SECONDARY SCHOOL IMPROVEMENT PROGRAMME (SSIP) 2015

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

2 TABLE OF CONTENTS SESSION TOPIC PAGE NO 11 Manufacturing 3-25 12 Cash Budgets 26-39 13 Projected Income Statements 40-55 14 VAT 56-66 15 Consolidation 67-76 16 Consolidation 77-87 17 Consolidation 87-97

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 (2.1.1 2.1.4) in the ANSWER BOOK. COLUMN A 2.1.1 Raw materials used in the factory 2.1.2 Advertising expenses 2.1.3 Office telephone account 2.1.4 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 2013. REQUIRED: 1.2.1 Provide the missing figures in the: Production Cost Statement Note for Factory Overhead Cost (8) (5) 1.2.2 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)

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 985 600 Prime cost? Factory overhead cost 94 980 Total manufacturing cost? Work-in-process (1 September 2012) 12 420? 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 2012 10 000 m R 9,00 R 90 000 Purchases of fabric 30 000 m 12,00 360 000 40 000 m 450 000 Issued to factory 28 000 m?? Stock on 31 August 2013 12 000 m?? 3. Direct labour cost Hours Rate Workers Total Normal time 1 200 R32,00 10 R384 000 Overtime 880 R64,00 10 R563 200 Employer's contributions R 38 400 R985 600

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 : 1. 4.2 75% 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 7 360 Indirect labour 22 230 Depreciation of factory plant 8 630 Rent expense? Water and electricity? Sundry expenses? 94 980 6. Administration cost Rent expense 6 600 Insurance 8 860 Water and electricity 6 840 Stationery 3 440 Sundry expenses 24 560 50 300 7. Production and sales 21 400 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: 1.3.1 Calculate the number of units that Sally needed to produce in order to break even in 2013. (4) 1.3.2 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 INFORMATION: 1. During the year, 12 860 units were produced and sold. 2. The selling price per unit was R30,00. 3. Variable and fixed costs: 2013 2012 Variable costs: TOTAL PER UNIT PER UNIT Direct material R128 600 R10,00 R12,20 Direct labour 102 880 8,00 7,00 Selling and distribution 51 440 4,00 3,80 R282 920 R22,00 R23,00 Fixed costs: Factory overheads R77 160 R6,00 Administration 19 290 1,50 R96 450 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 2012. The business is owned by Mary Muller. REQUIRED: Prepare the following for the year ended 30 June 2012: 2.1.1 Factory Overhead Note to the Production Cost Statement (20) 2.1.2 Production Cost Statement (Where notes are not required, show calculations in brackets.) (16) INFORMATION: 1. Stock balances: 30 JUNE 2012 1 JULY 2011 Direct-/Raw-material stock R20 000 R18 000 Work-in-process stock? R35 000 Indirect material stock R7 500 R7 200

7 2. Transactions for the year: A Raw materials: Purchased raw materials during the year, R650 000. Raw materials not ordered were returned to the supplier, R35 000. Cost of transportation of raw material was an additional R12 300. B Factory rent paid, R68 500. C Advertising paid, R23 500. D E F Factory maintenance paid, R46 700. Repairs to the amount of R1 300 were completed in June 2012, but will only be paid in July 2012. Water and electricity paid, R80 000 (this amount is to be split between the factory, 70% and the office, 30%). Indirect material purchased, R56 000. 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, R12 800 H I Sundry expenses paid, R21 000. 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, R46 000 (She spends 50% of her time cleaning the factory.) Three factory workers were employed. They each work 1 600 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 R89 050. This includes his salary for July 2012. Note that he received an increase of R650 per month with effect from 1 January 2012. He has been employed all year. Salary paid to the office assistant, R130 000 for the year. J The cost of production of chocolates for the year is R1 212 000.

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. 2.2.1 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) 2.2.2 Benny does not know how to calculate the break-even point. Give the workings to prove that the 2012 break-even point of 12 298 units for blankets is in fact correct. (4) 2.2.3 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) 2.2.4 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: 2012 2011 2012 2011 Total fixed costs (factory overhead costs and R3 800 000 R3 800 000 R2 500 000 R2 500 000 administration costs) Net profit R1 144 000 R5 975 000 R2 620 000 R930 000 Calculation of variable unit costs: Direct material cost per unit R34,00 R35,00 R27,00 R20,00

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 16 000 25 000 80 000 70 000 units units units units Break-even point 12 298 39 063 51 020 9 719 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 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

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 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 200 200 Finished goods 8 9 28 stock 305 01 Balance 5 900 Mar Feb 500 200 9 Feb 28 Direct materials cost 63 600 Balance 9 400 Direct labour 39 800 cost Factory overhead cost 205 600 314 900 Mar 01 Balance 9 400 314 900 FORMAT OF THE PRODUCTION COST STATEMENT Name of Manufacturer:.. PRODUCTION COST STATEMENT FOR THE YEAR ENDED 28 FEBRUARY 2009 NOTE R Direct materials cost 1 63 600 Direct labour cost 2 39 800 Prime cost 103 400 Factory overheads cost 3 205 600 Total cost of production 309 000 Add: Work-in-process at the beginning of the year 5 900 314 900 Less: Work-in-process at the end of year 9 400 Cost of production of finished goods for the year 305 500

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 16 800 2009 Feb 28 Direct materials cost 63 600 2009 Feb 28 Bank 40 000 Balance c/d 20 200 Creditors 25 000 control Bank-Carriage 2 000 83 800 83 800 2009 Mar 01 Balance b/d 20 200 NOTES TO THE PRODUCTION COST STATEMENT AND INCOME STATEMENT 1. DIRECT (RAW) MATERIALS COST R Balance at the beginning of the year 16 800 Purchases (net) 65 000 Carriage inwards/carriage On Purchases 2 000 Custom duties - 83 800 Less: Balance at the end of the year 20 200 63 600 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 37 500 2009 Feb 28 Work-inprocess stock 39 800 Pension contributions 1 000 Medical aid contributions 1 300 39 800 39 800

2. DIRECT LABOUR COST R Direct wages 37 500 Pension contributions 1 000 Medical aid contributions 1 300 39 800 14 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 13 000 2009 Feb 28 Work-inprocess stock 205 600 materials Indirect labour 18 000 Factory rent 19 920 Insurance 11 440 Sundry factory expenses 21 500 Electricity & 11 800 water Depreciation 18 600 Telephone 12 540 Salaries 54 000 Maintenance 12 400 Delivery expenses 12 400 205 600 205 600 3. FACTORY OVERHEADS COST R Indirect materials 13 000 Indirect labour 18 000 Factory rent 19 920 Insurance 11 440 Sundry factory expenses 21 500 Electricity & water 11 800 Depreciation 18 600 Telephone 12 540 Salaries 54 000 Maintenance 12 400 Delivery expenses 12 400 205 600

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 650 000 Less: Cost of Sales *307 900 Gross Profit 342 100 Administration cost 4 (49 490) Selling and distribution cost 5 (67 290) Net Profit 225 320 *The finished Stock Account is used to determine the cost of sales amount. Dr Finished goods stock B11 Cr 2008 Mar 01 Balance 25 100 2009 Feb 28 Work-inprocess stock 305 500 2009 Feb 28 Cost of sales 307 900 Balance 22 700 330 600 Mar 01 Balance 22 700 330 600 The Trading account and the Profit and Loss accounts are used to complete the Income Statement. Dr Trading account F1 Cr 2009 2009 Feb 28 Cost of sales 307 900 Feb 28 Sales 650 000 Profit & loss (Gross profit) 342 100

650 000 650 000 16 Dr Profit & loss account F 2 Cr 2009 2009 28 Trading Feb 28 Administration 49 490 Feb account 342 100 cost (Gross profit) Selling and distribution 67 290 costs Capital (Net profit) 225 320 342 100 342 100 The Administration Cost account is used to complete the Administration Cost note to the Income Statement (NOTE: 4) Dr ADMINISTRATION COST N17 Cr 2009 2009 Feb 28 Cleaning 500 Feb 28 Profit & loss 49 490 material Rent 1 240 Insurance 180 Telephone 270 Electricity & 900 water Delivery 1 200 expenses Salaries 24 000 Interest on loan 2 000 Depreciation 3 400 Sundry admin expenses 15 800 49 490 49 490 4. ADMINISTRATION COST R Cleaning material 500 Rent 1 240 Insurance 180 Telephone 270

Electricity & water 900 Delivery expenses 1 200 Salaries 24 000 Interest on loan 2 000 Depreciation 3 400 Sundry administration expenses 15 800 49 490 17 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 2009 2009 Feb 28 Advertising 20 000 Feb 28 Profit & loss 67 290 Bad debts 1 400 Packing 1 900 material Rent 1 240 Delivery 1 200 expenses Electricity & 900 water Salaries 30 000 Insurance 180 Telephone 270 Commission on sales 10 200 67 290 67 290 5. SELLING AND DISTRIBUTION COST R Advertising 20 000 Bad debts 1 400 Packing material 1 900 Rent 1 240 Delivery expenses 1 200 Electricity & water 900 Salaries 30 000 Insurance 180 Telephone 270 Commission on sales 10 200 67 290

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 1.1.1 1.1.2 1.1.3 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 2011. 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) 55 800 Work-in-process (1 October 2010) 45 000 Administration cost 75 000 Direct/Raw material cost 1 250 000 Direct labour cost 640 500 Factory overhead cost 728 000 Selling and distribution cost 306 000 Cost of production of finished goods 2 625 000 Sales 3 952 650 Cost of sales? Finished goods (30 September 2011) 45 700 Work-in-process (30 September 2011)? R

19 1.3 PIES GALORE This business produced 15 500 pies for the year ended 30 June 2011. 1.3.1 1.3.2 1.3.3 REQUIRED: Calculate the direct material cost per unit for 2011. Calculate the break-even point for the year ended 30 June 2011. Should the business be satisfied with the number of units that they are currently producing? Briefly explain. (3) (5) (3) 1.3.4 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 R224 750 R14,50 Total variable cost R131 750 R8,50 Total fixed cost R89 900 R5,80 Direct-material cost R79 050? [30] SECTION D: SOLUTIONS FOR SECTION A QUESTION 1 1.1 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 (1.1.1 1.1.4). 1.1.1 E (Direct material) 1.1.2 C (Selling and distribution) 1.1.3 D (Administration) 1.1.4 B (Factory Overhead) 8

20 1.2 1.2.1 PRODUCTION COST STATEMENT FOR THE YEAR ENDED 31 AUGUST 2013 OR 450 000 (1 mark) 135 000 (1 mark) OR 28 000 x (450 000 40 000) Direct material cost (28 000 x 11,25 ) 315 000 Direct labour cost 985 600 PRIME COST Operation DMC+DLC, more than 985 600 1 300 600 Factory overhead cost 94 980 TOTAL MANUFACTURING COST Operation PC+FOHC 1 395 580 Work-in-process (1 September 2012) 12 420 Work-in-process (31 August 2013) Operation; Accept positive figure depending on above COST OF PRODUCTION OF FINISHED GOODS (R65 x 21 400) 1 408 000 (17 000) 1 391 000 8 FACTORY OVERHEAD COST Indirect material 7 360 Indirect labour 22 230 Depreciation of factory plant 8 630 Rent Expense 6 600 x 5 33 000 Water and Electricity 6 840 x 75 / 25 20 520 Sundry factory expenses Operation 3 240 94 980 5

21 1.2.2 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 (R563 200) than they are from normal time (R384 000). The workers worked 1 200 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 1.3 1.3.1 Calculate the number of units that Sally needed to produce in order to break even in 2013. Could be answered in equation form R96 450 = 12 056,25 or 12 056 or 12 057 R30 R22 R8,00 (2 marks) Any one part correct, no R or % signs 4 1.3.2 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. (12 860 produced; BEP 12 056 / 12 057) See 1.3.1 for figures use consistently 3 TOTAL MARKS QUESTION 2 2.1.1 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 (7 200 + 56 000 7 500 ) 80% (1 mark) x 55 700 (3 marks) 5 760 (1 mark) + 44 800 (2 marks) 6 000 (1 mark) operation one part correct 44 560 Factory rent 68 500 Factory maintenance (46 700 + 1 300 ) operation one part correct 48 000 Water and electricity two marks or nil 56 000 Depreciation / machinery one mark or nil 12 800 Sundry expenses two marks or nil 12 000 Wages of cleaner one mark or nil *23 000 20

23 Indirect salary (89 050 6 500 650 ) operation one part correct *Could be combined as R104 900 Total factory overhead cost operation one part correct 7 150 *81 900 346 760-1 foreign entries to a maximum of -2 in the case of additional entries added into the note e.g. R23 500, R9 500, R130 000 2.1.2 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 (18 000 + 650 000 + 12 300 35 000 20 000 ) 635 000 (2 marks) 662 300 (2 marks) 627 300 (3 marks) Direct labour cost (192 000 + 54 000 ) (3x 1600 x 40) + (900 x 60) Prime cost operation adding Factory overhead cost see 2.1.1 Total cost of production accept 1212 000 / operation 625 300 one part correct 246 000 one part correct 871 300 346 760 1 218 060 Work-in-process on 1 July 2011 35 000 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 1 253 060 (41 060) Cost of production of finished goods 1 212 000-1 foreign entries to a maximum of -2 in the case of additional entries added in to the PCS 16

24 2.2.1 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 6 2.2.2 Benny does not know how to calculate the break-even point. Give the workings to prove that the 2012 break-even point of 12 298 units for blankets is in fact correct. R3 800 000 = R3 800 000 = 12 298 units (R430 R121) R309 OR (one mark) (one mark) (one mark) (one mark) 5 288 140 1 488 058 R3 800 000 = 82/0 (rounding off) (12 298 x R430) (12 298 x R121) R3 800 000 = 82/0 (rounding off) 4 2.2.3 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 3 702 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 9 000 units (from 25 000 to 16 000). The BEP has increased by 4

25 2 579 units (from 9 719 to 12 298). In 2011 15 281 units contributed to the profit (61%) in comparison to 2012 when only 3 702 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. 2.2.4 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. 80 000 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 R240 000) 5 TOTAL MARKS 55

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 2014. 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 (5.1.1 5.1.3) in the ANSWER BOOK. 1.1.1 The main purpose of preparing the Cash Budget is... (2) 1.1.2 ONE item in the Cash Budget that will not be reflected in a Projected Income Statement is... (2) 1.1.3 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 R35 000 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 R500 000 R350 000 R300 000 60% 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 Creditors are paid TWO months after the purchase of stock. 2. Debtors' collection: The credit limit for each debtor is R25 000. 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 345 000 138 000 2014 February R March December 480 000 144 000 192 000 January 300 000 57 000 90 000 A February 210 000 39 900 63 000 March 180 000 B 339 000 321 900 C 4. Extract from the Cash Budget: 2014 January February March R R R RECEIPTS: Cash sales 200 000 D 120 000 Receipts from debtors 339 000 321 900 C Rent income Loan from KZ Bank (12%) 400 000 PAYMENTS: Cash purchases 50 000 35 000 30 000 Payments to creditors 230 000 320 000 E Interest on loan 4 000 F Repayment of loan 40 000 40 000 Wages 32 500 22 048 G Advertising H 6 758 6 758 Sundry expenses Cash balance at end of month 350 000 200 000 (50 000) R

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 2014. 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 2014. 28 6. Advertising: The advertising budget will be increased by 9% with effect from 1 February 2014. 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 2011. The business is owned by Alfred Celtic. 40 REQUIRED: 2.1 Prepare a Debtors' Collection Schedule for November 2011. (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 2011. NOTE: The actual balance in the Debtors' Control Account was R79 500 at the beginning of the financial year and R83 500 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 2011. 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

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 R15 000 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, R960 000. 75% 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 R75 000. 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 R15 000 per account. The credit terms are 30 days. Name Total Current month 30 days 60 days 60 days+ A Botha 15 000 15 000 D Scott 29 000 10 000 5 000 2 000 12 000 P Raj 8 500 8 500 C Ntuli 16 400 11 200 5 200 N Mpo 14 600 5 800 5 300 3 500 83 500 42 000 15 500 14 000 12 000

LEKAZI FURNISHERS CASH BUDGET FOR THE THREE MONTHS ENDED 31 DECEMBER 2011 2011 OCTOBER 2011 NOVEMBER 2011 DECEMBER RECEIPTS 137 715 84 825 81 940 Cash sales C 19 500 18 750 Collection from debtors 59 965? 55 690 Rent income??? Mortgage loan from XYZ Bank? PAYMENTS 81 300 110 350 105 160 Purchase of stock for cash D 26 000 25 000 Payment to creditors 26 600 E 24 700 Repayment of loan 5 000 5 000 Interest on loan 750 750 Bank charges 1 200 1 350? Salaries and wages 22 000 22 000 23 760 Telephone 900 900 900 Advertising 1 000 1 000 1 000 Sundry expenses 2 600 2 700 2 800 Drawings??? Surplus (Deficit) for the month 56 415 (25 525) (23 220) Cash at the beginning of the month 8 300 64 715 A Cash at the end of the month 64 715 39 190 B 30 45 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 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 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: 1.1.1 The insurance figure for November 2010 (Note that the insurance premium will increase by 6% on 1 November 2010.) (2) 1.1.2 1.1.3 1.1.4 1.1.5 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. 1.2.1 1.2.2 1.2.3 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 INFORMATION: 1. EXTRACT FROM CASH BUDGET FOR SEPT. 2010 TO NOV. 2010 Sept. Oct. Nov. Total RECEIPTS: R R R R Joining fee (Admission fee)? 0 0? Monthly fee collections (Subscriptions) 285 000 285 000 285 000 855 000 Sale of refreshments 21 600 27 360 27 360 76 320 Fixed deposit matured 0 30 000 0 30 000 Interest on fixed deposit (8% p.a.) 640 640?? PAYMENTS: Insurance 7 000 7 000?? Commission paid 18 000 0 0 18 000 Transport allowance 6 000 0 0 6 000 Salary to Steffi Smit 4 200 5 250 5 250 14 700 Purchases of refreshments 12 000 15 200 15 200 42 400 2. 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 80 35 113 228 Commission earned R12 000 R5 250 R16 950 R34 200 Transport allowance paid R3 000 R3 000 R3 000 R9 000 Number of contracts cancelled on 1 November 2010 2 0 38 40 3. ACTUAL FEE INCOME COLLECTED COMPARED TO BUDGET Budgeted Actual September R285 000 R339 000 October R285 000 R323 000 November R285 000 R273 000 Total R855 000 R935 000 [30]

34 SECTION D: SOLUTIONS FOR SECTION A QUESTION 1 1.1 Complete the following sentences by filling in the missing word(s). Write only the word(s) next to the question number (5.1.1 5.1.3). 1.1.1 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 2 1.1.2 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 2 1.1.3 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 2 1.2 Calculate the missing figures in the Debtors' Collection Schedule and the Cash Budget indicated by A to H:

35 CALCULATION ANSWER A 40% x 300 000 All or nothing 120 000 B C D E F G H 36 000-1 800 (20% x 180 000) x 95% OR (57 000 / 300 000 x 180 000): 2 marks If R63 000 more than A+B 350 000 x 40% OR 210 000 (1 mark) /60 x 40 (1 mark) OR 350 000 (1 mark) 210 000 (1 mark) (500 000 x 100/200) 250 000 x 80% (400 000 40 000) x (12% 12) 360 000 x 1% OR 43 200 (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 R22 048 x 6 4 1 mark 1 mark 1 mark OR R22 048 + 11 024 1 mark 2 marks 6 758 x 100 109 OR 6 758 OR 6 758 558 (6 758 x 9 Any one part correct 34 200 Operation 217 200 Any one part correct 140 000 Any one part correct 200 000 Any one part correct 3 600 Any one part correct R33 072 Any one part correct 6 200 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: 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 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 R35 000 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 QUESTION 2 2.1 Prepare a Debtors' Collection Schedule for November 2011. Credit sales November collections September R 63 000 18 900 October 60 750 If 40% of credit sales 24 300 November 58 500 14 625 TOTAL operation 57 825 2.2 Calculate the figures indicated by A E in the Cash Budget. 8 A 39 190 B 15 970 no part-marks C D 20 250 no part-marks 81 000 x 100 x 1 1 150 2 E 27 000 if one part correct 25 650 if 95% of D 11 2.3 Calculate the debtors' average collection period (in days) for the financial year ended 31 October 2011. (79 500 + 83 500) / 2 no part marks for each figure 81 500 X 365 = 41,3 operation one part correct 720 000 1 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 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 R15 000 (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. 6 2.5 Calculate the percentage increase in salaries and wages in December 2011. 8% 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) 4 2.6 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 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 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 2012. 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 2012. 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 INFORMATION: HAPPY HOLIDAY SHOP EXTRACT FROM THE PROJECTED INCOME STATEMENT FOR THE THREE MONTHS ENDED 31 DECEMBER 2012 BUDGET ACTUAL BUDGET BUDGET OCT. 2012 OCT. 2012 NOV. 2012 DEC. 2012 Sales R 590 000 R 710 500 R 590 000 R 708 000 Cost of sales 368 750 490 000 368 750 442 500 Gross profit 221 250 220 500 221 250 265 500 Rent income 5 200 5 200?? Salaries???? Maintenance of property 4 000 7 000 4 000 4 000 Municipal rates on property 1 000 1 000 1 000 1 000 Telephone 1 500 1 200 1 500 1 500 Water and electricity 1 200 5 600 1 200 1 200 Advertising 4 000 4 000 4 000? Stationery???? Trading stock deficit 8 000 12 300 8 000 8 000 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 2011. He rents out an unused portion of this property to a tenant. The rent will increase by 5% on 1 November 2012. 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 2012. The interest rate is 15% p.a. and the loan is reduced by R50 000 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 2012. 3. 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 R10 500 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 R850 000). He will also be able to invest the surplus funds in a fixed deposit at 6% p.a. [40]

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 2010. 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 87 500 105 000 122 500 Cost of sales 50 000 60 000 70 000 Gross profit 37 500 45 000 52 500 Other operating income 122 000 122 000 162 000 Fee income from customers 120 000 120 000 160 000 Sundry income 2 000 2 000 2 000 OPERATING EXPENSES 95 350 120 072 127 372 Salary of hairdressing assistants 25 500 25 500 34 000 Wages of cleaner 3 400 3 672 3 672 Rent of premises 24 600 30 750 30 750 Consumable stores 14 400 14 400 19 200 Water & electricity 6 000 6 000 7 000 Telephone 2 200 2 200 2 200 Advertising 8 000 15 000 8 000 Motor vehicle expenses 1 400 5 600 5 600 Repairs & maintenance of equipment 3 500 3 500 3 500 Sundry expenses 2 300 2 300 2 300 Depreciation on vehicle 2 000 9 100 9 100 Depreciation on equipment 2 050 2 050 2 050 42 OPERATING PROFIT 64 150 46 928 87 128 Interest income 3 315 0 0 67 465 46 928 87 128 Interest on loan 750 625 500 NET PROFIT 66 715 46 303 86 628

ADDITIONAL INFORMATION: 1. Line of business: Helen gave up her job to start this business in 2004. She invested her life savings of R800 000 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 2010. 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 R468 000 for 12 months will mature on the 30 April 2010. 5. Fixed assets: Hairdressing equipment Date of purchase Cost price Accumulated depreciation on 31 March 2010 Depreciation rate 1 April2004 R164 000 R147 600 15% on cost VW Polo 1 July 2007 R120 000 R66 000 20% 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 2010. 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 2010. 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 R402 000. QUESTIONS: 2.1 Refer to the Projected Income Statement to identify / calculate the following: 2.1.1 The monthly salary paid to each hair stylist. (2) 2.1.2 The % increase in wages that the cleaner will receive during the projected period. (2)

2.1.3 The % interest rate on the fixed deposit. (4) 2.1.4 The rental per square metre, and the number of additional square metres she will rent from 1 May 2010. (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 2 200 4 150 B Water & electricity 6 000 4 900 C Fee income 120 000 136 800 Consumable stores 14 400 15 120 Sales of hair products 87 500 112 000 D Cost of sales 50 000 70 000 Gross profit 37 500 42 000 (10) 2.3 Helen is considering changes to the fixed assets owned by the business. 2.3.1 Calculate the cost of the new vehicle, which she plans to purchase on 30 April 2010. (4) 2.3.2 Prepare the expected asset disposal account for the trade-in of the old hairdressing equipment on 1 July 2010. (10) 2.3.3 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) 2.3.4 Helen is thinking of purchasing the business premises rather than renting them. Explain one major advantage and one major disadvantage of this option. (2) 2.3.5 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) 44 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 R800 000 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 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 500 000 Cost of sales (200 000) Gross profit 300 000 Other income 40 000 Gross income 340 000 Operating expenses (180 000) Operating profit 160 000 Interest Income 4 000 Profit before Interest Expense / Financing Cost 164 000 Interest expense / Financing Cost 24 000 Net profit for the period 140 000 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. 2.2. Purchases policy. 2.3. Mark-up on cost of sales. 2.4. 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 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. 3.2. 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. 3.4. 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

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 2009. 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 540 000 396 000 594 000 360 000 Cost of sales 300 000 220 000 330 000 200 000 Gross profit 240 000 176 000 264 000 160 000 Other income 47 000 34 000 53 000 44 000 Commission received 11 000 16 000 11 000 23 000 Rent income 36 000 18 000 42 000 21 000 Gross operating income 287 000 210 000 317 000 204 000 Operating expenses (154 480) (147 580) (136 128) (143 300) Salary of the store manager 40 000 40 000 50 000 50 000 Wages of shop assistants 24 000 24 000 24 000 16 800 Sundry operating expenses 13 000 9 000 14 000 9 000 Motor vehicle expenses 12 000 13 200 12 000 13 200

48 Telephone 1 000 3 000 1 000 5 000 Security expenses 7 000 3 500 7 000 3 500 Trading stock deficit 0 18 000 0 12 000 Training of employees 30 000 10 000 0 0 Advertising 5 000 1 000 5 000 1 000 Discount allowed 2 000 0 2 000 0 Bad debts 6 480 11 880 7 128 10 800 Stationery 4 000 4 000 4 000 7 000 Depreciation 10 000 10 000 10 000 15 000 Operating profit 132 520 62 420 180 872 60 700 Interest income (6% p.a.) 12 000 12 000 12 000 9 000 Profit before interest expense 144 520 74 420 192 872 69 700 Interest expense (15% p.a.) (37 500) (37 500) (37 500) (37 500) Net profit for the year 107 020 36 920 155 372 32 200 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 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 1 1.1 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 1.2 Calculate percentage increase in sales he expects in December. 118 000 / 590 000 = 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) 4 1.3 Calculate the mark-up percentage he actually achieved in October. 220 500 x 100 = 45% operation if one part correct 490 000 1 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. 6 1.4 Calculate the following figures in the Projected Income Statement: Workings Answer Rent income for November 2012 5 200 x 105 100 R5 460 operation one (one mark) R260 (one part correct mark) 5 200 + (5% x 5 200) Advertising for December 2012 Interest expense for November 2012 880 x 8 4 400 (one mark) (one mark) 4 000 + 400 + 2 640 15% x 950 000 / 12 R7 040 operation one part correct R11 875 operation one 10

51 part correct 1.5 Refer to the actual and budgeted figures for October 2012. 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. 2 1.6 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 R10 625 or R11 250 or R11 875 / He will be paying no interest on loan (i.e. 0) He will be earning interest on a fixed deposit 6% of R650 000 (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 (R10 625 R10 500) He will reflect a profit on sale of the property of R300 000 in the Income Statement. 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. Two valid points figures not necessary 4

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 (R126 000 per year) He will be losing rent income (R5 460 per month) He will be paying rent (R10 500 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 2 40 2.1.1 Calculation of monthly salary paid to each hair stylist: R25 500 / 3 = R8 500 OR R34 000 / 4 = R8 500 2 2.1.2 Calculation of the % increase in wages that the cleaner will receive during the projected period: 272 / 3 400 X 100 = 8% 2 2.1.3 Calculation of % interest rate on the fixed deposit: 3 315 / 468 000 X 12 X 100 = 8,5% 4 2.1.4 Calculation of rental per square metre: 24 600 / 60 = R410 Calculation of number of additional square metres she will rent from 1 May 2010: 30 750 / 410 = 75 OR 60 x 30 750 / 24 600 = 75 sq metres Increase = 75 60 = 15 sq metres 4 2.2 Provide four comments that you would include in your internal auditor s report in respect of scenarios A, B, C and D below.

53 Comment on telephone: 10 A Good answer = 2 marks; Satisfactory =1; Incorrect =0 Expected response: : The telephone costs have exceeded projections by R1 950. 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 (+R24 500 / +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. 2.3.1 Calculation of the cost of the new vehicle which she plans to purchase on 30 April 2010: 7 100 / 0,2 X 12 = R426 000 4

54 2.3.2 ASSET DISPOSAL 2010 2010 July 164 July Equipment 1 000 1 Profit on disposal of asset 20 950 Acc depr on equipment (153750 + 8 200 ) Creditors control 161 950 23 000 184 950 184 950 10 2.3.3 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 R379 000 = R4 737,50 pm negative effect Depreciation: 15% R402 000/12 less R2 050 = R2 975 pm negative effect Maintenance: R3 500 pm positive effect 8 2.3.4 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) 2 2.3.5 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 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 R800 000 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 R66 549 pm from this business, approximately R798 564 pa. She is losing out on interest on her savings approximately R68 000 pa or R5 667 pm (based on interest rate 8,5% pa) She is befitting by more than R700 000 pa, which means she has probably made the right decision. Alternative correct and valid responses acceptable. 4 TOTAL MARKS 59

56 SESSION NO: TOPIC: VAT FOURTEEN SECTION A: TYPICAL EXAM QUESTIONS 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 VAT Mango Supermarket is a registered VAT vendor. VAT is calculated at 14%. All goods are sold at 50% on cost. REQUIRED: 1.2.1 1.2.2 1.2.3 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 2010. Calculate the amount of VAT that would be reflected on the invoices that were issued to the debtors during February 2010. (3) (3) (3) INFORMATION: The following Ledger Accounts were extracted from the General Ledger of Mango Supermarket.

57 GENERAL LEDGER OF MANGO SUPERMARKET BALANCE SHEET ACCOUNTS SECTION VAT CONTROL 2010 Feb. 28 Input VAT GJ 9 780 2010 Feb. 28 Output VAT GJ 31 024 TRADING STOCK 2010 Feb. 1 Balance b/d 122 000 2010 Feb. 28 Creditors' control CAJ 8 000 28 Creditors' control CJ 80 000 Cost of sales DJ 83 000 Cost of sales DAJ 1 200 Cost of sales CRJ 65 000 DEBTORS' CONTROL 2010 Feb. 1 Balance b/d 85 000 2010 Feb. 28 Journal Credits (Bad debts) GJ 456 28 Sundry accounts DJ 141 930 1.3 VAT REQUIRED: Complete the following statements by writing down the missing words or figures. (For QUESTIONS 1.1.3 and 1.1.4 choose from the words given in brackets.) 1.3.1 1.3.2 1.3.3 1.3.4 1.3.5 1.3.6 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 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 R1 760 000? Equipment purchased by cheque R40 000 R45 600 Sales of goods for cash and on credit? R930 240 Goods returned by customers R48 000 R54 720 Discount allowed to debtors on settlement of their accounts R4 000? Drawings of stock by the owner R24 000 R27 360 Bad debts? R18 240 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 1993. 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 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 R1 000 000 a year must be registered as a vendor. Where the turnover is less than R1 000 000, 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.

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 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

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 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 2009. Lumart Traders is a registered vendor with a turnover of R2 000 000 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 200 000 trading stock 80 000 contributed (No zero rated items) Cash sales (20% zero rated) Net Credit sales (No zero rated items) 130 000 Rent income 120 000 Drawings of trading stock by owner QUESTIONS TO ANSWER: Credit purchases (Including zero rated items 20%) 50 000 70 000 Stationery 2 000 Drawings of cash by owner 25 000 20 000 Wages 68 000 Fuel for delivery vehicles New computers purchased Purchase of delivery van 5 000 45 000 98 000 1.1.1 What is the difference between VAT input and VAT output? (2) 1.1.2 Would Lumart Traders have to charge VAT on all sales. Explain. (2) 1.1.3 Calculate the VAT input and VAT output for the two months. (11) 1.1.4 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

VALUE ADDED TAX The following information was taken from the books of Leading Technologies for June 2012. All goods bought and sold by the business are subject to 14% VAT. REQUIRED: 1.2.1 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) 1.2.2 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 1 524 000? Equipment/Expenses purchased/paid for R 62 000 R 8 680 R 70 680 Other sales of goods for cash and on credit R 259 070 R 2 109 570 Sale of LeadPads for May and June (250 units)? R427 500 Goods returned by customers R 24 000 R 3 360 R 27 360 Drawings of stock by the owner R 36 000 R 5 040 R 41 040 Bad debts R 25 500 R 3 570 R 29 070 64 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 1.1.2 True instead of True or False 1.1.3 False 1.1.4 False 1.1.5 True 10 1.2.1 Calculate the VAT payable to SARS or receivable from SARS. R31 024 R9 780 = R21 244 Two marks or nothing 3

65 State whether the amount is payable or receivable. Payable 1.2.2 Calculate the VAT on net purchases for February 2010. R72 000 x 14% = R10 080 operation if one part correct 3 1.2.3 Calculate the amount of VAT that would be reflected on the invoices that were issued to the debtors during February 2010. R141 930 x 14/114 = R17 430 3 1.3 Complete the statements by writing down the missing words or figures. (For QUESTIONS 1.1.3 and 1.1.4 choose from the words given in brackets.) 1.3.1 Value-added Tax 1.3.2 14 1.3.3 VAT Output 1.3.4 Credit VAT Control 1.3.5 R3 668 1.3.6 R4 900 14 1.4 Calculate the amount of VAT payable to/by SARS on 28 February 2009. Show ALL workings. Ledger accounts for VAT are not required, but you may use this to arrive at your answer. R246 400 + 5 600 + 6 720 + 2 240 + 560 (R114 240 + 3 360) = R143 920 OR Input VAT = 246 400 + 5 600 = R252 000 Output VAT = 114 240 6 720 560 + 3 360 2 240 = R108 080 Difference = R143 920 VAT CONTROL

66 Bank (Purchases) Bank (Equipment) Debtors' control (Returns) Sundry account (2 240 + 560) 246 400 5 600 6 720 2 800 Bank & Debtors' control Sundry account Balance c/d 114 240 3 360 143 920 261 520 261 520 Balance b/d 143 920 Indicate whether the amount is payable to or receivable from SARS. The amount is owed by SARS to Laser Stores 11

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 2011. This is a manufacturing business specialising in the production of one type of handbag made of leather. REQUIRED: 1.1.1 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) 1.1.2 Prepare the note Cost Of Finished Goods Sold (13) 1.1.3 Prepare the Production Cost Statement for the year ended 30 June 2011 (13) 1.1.4 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, R120. 4. Direct material cost per bag, R25 5. Prime cost per bag, R55

68 6. Total cost of production of finished bags, R760 000 7. Number of bags completed during the year, 10 000 8. Number of bags sold during the year, 12 000. 9. Number of unsold bags at the end of the financial year, 300. 10. Administration costs for the year amounted to R198 000. 11. Selling and distribution costs for the year amounted to R156 000. 12. The Gross profit for the year amounted to R528 000. 1.2 SPARK MANUFACTURERS This business makes calculators. The information below relates to the year ended 30 June 2011. 15 000 1.2.1 1.2.2 1.2.3 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. R1 650 000 (2) Total Use fixed the figures costs above to calculate the break-even point. R440 000 (5) Total variable costs R1 050 000 Comment on your calculation in QUESTION 1.2.2. 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 2013. 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: 2.1.1 Prepare the notes to calculate the Direct materials cost and factory overhead cost. (24) 2.1.2 Prepare the Production Cost Statement for the year ended 31 July 2013. (Show calculations in brackets) (12)

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 2012 31 July 2013 720 000 1 647 500 89 400? 500 000 330 000 152 000 64 000 2. Transactions during the year: Raw materials purchased on credit, R 970 000 Raw materials purchased for cash, R978 000 Raw materials donated by the factory to the local school, R50 000 Cost of transporting raw materials to the factory, R29 500 Factory indirect materials bought for cash, R78 000 Factory indirect materials returned to suppliers, R24 000 Wages paid to factory workers who make the lollipops, R756 000 Salary paid to employees, R658 000 Included in this amount is the salary of the factory foremen R150 000 Commission on sales, R200 000 all sales are subject to a commission of 5% Maintenance of factory equipment paid, R23 000. An invoice of R14 500 was received but has not been processed as yet. Water & electricity paid, R98 000 (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, R168 000 (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 R89 000. Bad debts, R56 000 Carriage on sales, R 67 890 2.2 You are provided with information relating to Nkosi Manufacturers, a business which manufactures only one type of plastic chair REQUIRED: Use the information to: 2.2.1 Explain why it is important for a manufacturing business to calculate (3)

70 unit costs and a break -even-point each month 2.2.2 Calculate the variable cost per unit for 2013 (4) 2.2.3 Calculate the break-even point for 2013 (4) 2.2.4 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 2013 3. Direct material cost per chair, R37. 4. Prime cost per chair, R69 5. Number of chairs completed during the year, 40 000. 6. Total cost of production of finished chairs, R3 500 000. 7. Number of chairs sold during the year, 40 000. 8. Administration costs for the year amounted to R340 000. 9. Selling and distribution costs for the year amounted to R320 000. 50 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 2012. 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 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 2012. Show all workings in brackets. (14) 1.4 Calculate the gross profit for the year ended 28 February 2012. (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 R180 000 Work-in-process stock R157 500 Finished goods stock R192 000 Indirect materials stock R14 800 2. Raw materials (fabric for dresses) were imported during the year from Japan. Details are: Cost of fabric imported on credit: $120 000 (exchange rate R8.00 = $1.00) Customs duty paid on the fabric: 30% Shipping costs paid: R95 000 3. Indirect materials were bought for cash during the year, R25 200. Transport costs on these were paid out of petty cash R400. 4. 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 R220 000 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 R156 000.

72 5. Electricity and water paid during the year was R54 000 and Rent paid was R132 000. 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 R10 000 and the selling price was R15 000. 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 R40 000 Work-in-process stock R102 900 Finished goods stock R127 500 Indirect materials stock R13 200 8. The following totals appeared in the ledger at the end of the financial year: Administration cost R133 000 Selling & distribution cost R144 000 SECTION C: SOLUTIONS FOR SECTION A QUESTION 1: 1.1.1 Choose an explanation from COLUMN B that matches a concept in COLUMN A. COLUMN A COLUMN B 1.1.1 D 1.1.2 E 1.1.3 A 1.1.4 C 1.1.5 B 5

73 1.1.2 4. Cost of finished goods sold Opening stock of finished goods # 174 800 Cost of finished goods produced during the year 760 000 934 800 Closing stock of finished goods (300 x76 ) (22 800) Cost of finished goods sold 912 000 # o/s +man-sales=f/stock X+10 000-12000 =300 X=2 300 x (760 000 / 10 000 ) 13 1.1.3 HEEDAS BAGZ PRODUCTION COST STATEMENT FOR THE YEAR ENDED 28 FEBRUARY 2011 R Direct costs/primary cost 550 000 Direct material costs 250 000 Direct labour costs 300 000 Factory overhead costs 210 000 Total manufacturing costs 760 000 Work-in-process at beginning of the year 0000 Work-in-process at end of the year (0000) Cost of production of finished goods 760 000 13 1.1.4 NET PROFIT FOR THE YEAR ENDED 28 FEBRUARY 2011 Gross profit 528 000 Expenses 354 000 Selling and distribution 156 000 Administration cost 198 000 Net profit for the year 174 000 4

74 1.2 Spark Manufacturers 1.2.1 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 2 1.2.3 Calculate the break-even point. SP per unit = R1 650 000 / 15 000 = R110 VC per unit = R1 050 000 / 15 000 units = R70 Contribution per unit = R40 BEP = R440 000 / R40 = 11 000 units 5 1.2.4 Comment on your calculation in 3.2.3. Briefly explain. Give credit if responses are based on an incorrect calculation above. Comment: Compare BEP to the 15 000 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 MANUFACTURING (50 marks; 30 minutes) 2.1.1 CALCULATION OF RAW MATERIALS COST Opening stock 720 000 Purchases(970 000 + 978 000-50 000 ) 1 898 000 Carriage on purchases 29 500 2 647 500 Closing stock (1 647 500) 1 000 000 8 CALCULATION OF FACTORY OVERHEAD COST Factory indirect materials(152 00 +78 000-24 000-64 000 ) 142 000 Factory Foremen 150 000 Factory Maintenance(23 000 +14 500 ) 37 500 Water and electricity 56 000 Factory rent(168 000-12 000 x 57% 88 920 Factory depreciation 89 000 563 420 2.1.2 LOLIPOP MANUFACTURERS PRODUCTION COST STATEMENT FOR YEAR ENDED 31 JULY 2013 16 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 1 756 000 see 1 000 000 DMC 756 000 563 420 2 319 420 89 400 see FOC 2 408 820 (589 300) 1 819 520 12

76 2.2.1 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 3 2.2.2 Calculate the variable cost per unit Direct material+ direct labour + selling and distribution =R37 + R32 + R8 =R77 4 2.2.3 Calculate the break- even-point F/C/contribution per unit accept if same as 3.2.3 = 1 080 000/(200-77) =1 080 000/123 =8780 4 2.2.4 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 2..2.3) Comment: Compare BEP to the 40 000 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 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) 1.4 75 % of the total sales per month is for cash. Calculate the total sales for February 2013. (4) 1.5 Calculate the percentage increase in rent income on 1 February 2013. (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 2013 - 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 additional secretary at a salary of R12 000 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 72 000 84 000 72 000 Cash received from Debtors * * * Rent income 12 000 13 440 13 440 Additional loan J Interest on current banking account L Sundry income * * * Increase in capital * TOTAL RECEIPTS 108 600 362 200 207 750 CASH PAYMENTS Payments to creditors 54 000 43 200 50 400 Interest on loan 1 000 1 000 1 875 Advertising 1 920 2 240 1 920 Drawings 12 000 12 000 18 000 Salaries and wages 89 300 89 300 H Operating expenses * * * Interest on bank overdraft * K TOTAL PAYMENTS 164 849 193 513 232 455 CASH SURPLUS (SHORTAGE) (56 249) 168 687 E Bank (opening balance) (8 600) (64 849) F Bank (closing balance) (64 849) 103 838 G DEBTORS COLLECTION SCHEDULE Credit sales January February March November 28 000 4 200 December 30 000 9 000 4 500 January 24 000 11 400 7 200 A February 28 000 13 300 B March 25 000 C 24 600 25 000 D Additional information: 1. Sales: 75 % of the total sales is for cash. 2. Debtors are expected to pay as follow:

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 INFORMATION: 1.Cash Budget for the period 1 October to 31 December 2012 CASH RECEIPTS October November December Cash sales 330 000 360 000 270 000 Cash from debtors 122 400 166 800 195 600 Maturing of fixed deposit (including interest for six months at 6% p.a.) 74 200 Loan 180 000 50 000 Total Receipts 452 400 781 000 515 600 CASH PAYMENTS Cash purchases of stock 55 000 60 000 45 000 Cash paid to creditors 120 000 160 000 220 000 Interest on loan 1 500 1917 Purchase of equipment 225 000 225 000 Other fixed expenses 125 000 125 000 125 000 Total Payments 300 000 571 500 616 917 Surplus/Deficit 152 400 209 500 (101 317) Opening bank balance (7500) 144 900 354 400 Closing bank balance 144 900 354 400 253 083 DEBTORS COLLECTION SCHEDULE CREDIT SALES October November December August 36 000 0 0 September 86400 48000 0 October 0 118800 66000 November 0 0 129600

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? 1.2.1 Explain your answer fully with at least 2 points to substantiate your answer. (2) 1.2.2 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 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 2011. ZOLA TRADERS CASH BUDGET FOR THE THREE MONTHS ENDED 30 AUGUST 2011. CASH RECEIPTS JUNE JULY AUGUST Cash sales 60000 80000 76000 Cash from debtors 93390 104100 * Rent Income 6000 6000 * Loan from Helpu bank 180 000 Total Receipts 159390 370100 173038 CASH PAYMENTS Cash purchases 60 000 80 000 76 000 Cash paid to creditors 108 800 140 800 96 000 Interest on loan 2175 Salaries and wages 40 000 48 000 40 000 Advertising 1 500 10 000 1 900 Sundry expenses 10 000 10 000 10 000 Total Payments 220 300 288 800 226 075 Surplus/Deficit (60910) 81 300 (53 037) Opening bank balance 130 000 69 090 150 390 Closing bank balance 69 090 150 390 97 353 DEBTORS COLLECTION SCHEDULE CREDIT SALES AUGUST May R132 000 6 600 June R90 000 43 200 July R120 000 *(a) August *(c) *(b) Total *(d) 30

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 24 000 x 15 % = 3 600 28 000 x 30 % = 8 400 (25 000 x 50 %) - 5% = 11 875 (2) (2) (3) D 3 600 + 8 400 + 11 875 = 23 875 the first 3 amounts must be answers A-C (1) E F G 207 750-232 455 = (24 705) 103 838 (24 705) + 103 838 = 79 133 (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 Fixed assets purchased Capita contribution Drawings Payments to creditors Receipts from debtors Any other acceptable answer 1.4 75 % of the total sales per month, is for cash. Calculate the total sales for February 2013. 84 000 x 100/75 = 112 000 (4) 1.5 Calculate the percentage increase in rent income on 1 February 2013. 1 440 x 100 12 000 = 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 2013 - see H. H: 89 300 + 3 % = 91 979 (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 R12 000 to R18 000 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 = 10 500 (5)

85 10 500 x 100/15 = 70 000 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. K: Interest on overdraft: 64 849 x 18 x 1 1 100 12 = R973 L: Interest on favourable bank balance 103 838 x 6 x 1 1 100 12 = R519 (8) 1.10 The owner, S Kenau, is not sure whether he should appoint an additional secretary at a salary of R12 000 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 R232 455 and receipts only 207 750) During February the owner contributed extra capital and made an additional loan during March of R70 000. (3)

86 QUESTION 2 2.1 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 2 2.2. Calculate what percentage of the purchases of stock is for cash in the month of October. 55 000 x 100 /275000 =20% 2.3. Calculate the credit sales for October 2012.A 10% discount is allowed to customers who pay within thirty days. = 100 x 118800 /90 =R132000 +R66000 =R198 000 2.4 What percentage of debtors pay their accounts within thirty days? Use figures for October to determine your answer. 4 6 =132000 x 100/198000 =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. 5 2.6 List two items that could be included in other fixed expenses (any two) Rent Expense Insurance Salaries 2 4

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 2 87 2.8 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. 5 30 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 2010. 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 REQUIRED: 1.1.1 Prepare a comparison of the value of closing stock using both the weighted average and FIFO methods of valuing stock. (12) 1.1.2 State how the change from weighted average methods to FIFO methods will influence the gross profit of the business? (2) 1.1.3 Calculation of cost of sales using the FIFO method. You may prepare a trading account. (6) 1.1.4 Calculate the number of units missing. (5) 1.1.5 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 units @ R3 600 each Stock of Televisions (30 June 2011) 144 units 2. Purchases Creditors control 1 November 2010 192 @ R4 200 each Bank 1 February 2011 168 @ R6 000 each Creditors control 1 May 2011 96 @ R7 200 each Total 456 = R2 505 600 3. Import duties R89 000 purchased on 1 November 2010 4. Carriage on sales R9 000 5. Carriage on purchases R7 000 6. Sales for the year 308 units, R2 167 200 1.2 VALUE-ADDED TAX The following information was taken from the books of Laser Stores for JUNE 2011. 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]

INFORMATION: Excluding VAT Including VAT Stock purchased by cheque R1 760 000? Equipment purchased by cheque R40 000 R45 600 Sales of goods for cash and on credit? R930 240 Goods returned by customers R48 000 R54 720 Discount allowed to debtors on settlement of R4 000? their accounts Drawings of stock by the owner R24 000 R27 360 Bad debts? R18 240 89 37 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 2012. 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. 2.1.1 The number of LeadPads stolen (from the March delivery). (6) 2.1.2 The value of stock of LeadPads on hand on 30 June 2012. (11) The owner, K Lawrence, is considering changing the stock valuation method from the weighted average to the First-In-First-Out (FIFO) method. 2.1.3 Calculate the value of closing stock using the FIFO method. (6) 2.1.4 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 INFORMATION: 1. Stock, purchases and sales during the year. Units Unit price (Exc VAT) Total price In Rands LeadPads on hand: 1 July 2011 250 R 600 R 150 000 Net purchases of LeadPads: 1 710 R 1 343 340 Import Duties paid on all purchases R 226 140 Purchases: 01 September 2011 670 $80 R 402 000 01 December 2011 520 $88 R 343 200 01 March 2012 340 $90 R 229 500 01 May 2012 200 $104 R 156 000 Units returned to supplier March purchases (20) $90 (R13 500) LeadPads per stock take: 30 June 2012 280?? Sales of LeadPads for the year 1 670 R 1 500 R 2 505 000 2. All LeadPads are imported from the USA. Prices are quoted in US dollars ($). 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. 2.2. VALUE ADDED TAX 26 The following information was taken from the books of Leading Technologies for June 2012. All goods bought and sold by the business are subject to 14% VAT. REQUIRED: 2.2.1 Calculate the amount of VAT payable to/by SARS on 30 June 2012 and (11)

91 indicate whether the amount is payable to or receivable from SARS. Show ALL workings. 2.2.2 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 1 524 000? Equipment/Expenses purchased/paid for R 62 000 R 8 680 R 70 680 Other sales of goods for cash and on credit R 259 070 R 2 109 570 Sale of LeadPads for May and June (250 units)? R427 500 Goods returned by customers R 24 000 R 3 360 R 27 360 Drawings of stock by the owner R 36 000 R 5 040 R 41 040 Bad debts R 25 500 R 3 570 R 29 070 41 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 2008. 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 R20 000 cash. (VAT excluded) What advice would you offer Sinker Traders? (List one point) (3)

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 2008 2008 July 31 (b) DAJ 380 July 31 (a) CRJ 6 804 Bad Debts GJ 14 Debtors DJ 9 794 Control (h) GJ (f) Drawings GJ 196 *? * 92 (2) 20 Dr INPUT VAT Cr 2008 2008 July 31 Bank (c) 15 300 July 31 (d) CAJ 900 Creditors Control CJ 3 600 *? GJ *? *? *?

93 Dr VAT CONTROL ACCOUNT Cr 2008 2008 July 31 (e) GJ (g) July 1 Balance b/d 1 200 31 *? GJ (f) Balance c/d 400 * *?? Aug 1 Balance b/d 400 20 SECTION C: SOLUTIONS FOR SECTION A QUESTION ONE 1.1.1 Value of Closing stock 144 units First In First Out (FIFO) 7 000 96 X R7 200 = R691 200 48 X R6 000 = R288 000 R986 200 Weighted Average Opening stock R86 400 Import duties 89 000 Carriage on purchase 7 000 Purchases R2 505 600 144 X 5 600 = R806 400 R 2 688 000 480 units =R5 600 12 1.1.2 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 1.1.3 Calculate cost of sales FIFO Opening stock + purchases + import duties + carriage on purchases closing stock = 86 400 + 2 505 600 + 7 000 986 200 = R1 612 800 6 1.1.4 Calculate the number of units missing 24 + 456-308 144 = 28 missing or 24 + 456-308 = 480 available for sale 308 sold 144 physical count 172 144 = 28 missing 5 1.1.5 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 2 1.2 Calculate the amount of VAT payable to/by SARS on 30 June 2011. Show ALL workings. Ledger accounts for VAT are not required, but you may use this to arrive at your answer. R246 400 + 5 600 + 6 720 + 2 240 + 560 (R114 240 + 3 360) = R143 920 OR Input VAT = 246 400 + 5 600 = R252 000 Output VAT = 114 240 6 720 560 + 3 360 2 240 = R108 080 Difference = R143 920 VAT CONTROL Bank (Purchases) Bank (Equipment) 246 400 Bank & Debtors' control 114 240 3 360 10

95 Debtors' control (Returns) Sundry account (2 240 + 560) 5 600 6 720 Sundry account Balance c/d 143 920 2 800 261 520 261 520 Balance b/d 143 920 Indicate whether the amount is payable to or receivable from SARS. The amount is owed by SARS to Laser Stores 27 10 TOTAL MARKS 37 QUESTION 2: STOCK SYSTEMS AND VAT (41 MARKS; 24 MINUTES) QUESTION 2.1 STOCK VALUATION 2.1.1 The number of LeadPads stolen (from the last delivery in May). 250 + 1710 280 1670 = 10 6 2.1.2 The value of stock of LeadPads on hand on 30 June 2012. (Weighted Average Method)

96 150 000 + 1 343 340 250 + 1 710 =1 493 340 / 1 960 = R761,91 Final stock = 761,91 x 280 = R213 335 11 2.1.3 Calculate the value of closing stock using the FIFO method. Stolen March/September 200 X (104X 7,50 ) = 156 000 80 X (90 X 7,50 ) = 54 000 = 210 000 Plus import duty 226 140 / 1710 x 280 = 37 029 TOTAL = R247 029 Stolen May (200 10) X (104 X 7,50 ) = 148 200 90 X (90 X 7,50 ) = 60 750 = 208 950 Plus import duty 226 140 / 1710 x 280 = 37 029 TOTAL =R245 979 6 2.1.4 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 2.1.4 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 any one valid reason 3 26 QUESTION 2.2: VALUE ADDED TAX 2.2.1 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 213 360 Other sales 259 070 Equipment/Exp purchased 8 680 Sale of LeadPads 52 500 Accept negative as outputs Goods returned by customers (3 360) Drawings 5 040 Bad debts (3 570) Accept negatives as inputs 222 040 309 680 Receivable Payable R87 640 11 2.2.2 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 R1 000 000 must register as a VAT vendor. The sales for only two months in this business is R2 109 570 which exceeds the amount of R1 000 000. must quote the figures 2 X 4 26 + 15 = 41