H Sundry expenses Cash balance at end of month (50 000) R

28 Loan and interest on loan: The interest on the loan and the monthly loan instalments are payable at the end of each month. Interest is not capitalised. 5. Wages: In January the business will have five employees, each earning a wage of R1 300 per week. All the employees are paid their wages on Fridays. There are five Fridays in January and four Fridays in February and March One employee will resign on 31 January 2014 and the other employees will be given a 6% increase on that date. The business plans to employ two more staff members at the same weekly wage as the others on 1 March Advertising: The advertising budget will be increased by 9% with effect from 1 February QUESTION 2: BUDGET AND DEBTORS' ANALYSIS (45 marks; 25 minutes) You are provided with the Cash Budget and related information of Lekazi Furnishers for the three months ended 31 December The business is owned by Alfred Celtic. 40 REQUIRED: 2.1 Prepare a Debtors' Collection Schedule for November (8) 2.2 Calculate the figures indicated by A E in the Cash Budget. (11) 2.3 Calculate the debtors' average collection period (in days) for the financial year ended 31 October NOTE: The actual balance in the Debtors' Control Account was R at the beginning of the financial year and R at the end of the financial year. Explain whether Alfred should be satisfied with this collection period. Give ONE reason for your opinion. (8) 2.4 Refer to the Debtors' Age Analysis. Alfred feels that he has problems in controlling debtors. Give TWO different reasons why he feels this way. Briefly explain. In each case, identify the problem debtor(s). (6) 2.5 Calculate the percentage increase in salaries and wages in December One of the employees, Mona Lott, is not happy with this increase. State TWO points in response to her complaint. (4) 2.6 On 31 October 2011 you identified the figures below. Explain what you would

29 say to Alfred about each of the following items at the end of October, and give ONE point of advice in each case: 29 OCTOBER 2011 BUDGETED ACTUAL Advertising R1 000 R1 000 Sundry expenses R2 600 R1 900 Telephone R900 R3 800 Rent income R7 500 R1 150 (8) INFORMATION: 1. Credit terms and credit limits: It is Alfred's policy to grant debtors credit limits of R each. They are expected to settle their accounts within 30 days from the date on the statement. 2. Sales and cost of sales Total sales for the past financial year, R % of sales are on credit, the rest are for cash. The total sales for October to December were as follows: October R81 000; November R78 000; December R The business uses a mark-up of 50% on cost at all times. Stock is replaced on a monthly basis. 50% of all purchases are for cash, the rest are on credit. Creditors are paid in the month after the purchases in order to receive 5% discount. 3. Debtors' collection: Debtors are expected to pay as follows: 25% of debtors settle their accounts in the month of the sale (current). 40% settle in the month following the sales transaction month (30 days). 30% settle in the second month (60 days). 5% are written off. 4. DEBTORS' AGE ANALYSIS ON 31 OCTOBER 2011 NOTE: Business policy sets credit limits at R per account. The credit terms are 30 days. Name Total Current month 30 days 60 days 60 days+ A Botha D Scott P Raj C Ntuli N Mpo

30 LEKAZI FURNISHERS CASH BUDGET FOR THE THREE MONTHS ENDED 31 DECEMBER OCTOBER 2011 NOVEMBER 2011 DECEMBER RECEIPTS Cash sales C Collection from debtors ? Rent income??? Mortgage loan from XYZ Bank? PAYMENTS Purchase of stock for cash D Payment to creditors E Repayment of loan Interest on loan Bank charges ? Salaries and wages Telephone Advertising Sundry expenses Drawings??? Surplus (Deficit) for the month (25 525) (23 220) Cash at the beginning of the month A Cash at the end of the month B SECTION B: NOTES ON CONTENT In Grade 10, the concept and the following types of budgets were completed Cash budgets Zero base budget Capital budget Long term budget Medium term budget In Grade 11 the following aspects of the budget were completed Debtors collection schedule Projected creditors payments Cash forecast Cash budget Projected income statement

31 31 ANALYSIS AND INTERPRETATION OF CASH BUDGETS You have seen that a Cash Budget contains an estimate of incoming cash and outgoing cash for a specific future period. Therefore the preparation of a cash budget will reveal when there is extra cash lying idle and also when there is a shortage of cash resulting in a bank overdraft. It also reveals whether our debtors are taking too long to pay us and whether we pay our creditors too quickly. In fact many observations and conclusions can be drawn by closely studying a Cash Budget. In answering questions in this section it is assumed that the matriculation candidate already knows how to draw up a Cash Budget as well as a Forecast Income Statement. COMPARISON: SOLE TRADER/COMPANY The following comparisons can be made between the sole trader and a company s cash budget and income statement: CASH BUDGETS SOLE TRADER MARCH COMPANY MARCH RECEIPTS RECEIPTS Cash Sales x Cash Sales x Collections from debtors xx Collections from debtors xx Capital x Ordinary Share Capital x Loan from Mini Bank x Loan from Mini Bank x Investments (matured) x Investments (matured) x etc x etc x TOTAL RECEIPTS xxx TOTAL RECEIPTS xxx PAYMENTS PAYMENTS Cash purchase of Stock X Cash purchase of Stock X Payment of creditors X Payment of creditors X Rental of premises X Rental of premises X Purchase of Equipment X Purchase of Equipment X Salaries and wages X Salaries and wages X Interest on loan X Interest on loan X Advertising X Advertising X Other overhead expenses X Other overhead expenses X Drawings X Income Tax X etc X Ordinary share dividends X X Ordinary Share capital X etc x TOTAL PAYMENTS xx TOTAL PAYMENTS xx

32 32 CASH SURPLUS (DEFICIT) x CASH SURPLUS x (DEFICIT) Bank opening balance xx Bank opening balance xx Bank closing balance xx Bank closing balance xx (the shaded items indicates the difference) SECTION C: HOMEWORK QUESTIONS QUESTION 1: CASH BUDGETS (30 marks; 20 minutes) You are provided with an extract from the Cash Budget of Parys Gymnasium. The business is owned by Piet Nkosi. Each member pays a once-off admission fee of R1 000 and a subscription fee of R500 per month to belong to the gymnasium. Piet employs Steffi Smit to collect and control the fee income. REQUIRED: 1.1 Calculate the following: The insurance figure for November 2010 (Note that the insurance premium will increase by 6% on 1 November 2010.) (2) The % increase in Steffi Smit's salary in October 2010 The mark-up % that is applied on the sale of refreshments (Note that refreshments are sold for cash only and are replaced in the month of sale.) The amount invested in the fixed deposit on 1 September 2010 (Note that the interest rate is 8% p.a. A portion of the fixed deposit matures on 31 October 2010.) Interest on the fixed deposit for November 2010 (2) (3) (3) (3) 1.2 As internal auditor you are required to give Piet feedback on the marketing strategy and fee collection How many new customers did Piet expect to gain from the marketing strategy in September 2010? What TWO aspects of the marketing strategy could be improved? Give figures to support your answer and make suggestions for EACH. Has Steffi Smit been successful in the collection of fee income? Explain by quoting figures to support your opinion. (4) (6) (7)

33 33 INFORMATION: 1. EXTRACT FROM CASH BUDGET FOR SEPT TO NOV Sept. Oct. Nov. Total RECEIPTS: R R R R Joining fee (Admission fee)? 0 0? Monthly fee collections (Subscriptions) Sale of refreshments Fixed deposit matured Interest on fixed deposit (8% p.a.) ?? PAYMENTS: Insurance ?? Commission paid Transport allowance Salary to Steffi Smit Purchases of refreshments MARKETING STRATEGY: At the end of August Piet had 450 customers. Piet developed a new marketing strategy to increase the number of customers significantly. He planned to employ three people (Chase, Jane and Dan) at the beginning of September 2010 to market the gymnasium and get new customers to sign contracts. He would pay them commission of R150 for each new customer and a travel allowance. Piet asked you, as the internal auditor, to analyse the work done by the marketing team. Your analysis is as follows: Analysis of work done by the marketing team September Chase Jane Dan Total Number of new contracts issued Commission earned R R5 250 R R Transport allowance paid R3 000 R3 000 R3 000 R9 000 Number of contracts cancelled on 1 November ACTUAL FEE INCOME COLLECTED COMPARED TO BUDGET Budgeted Actual September R R October R R November R R Total R R [30]

34 34 SECTION D: SOLUTIONS FOR SECTION A QUESTION Complete the following sentences by filling in the missing word(s). Write only the word(s) next to the question number ( ) The main purpose of preparing the Cash Budget is... Expected responses: Any valid answer with future implications To plan To predict cash flows/determine receipts & payments for the future To control cash Note: Do not accept reference to Income and Expenditure ONE item in the Cash Budget that will not be reflected in a Projected Income Statement is... Any valid answer Loan / Assets / Payments to creditors / Drawings Receipts from debtors / Fixed deposits / Capital / Dividends ONE item that will appear in a Projected Income Statement but not in a Cash Budget is... Any valid answer Depreciation / Bad debts / Discount received and allowed Profit/loss on sale of asset Calculate the missing figures in the Debtors' Collection Schedule and the Cash Budget indicated by A to H:

35 35 CALCULATION ANSWER A 40% x All or nothing B C D E F G H (20% x ) x 95% OR ( / x ): 2 marks If R more than A+B x 40% OR (1 mark) /60 x 40 (1 mark) OR (1 mark) (1 mark) ( x 100/200) x 80% ( ) x (12% 12) x 1% OR (1 mark) 12 (1 mark) (R1 300 x 1,06: 2 marks) (6 x R5 512: 3 marks) 6 x R1 378 x 4 weeks OR R x mark 1 mark 1 mark OR R mark 2 marks x OR OR (6 758 x 9 Any one part correct Operation Any one part correct Any one part correct Any one part correct Any one part correct R Any one part correct Explain what you would say to Peter about each of the following items at the end of November, and give ONE point of advice in EACH case: Telephone Sundry expenses EXPLANATION Overspent/ Under-budgeted/ Not well controlled Negative variance Well budgeted/ Well controlled Nil variance / Same ADVICE Check private calls/ Budget more realistically for business calls Stick to the budget/ Maintain this in future/keep it up Try to reduce in future 6

36 36 Rent income Received less than budgeted/ Not well controlled Negative variance Investigate payment by tenant/ Keep property occupied Employ debt collector Budget more realistically 1.4 In order to increase sales and the number of customers, Peter intends to advertise that credit limits for all credit customers will be increased to R and that new customers are welcome to open accounts during April. Give THREE points of advice to Peter in this regard. Any THREE separate valid points Good answer = 2 marks; part answer = 1 mark Expected responses for 2 marks: Do not sell more on credit as this will worsen the overdraft (60% of his existing sales are already on credit, and 50% settle after 30 days). He must screen debtors properly (e.g. pay slip / credit reference), not simply allow them to open accounts without checking ability to pay (contravention of consumer legislation). Only increase credit limits of customers who settle their debts promptly (preferably within 30 days). He must improve the rate of collections from debtors by offering discount (50% of debtors settle after 30 days). He must improve the rate of collections from debtors by charging interest (50% of debtors settle after 30 days). He must provide for additional administration costs (e.g. salaries of clerk, bad debts) to control the debtors. He must introduce more working capital into the business to finance the stock sold on credit (as the debtors will pay later). Expected responses for 1 mark: Improve debtors collections Take precautions to prevent slow payers Provide for bad debts 6 TOTAL MARKS 40

37 37 QUESTION Prepare a Debtors' Collection Schedule for November Credit sales November collections September R October If 40% of credit sales November TOTAL operation Calculate the figures indicated by A E in the Cash Budget. 8 A B no part-marks C D no part-marks x 100 x E if one part correct if 95% of D Calculate the debtors' average collection period (in days) for the financial year ended 31 October ( ) / 2 no part marks for each figure X 365 = 41,3 operation one part correct accept 41 or 42 Explain whether Alfred should be satisfied with this collection period. Give ONE reason for your opinion. Yes/No Valid reason depending on calculation 8

38 38 Part-mark for partial answer; must refer credit term Possible reason: Debtors are not complying with the (30 day) credit term. The collection period is therefore not good. Although they are not complying with the (30 day) credit term, most of them are expected to settle their accounts within 60 days. 2.4 Refer to the Debtors' Age Analysis. Alfred feels that he has problems in controlling debtors. Give TWO different reasons why he feels this way. Briefly explain. In each case, identify the problem debtor(s). Reason Name(s) Any two valid different points Two debtors are exceeding the credit limit or R (D Scott or C Ntuli) Three debtors are taking longer than the credit term or 30 days (D Scott or P Raj or N Mpo) One debtor appears to have absconded (P Raj). Figures are not required, but figures may be used to refer to the credit limit or the credit term. Any ONE relevant debtor may be mentioned Calculate the percentage increase in salaries and wages in December % no part-marks; accept 8 One of the employees, Mona Lott, is not happy with this increase. State TWO points in response to her complaint. Response to Mona Lott: any two valid responses: 1 mark each Compare to inflation rate Sales are decreasing per month Economy is declining, she is lucky to have a job Expenses exceed the income for the past two months There is not much money in the bank Consider amount of drawings taken by owner (can only work out Nov drawings) Explain what you would say to Alfred about each of the following items at the end of October, and give ONE point of advice in each case: 8

39 39 Comment Advice Do not accept single words e.g. good / bad for an explanation / Do not accept increase / decrease COMMENT TO ADVICE ALFRED Advertising The expense is the same as the budget / well planned. They should consider increasing the advertising budget (as the sales figures are declining) / maintain control over this Sundry expenses Telephone Rent income Favourable variance (actual less than budget). Efficient and well controlled. Significantly overspent (actual more than budget). Significantly under budget (actual less than budget) / Budget was unrealistically high. TOTAL MARKS item in future. Maintain control over sundry expenses / allocate individual expenses to separate accounts for even better control / check that sundry expenses are correctly recorded / budget for a lesser amount in future. Extra control needed / unnecessary (private) calls not related to business should be avoided / phone codes / inspect if budget is realistic. Investigate shortfall e.g. poor collection, tenant has left, etc. to rectify this problem / tenants to sign debit orders / appoint a rent collector / charge interest on slow payers. 45

40 40 SESSION NO: THIRTEEN TOPIC: PROJECTED INCOME STATEMENTS SECTION A: TYPICAL EXAM QUESTIONS QUESTION 1: PROJECTED INCOME STATEMENT AND INTERNAL CONTROL (40 marks; 25 minutes) The Happy Holiday Shop is owned by Jim Jambo. You are provided with extracts from the Projected Income Statement which Jim prepared for the three months ending 31 December He has included a column for the actual expenses that he has incurred in October. REQUIRED: 1.1 Explain why it is important for Jim to prepare a Projected Income Statement. (2) 1.2 Calculate the percentage increase in sales he expects in December. Explain why he has budgeted for this increase. (4) 1.3 Mark-up: During October a competitor opened a shop up in the same area. Jim decided to adjust his mark-up percentage immediately to counter the new competitor. Calculate the mark-up percentage he actually achieved in October. Explain whether or not it was a good idea to change the mark-up percentage from its original target. 1.4 Calculate the following figures in the Projected Income Statement: Rent income for November 2012 (Refer to Additional Information 1.) Advertising for December 2012 (Refer to Additional Information 2.) Interest expense for November 2012 (Refer to Additional Information 1.) 1.5 Refer to the actual and budgeted figures for October Identify the THREE overhead expenses that have been poorly controlled by Jim. Quote figures to support your answer. What advice would you offer Jim to improve his internal control over these overhead expenses? Explain. (3) (3) (10) (6) (2) 1.6 Refer to Additional Information 3. Jim is of the opinion that he could benefit financially if he accepts Samuel's offer. State THREE points that would have a positive effect on his Projected Income Statement for January 2013 if he accepts the offer. Give figures or information from the question to support your answer. (6) 1.7 Jim is also conscious of the fact that there are negative points if he accepts the offer. State TWO points that Jim should consider before finalising his decision to sell the property. Explain. (4)

41 41 INFORMATION: HAPPY HOLIDAY SHOP EXTRACT FROM THE PROJECTED INCOME STATEMENT FOR THE THREE MONTHS ENDED 31 DECEMBER 2012 BUDGET ACTUAL BUDGET BUDGET OCT OCT NOV DEC Sales R R R R Cost of sales Gross profit Rent income ?? Salaries???? Maintenance of property Municipal rates on property Telephone Water and electricity Advertising ? Stationery???? Trading stock deficit Interest expense (15% p.a.) (12 500) (12 500)? (11 250) ADDITIONAL INFORMATION: 1. Jim bought the land and buildings for R1,2 million in He rents out an unused portion of this property to a tenant. The rent will increase by 5% on 1 November Jim had received a loan from his brother to pay for the land and buildings. The balance of this loan was R1 million on 1 October The interest rate is 15% p.a. and the loan is reduced by R per month on the last day of the month. Interest is paid monthly and is not capitalised. 2. Currently Jim places five advertisements per month in the local newspaper. He plans to increase this to eight advertisements in December. The rate per advertisement will increase by 10% on 1 December Jim would like to improve his projected net income and is considering a proposal from a local businessman, Samuel Davids. Samuel is prepared to purchase all the land and buildings of the business from Jim for R1,5 million during December 2012 and rent it to him for R per month. Jim is interested in this offer as he knows that this will enable him to repay the loan from his brother in full on 1 January 2013 (the loan on this date will be R ). He will also be able to invest the surplus funds in a fixed deposit at 6% p.a. [40]

42 QUESTION 2: PROJECTED INCOME STATEMENT (59 marks; 30 minutes) You are provided with the Projected Income Statement and additional information relating to Helen s Hair Stylists for the period April to June The business is owned by Helen Davids. Helen has also prepared a Cash Budget for the same time period. The financial year-end is 31 March. REQUIRED: Answer the questions that follow. INFORMATION: HELEN'S HAIR STYLISTS PROJECTED INCOME STATEMENT FOR APRIL TO JUNE 2010 APRIL MAY JUNE R R R Sales of hair products Cost of sales Gross profit Other operating income Fee income from customers Sundry income OPERATING EXPENSES Salary of hairdressing assistants Wages of cleaner Rent of premises Consumable stores Water & electricity Telephone Advertising Motor vehicle expenses Repairs & maintenance of equipment Sundry expenses Depreciation on vehicle Depreciation on equipment OPERATING PROFIT Interest income Interest on loan NET PROFIT

43 ADDITIONAL INFORMATION: 1. Line of business: Helen gave up her job to start this business in She invested her life savings of R in this business. The business styles hair for its customers. They also sell hair products to the public. 2. Employees: Helen employs three hair stylists. She has planned to expand the business by employing a fourth stylist from 1 June She also employs a cleaner. 3. Business premises rented: The rent is calculated on a fixed amount per square metre. She currently rents 60 square metres, but will increase this floor space as from 1 May 2010 due to expansion. 4. Fixed deposit: The fixed deposit of R for 12 months will mature on the 30 April Fixed assets: Hairdressing equipment Date of purchase Cost price Accumulated depreciation on 31 March 2010 Depreciation rate 1 April2004 R R % on cost VW Polo 1 July 2007 R R % on cost BMW 5-series 1 May 2010?? 20% on cost 43 Helen plans to make the following changes to fixed assets: VW Polo will be retained by the business. The new BMW will be purchased on 1 May Some of the funds from the fixed deposit will be used to buy the vehicle. She intends to replace all the hairdressing equipment on 1 July The old equipment will be traded in and the difference will be financed by way of a loan (interest rate 15%). The trade-in value is expected to be R23 000, while the cost of the new equipment will be R QUESTIONS: 2.1 Refer to the Projected Income Statement to identify / calculate the following: The monthly salary paid to each hair stylist. (2) The % increase in wages that the cleaner will receive during the projected period. (2)

44 2.1.3 The % interest rate on the fixed deposit. (4) The rental per square metre, and the number of additional square metres she will rent from 1 May (4) 2.2 As the internal auditor you compare the following projected figures to the actual figures at the end of April. Provide four comments that you would include in your internal auditor s report in respect of scenarios A, B, C and D below. Projected April 2010 Actual April 2010 A Telephone B Water & electricity C Fee income Consumable stores Sales of hair products D Cost of sales Gross profit (10) 2.3 Helen is considering changes to the fixed assets owned by the business Calculate the cost of the new vehicle, which she plans to purchase on 30 April (4) Prepare the expected asset disposal account for the trade-in of the old hairdressing equipment on 1 July (10) What effect will the purchase of the new equipment have on the expected profits of the business each month? Provide calculations to support your answer. (8) Helen is thinking of purchasing the business premises rather than renting them. Explain one major advantage and one major disadvantage of this option. (2) Has Helen acted responsibly in the decisions she has taken/planned regarding the fixed assets? Explain, quoting specific information from the question. (See Additional information 5 on previous page.) (5) Helen is not sure if she has made the right decision to give up her previous job many years ago and to invest R in this business. Refer to the projected monthly profit for this period. Based on these projections, what is your opinion on the decision that Helen took? Explain. (4) 59

45 45 SECTION B: NOTES ON CONTENT THE PROJECTED INCOME STATEMENT The main aim of any business is to make a profit. Regular and thorough planning is essential. Budgeting is an integral part of this process. Budgeting is forecasting for the future. The current budget is used to plan for the future. Likewise the enterprise has to prepare a projected income statement for the future from the current income statement. The following is the basic format of the Income Statement. INCOME STATEMENT R Sales Cost of sales ( ) Gross profit Other income Gross income Operating expenses ( ) Operating profit Interest Income Profit before Interest Expense / Financing Cost Interest expense / Financing Cost Net profit for the period To prepare a basic Income Statement as shown above, factors such as the following need to be taken into consideration: 1. The financial statements of the previous year. 2. What changes are expected in respect of the following: 2.1. Sales policy Purchases policy Mark-up on cost of sales Will there be an increase or decrease in expenses e.g. rise in wages, rise in interest rate on mortgage loan, decrease in telephone, etc? 2.5. Will there be an increase or decrease in other income e.g. rent income, interest on fixed deposit, etc? 2.6. In the case of a public company, will there be a change i.r.o dividends, tax rate, etc? 2.7. Will there be additional purchase of fixed assets or sale of fixed assets thereby affecting depreciation? 2.8. Will there be an increase or decrease in the long term loan thereby affecting interest on loan?

46 46 HOW TO PREPARE A MONTHLY PROJECTED INCOME STATEMENT 1. Take as a starting point the actual income statement of the past year. 2. Divide the figures by 12 so as to gauge the monthly figures. 3. The following factors, amongst others, must be taken into account: 3.1. Increase in expenses due to inflation e.g. wages, fuel increases Increased demand in a particular month (season) due to special events such as religious holidays, sports events, international events, etc 3.3. Expected decline in sales due to increased competition Expected gross profit i.e. mark up on cost of sales. PROJECTED INCOME STATEMENT SOLE TRADER MARCH MARCH COMPANY BUDGET BUDGET Sales x Sales x Cost of sales (x) Cost of sales (x) Gross profit Xx Gross profit Xx Other Income Xx Other Income Xx Commission received X Commission received X Rent Income X Rent Income X etc X etc X Gross Operating income Xx Gross Operating income Xx Operating expenses (xx) Operating expenses (xx) Salaries X Salaries X Wages X Wages X Sundry Operating X Sundry Operating X Expenses Expenses Motor vehicles expenses X Motor vehicles expenses X Telephone X Telephone X Security expenses X Security expenses X Trading stock deficit X Trading stock deficit X Training of employees X Training of employees X Advertising X Advertising X Discount allowed X Discount allowed X Bad Debts X Bad Debts X

47 Stationery X Stationery X Depreciation X Depreciation X etc X etc X Operating Profit Xx Operating Profit Xx Interest Income Xx Interest Income Xx Profit before interest Xx Profit before interest Xx expense expense Interest Expense (x) Interest Expense (x) Profit for the year Xx Net Profit before tax Xx Income Tax (x) Net profit after tax xx (The shaded items indicates the differences) 47 SECTION C: HOMEWORK QUESTIONS QUESTION 1 PROJECTED INCOME STATEMENT (45 marks; 30 minutes) You are provided with a Projected Income Statement for Riverside Traders for January and February The actual figures are also provided. The business is owned by Cheryl Rivers. She uses a fixed mark-up percentage at all times and credit sales comprise 60% of all sales. RIVERSIDE TRADERS PROJECTED INCOME STATEMENT FOR JANUARY AND FEBRUARY 2009 JANUARY BUDGET JANUARY ACTUAL FEBRUARY BUDGET FEBRUARY ACTUAL Sales Cost of sales Gross profit Other income Commission received Rent income Gross operating income Operating expenses ( ) ( ) ( ) ( ) Salary of the store manager Wages of shop assistants Sundry operating expenses Motor vehicle expenses

48 48 Telephone Security expenses Trading stock deficit Training of employees Advertising Discount allowed Bad debts Stationery Depreciation Operating profit Interest income (6% p.a.) Profit before interest expense Interest expense (15% p.a.) (37 500) (37 500) (37 500) (37 500) Net profit for the year REQUIRED: 1.1 Calculate the mark-up % that Cheryl uses for her business. (4) 1.2 Refer to the actual figures for February for Interest income and Depreciation. In each case, give a probable reason why the actual figure is different from the budget for February. (4) 1.3 Cheryl is always worried about the internal control over three expenses in particular: Stationery, Telephone and Motor Vehicle Expenses (especially as the petrol price increased unexpectedly by 25% at the beginning of January). Comment on whether or not these expenses have been well controlled. Quote figures to support your answer. (7) 1.4 Cheryl is concerned that she has to keep contributing more capital each month so that the business can settle its debts. Explain why the Projected Income Statement will not help her in identifying the reasons for this problem. (3) 1.5 Cheryl has also borrowed money to set up this business. She is not sure if she can afford the loan repayments, which start in March. Calculate the amount of the loan. What advice would you give her regarding accessing funds in order to repay the loan? Name TWO points. 1.6 Cheryl is concerned about the support she is getting from her customers. She is concerned about losing 'goodwill'. (4) (4) (2)

49 49 Quote figures from the question, which indicate that she appears to be losing customers. (6) Identify THREE points, with appropriate figures from the Projected Income Statement, which indicate that she has made mistakes in dealing with her customers. 1.7 The shop assistants earn equal wages. Two of the six shop assistants resigned at the beginning of February. They have not been replaced. Calculate the monthly salary earned by each shop assistant in January. Calculate the % salary increase that Cheryl granted the shop assistants in February. Give TWO reasons why they would not be happy with this increase. Quote evidence to support your answer. (3) (4) (4) 45 SECTION D: SOLUTIONS FOR SECTION A QUESTION Explain why it is important for Jim to prepare a projected Income Statement. Valid explanation Good = 2 marks; satisfactory = 1 mark; incorrect = 0 marks Expected response for 2 marks: To reflect the profit or loss the business can expect to make It enables him to plan properly and to anticipate any problems which could arise So that he can compare budgeted to actual figures in order to take corrective action. Expected response for 1 mark: To see if the business is making a profit or loss To reflect projected income and expenditure. 2

50 Calculate percentage increase in sales he expects in December / = 20% no part marks Explain why he has budgeted for this increase. Explanation Expected response for 2 marks: December should be a much busier period because of festive season (Christmas) or summer holidays There are more advertisements placed in December than in the other months. This is a shop focusing on holiday activities (so they should be busy during these periods) Calculate the mark-up percentage he actually achieved in October x 100 = 45% operation if one part correct Explain whether or not it was a good idea to change the mark-up percentage from his original target. Yes / No Explanation part-marks for partial answers Explanation for no: Even though the actual sales were much more than budgeted, it did not result in a higher gross profit. Explanation for yes: Sales increased significantly. (Although the gross profit was apparently the same), the business now has more customers (goodwill) which will benefit them in future. If they did not decrease their gross profit margin (from 60%) to 45%, they would not stay competitive and sales could drop and consequently net profit would drop Calculate the following figures in the Projected Income Statement: Workings Answer Rent income for November x R5 460 operation one (one mark) R260 (one part correct mark) (5% x 5 200) Advertising for December 2012 Interest expense for November x (one mark) (one mark) % x / 12 R7 040 operation one part correct R operation one 10

51 51 part correct 1.5 Refer to the actual and budgeted figures for October Identify the THREE overhead expenses that have been poorly controlled by Jim. Quote figures to support your answer. Identification of THREE items: Identification of figures: Any three items: Maintenance of property is R3 000 over budget (R7 000/R4 000) Water and electricity is R4 400 over budget (R5 600/R1 200) Trading stock deficit is R4 300 over budget (R12 300/R8 000) What advice would you offer Jim to improve his internal control over these overhead expenses? Explain. Advice part-marks for partial answers 6 Expected responses for 2 marks: Jim must inspect the reasons for being over budget (e.g. lack of care over property, water leaks, poor control of stock) He must take corrective action for the items that are over budget. He must budget more realistically in future Jim is of the opinion that he could benefit financially if he accepts Samuel's offer. State THREE points that would have a positive effect on his Projected Income Statement for January 2013 if he accepts the offer. Give figures or information from the question to support your answer. Three separate points Figures Expected responses for 2 marks each: He will be saving interest on the loan R or R or R / He will be paying no interest on loan (i.e. 0) He will be earning interest on a fixed deposit 6% of R (R3 250) He will save on maintenance costs R4 000 or R7 000 / He will incur no maintenance costs (i.e. 0) He will save on rates R1 000 / He will not pay rates (i.e. 0) The rent expense is R125 less than the interest on the loan (R R10 500) He will reflect a profit on sale of the property of R in the Income Statement Jim is also conscious of the fact that there are negative points if he accepts the offer. State TWO points that Jim should consider before finalising his decision to sell the property. Explain. Two valid points figures not necessary 4

52 52 Expected responses for 2 marks: He will be losing an asset which appreciates in value over time The value of the land and buildings may increase by more than the rent he is paying (R per year) He will be losing rent income (R5 460 per month) He will be paying rent (R per month) The rental will increase annually It could hamper future development of the business (if he does not own the fixed assets) He will not have collateral in the form of property. TOTAL MARKS QUESTION Calculation of monthly salary paid to each hair stylist: R / 3 = R8 500 OR R / 4 = R Calculation of the % increase in wages that the cleaner will receive during the projected period: 272 / X 100 = 8% Calculation of % interest rate on the fixed deposit: / X 12 X 100 = 8,5% Calculation of rental per square metre: / 60 = R410 Calculation of number of additional square metres she will rent from 1 May 2010: / 410 = 75 OR 60 x / = 75 sq metres Increase = = 15 sq metres Provide four comments that you would include in your internal auditor s report in respect of scenarios A, B, C and D below.

53 53 Comment on telephone: 10 A Good answer = 2 marks; Satisfactory =1; Incorrect =0 Expected response: : The telephone costs have exceeded projections by R These have not been well controlled and measures must be implemented to rectify this. Alternative correct and valid responses acceptable. Comment on water & electricity: Good answer = 2 marks; Satisfactory =1; Incorrect =0 B Expected response: The water & electricity costs are R1 100 under the projections. These have been well controlled especially considering the increase in electricity tariffs (and the increase in the number of customers). Alternative correct and valid responses acceptable. Comment on fee income & consumable stores: Excellent answer = 3 marks; Good answer = 2 marks; Satisfactory =1; Incorrect =0 C Expected response: There was a good increase in fee income (+14%) which indicates that the business is popular with its customers. The consumables stores (e.g. shampoos, conditioners) increased slightly (+5%) but not in the same proportion as the fees received. Alternative correct and valid responses acceptable. Comment on sale of hair products, cost of sales & gross profit: D Excellent answer = 3 marks; Good answer = 2 marks; Satisfactory =1; Incorrect =0 Expected response: There was a good increase in sales (+R / +28%) which was caused by the decrease in the mark-up % (from 75% to 60%). The increased sales volume on the lower mark-up resulted in an increase in the gross profit (+R4 500 / +12%). It appears that this was a good strategy. Alternative correct and valid responses acceptable Calculation of the cost of the new vehicle which she plans to purchase on 30 April 2010: / 0,2 X 12 = R

54 ASSET DISPOSAL July 164 July Equipment Profit on disposal of asset Acc depr on equipment ( ) Creditors control What effect will the purchase of the new equipment have on the expected profits of the business each month? Provide calculations to support your answer. Interest on loan: 15% of R = R4 737,50 pm negative effect Depreciation: 15% R /12 less R2 050 = R2 975 pm negative effect Maintenance: R3 500 pm positive effect Helen is thinking of purchasing the business premises rather than renting them. Explain one major advantage and one major disadvantage of this option, with specific reference to the effect that the purchasing of the premises would have on projected profits. Advantage: Saving on rent / Earn capital gains on property values Disadvantage: Repairs and maintenance to be paid / She will need a bond to finance this option (high repayments) Has Helen acted responsibly in the decisions she has taken/planned regarding the fixed assets? Explain, quoting specific information from the question. (See Additional information 5 on previous page.) Excellent answer = 4-5 marks; Good answer = 2-3 marks; Satisfactory =1; Incorrect =0 Expected response: It was responsible of her to replace the old equipment. The new equipment will attract customers, will make working conditions better and will involve less maintenance. With regard to the vehicles, it was irresponsible of her to purchase an expensive new car, especially as the customers travel to the 5

55 55 business. Also, this meant that the fixed deposit was used to finance the expensive car. This money could have been used to finance the equipment without high interest charges. Alternative correct and valid responses acceptable. 2.4 Helen is not sure if she has made the right decision to give up her previous job many years ago and to invest R in this business. Refer to the projected monthly profit for this period. Based on these projections, what is your opinion on the decision which Helen took? Explain. Excellent answer = 4 marks; Good answer = 2-3 marks; Satisfactory =1; Incorrect =0 Expected response: Her projections show that she expects to earn an average of R pm from this business, approximately R pa. She is losing out on interest on her savings approximately R pa or R5 667 pm (based on interest rate 8,5% pa) She is befitting by more than R pa, which means she has probably made the right decision. Alternative correct and valid responses acceptable. 4 TOTAL MARKS 59

56 56 SESSION NO: TOPIC: VAT FOURTEEN SECTION A: TYPICAL EXAM QUESTIONS 1.1 CONCEPTS REQUIRED: Indicate whether the following statements are TRUE or FALSE: The FIFO method of stock valuation is based on the assumption that stock acquired last is the first merchandise to be sold. Under the perpetual stock system carriage on goods bought is debited to the Trading Stock Account. Under the periodic stock system, when goods are sold, the cost of sales is recorded at the same time. All businesses in South Africa must charge value-added tax on all goods that they sell and all services that they provide. When the owner of a clothing business takes clothing for personal use at cost price, VAT is levied on these goods. (10) 1.2 VAT Mango Supermarket is a registered VAT vendor. VAT is calculated at 14%. All goods are sold at 50% on cost. REQUIRED: Calculate the VAT payable to SARS or receivable from SARS. State whether the amount is payable or receivable. Calculate the VAT on net purchases of trading stock for February Calculate the amount of VAT that would be reflected on the invoices that were issued to the debtors during February (3) (3) (3) INFORMATION: The following Ledger Accounts were extracted from the General Ledger of Mango Supermarket.

57 57 GENERAL LEDGER OF MANGO SUPERMARKET BALANCE SHEET ACCOUNTS SECTION VAT CONTROL 2010 Feb. 28 Input VAT GJ Feb. 28 Output VAT GJ TRADING STOCK 2010 Feb. 1 Balance b/d Feb. 28 Creditors' control CAJ Creditors' control CJ Cost of sales DJ Cost of sales DAJ Cost of sales CRJ DEBTORS' CONTROL 2010 Feb. 1 Balance b/d Feb. 28 Journal Credits (Bad debts) GJ Sundry accounts DJ VAT REQUIRED: Complete the following statements by writing down the missing words or figures. (For QUESTIONS and choose from the words given in brackets.) The letters 'VAT' stand for In South Africa, VAT is levied at %. VAT collected by a business on the sale of goods and services is regarded as (VAT input/vat output). In the ledger, a (debit/credit) balance on the (VAT Input/ VAT Output/VAT Control) Account reflects the final amount that must be paid to SARS. An item of stock is purchased for R26 200, excluding VAT. The amount of VAT on this item is R An item of stock is sold for R39 900, including VAT. The amount of VAT on this item is R (2) (2) (2) (4) (2) (2) 1.4 Calculate the amount of VAT payable to/by SARS on 28 February 2009 and indicate whether the amount is payable to or receivable from SARS. (11)

58 58 Show ALL workings. Ledger accounts for VAT are not required, but you may use this to arrive at your answer. INFORMATION: Excluding VAT Including VAT Stock purchased by cheque R ? Equipment purchased by cheque R R Sales of goods for cash and on credit? R Goods returned by customers R R Discount allowed to debtors on settlement of their accounts R4 000? Drawings of stock by the owner R R Bad debts? R SECTION B: NOTES ON CONTENT INTRODUCTION Value-Added Tax (VAT) is an indirect tax based on consumption of goods and services in the economy. Revenue raised for the government by requiring certain vendors or traders to register and to charge VAT on taxable supplies of goods or services. VAT was first introduced on 30 September 1991 at 10% and increased to 14% on 7 April As discussed in grade 10, valued added tax is levied in terms of the Value-Added Tax Act (No 89 of 1991). This value added tax is an indirect tax which is payable on the supply of goods or services made by a VAT vendor. The money collected is an important source of revenue to the South African National Budget. It is utilised to provide for education, social development, housing, health, water, etc. The VAT system comprises of three types of supplies: Standard rated supplies Supplies of goods and services subject to the VAT rate in force at the time of supply Exempt supplies Supplies of certain services not subject to VAT. Vendors making exempt supplies are not entitled to input credits. Zero-rated supplies Supplies of certain goods or services subject to VAT at zero percent. The following are amongst others, are zero rated: Brown bread, maize meal, samp, mealie rice, rice, fresh vegetables, fresh fruit, Milk, eggs, petrol, etc.

59 59 VAT is only charged by a vendor. A taxable activity is any activity carried on continuously or regularly. VAT is levied on all sales of goods and services by businesses that are registered as VAT vendors. Any business with a turnover of more than R a year must be registered as a vendor. Where the turnover is less than R , BUT EXCEEDS R50 000, a vendor can register voluntarily. (as at 1 March 2010). VAT is payable to the South African Revenue Services (SARS). When goods are purchased a vendor can claim INPUT VAT from SARS and when goods are sold a vendor becomes liable for OUTPUT VAT to SARS. Present legislation requires that businesses calculate the amount payable to SARS timeously, depending on the turnover (every four months/ two months/every month) and ensure that payment is made to SARS by the 25 th of the next month at the very latest. Should payment be received late, SARS penalizes the business by charging an interest on the overdue payment. As from 1 March 2005, a tax invoice must reflect the purchaser s trade name and VAT registration number. INVOICE BASED This implies that VAT is charged to customers and it is due to SARS the moment the invoice is issued which means that you will have to pay in the VAT even though you have not received the money for the sale of goods. (This is the norm for VAT payments) RECEIPT BASED The VAT to SARS is only payable when the money is received and the business has to register for this. (Certain conditions apply) OUTPUT VAT A taxable supply is any supply of goods or services by a vendor in the course or furtherance of a business enterprise. Value added tax is charged at one of the following rates: Standard rate, currently at 14% Zero-rated (i.e. 0%) As a general rule all goods and services are standard rated, unless specifically zerorated or exempt. To reduce the impact on the indigent and poor a number of basic foodstuffs are zerorated. In addition to certain zero-rated foodstuffs, illuminating paraffin, petrol and diesel are also zero-rated.

60 In line with international practice, the international transport of passengers and goods are also zero-rated. INPUT VAT Input tax is the VAT that a business pays on all its business expenses for which it has a tax invoice. In order for a vendor to be allowed to deduct input tax from output tax in calculating how much he must pay to SARS he must have a valid tax invoice from the vendor who has supplied the goods or services. Amongst other necessary details a tax invoice must contain the following: The words tax invoice Tax registration number Value of the goods before tax Amount of tax VAT ANALYSIS Summary and analysis of Input VAT and Output VAT on business transactions: 60 Trading Stock Purchase (bought for resale) Sales (sale of trading stock) Fixed Assets (used to generate sales) Purchase of Fixed/Tangible Assets Land and Buildings Vehicles panel van, Equipment Sale of Fixed/Tangible Assets INPUT VAT OUTPUT INPUT VAT OUTPUT The purchase price of motor cars, kombi s, station wagon and double cab vehicles may not be claimed for input tax, even if the vehicle is used for business. Expenses (incurred to generate sales) Expenses incurred i.e. Rent Paid, Stationery, Insurance Water and Electricity, Repairs and Maintenance, etc Excludes: Interest paid, Property rates, Entertainment expenses, Fuel. INPUT VAT Entertainment Expenses includes staff tea, coffee and other refreshments, boardroom lunches, Christmas parties and customer entertainment of all kinds may not be claimed for input tax

61 61 Income Example: Rent Income Interest received has no VAT implications OUTPUT VAT Transaction Summary with regard to Input VAT VAT Payable Claim for VAT Items Yes No Yes No Advertisements Bank Charges Delivery Vehicle Depreciation Equipment Insurance Interest on Investments Interest on Loan Office building Packing Material Petrol and Oil Refreshments/Entertainment Salaries and wages Trading stock Water and electricity etc FORMAT OF THE THREE VAT LEDGER ACCOUNTS Dr VAT Output N6 Cr Debtors Control DAJ XXX - Bank CRJ XXX - Bad Debtors GJ XXX - Debts Control DJ XXX - Discount Drawing GJ XXX - Allowed GJ XXX - VAT Discount GJ XXX - Control Allowed GJ XXX - XXX - XXX - CASH SALES CREDIT SALES OWNER TOOK GOODS FOR OWN USE DEBTORS RETURNED GOODS WROTE OFF BAD DEBTS

62 DISCOUNT ALLOWED TO DEBTORS DISCOUNT CANCELLED ON DISHONOURED CHEQUE TRANSFER TO VAT CONTROL Bank CPJ XXX - Creditors Control Petty Cash CJ XXX - PCJ XXX - VAT Input Creditors Control Discount Received VAT Control N7 62 CAJ XXX - GJ XXX - GJ XXX - XXX - XXX - CASH PURCHASE OF MERCHANDISE CREDIT PURCHASE OF MERCHANDISE ITEMS PURCHASED FROM PETTY CASH MERCHANDISE RETURNED TO SUPPLIERS DISCOUNT RECEIVED FROM CREDITORS TRANSFER TO VAT CONTROL VAT Control Account B9 VAT Input GJ XXX - VAT Output GJ XXX - Balance c/d XXX - XXX - XXX - Balance b/d XXX -

63 63 SECTION C: HOMEWORK QUESTIONS QUESTION 1 VALUE ADDED TAX The summary of transactions is an extract from the books of Lumart Traders for the months July and August Lumart Traders is a registered vendor with a turnover of R plus per annum. All items, except the zero rated or exempt items, are subject to VAT at 14%. SUMMARY OF TRANSACTIONS JULY AND AUGUST 2009 (Excluding VAT) Detail Amount Details Amount Cash purchases of Additional capital trading stock contributed (No zero rated items) Cash sales (20% zero rated) Net Credit sales (No zero rated items) Rent income Drawings of trading stock by owner QUESTIONS TO ANSWER: Credit purchases (Including zero rated items 20%) Stationery Drawings of cash by owner Wages Fuel for delivery vehicles New computers purchased Purchase of delivery van What is the difference between VAT input and VAT output? (2) Would Lumart Traders have to charge VAT on all sales. Explain. (2) Calculate the VAT input and VAT output for the two months. (11) Lumart Traders want to claim VAT on all sales (inclusive of zero-rated goods) as this will reduce the amount of VAT the business has to pay to SARS. Provide advice on this suggestion. (3) [18] QUESTION 1.2

64 VALUE ADDED TAX The following information was taken from the books of Leading Technologies for June All goods bought and sold by the business are subject to 14% VAT. REQUIRED: Calculate the amount of VAT payable to/by SARS on 30 June 2012 and indicate whether the amount is payable to or receivable from SARS. Show ALL workings. (11) The owner does not agree with his accountant with regard to registering as a VAT vendor. Explain to him, quoting figures from the information supplied why it is necessary for this business to be a VAT vendor. (4) INFORMATION: Excluding VAT VAT Including VAT Stock purchased as per VAT invoices R ? Equipment/Expenses purchased/paid for R R R Other sales of goods for cash and on credit R R Sale of LeadPads for May and June (250 units)? R Goods returned by customers R R R Drawings of stock by the owner R R R Bad debts R R R SECTION D: SOLUTIONS FOR SECTION A QUESTION Indicate whether the statements are TRUE or FALSE False Accept T or F True instead of True or False False False True Calculate the VAT payable to SARS or receivable from SARS. R R9 780 = R Two marks or nothing 3

65 65 State whether the amount is payable or receivable. Payable Calculate the VAT on net purchases for February R x 14% = R operation if one part correct Calculate the amount of VAT that would be reflected on the invoices that were issued to the debtors during February R x 14/114 = R Complete the statements by writing down the missing words or figures. (For QUESTIONS and choose from the words given in brackets.) Value-added Tax VAT Output Credit VAT Control R R Calculate the amount of VAT payable to/by SARS on 28 February Show ALL workings. Ledger accounts for VAT are not required, but you may use this to arrive at your answer. R (R ) = R OR Input VAT = = R Output VAT = = R Difference = R VAT CONTROL

66 66 Bank (Purchases) Bank (Equipment) Debtors' control (Returns) Sundry account ( ) Bank & Debtors' control Sundry account Balance c/d Balance b/d Indicate whether the amount is payable to or receivable from SARS. The amount is owed by SARS to Laser Stores 11

67 67 SESSION NO: FIFTEEN TOPIC: CONSOLIDATION SECTION A: TYPICAL EXAM QUESTIONS QUESTION 1: MANUFACTURING (45 Marks; 27 minutes) 1.1 HEEDA BAGZ You are provided with information relating to Heeda Bagz for the financial year ended 30 June This is a manufacturing business specialising in the production of one type of handbag made of leather. REQUIRED: Match the cost in column 1 with an applicable expense item in column 2 COLUMN 1 COLUMN 2 1 Direct materials cost A Depreciation on factory equipment 2 Direct labour cost B Commission to sales agents 3 Factory overhead cost C Salary paid to accountant 4 Administration cost D Leather bought from suppliers 5 Selling & distribution cost E Wages paid to factory machinist (5) Prepare the note Cost Of Finished Goods Sold (13) Prepare the Production Cost Statement for the year ended 30 June 2011 (13) Calculate the Net Profit for the year ended 30June 2011 (4) INFORMATION: 1. There was no work-in-process stock, not at the beginning nor at the end of the financial year. 2. There were stocks of finished goods both at the beginning and at the end of the financial year. The cost of these bags remained constant over the two years. 3. Selling price per bag, R Direct material cost per bag, R25 5. Prime cost per bag, R55

68 68 6. Total cost of production of finished bags, R Number of bags completed during the year, Number of bags sold during the year, Number of unsold bags at the end of the financial year, Administration costs for the year amounted to R Selling and distribution costs for the year amounted to R The Gross profit for the year amounted to R SPARK MANUFACTURERS This business makes calculators. The information below relates to the year ended 30 June Number Explain of why calculators it is produced important for a manufacturing business to Sales calculate for the unit year cost (all and manufactured a break-even units point were each sold) month. R (2) Total Use fixed the figures costs above to calculate the break-even point. R (5) Total variable costs R Comment on your calculation in QUESTION Briefly explain. (3) [45] QUESTION TWO MANUFACTURING (50 marks; 30 minutes) 2.1 PRODUCTION COST STATEMENT & PERIODIC STOCK You are provided with information relating to Lolipop Manufacturers for the financial year ended 31 July The business makes sweets, and sells these at a mark-up of 100% on cost. They use the perpetual inventory system for finished goods and periodic system for raw materials and indirect materials. REQUIRED: Prepare the notes to calculate the Direct materials cost and factory overhead cost. (24) Prepare the Production Cost Statement for the year ended 31 July (Show calculations in brackets) (12)

69 69 INFORMATION: 1. The following balances appeared, amongst others, in the ledger at the beginning and end of the financial year. Raw materials stock Work-in-process stock Finished goods stock Factory Indirect materials stock 1 August July ? Transactions during the year: Raw materials purchased on credit, R Raw materials purchased for cash, R Raw materials donated by the factory to the local school, R Cost of transporting raw materials to the factory, R Factory indirect materials bought for cash, R Factory indirect materials returned to suppliers, R Wages paid to factory workers who make the lollipops, R Salary paid to employees, R Included in this amount is the salary of the factory foremen R Commission on sales, R all sales are subject to a commission of 5% Maintenance of factory equipment paid, R An invoice of R was received but has not been processed as yet. Water & electricity paid, R (this is to be split between the factory, office and sales sections in the ratio 4:2:1 respectively). Lolipop Manufacturers leased a new building. Rent paid, R (this is to be split across the various departments according to floor area - the factory accounts for 57% out of the total area) Included in this figure is the deposit equal to one month rental. Depreciation on factory equipment amounts to R Bad debts, R Carriage on sales, R You are provided with information relating to Nkosi Manufacturers, a business which manufactures only one type of plastic chair REQUIRED: Use the information to: Explain why it is important for a manufacturing business to calculate (3)

70 70 unit costs and a break -even-point each month Calculate the variable cost per unit for 2013 (4) Calculate the break-even point for 2013 (4) Comment on the break- even point (3) INFORMATION: 1. There was no work-in-process at the beginning or end of the financial year 2. All chairs were sold at a fixed price of R200 each in Direct material cost per chair, R Prime cost per chair, R69 5. Number of chairs completed during the year, Total cost of production of finished chairs, R Number of chairs sold during the year, Administration costs for the year amounted to R Selling and distribution costs for the year amounted to R SECTION B: HOMEWORK QUESTIONS QUESTION 1: MANUFACTURING (50 marks; 30 minutes) You are provided with information relating to Trendy Fashions for the financial year ended 28 February The business makes dresses for Banquets using imported fabric. They use the perpetual inventory system for all stocks except in the case of indirect materials when the periodic system is used. The business is owned by Florence Nxumalo.

71 71 REQUIRED: 1.1 Calculate the Direct Labour Cost for the year. (7) 1.2 Factory Overhead Cost note. (16) 1.3 Prepare the Production Cost Statement for the year ended 28 February Show all workings in brackets. (14) 1.4 Calculate the gross profit for the year ended 28 February (8) 1.5 Explain to the owner how to calculate the break even point.(do not calculate it.) (3) 1.6 Florence is concerned about the control over certain costs. Direct materials account for more than 40% of the cost of one dress, while direct labour accounts for more than 30%. Florence wants your advice. Provide two suggestions on how to improve efficiency in the use of direct materials. (2) INFORMATION FOR YEAR ENDE 28 FEBRUARY 2012: 1. Stock on hand at the beginning of the year comprised: Raw materials stock R Work-in-process stock R Finished goods stock R Indirect materials stock R Raw materials (fabric for dresses) were imported during the year from Japan. Details are: Cost of fabric imported on credit: $ (exchange rate R8.00 = $1.00) Customs duty paid on the fabric: 30% Shipping costs paid: R Indirect materials were bought for cash during the year, R Transport costs on these were paid out of petty cash R Remuneration is as follows: The 4 direct workers worked for 160 days during the year, 9 hours per day at R30 per hour. All four workers also worked 5 hours overtime on 12 days. Overtime is paid at normal rate plus 50%. The foreman was paid a salary of R for the year. The cleaner was paid R3 640 per month. This is to be split between the factory, the office and the sales dept in the ratio 5 : 1 : 1. The salespersons were paid commission of R

72 72 5. Electricity and water paid during the year was R and Rent paid was R The rent for February has not yet been paid. These are to be split according to floor area: Factory: Office: Sales department: 300 sq metres 80 sq metres 120 sq metres 6. A completed dress was stolen from the shop. The cost of the finished article is R and the selling price was R The business uses a fixed mark-up percentage at all times. 7. Stock on hand at the end of the year comprised: Raw materials stock R Work-in-process stock R Finished goods stock R Indirect materials stock R The following totals appeared in the ledger at the end of the financial year: Administration cost R Selling & distribution cost R SECTION C: SOLUTIONS FOR SECTION A QUESTION 1: Choose an explanation from COLUMN B that matches a concept in COLUMN A. COLUMN A COLUMN B D E A C B 5

73 Cost of finished goods sold Opening stock of finished goods # Cost of finished goods produced during the year Closing stock of finished goods (300 x76 ) (22 800) Cost of finished goods sold # o/s +man-sales=f/stock X =300 X=2 300 x ( / ) HEEDAS BAGZ PRODUCTION COST STATEMENT FOR THE YEAR ENDED 28 FEBRUARY 2011 R Direct costs/primary cost Direct material costs Direct labour costs Factory overhead costs Total manufacturing costs Work-in-process at beginning of the year 0000 Work-in-process at end of the year (0000) Cost of production of finished goods NET PROFIT FOR THE YEAR ENDED 28 FEBRUARY 2011 Gross profit Expenses Selling and distribution Administration cost Net profit for the year

74 Spark Manufacturers Explain why it is important for a manufacturing business to calculate unit cost and a break-even point each month. Good explanation = 2 marks; Satisfactory = 1 mark; Incorrect = 0 marks To make comparisons to identify potential problems cost items in advance and to assess whether it is practical for the business to achieve the production that will result in a profit. So that any potential problems of low production can be anticipated. To start corrective action promptly before losses occur. No profits are made until break-even is reached. Determine the minimum number of unit produce to prevent losses Calculate the break-even point. SP per unit = R / = R110 VC per unit = R / units = R70 Contribution per unit = R40 BEP = R / R40 = units Comment on your calculation in Briefly explain. Give credit if responses are based on an incorrect calculation above. Comment: Compare BEP to the units produced The business is producing enough units they are above the BEP, which means that the business will be making a profit. 3 TOTAL MARKS 45

75 75 MANUFACTURING (50 marks; 30 minutes) CALCULATION OF RAW MATERIALS COST Opening stock Purchases( ) Carriage on purchases Closing stock ( ) CALCULATION OF FACTORY OVERHEAD COST Factory indirect materials( ) Factory Foremen Factory Maintenance( ) Water and electricity Factory rent( x 57% Factory depreciation LOLIPOP MANUFACTURERS PRODUCTION COST STATEMENT FOR YEAR ENDED 31 JULY Prime / Direct cost Direct materials cost Direct labour cost Factory overhead cost Total manufacturing costs Work-in-process at the beginning of the year Work-in-process at the end of the year Cost of production of finished goods see DMC see FOC ( )

76 Explain why it is important for a manufacturing business to calculate unit costs and a break -even-point each month Any valid explanation Good answer=3 Satisfactory=2 poor=1 Incorrect=0 To make comparisons -To identify potential problem cost items in advance To assess whether it is practical for the business to achieve the desired production that will result in a profit Calculate the variable cost per unit Direct material+ direct labour + selling and distribution =R37 + R32 + R8 =R Calculate the break- even-point F/C/contribution per unit accept if same as = /(200-77) = /123 = Comment on the BREAK EVEN point Any valid explanation Good answer=3 Satisfactory=2 poor=1 Incorrect=0 Give credit if responses are based on an incorrect calculation above (see ) Comment: Compare BEP to the units produced e.g. The business is producing enough units they are above the BEP which means that the business will be making a profit. 3 TOTAL MARKS 50

77 77 SESSION NO: 16 TOPIC: CONSOLIDATION SECTION A: TYPICAL EXAM QUESTIONS QUESTION 1: [45 marks; 27 minutes] The information given to you was taken from the records of Kenau Traders. You are provided with an incomplete Cash Budget and Debtors Collection Schedule. REQUIRED: 1.1 Complete the Debtors Collection schedule and Cash Budget by calculating the amounts represented by the letters A-G. (12) 1.2 Name 2 items, which will appear in a Projected Income Statement but will not be in a Cash Budget. (2) 1.3 Identify 2 items which will appear in the Cash Budget, but will not be in a Projected Income Statement. (2) % of the total sales per month is for cash. Calculate the total sales for February (4) 1.5 Calculate the percentage increase in rent income on 1 February (3) 1.6 On 1 March 2013, a salary and wage increase was given to employees. Calculate the amount spent on salaries and wages in March see H. (2) 1.7 The employees are not satisfied with their salary increase of 3 % and are organizing a strike. Do they have reason to feel unsatisfied? Give a reason for your answer and quote figures. (4) 1.8 An additional loan was made on 1 March 2013 at an interest rate of 15 % per annum. Calculate the additional amount borrowed - see J. (5) 1.9 Interest on the current banking account is received or paid every month and is calculated as follow (to the nearest rand) on die bank balance on the first day of each month: 18 % per year on the unfavorable balance (overdraft) 6 % per year on the favorable balance. Calculate the interest on the current banking account for February and March see K and L. (6) 1.10 The owner, S Kenau, is not sure whether he should appoint an (5)

78 78 additional secretary at a salary of R per month. He asks your opinion on this matter. What advice will you give him? Give a reason for you advice by quoting figures. INFORMATION: CASH BUDGET OF KENAU TRADERS FOR THE 3 MONTHS ENDING 31 MARCH 2013 JANUARY FEBRUARY MARCH CASH RECEIPTS Cash sales Cash received from Debtors * * * Rent income Additional loan J Interest on current banking account L Sundry income * * * Increase in capital * TOTAL RECEIPTS CASH PAYMENTS Payments to creditors Interest on loan Advertising Drawings Salaries and wages H Operating expenses * * * Interest on bank overdraft * K TOTAL PAYMENTS CASH SURPLUS (SHORTAGE) (56 249) E Bank (opening balance) (8 600) (64 849) F Bank (closing balance) (64 849) G DEBTORS COLLECTION SCHEDULE Credit sales January February March November December January A February B March C D Additional information: 1. Sales: 75 % of the total sales is for cash. 2. Debtors are expected to pay as follow:

79 79 50 % in the transaction month, subject to 5% discount 30 % in the month following the transaction month 15 % in the second month following the transaction month 5 % will be written off as bad debts after the third month QUESTION 2: CASH BUDGET (30 marks; 20 minutes). The information supplied to you was extracted from the books of Xaba Traders. INFORMATION Creditors are paid two months after the month of purchase E.g. Goods bought on credit in October will be paid for in December REQUIRED: Answer the following questions 2.1 List two possible ways in which the purchase of equipment can be funded. (2) 2.2 Calculate what percentage of the purchases of stock is for cash in the month of October (4) 2.3 Calculate the credit sales for October 2012.A 10% discount is allowed to customers who pay within thirty days. 2.4 What percentage of debtors pays their accounts within thirty days? Use figures for October 2012 to determine your answer. (4) 2.5 Use your answer in 6.2,6,3 and 6.4 above to illustrate that receipt from debtors, payments to creditors and purchases of stock are well managed. (5) (6) 2.6 List two items that could be included in other fixed expenses. 2.7 Identify two expenses that could appear in a projected income statement but not in a cash budget. 2.8 Do you think it was a good idea not to re-invest the fixed deposit? Support your answer with a calculation. (2) (2) (5)

80 80 INFORMATION: 1.Cash Budget for the period 1 October to 31 December 2012 CASH RECEIPTS October November December Cash sales Cash from debtors Maturing of fixed deposit (including interest for six months at 6% p.a.) Loan Total Receipts CASH PAYMENTS Cash purchases of stock Cash paid to creditors Interest on loan Purchase of equipment Other fixed expenses Total Payments Surplus/Deficit ( ) Opening bank balance (7500) Closing bank balance DEBTORS COLLECTION SCHEDULE CREDIT SALES October November December August September October November

81 81 SECTION B: HOMEWORK QUESTIONS QUESTION 1: CASH BUDGET (30 marks; 18 minutes) Zola Trader buys and sells a wide range of sporting goods to the customers. REQUIRED: 1.1 Calculate the total sales for august. (4) 1.2 The owner feels that the debtors are not being properly managed Do you agree? Explain your answer fully with at least 2 points to substantiate your answer. (2) Discuss two measures that he could introduce to improve the situation. 1.3 Calculate the interest rate on the loan from Helpu Bank. (5) 1.4 Management is not sure whether their advertising policy has been effective. Comment on this by discussing at least Two points. 1.5 Complete the Debtors Collection Schedule to show receipts from debtors during the month of August only.note the credit sales have been inserted on the table other than August that you will have to calculate: 60% of sales are on credit 15% Within the same month as the sale subject to the 2% discount 20% in the following month after the sale. 48% In the second month following the sale 5% in the third month following the sale. 12% are written off as bad debts after 120 days. (8) 1.6 Do you think the owner has cause to worry about the cash flow of the business? Discuss by quoting figures to support your answer. (5) (2) (4) INFORMATION: 1. Purchases: All goods are marked up by 25% on cost. Zola Traders work on fixed stock base i.e stock sold each month is replenished in the same month.80% of all purchases are on credit.

82 82 2. LOAN FROM HELPU BANK The loan from Helpu Bank was received on the 1 July 2011.Interest will be paid monthly starting from the 1 August ZOLA TRADERS CASH BUDGET FOR THE THREE MONTHS ENDED 30 AUGUST CASH RECEIPTS JUNE JULY AUGUST Cash sales Cash from debtors * Rent Income * Loan from Helpu bank Total Receipts CASH PAYMENTS Cash purchases Cash paid to creditors Interest on loan 2175 Salaries and wages Advertising Sundry expenses Total Payments Surplus/Deficit (60910) (53 037) Opening bank balance Closing bank balance DEBTORS COLLECTION SCHEDULE CREDIT SALES AUGUST May R June R July R *(a) August *(c) *(b) Total *(d) 30

83 83 SECTION C: SOLUTIONS FOR SECTION A QUESTION 1: [45 marks; 27 minutes] 1.1 Complete the Debtors Collection schedule and Cash Budget by calculating the amounts represented by the letters A-G. A B C x 15 % = x 30 % = ( x 50 %) - 5% = (2) (2) (3) D = the first 3 amounts must be answers A-C (1) E F G = (24 705) (24 705) = (2) (1) (1) 1.2 Name 2 items, which will appear in a Projected Income Statement but will not be in a Cash Budget. Depreciation Discount allowed Discount received Bad debts Any other acceptable answer (2) 1.3 Identify 2 items which will appear in the Cash Budget, but will not be in a Projected Income Statement. Loan obtained/repayment of loan (2)

84 84 Fixed assets purchased Capita contribution Drawings Payments to creditors Receipts from debtors Any other acceptable answer % of the total sales per month, is for cash. Calculate the total sales for February x 100/75 = (4) 1.5 Calculate the percentage increase in rent income on 1 February x = 12 % (3) 1.6 On 1 March 2013, a salary and wage increase was given to employees. Calculate the amount spent on salaries and wages in March see H. H: % = (2) 1.7 The employees are not satisfied with their salary increase of 3 % and are organizing a strike. Do they have reason to feel unsatisfied? Give a reason for your answer and quote figures. Yes Reason: Quote figures The drawings of the owner increased from R to R per month it is 50 %. (4) 1.8 An additional loan was made on 1 March 2013 at an interest rate of 15 % per annum. Calculate the additional amount borrowed - see J. J: 875 x 12 = (5)

85 x 100/15 = Interest on the current banking account is received or paid every month and is calculated as follow (to the nearest rand) on die bank balance on the first day of each month: 18 % per year on the unfavorable balance (overdraft) 6 % per year on the favorable balance. Calculate the interest on the current banking account for February and March see K and L. K: Interest on overdraft: x 18 x = R973 L: Interest on favourable bank balance x 6 x = R519 (8) 1.10 The owner, S Kenau, is not sure whether he should appoint an additional secretary at a salary of R per month. He asks your opinion on this matter. What advice will you give him? Give a reason for you advice by quoting figures. Advice: Reason: Advice: do not take on a new secretary. Reason: The payments in January and March were more than the receipts (payments for March was R and receipts only ) During February the owner contributed extra capital and made an additional loan during March of R (3)

86 86 QUESTION List two possible ways in which the purchase of equipment can be funded. Availability of cash in the current bank account The fixed deposit that matured Additional loan Any two Calculate what percentage of the purchases of stock is for cash in the month of October x 100 / =20% 2.3. Calculate the credit sales for October 2012.A 10% discount is allowed to customers who pay within thirty days. = 100 x /90 =R R66000 =R What percentage of debtors pay their accounts within thirty days? Use figures for October to determine your answer. 4 6 = x 100/ =66.7%0r 67% 2.5 Use your answer in 6.2,6,3 and 6.4 above to illustrate that receipt from debtors, payments to creditors and purchases of stock is well managed. cash sales represent a much larger percentage of the total sales, whereas cash purchases represent only 20% of the total purchases. 67% of credit sales is settled within 30 days Creditors are paid within 60 days The above information indicates a healthy cash flow and liquidity position List two items that could be included in other fixed expenses (any two) Rent Expense Insurance Salaries 2 4

87 2.7 Name two expenses that could appear in a projected income statement but in a cash budget. Depreciation,, Discount allowed Loss on sale of assets Provision for bad debts adjustment(increase) -Any two of the above Do you think it was a good idea not to re-invest the fixed deposit. Support your answer with a calculation = 750 x 100/50000 =1,5% per month(x 12) =18% per annum Earning interest at 6% p.a. on the fixed deposit whilst paying interest at 18% p.a. on the loan is not advisable as it affects profitability SESSION NO: 17 TOPIC: VAT AND OTHERS SECTION A: TYPICAL EXAM QUESTIONS QUESTION 1: INVENTORY SYSTEMS AND VAT (38 marks; 24 minutes) TV Traders Import and sell one type of television from Japan. Televisions are imported and paid for in US dollars. TV Traders have been using the periodic stock system and the weighted average method of valuing inventory since the beginning of the financial year, 1 July The financial director of TV Traders is concerned about the effect of the exchange rate fluctuations on the financial results. A friend of his has suggested that he prepare his books using the FIFO method. The financial director has asked you to prepare a comparison for him. He is also concerned about possible stock losses.

88 88 REQUIRED: Prepare a comparison of the value of closing stock using both the weighted average and FIFO methods of valuing stock. (12) State how the change from weighted average methods to FIFO methods will influence the gross profit of the business? (2) Calculation of cost of sales using the FIFO method. You may prepare a trading account. (6) Calculate the number of units missing. (5) What solutions would you offer to the financial director to help solve the problem of the missing units? Provide 2 good solutions. (2) INFORMATION: 1. Stock of Televisions ( 1 July 2010 ) 24 R3 600 each Stock of Televisions (30 June 2011) 144 units 2. Purchases Creditors control 1 November 2010 R4 200 each Bank 1 February 2011 R6 000 each Creditors control 1 May 2011 R7 200 each Total 456 = R Import duties R purchased on 1 November Carriage on sales R Carriage on purchases R Sales for the year 308 units, R VALUE-ADDED TAX The following information was taken from the books of Laser Stores for JUNE All goods bought and sold by Laser Stores are subject to 14% VAT. REQUIRED: Calculate the amount of VAT payable to/by SARS on 30 June 2011 and indicate whether the amount is payable to or receivable from SARS. Show ALL workings. Ledger accounts for VAT are not required, but you may use ledger accounts to arrive at your answer. (10) [27]

89 INFORMATION: Excluding VAT Including VAT Stock purchased by cheque R ? Equipment purchased by cheque R R Sales of goods for cash and on credit? R Goods returned by customers R R Discount allowed to debtors on settlement of R4 000? their accounts Drawings of stock by the owner R R Bad debts? R QUESTION 2: STOCK SYSTEMS AND VAT (41 MARKS; 25 MINUTES) 2.1. STOCK VALUATION You are provided with information on the following page relating to Leading Technologies for the year ended 30 June The business sells computer hardware and software. The periodic inventory system and the weighted average stock valuation method are in operation. All goods bought and sold by Leading Technologies are subject to 14% VAT. The LeadPads are one of the lines sold by Leading Technologies. REQUIRED: 2.1 Use the weighted average method to calculate the following. Round off calculations to the nearest rand The number of LeadPads stolen (from the March delivery). (6) The value of stock of LeadPads on hand on 30 June (11) The owner, K Lawrence, is considering changing the stock valuation method from the weighted average to the First-In-First-Out (FIFO) method Calculate the value of closing stock using the FIFO method. (6) Advise K Lawrence on whether he should or should not change his stock valuation method to the FIFO method. Briefly explain and give one valid reason for your answer. (3)

90 90 INFORMATION: 1. Stock, purchases and sales during the year. Units Unit price (Exc VAT) Total price In Rands LeadPads on hand: 1 July R 600 R Net purchases of LeadPads: R Import Duties paid on all purchases R Purchases: 01 September $80 R December $88 R March $90 R May $104 R Units returned to supplier March purchases (20) $90 (R13 500) LeadPads per stock take: 30 June ?? Sales of LeadPads for the year R R All LeadPads are imported from the USA. Prices are quoted in US dollars ($). The exchange rate was R7,50 = $1,00 throughout the year. 3. Twenty of the units purchased in March 2012 were defective and returned to the suppliers. A full refund was received. 4. Some units were stolen from the September 2011 consignment. The Insurance company has decided not to refund the business. 5. The business uses a fixed selling price of R1 500 per unit VALUE ADDED TAX 26 The following information was taken from the books of Leading Technologies for June All goods bought and sold by the business are subject to 14% VAT. REQUIRED: Calculate the amount of VAT payable to/by SARS on 30 June 2012 and (11)

91 91 indicate whether the amount is payable to or receivable from SARS. Show ALL workings The owner does not agree with his accountant with regard to registering as a VAT vendor. Explain to him, quoting figures from the information supplied why it is necessary for this business to be a VAT vendor. (4) INFORMATION: Excluding VAT VAT Including VAT Stock purchased as per VAT invoices R ? Equipment/Expenses purchased/paid for R R R Other sales of goods for cash and on credit R R Sale of LeadPads for May and June (250 units)? R Goods returned by customers R R R Drawings of stock by the owner R R R Bad debts R R R SECTION B: HOMEWORK QUESTIONS QUESTION 1: VALUE ADDED TAX (20 marks: 13 minutes) Hook Traders, owned by Michael Hook, is a registered VAT vendor who uses the invoice basis on a one-month period. You are provided with information for the month of July REQUIRED: 1.1 Michael approaches the owner of Sinker Traders (a registered vendor) not to charge VAT for the goods he wants to buy. He wishes to pay R cash. (VAT excluded) What advice would you offer Sinker Traders? (List one point) (3)

92 1.2 (a) Explain the difference between VAT-output and VAT-input. (3) (b) Is it possible for VAT-Control to have a debit balance? Explain briefly. 1.3 Study the ledger accounts provided and provide the missing details, contraaccounts as indicated by (a) - (h). (12) INFORMATION: 1. GENERAL LEDGER OF HOOK TRADERS BALANCE SHEET ACCOUNTS SECTION Dr OUTPUT VAT Cr July 31 (b) DAJ 380 July 31 (a) CRJ Bad Debts GJ 14 Debtors DJ Control (h) GJ (f) Drawings GJ 196 *? * 92 (2) 20 Dr INPUT VAT Cr July 31 Bank (c) July 31 (d) CAJ 900 Creditors Control CJ *? GJ *? *? *?

93 93 Dr VAT CONTROL ACCOUNT Cr July 31 (e) GJ (g) July 1 Balance b/d *? GJ (f) Balance c/d 400 * *?? Aug 1 Balance b/d SECTION C: SOLUTIONS FOR SECTION A QUESTION ONE Value of Closing stock 144 units First In First Out (FIFO) X R7 200 = R X R6 000 = R R Weighted Average Opening stock R Import duties Carriage on purchase Purchases R X = R R units =R How will the change from weighted average methods to FIFO methods influence the gross profit of the business? FIFO closing stock is bigger which means a bigger Gross profit. 2

94 Calculate cost of sales FIFO Opening stock + purchases + import duties + carriage on purchases closing stock = = R Calculate the number of units missing = 28 missing or = 480 available for sale 308 sold 144 physical count = 28 missing What solutions would you offer to the financial director to help solve the problem of the missing units. Provide 2 good solutions. Solution 1: Convert to perpetual system Regular stock counts Solution 2: Documentation proper authorization Any other acceptable answer Calculate the amount of VAT payable to/by SARS on 30 June Show ALL workings. Ledger accounts for VAT are not required, but you may use this to arrive at your answer. R (R ) = R OR Input VAT = = R Output VAT = = R Difference = R VAT CONTROL Bank (Purchases) Bank (Equipment) Bank & Debtors' control

95 95 Debtors' control (Returns) Sundry account ( ) Sundry account Balance c/d Balance b/d Indicate whether the amount is payable to or receivable from SARS. The amount is owed by SARS to Laser Stores TOTAL MARKS 37 QUESTION 2: STOCK SYSTEMS AND VAT (41 MARKS; 24 MINUTES) QUESTION 2.1 STOCK VALUATION The number of LeadPads stolen (from the last delivery in May) = The value of stock of LeadPads on hand on 30 June (Weighted Average Method)

96 = / = R761,91 Final stock = 761,91 x 280 = R Calculate the value of closing stock using the FIFO method. Stolen March/September 200 X (104X 7,50 ) = X (90 X 7,50 ) = = Plus import duty / 1710 x 280 = TOTAL = R Stolen May (200 10) X (104 X 7,50 ) = X (90 X 7,50 ) = = Plus import duty / 1710 x 280 = TOTAL =R Advise K Lawrence on whether he should or should not change his stock valuation method to the FIFO method. Briefly explain and give one valid reason for your answer. No Annual financial statements not comparable if change is made Profits can be manipulated which has tax implications Would affect the next financial years results as well any one valid reason 3 OR Advise K Lawrence on whether he should or should not change his stock valuation method to the FIFO method. Briefly explain and give one valid reason for your answer. Yes More accurate stock valuation in the light of current prices

97 97 any one valid reason 3 26 QUESTION 2.2: VALUE ADDED TAX Calculate the amount of VAT payable to/by SARS on 30 June 2012 and indicate whether the amount is payable to or receivable from SARS. Show ALL workings. Inputs Outputs Stock purchased Other sales Equipment/Exp purchased Sale of LeadPads Accept negative as outputs Goods returned by customers (3 360) Drawings Bad debts (3 570) Accept negatives as inputs Receivable Payable R The owner does not agree with his accountant with regard to registering as a VAT vendor. Explain to him, quoting figures from the information supplied why it is necessary for this business to be a VAT vendor. Legislation demands that all vendors with a turnover over R must register as a VAT vendor. The sales for only two months in this business is R which exceeds the amount of R must quote the figures 2 X = 41