SECONDARY SCHOOL IMPROVEMENT PROGRAMME (SSIP) 2015 GRADE 12 SUBJECT: ACCOUNTING LEARNER NOTES (Page 1 of 73) 1
TABLE OF CONTENTS SESSION TOPIC PAGE 5 Fixed Assets 3-12 6 Inventory Valuation 13-25 7 Consolidation 26-38 8 Consolidation 38-47 9 Consolidation 47-58 10 Reconciliations 59-73 2
SESSION NO: FIVE TOPIC: FIXED ASSETS SUGGESTIONS FOR IMPROVEMENT Learners should be given question papers from the beginning of the year. Question papers to be used frequently in class instead of only using textbooks. Teach a section and assess learners using past exam papers so that they can become familiar with the exam questions. The most important is the marking of the assessment and the discussion with learners. Assessment task (SBA) should be examination related. The grade 11 curriculum must be thoroughly mediated so as to ensure that learners are thoroughly prepared for the sections that are continued in grade 12. The applications involved in valuing fixed assets and stock require regular practice and continual reinforcement at appropriate times. These can be integrated into other Grade 12 topics such as Companies, Manufacturing and Projected Income Statements to eliminate the need to devote additional revision time to these topics. Teachers should ensure that the opportunities are used to include these applications in class tasks and tests on a regular basis. Teachers must ensure that the procedures of calculating depreciation and drawing up asset disposal accounts and fixed asset notes are properly addressed by the end of Grade 11. SECTION A: TYPICAL EXAM QUESTIONS QUESTION 6: FIXED ASSETS, INVENTORY VALUATION AND INTERNAL CONTROL (24 marks; 18 minutes) 1.1 FIXED ASSETS You are provided with details of the fixed assets of Ulwazi Ltd. The financial year ends on 31 March 2013. REQUIRED: 1.1.1 Calculate the missing figures indicated by A, B and C in the Fixed Assets Note below. (9) 1.1.2 Prepare the Asset Disposal Account for the computer sold on 31 January 2013. (11) 1.1.3 You are the internal auditor. State TWO concerns that you would 3
voice in respect of the fixed assets with the board of directors. Explain in EACH case why you are concerned. (4) INFORMATION: 1. Fixed Assets Note: Land and buildings Equipment Vehicles Carrying value (1 April 2012) 3 000 000 184 000 560 000 Cost 3 000 000 258 000 780 000 Accumulated depreciation ( - ) (220 000) Movements: Additions (cost) 360 000 Disposals (carrying value) A Depreciation B Carrying value (31 March 2013) 2 100 000 Cost 2 100 000 240 000 1 140 000 Accumulated depreciation ( - ) C Information 3. 2. Unused land was sold for cash at cost to solve cash-flow problems. This property was bought by Pedoma (Pty) Ltd. The majority shareholder in this company is Betty Benson, the CEO's wife. 4
3. A computer (equipment) was sold for R800 cash to the CEO, Ben Benson, on 31 January 2013. FIXED ASSET REGISTER Item: IT3 Laptop Cost: R18 000 Date purchased: 1 October 2010 Rate of depreciation: 25% p.a. on cost E22189 DEPRECIATION ACCUMULATED CARRYING DEPRECIATION VALUE 31 March 2011 R2 250 R2 250 R15 750 31 March 2012 R4 500 R6 750 R11 250 31 January 2013??? 4. A new vehicle costing R360 000 was purchased on 30 June 2012. 5. Depreciation is written off on Vehicles at 20% p.a. on the diminishing-balance method. 1.2 MASTER LIMITED You are provided with information relating to Master Ltd for the financial year ended 30 June 2012. REQUIRED: 1.2.1 Use Information 2 to complete the Note for Fixed/Tangible Assets by filling in the missing figures indicated by an * (17) INFORMATION: 1. Note to the Balance Sheet on 30 June 2012 FIXED/TANGIBLE ASSETS LAND AND EQUIPMENT VEHICLES BUILDINGS Carrying value 1 July 2011 R 930 000 R 220 000 R 519 200 Cost 930 000 561 000 814 000 Accumulated depreciation 0 (341 000) (294 800) Movements Additions at cost * * 0 Disposal at carrying value 0 0 * Depreciation 0 * (98 890) Carrying value 30 June 2012 1 580 000 * * Cost 1 580 000 616 000 * 5
Accumulated depreciation 0 * * 2. Details of fixed assets Land and buildings were bought during the year and are not depreciated. New equipment was bought for R55 000 halfway through the financial year. This transaction has been correctly recorded. Provide for depreciation on equipment at 10% p.a. on cost price. A vehicle was sold for cash at carrying value on 31 March 2012. This has been properly recorded. The details of the asset sold from the Fixed Asset Register were as follows: - Cost price, R165 000 - Accumulated depreciation at beginning of financial year, R66 000 - Depreciation rate of 20% p.a. on the diminishing-balance method Depreciation on all the vehicles is R98 890 for the year. SECTION B: NOTES ON CONTENT 5.1 FIXED ASSETS/TANGIBLE ASSETS TANGIBLE ASSETS Tangible/Fixed assets such as land and buildings, vehicles and equipment are those assets of material value which: are used in the business to generate income are of long life are not purchased for the purpose of resale, in the normal course of business activities. have actual physical existence DEPRECIATION These tangible assets lose their value as a result of wear and tear. The loss of the value of the asset must be brought into account at the end of the financial year as an expense. This loss of value is known as depreciation. This is done in accordance with the matching concept, i.e. all expenses relating to the accounting period must be matched with the accounting period under review. Depreciation is an imputed expense. The cost of a tangible asset (e.g. motor vehicle) must be distributed fairly over the whole life of the asset. The methods of accounting for depreciation are: Fixed installment method (percentage on cost) Diminishing balance method (percentage on carrying value/ book value) 6
The above methods were dealt with in detail in grade 10 and 11. Wear and tear can be calculated on a straight-line basis provided the taxpayer complies with certain requirements: adequate records must be maintained the method must be applied to all assets in the same class the taxpayer must be able to provide a detailed schedule of assets disposed of, including date of acquisition, tax value in the previous tax year, the price on disposal or scrapping, the final written down value of the asset to be reflected at R1, the records must be maintained so that each asset s value can be established at any point in time The asset must be used in the taxpayer s trade. The following, amongst others, rates for wear and tear allowances are allowed by SARS: WEAR AND TEAR ALLOWANCES Wear and tear can be calculated on a straight-line basis provided the taxpayer complies with certain requirements: adequate records must be maintained the method must be applied to all assets in the same class the taxpayer must be able to provide a detailed schedule of assets disposed of, including date of acquisition, tax value in the previous tax year, the price on disposal or scrapping, the final written down value of the asset to be reflected at R1, the records must be maintained so that each asset s value can be established at any point in time The asset must be used in the taxpayer s trade. The most common of which are: Item Number of years Asset Years Cellular telephones 2 Computers (mainframe or servers) 5 Computers (personal computers) 3 Delivery vehicles 4 Fax machines 3 Furniture & fittings 6 Office equipment mechanical 5 Office equipment electronic 3 Passenger cars 5 7
Photocopying equipment 5 Trucks (heavy-duty) 3 Trucks (other) 4 Assets costing R7 000 or less can be written off in full in the year of acquisition. The wear and tear may be claimed on either the diminishing balance method or on cost, in which certain requirements apply. LIFESPAN OF ASSETS If the estimated life of an asset extends beyond the current financial year, future financial periods will benefit from the use of the asset. Thus, the need for depreciation arises. Depreciation is the process of systematic distribution of the cost of the asset over its useful life. The life span of the asset cannot be determined with accuracy. It must therefore be estimated. It may be measured in terms of time, production or service. Factors in a business which play a part to determine the life span are: experience with similar assets in the past current condition of the asset policy with regard to replacement of fixed assets The wear and tear allowances table as provided by SARS will assist the business to determine the life span of the asset, when the usefulness of the asset comes to an end and what measures must be taken to dispose and/or replace the asset concerned. AGE OF ASSETS The age of an asset will be influenced by the recommendations from SARS. It would be useful for the company to determine the age by looking at the rate of depreciation by SARS. The method of depreciation will also influence the age of the asset. However, an asset will still be useful after it has been written off. For example, SARS recommends 33, 33% depreciation rate p.a. for computers, fax machines, etc. It means the asset has a useful life of 3 years. After 3 years the computer may still be used, and at a profit if it is sold. The sale will be recorded as a profit on sale of asset. REPLACEMENT RATE This is also linked to the above explanation. It will be advisable for businesses to use the rate of depreciation recommended by SARS as shown under 5.3. An asset should be replaced after provision has been made for the accumulated depreciation. This process also assists the business in the budgeting process. The accountant will provide for the replacement in the budget over a period to cushion the actual purchase when the replacement time falls due. 8
CARRYING VALUE OF ONE RAND When Accumulated Depreciation exceeds the cost of the asset than the carrying value must equal R1, 00 (One rand) e.g. Cost = R100 000 Accumulated depreciation at beginning = R 98 000 Depreciation = current year = R 5 000 Accumulated depreciation = R103 000 Carrying value = R 3 000 (Cannot be negative) Annual depreciation must be reduced to R1 999 so that the carrying value will be R1,00 The accumulated depreciation must be shown as R99 999. Cost R100 000 Accumulated depreciation R 99 999 Carrying value (closing date) R 1 DISPOSAL OF TANGIBLE ASSETS Tangible assets are possessions with a relatively long lifespan which are not purchased for the purpose of resale, in the normal course of business activities. Tangible assets, such as vehicles, equipment and buildings are purchased for use by the business. However, the business may find that they no longer require a particular asset, e.g. an old vehicle and may thus decide to sell the asset. These disposals can take place at any time during the accounting period. (The financial year). Before disposal, proper authorisation is required for the sale of the asset. In the case of a sole trader, the owner himself would conclude the transaction and he has the required authority to enter into the transaction. The asset can be disposed in one of the following ways: On credit General Journal For cash Cash Receipts Journal Trade-in (for new asset) General Journal For personal use General Journal Given away as donation General Journal This disposal can take place at The beginning of the accounting period The end of the accounting period During the accounting period THE ABOVE HAS BEEN DEALT WITH IN GRADE 11 9
SECTION C: HOMEWORK QUESTIONS QUESTION ONE You are provided with information relating to PK Limited, a public company. The financial year end is on 30 June 2010. REQUIRED: Study the information provided and answer the questions that follow. 1.1 1.2 Prepare the Asset Disposal Account on 31 December 2009 in the General Ledger. Complete the Note for Fixed (Tangible) Assets on 30 June 2010. (9) (15) INFORMATION: 1. 2. Equipment bought on 30 June 2007 for R40 000 was sold for cash on 31 December 2009 at carrying value. New equipment was purchased on 1 February 2010 for R160 000. Depreciation on equipment is written off at 15% p.a. on cost price. The following totals were extracted from the financial statements on 30 June 2010: Balance Sheet 2010 2009 Land and buildings 2 764 000 4 139 000 Equipment at cost 420 000 300 000 Accumulated depreciation on? equipment 135 000 QUESTION TWO 2 You are provided with the Pre-adjustment Trial Balance of Khachwee Limited for the year ended 30 June 2011. REQUIRED: 2.1 Prepare the Asset Disposal Account to record the sale of vehicles. See information G and H under Adjustments below. (9) 10
INFORMATION: 1. KACHWEE LTD EXTRACT FROM THE PRE-ADJUSTMENT TRIAL BALANCE AS AT 30 JUNE 2011 DEBIT CREDIT Balance Sheet Accounts Section R R Land and buildings 2 097 000 Vehicles 814 000 Equipment 616 000 Accumulated depreciation on vehicles 294 800 Accumulated depreciation on equipment 341 000 2. ADJUSTMENTS: A. A vehicle was sold on credit for R90 000 on 31 December 2010. The fixed-asset register revealed the following regarding this vehicle: R Cost price 235 000 Accumulated depreciation on 1 July 2010 105 750 This transaction has not yet been recorded by the bookkeeper. B. Make provision for depreciation as follows: Vehicles at 15% p.a. on cost price Equipment at 10% p.a. on the diminishing balance method. NOTE: New equipment to the value of R48 000 was purchased on 1 September 2010. This has been correctly recorded. SECTION D: SOLUTIONS FOR SECTION A QUESTION 1.1 FIXED ASSETS 1.1.1 Calculate the missing figures indicated by A, B and C in the Fixed Asset Note: CALCULATION ANSWER 9 11
A R3 000 000 R2 100 000 B R112 000 + R54 000 20% x (780 000 220 000) 360 000 x 20% x 9/12 C If B + 220 000 All or nothing R900 000 Any one part correct R166 000 Operation R386 000 1.1.2 LEDGER OF ULWAZI LTD ASSET DISPOSAL ACCOUNT 2013 Jan 31 Equipment 18 000 2013 Jan 31 Accu depr on equipment 6 750+ 3 750 One part of workings correct 10 500 Bank 800 18 000 Loss on disposal Operation 6 700 May be a profit, depending on figures 18 000 11 1.1.3 You are the internal auditor. State TWO concerns that you would voice in respect of the fixed assets with the board of directors. Explain in EACH case why you are concerned. Reason must correspond to the concern CONCERN Any TWO REASON Any TWO Land and buildings were sold at cost price Unreasonable purchase price for a computer (R800) taken by CEO Should have been sold at its current market value A loss of R6 700 has been incurred / he should be charged the fair market value / unethical Nepotism shown by the CEO Land and buildings being used to solve a cash flow problem Land and buildings were not sold at its current market value / was not advertised to public / Deal has been finalised with his wife / Corruption Land and building normally appreciate in value (loss of possible profits) Vehicles were bought These might not be necessary 4 12
(R360 000) 1.2 MASTER LIMITED 1.2.1 NOTE TO THE BALANCE SHEET ON 30 JUNE 2012 FIXED/TANGIBLE ASSETS Land and Equipment Vehicles Buildings Carrying value 1 July 2011 930 000 220 000 519 200 Cost 930 000 561 000 814 000 Accumulated depreciation 0 (341 000) (294 800) Movements Additions at cost 650 000 55 000 0 Disposal at carrying value 0 0 ( 84 150) (165 000-66 000-14 850) operation one part 80 850 correct Depreciation (E: 2 750 + 56 100 ) 0 ( 58 850) operation one part correct (98 890) Inspect reasonable Inspect reasonable Carrying value 30 June 2012 1 580 000 216 150 336 160 Cost 1 580 000 616 000 649 000 Accumulated depreciation 0 (399 850) Inspect reasonable (312 840) Inspect reasonable 17 SESSION NO: SIX TOPIC: INVENTORY VALUATION IMPORTANT ASPECTS TO BE CONSIDERED BY EDUCATORS Revision on the perpetual and periodic stock systems. Discuss the different methods of stock valuation: Specific identification. FIFO. Weighted average. LIFO not covered in the curriculum. GAAP, IFRS and ethical issues SECTION A: TYPICAL EXAM QUESTIONS 13
QUESTION 1: CONCEPTS, INVENTORY (45 marks;30 minutes) 1.1 CONCEPTS REQUIRED: Indicate whether the following statements are TRUE or FALSE: 1.1.1 1.1.2 1.1.3 1.1.4 1.1.5 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 INVENTORY VALUATION You are provided with information relating to Quality Building Suppliers for April 2012. They buy boxes of floor tiles and sell them to retailers around Hazyview. They use the weighted-average method for stock valuation and the periodic inventory system. Refer to the table below. 1.2.1 Calculate the total value of the opening stock (A). (3) 1.2.2 Calculate the value of the tiles received on 25 April 2012 (B). (4) 1.2.3 Calculate the value of the closing stock using the weightedaverage method. (6) INFORMATION BOXES OF TILES ON HAND VALUE PER UNIT CARRIAGE ON PURCHASES TOTAL VALUE Opening stock (1 April 2012) 600 R85,00 (A) Boxes of tiles purchased during the month 3 160? 10 April 2012 1 000 R90,00 R4 500 R94 500 20 April 2012 1 200 R95,00 R5 700 R119 700 25 April 2012 960 R120,00 R5 760 (B) Boxes of damaged tiles returned to supplier (these tiles were originally delivered on 25 April) 100?? 14
Sales for the month 2 510 R160,00 R401 600 Closing stock (30 April 2012) 1 150?? 1.3 INVENTORY VALUATION AND INTERNAL CONTROL You are provided with information relating to Fast Save Traders owned by Mohammed Khan. The business sells school shirts. Their financial year ends on 31 July 2013. The business uses the FIFO (first in first out) method to value stock. The periodic inventory system is used. 1.3.1 Calculate the value of closing stock according to the FIFO method on 31 July 2013. (7) 1.3.2 Calculate: Mark-up percentage (%) achieved on cost Stock holding period (use average stock in your calculation) (4) (4) 1.3.3 The business aims at a mark-up of 30% on cost. As the internal auditor, what would you investigate? Explain. State TWO points. (4) 1.3.4 The stock holding period for 2012 was 30 days. Should Mohammed be satisfied with the stock holding period for 2013? Explain. (3) INFORMATION: 1. Sales and cost of sales for the year: TOTAL Sales (3 600 shirts at R140 each) R504 000 Cost of sales R415 500 2. Inventories of shirts: NUMBER OF UNITS PRICE PER UNIT TOTAL 1 August 2012 600 R80 R48 000 31 July 2013 970?? 15
3. Purchases and returns: NUMBER OF UNITS PRICE PER UNIT TOTAL Purchases: 12 October 2012 750 R110 R82 500 18 December 2012 1 900 R130 R247 000 6 March 2013 680 R100 R68 000 24 June 2013 880 R120 R105 600 4 210 R503 100 Returns: 7 March 2013 (60) R100 (R6 000) 24 June 2013 (150) R120 (R18 000) NET TOTAL 4 000 R479 100 SECTION B: NOTES ON CONTENT INTRODUCTION The proper valuation of stock is very important as it influences the financial statements, and also because the investment in stock normally constitutes a large percentage of total assets. Millions of rand are invested in raw materials, work-inprocess and finished goods. It is therefore important for a company to decide which method of stock valuation to use. STOCK VALUATION METHODS There are generally 3 methods used to valuate stock. The 3 methods are: FIFO - First in first out Weighted average method Specific identification method FIRST IN, FIRST OUT METHOD (FIFO) Sale of goods is based on First in, first out basis, i.e. goods bought first are the first to be issued for sale. The following transactions were concluded in respect of boots bought and sold by Jonnie Boots Traders for the year ended 31 December 20.9 EXAMPLE INSTRUCTION Use the FIFO method to determine the following: The number of boots on hand at the end of the year. Value of stock on hand at the end of the period 16
The closing stock Gross profit Cost of sales INFORMATION: Extracted from invoices, delivery notes and stock control records for 20.9 Details Month Quantity Price Bought January 120 boots at R120 each June 80 boots at R140 each November 40 boots at R160 each Sold for the year 168 boots at R100 each Stock on hand at year end? STOCK REGISTER Date 20.9 Jan 20.9 June 20.9 Nov Quantit y Unit price 120 R120 80 R140 Amoun t R14 400 R11 200 Quantit y sold Stoc k on hand Value of unsold stock 120 NIL 0 48 32 R4 480 Cumulati ve value of unsold stock 40 R160 R6 400-40 R6 400 R10 880 Profit Total 240 R32 000 168 72 R10 880 R10 880 Total sold Cost of sales 168 R200 R32 000 R10 880= R33 600 R21 120 R12 480 Stoc k on hand *72 R10 800 * 120 + 80 + 40 = 240 168 = 72 17
Trading stock account to determine closing stock and gross profit Trading account Opening stock nil Sales 33 600 Purchases 32 000 Closing stock 10 880 Profit and loss (Gross profit) 12 480 44 480 44 480 Cost of sales and Gross profit COST OF SALES GROSS PROFIT 120 boots at R120 each 14 400 Sales 33 600 48 boots at R140 each 6 720 Cost of sales (21 120) Cost of sales 21 120 Gross Profit 12 480 Value of Stock on hand Details Month Quantity Price Amount Stock on hand Bought January 120 boots at R120 14 400 nil each June 80 boots at R140 11 200 32 each November 40 boots at R160 each 6 400 40 Sold for the year 168 boots at R200 each 33 600 Stock on hand at year end 72 boots? 72 Calculation: QUANTITY BOUGHT 120 boots bought all sold nil 80 boots bought sold 48 on hand 32 X R140 R4 480 40 boots bought sold nil on hand 40 X R160 = R6 400 R6 400 Value of Stock on hand R10 880 Cost of stock 18
WEIGHTED AVERAGE METHOD The weighted average method does not take quantities into account but average price into account. With the receipt of goods the average cost of each item is recalculated or calculated at the end of the financial year. The following transactions were concluded in respect of boots bought and sold by Jonnie Boots Traders for 20.10 INSTRUCTION: Use the Weighted Average method to determine the following: The no. of boots on hand at the end of the period Value of stock on hand at the end of the period The closing stock Gross profit Cost of sales INFORMATION: Details Month Quantity Price Bought January 120 boots at R120 each June 80 boots at R140 each November 40 boots at R160 each Sold for the year 168 boots at R100 each Stock on hand at year end 72 boots Date 20.9 Jan 20.9 June 20.9 Nov Quan tity Unit price Amount Quantit y sold Stoc k on hand Value of unsol d stock 120 R120 R14 400 120 NIL 0 80 R140 R11 200 48 32 R4 480 Cumulativ e value of unsold stock 40 R160 R6 400-40 R6 400 R10 880 Profit Total 240 R32 000 168 72 R10 880 R10 880 Average R32 000 divide by 240 19
Cost price Total sold = R133,33 168 R200 R33 600 Stock on hand *72 72XR133,33 =R9 599,76 Cost of sales R32 000 R9 599,76= R22 400,24 R124 80 * 120 + 80 + 40 = 240 168 = 72 Trading account to determine closing stock and gross profit Trading account Opening stock nil Sales 33 600 Purchases 32 000 Closing stock 9 600 Profit and loss (Gross profit) 11 200 43 200 43 200 COST OF SALES GROSS PROFIT 120 boots at R133,33 each 15 999,60 Sales 33 600 48 boots at R133,33 each 6 399.84 Cost of sales (22 400) Cost of sales 22 399,44 Gross Profit 11 200 Cost of sales and gross profit 22 400 (rounded off) COMPARISON FIFO WEIGHTED Closing Stock value 10 880 9 600 Gross Profit 12 480 11 200 Cost of sales 21 120 22 400 Specific identification method of inventory valuation You are provided with information relating to AA Car Dealers. The business uses the specific identification method of valuing stock. The following items are in stock at the beginning of May 2013: 20
Description Cost price Published selling price Item 1 Audi A1 (1.2 litre R170 000 R215 000 engine) Item 2 Audi A3 (2.0 litre R270 000 R324 000 engine) Item 3 Audi A6 (1.8 litre R330 000 R380 000 engine) Item 4 Audi A8 (3.0 litre R580 000 R650 000 engine) Items 1 and 3 are sold for cash during May 2013 at their published selling prices.. Required: (a) (b) (c) (d) Calculate the following: Value of trading stock on 31 May 2013 Gross profit earned during May 2013 Explain why it would be unreasonable for this business to value its stock items on the basis of FIFO or Weighted Average. Explain why it would be unreasonable for certain other businesses to use the specific identification method e.g. a fruit shop which sells apples. AA Car Dealers do not want the cost prices of stock items to be public knowledge. What strategies could they use to keep the cost prices confidential? Solution: (a) Value of trading stock on 31 May 2013 = R270 000 + R580 000 = R850 000 Gross profit earned during May 2013 = Sales Cost of sales = (215 000 + 380 000) (170 000 + 330 000) = R95 000 (b) Explain why it would be unreasonable for this business to value its stock items on the basis of FIFO or Weighted Average. They sell discrete (separate) items (i.e. cars) that are very different from each other in terms of price and character. It would be inappropriate to value the cars based on the last two items bought or the weighted average because the cost prices vary considerably. Also they sell low volumes of these large articles. This makes it easier to identify the specific cost on each car. 21
(c) Explain why it would be unreasonable for certain other businesses to use the specific identification method e.g. a fruit shop which sells apples. Apples comprise numerous similar articles sold at similar prices. Cost prices might change from day to day, or from supplier to supplier, the articles would all be placed in containers for customers to select. Difficult to apply a specific price to any one apple. (d) AA Car Dealers do not want the cost prices of stock items to be public knowledge. What strategies could they use to keep the cost prices confidential? Keep the cost prices in a catalogue which can be secured in the manager s office. Secret cost code e.g. a 10-letter word such as BLACKHORSE where B=1, L=2 etc. Allocate separate product numbers to each item and record them on the computer system together with the specific cost prices. SECTION C: HOMEWORK QUESTIONS QUESTION 1: INVENTORY VALUATION (30 marks; 20 minutes) 1.1 INVENTORY VALUATION Speedy Traders sells one type of bicycle to major retail stores around South Africa. They make use of the FIFO method for stock valuation and use the periodic inventory system. The business is owned by Steve Martin. REQUIRED: 1.1.1 1.1.2 1.1.3 1.1.4 What do the letters FIFO stand for? Calculate the value per bicycle on hand on 1 July 2010. Calculate the value of the closing stock on 30 June 2011 according to the FIFO method. Calculate the gross profit on 30 June 2011. (2) (2) (4) (6) 1.1.5 The owner and the accountant disagree on the method of stock valuation. Steve, the owner, wants to continue using the FIFO method, because he says it is easier to calculate. Bongi, the 22
accountant, wants to use the weighted-average method, because she says the profit will be lower, and therefore the income tax will be lower. As internal auditor, what would you say to Steve and Bongi? State TWO points. (4) INFORMATION: The information below appeared in the records of Speedy Traders for the year ended 30 June 2011. The business used a fixed selling price of R6 750 per bicycle. INFORMATION ON STOCK NUMBER OF BICYCLES VALUE PER BICYCLE TOTAL VALUE Bicycles on hand on 1 July 2010 60? R240 000 Bicycles bought during the year 630 R2 606 000 September 2010 250 R3 800 R950 000 January 2011 200 R4 500 R900 000 May 2011 180 R4 200 R756 000 Bicycles returned from January 5 R4 500 R22 500 purchases Bicycles sold during the year 450 R6 750 R3 037 500 Bicycles on hand on 30 June 2011 235?? 1.2 PROBLEM-SOLVING Quick Bikes sells one brand of scooters. The owner, Doctor Zulu, has three branches operating in Riverside, Valley View and Mountain Rise. The three branches are managed by Robby, Vusi and Melanie, respectively. Doctor Zulu has obtained the annual figures from the three branches for the financial period ending 28 February 2011. REQUIRED: Identify ONE problem in relation to each branch, quoting figures to support the problem. In each case, offer Doctor Zulu advice on how to solve the problem. (12) INFORMATION: 23
RIVERSIDE (ROBBY) VALLEY VIEW (VUSI) MOUNTAIN RISE (MELANIE) Number of scooters available for sale Number of scooters sold during the year Physical count on 28 February 2011 470 300 190 380 75 190 72 225 Nil Cost price per scooter R7 500 R7 500 R7 500 Selling price per scooter R11 500 R11 500 R11 500 Advertising per year R15 000 R40 000 R60 000 Salary of manager R30 000 per month R30 000 per month R30 000 per month 30 SECTION D: SOLUTIONS FOR SECTION A QUESTION 1 1.1 Indicate whether the statements are TRUE or FALSE. 1.1.1 False Accept T or F instead of True or False 1.1.2 True 1.1.3 False 1.1.4 False 1.1.5 True 10 1.2.1 Calculate the total value of the opening stock (A). 600 x R85 = R51 000 operation one part correct; accept without R sign 3 24
1.2.2 Calculate the value of the tiles received on 25 April 2012 (B). 960 x R120 + R5 760 = R120 960 operation one part correct R115 200 (2 marks) accept without R sign 4 1.2.3 Calculate the value of closing stock using the weighted average method. see 1.2.1 214 200 if 1.2.2 + 94 500 + 119 700 Inspect reasonable 51 000 + 335 160 12 000 (or 12 600) x 1 150 3 660 = 374 160 (or 373 560) x 1 150 3 660 = R117 563,93 operation one part correct or R117 563,92 or R117 564 OR R102,23 x 1 150 = R117 564,50 or R117 565 R102,07 x 1 150 = R117 380,50 or R117 380 or R117 381 (4 marks) (1 mark) (1 method mark) 6 1.3 1.3.1 Value of closing stock according to the FIFO method # R87 600 730 x R120 If 970 # 240 x R100 One part correct OR 48 000 + 503 100 18 000 6 000 415 500 Operation R24 000 Operation R111 600 1 mark 1 mark 1 mark 1 mark 2 marks 7 1.3.2 Calculation of mark-up percentage (%) achieved on cost 504 000 415 500 (2 or nothing) Any one part correct 88 500 x 100 = 21,3% or 21,29% R415 500 Calculation of stock holding period (use average stock in your calculation) See 6.2.1 must be added to 48 000 to get the method mark Award 2 marks for average stock if correct (see 6.2.1). 79 800 ½ (R48 000 + R111 600 ) x 365 R415 500 1 = 69,35 days or 70 days or 2,3 months Operation, one part correct, shown in days or months 8 25
1.3.3 The business aims at a mark-up of 30% on cost. As the internal auditor, what would you investigate? Explain. State TWO points. See 6.2.2 above. Points below will depend on MU% calculated. Any TWO Good answer = 2 marks; part answer = 1 mark Excessive trade discounts offered to customers Incorrect mark-up calculations Too many items sold at seasonal sales (discounts) Excessive stock on hand leading to clearance sales Theft of cash / stock Counter competitors prices OR: Will have to increase selling (marked) prices in future Buy in bulk Cheaper supplier 4 1.3.4 The stock holding period for 2012 was 30 days. Should Mohammed be satisfied with the stock holding period for 2013? Explain. See 6.2.2 above. Points below will depend on stock period calculated. Yes/No: Explanation: Good answer = 2 marks; part answer = 1 mark Explanation for NO: The stock holding period has increased (from 30 days to 70 days). This is not good as money is tied up in stock Stock might not be sold if it deteriorates More chance of stock theft Explanation for YES: Stock levels too low in 2012 and now less likely to run out of stock Better prices through bulk purchases. 3 SESSION NO: SEVEN TOPIC: CONSOLIDATION SECTION A: TYPICAL EXAM QUESTIONS QUESTION 1 Companies: Financial Statements and Interpretation (85 marks ; 51 minutes) A Financial Statements and Interpretation You are provided with information from the accounting records of Meera Traders LTD. The financial year-end is 28 February 2013. The company is registered with an authorised share capital of R700 000. 26
REQUIRED: 1.1 1.1.1 Briefly explain the GAAP principle that relates to doing adjustments at the end of the financial year. (2) 1.1.2 Taking into account the additional information (adjustments), complete the Income Statement for the year ended 28 February 2013. (23) 1.2 Prepare the Note for Trade and Other Receivables. (7) Complete the partially completed Balance Sheet. (18) 1.3 Refer to the table of indicators provided. 1.3.1 (a) Calculate the CURRENT RATIO and the ACID TEST RATIO for 2013. (7) (b) Comment on the liquidity position of this business. Quote TWO financial indicators/figures to support your argument. (6) 1.3.2 Shareholders were not happy with the dividends they received. Calculate the dividend per share (DPS) and the earnings per share (EPS) for the current year. (7) Use your findings above (as well as other financial indicators provided) to explain why the shareholders are unhappy. (4) 1.4 The company intends issuing all unissued shares in the next financial year. One of the shareholders approached a director and requested that he be allowed to purchase the shares before they are offered to the public. Should the director be allowed to do this? Explain. (3) INFORMATION: 1. Balances and Totals from the Pre-adjustment Trial Balance on 28 February 2013. Ordinary Share Capital (110 000 shares) 550 000 Retained income (1 March 2012) 70 055 Loan: Sandy Bank (12,5%) 135 000 Fixed Deposit: BB Bank 50 000 Tangible Assets (carrying value on 28 February 2013) 700 380 Trading stock 32 800 Debtors control 17 530 Provision for bad debts (1 March 2012) 1 075 Creditors Control 22 360 Bank (overdraft) 9 900 27
Cash float 2 500 Petty cash 1 000 SARS: Income Tax (Dr) 20 000 Gross Profit on 28 February 2013 314 000 Salaries 83 200 Discount allowed 1 450 Audit fees 5 500 Directors fees 142 000 Consumable stores 7 330 Interest on investment 4 125 Rent Income 51 300 Profit on sale of asset 470 Insurance 6 400 Stationery 7 220 Sundry expenses 18 400 Ordinary share dividends 13 200 2. Additional Information: (a) Stock count at the end of the financial year revealed the following stock on hand: Trading stock: R29 300 Consumable stores: R1 130 (b) The account of X. Payi (a debtor), must be written off as a bad debt, R830. (c) (d) (e) (f) (g) (h) (i) R400 received from Y. Bother (a debtor whose account was previously written off) was posted to the Debtors Control Account. This must still be corrected. After taking into account the adjustments involving debtors, the provision for bad debts must be adjusted to 5% of debtors. Rent income for February 2013 was not yet received. Take into account that the rent increased by R360 per month from 1 September 2012. Half the insurance paid relates to the next financial year. Interest on fixed deposit for the last quarter of the financial year was not received. Note that the R50 000 was invested on 1 March 2012. Interest on loan is capitalised on 28 February 2013. The current year s interest is included in the loan balance above. Note that R18 000 of the loan is repayable on 1 March each year. No other payments were made. Depreciation of R34 375 must be taken into account. 28
(j) Income tax for the year amounts to R22 475. (k) A final dividend of R8 800 was declared. There were no additional shares issued in this financial year neither were any shares bought back. 3 Financial Indicators: 28 FEB 2013 28 FEB 2012 Current ratio? 1,5 : 1 Acid test ratio? 0,9 : 1 Debtors average collection period 38 days 41 days Creditors average payment period 42 days 40 days EPS (Earnings per share)? 26 cents DPS (Dividends per share)? 23 cents % return on shareholders equity 30% 37% Current interest rate on investments 10% B Auditing and Professional Bodies The audit report received from the independent auditors highlighted the following: 1. The financial statements are the responsibility of the company s directors. Their responsibility is to express an opinion on the financial statements based on the audit performed. 2. The audit includes, on a test basis, evidence supporting the amounts in the financial statements and assessing the accounting principles used. 3. It stated that the financial statements fairly present, in all material respects, the financial position of the company, and that it is in accordance with IFRS as well as the Companies Act of South Africa. QUESTIONS: 1.5 Explain why it is important for the independent auditor to be a member of a professional body such as SAICA. (2) 1.6 Give an example of the evidence that auditors would use in compiling an audit report. (2) 1.7 What does on a test basis imply? Explain. (2) 29
1.8 Explain why the company should be satisfied with the audit report. (2) 8 SECTION B: HOMEWORK QUESTIONS QUESTION 1 COMPANY REPORTING (65 marks; 30 minutes) 1.1 INCOME STATEMENT You are provided with information relating to Samora Sports Limited. The company sells sports equipment and repairs equipment for their customers. REQUIRED: Prepare the Income Statement for the year ended 30 June 2008 after taking all the adjustments and additional information into account. (50) INFORMATION: 1. Figures extracted from the Pre-Adjustment Trial Balance on 30 June 2008: Ordinary share capital (R5 Issue price) R 1 200 000 Fixed deposit 160 000 Trading stock 215 000 Debtors control 39 090 Equipment (for office and shop) 224 000 Accumulated depreciation on office and shop equipment 130 000 Mortgage loan from Credbank 281 200 Sales 1 703 200 Debtors allowances 17 000 Cost of sales? Service fee income (in respect of repair services) 297 140 Rent income 105 000 Interest income 11 200 Salaries and wages 234 750 Employers' contributions to Pension Fund and UIF 53 200 Audit fees 30 000 Directors fees 230 000 Consumable stores 51 100 Bank charges 5 240 Sundry expenses? 30
2. Adjustments and additional information: The auditors have identified the following errors or omissions: 2.1 The auditors are owed a further R28 000 after completing the audit. 2.2 Bank charges of R310 reflected on the June 2008 bank statement have not yet been entered in the books. 2.3 A credit note issued to a debtor, A Mona, dated 28 June 2008 was not recorded in the books. The credit note was for: Goods returned by A Mona, R 6 200 (the cost was R4 800) Price reduction on unsatisfactory repair of a tennis racket, R540 2.4 The stock count on 30 June 2008 revealed the following on hand: Trading stock, R202 000 Consumable stores, R900 2.5 An employee was left out of the Salaries Journal for June 2008. The details from his pay-slip were: Gross salary R6 000 PAYE deduction (18%) (1 080) Pension deduction (7,5%) (450) UIF (60) Net salary R4 410 The business contributions were: Pension Fund: 10,5% of gross salary UIF: Rand-for-rand basis 2.6 The tenant paid the July and August rent in June 2008. The rent was increased by R700 per month on 1 January 2008. 2.7 Provide for depreciation on office and shop equipment at 10% p.a. on the diminishing-balance method. Note that new shop equipment costing R30 000 was purchased half-way through the financial year (this was properly recorded). 2.8 Interest on the loan was capitalised. The loan statement from Credbank on 30 June 2008 reflects the following: CREDBANK Loan statement on 30 June 2008 Balance on 1 July 2007 R332 800 Interest charged? Monthly payments to Credbank in terms of the loan agreement (12 months x R4 300) R 51 600 Balance on 30 June 2008 R326 000 The interest expense for the year has not yet been entered in the books. 31
2.9 Use the following percentages to calculate the missing figures: Mark-up % achieved: 60% on cost Operating profit on sales: 20% Income tax rate: 30% of net profit 1.2 CORPORATE GOVERNANCE AND AUDITING The following audit report was issued by the auditors of Samora Sports Ltd: Audit opinion To the shareholders: In our opinion, the financial statements fairly present, in all material respects, the financial position of the company and the group at 30 June 2008 and the results of their operations and cash flows for the year ended, in accordance with International Financial Reporting Standards, and in the manner required by the Companies Act in South Africa. I.M. Wright & Associates Chartered Accountants (SA) Registered Accountants and Auditors Pretoria 10 August 2008 1.2.1 Why does the Companies Act make it a requirement for public companies to be audited? (2) 1.2.2 Although this audit opinion is addressed to the shareholders, other interested persons will also want to read it. Name ONE other person who would be interested in this audit opinion, and give a reason for his/her interest in the opinion. (3) 1.2.3 At the AGM, one of the shareholders says that he is not happy with the words 'fairly present' in the audit report. He wants the auditors to say that the financial statements are 'correct in all respects'. What explanation should be given to this shareholder? State ONE point. (3) 1.2.4 The directors are not happy with the high audit fees reflected in the Income Statement. Explain why improvement in internal control will have a positive effect on the external auditors' fees. State ONE point. (3) 1.2.5 SAICA is one of the main professional bodies governing accountants in this country. Explain TWO of the main roles performed by SAICA. (4) 32
SECTION C: SOLUTIONS FOR SECTION A QUESTION 1 Companies: Financial Statements and Interpretation (85 marks ; 51 minutes) A Financial Statements and Interpretation 1.1.1 Briefly explain the GAAP principle that relates to doing adjustments at the end of the financial year. Matching concept Any valid response. Income and expenses are recognised and recorded in the period in which they apply. Expenses must be matched against the income earned in a specific financial year 33
1.1.1 INCOME STATEMENT FOR THE YEAR ENDED 28 FEBRUARY 2013 GROSS PROFIT 314 000 Other Income 57 250 Rent Income (51 300 + 4 860 ) 56 160 Profit on sale of asset 470 Bad Debts Recovered 400 Provision for Bad Debt Adjustment (1 075 855) 220 GROSS INCOME 371 250 Operating Expenses (305 875) Salaries 83 200 Discount Allowed 1 450 Audit fees 5 500 Directors fees 142 000 Stationery 7 220 Sundry Expenses 18 400 Consumable Stores ( 7 330 1 130 ) 6 200 Insurance (6 400 3 200 ) or 6 400/2 3 200 Bad Debts 830 Depreciation (28 000 + 6 375) given 34 375 Trading Stock deficit (32 800 29 300) 3 500 OPERATING PROFIT 65 375 Interest Income (4 125 + 1 375 ) or 4 125 x 4 / 3 5 500 NET PROFIT BEFORE INTEREST EXPENSE 70 875 Interest Expense (135 000 x 12,5 / 112,5) (15 000) NET PROFIT BEFORE INCOME TAX 55 875 Income Tax (22 475) NET PROFIT FOR THE YEAR 33 400-1 each for foreign entries (balance sheet accounts) max -2 Misplaced items must be marked wrong. 23 34
1.2: MEERA TRADERS LTD BALANCE SHEET AS AT 28 FEBRUARY 2013 ASSETS NOTES NON-CURRENT ASSETS 750 380 Tangible Assets 700 380 Financial Assets: Fixed Deposit 50 000 CURRENT ASSETS Inventories Trade and other receivables Cash and cash equivalents (29 300 + 1 130 ) Check transfer (2 500 + 1 000) 59 610 30 430 25 680 3 500 TOTAL ASSETS (5) 809 990 EQUITY AND LIABILITIES SHAREHOLDERS EQUITY 631 455 Ordinary share capital 550 000 Share premium 35 555 Retained income 34 500 + 33 400 (13 200 + 8 800) 45 900 NON-CURRENT LIABILITIES 117 000 Loan: Sandy Bank (135 000 18 000 ) 117 000 CURRENT LIABILITIES inspect 61 535 Trade and other payables (Creditors) Accept various combinations for Trade and other payables 22 360 SARS: (Income Tax) (22 475 20 000) 2 475 Shareholders for dividends Short term portion of loan Bank overdraft 8 800 18 000 9 900 TOTAL EQUITIES AND LIABILITIES (13) 809 990 Note the general rules when awarding method marks. -1 for foreign items (max -3) Balance Sheet accounts misplaced are not foreign. Award the marks (-1 for each misplaced item) 8 35
TRADE AND OTHER RECEIVABLES Trade Debtors (17 530 830 + 400 ) 17 100 Provision for Bad Debts (855) Accrued Income (1 375 + 4 860 ) 6 235 Prepaid expenses 3 200 25 680 7 1.3.1 (a) Calculate the CURRENT RATIO and the ACID TEST RATIO for 2013. CURRENT RATIO Check amounts transferred from QUESTION 1.2 59 610 : 61 535 0,97 : 1 ACID TEST RATIO (59 610 30 430) : 61 535 Check QUESTION 1.2 29180 Or (25 680 + 3 500) 0,47 : 1 7 (b) Comment on the liquidity position of this business. Quote TWO financial indicators/figures to support your argument. Must mention two of Current Ratio, Acid Test Ratio, Debtors Collection period and/or Creditors Payment period. -1 for any other ratios mentioned (if more than three ratios listed) for quoting figures for an explanation each Current ratio and the Acid Test ratio have decreased and are well below efficient levels. Debtors take too long to settle their accounts (30 days) Creditors are paid well within the normal 60 days allowed 6 36
1.3.2 Shareholders were not happy with the dividends they received. Calculate the dividend per share (DPS) and the earnings per share (EPS) for the current year. DPS EPS 22 000 13 200 + 8 800 x 100 33 400 x 100 110 000 110 000 = 20 cents = 30 cents (30,3) Use your findings above (as well as other financial indicators provided) to explain why the shareholders are unhappy. Two valid explanation The shareholders received a lower DPS than last year, although the EPS increased. The business chose to retain income rather than distribute dividends. Further, the ROSHE is much higher than interest on alternative investments (meaning that they should be pleased) yet the DPS is reduced. 7 4 1.4 The company intends issuing all unissued shares in the next financial year. One of the shareholders approached a director and requested that he be allowed to purchase the shares before they are offered to the public. Should he be allowed to do this? Explain. Any valid explanation No. It is unethical and against the Company s Act. All shares must be advertised and the general public must have access to them. (Transparency). The Shareholders become members of the public and must compete for the new shares in the market. (award part marks for incomplete/partial answers) 3 B Auditing and Professional Bodies 1.5 Explain why it is important for the independent auditor to be a member of a professional body such as SAICA. Any valid response Assurance of knowledge of accounting and auditing principles/ensures uniformity or standardisation of treatment of financial information Continuous professional training/bound by a professional code of conduct/cannot be negligent in his duties 2 37
1.6 Give an example of the evidence that auditors would use in compiling an audit report. Any valid response Any one of: asset register; stock register; record of debtors and creditors; journals and documents, etc. 2 1.7 What does on a test basis imply? Explain. Any valid response Auditors do random sampling (they do not check every document or procedure) they give an opinion based on the sample they tested. 2 1.8 Explain why the company should be satisfied with this audit report. Any valid response The report is unqualified. No material errors/problems detected/auditors are satisfied that fair presentation is noted/the statements are reliable. 2 QUESTION 1 TOTAL: 85 SESSION NO: EIGHT TOPIC: CONSOLIDATION SECTION A: TYPICAL EXAM QUESTIONS COMPANY QUESTION 1 Marvin Traders Limited has a registered authorised share capital of 500 000 ordinary shares. Their financial year ends on the last day of February each year. New shares were issued on 1 April 2011. REQUIRED: (for the 2012 financial year ended 29 February 2012) 1.1 Prepare the following notes to the Cash Flow Statement on 29 February 2012: 1.1.1 Reconciliation between net profit before taxation and cash 38
1.1.2 1.1.3 generated by operations Dividends paid Income tax paid (14) (7) (7) 1.2 Calculate the average price of the shares on 29 February 2012. (4) 1.3 Study the following ratios and explain what this means for the business: Current ratio Acid-test ratio 2012 2011 1,18 : 1 0,85 : 1 0,57 : 1 0,31 : 1 (6) 1.4 1.5 1.6 1.7 1.8 1.9 1.10 Calculate the debt equity ratio (shareholders' equity) ratio for the 2012 financial year. Calculate the creditor's payment period (in months) for the 2012 financial year. Calculate the number of days the company had to wait in the 2012 financial year before debtors settled their debts. Outline TWO ways in which management could encourage debtors to pay their debts earlier. Calculate the net asset value per share on 29 February 2012. Calculate the return on average shareholders' equity (after tax) for 2012. Do you think that the return average shareholders' equity calculated in QUESTION 1.9 is acceptable? Give a brief explanation for your answer. (5) (5) (5) (4) (5) (4) (4) INFORMATION: 1. EXTRACTS FROM THE INCOME STATEMENT: 2012 2011 Sales (this includes credit sales of R640 000 for 2012) 960 000 840 000 Cost of sales 600 000 560 000 Interest on loan 9 750 12 000 Depreciation: Equipment Vehicles 28 000 34 140 8 000 16 000 Income tax 73 500 54 180 Net profit after tax 136 500 100 620 EXTRACT FROM THE BALANCE SHEET: Interim dividends declared and paid 98 000 30 000 39
2. EXTRACTS FROM THE POST-CLOSING TRIAL BALANCE ON 29 FEBRUARY: 2012 2011 Ordinary shareholders' equity 600 000 401 500 Ordinary share capital 450 000 300 000 Retained income/accumulated profit 150 000 101 550 Long-term liabilities (15% p.a.) 60 000 90 000 Fixed assets at carrying value 632 210 511 420 Current assets 178 960 116 000 Trading inventory 93 450 73 350 Debtors' control 63 290 42 650 Cash and cash equivalents 22 220 - Current liabilities 151 170 135 920 Bank overdraft - 8 500 Creditors' control 94 000 93 000 Accrued expenses 560 280 South African Revenue Service (Income tax) 7 410 6 140 Shareholders for dividends 49 200 28 000 ORDINARY SHARE CAPITAL The ordinary share capital on 1 March 2011 consisted of: 40 000 ordinary shares issued in the 2009 financial year at R4,00 per share 20 000 ordinary shares issued in the 2010 financial year at R7, 00 per share. The new shares were sold at R10 per share 70 SECTION B: HOMEWORK QUESTIONS QUESTION 1 CASH FLOW AND INTERPRETATION OF A COMPANY You are provided with information relating to Glebo Limited for the year ended 30 June 2008. Glebo Limited is a public company listed on the JSE Securities Exchange. They are based in Pretoria and they sell office stationery. The directors of Glebo Limited decided to open new branches in Bloemfontein and Witbank halfway through the year. Note: Answer the questions below. Where you are asked to comment on financial indicators you must quote the name of the relevant indicator as well as the figure, which is provided or calculated in the question for that indicator. 40