1

TABLE OF CONTENTS PAGE

1. Introduction 3
2. How to use this self-study guide 4
3. Analysis and Interpretation of financial and non- 6
financial information
3.1 Key concepts and explanations 6
3.2 Profitability 13
3.3 Liquidity 16
3.4 Solvency 19
3.5 Return 21
3.6 Risk and gearing 23
3.7 Interpretation beyond Financial Indicators 27
3.7.1 Dividend pay-out policy 27
3.7.2 % shareholding 27
4. Consolidation Activities 31
5. Answer Book 47
6. Suggested Answers and Marking Guidelines 61

7. Examination guidance 77
8. General Study and Examination Tips 78
9. Acknowledgments 79

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1. INTRODUCTION

The declaration of COVID-19 as a global pandemic by the World Health Organisation led to the
disruption of effective teaching and learning in many schools in South Africa. The majority of learners
in various grades spent less time in class due to the phased-in approach and rotational/ alternate
attendance system that was implemented by various provinces. Consequently, the majority of schools
were not able to complete all the relevant content designed for specific grades in accordance with the
Curriculum and Assessment Policy Statements in most subjects.

As part of mitigating against the impact of COVID-19 on the current Grade 12, the Department
of Basic Education (DBE) worked in collaboration with subject specialists from various Provincial
Education Departments (PEDs) developed this Self-Study Guide. The Study Guide covers those
topics, skills and concepts that are located in Grade 12, that are critical to lay the foundation for
Grade 12. The main aim is to close the pre-existing content gaps in order to strengthen the mastery
of subject knowledge in Grade 12. More importantly, the Study Guide will engender the attitudes in
the learners to learning independently while mastering the core cross-cutting concepts.

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2. HOW TO USE THIS SELF STUDY GUIDE

This manual addresses content and offer strategies to develop the skill of Analysing and
Interpreting financial information, in a piecemeal approach, with consolidation activities to conclude.

The explanations and activities are intended to supplement the work you may have covered in
class or have gained from textbooks.

They proceed from the short, simple focused examples to more complex calculations necessary for
analysis and interpretation of information.

It is important to allocate sufficient time to:

Carefully read the explanations provided; underline / highlight key concepts, difficult vocabulary,
important dates and relevant amounts.
Interrogate the worked example to gain an understanding of the message being conveyed or the
sequence of events being illustrated.

Attempt the activities on you own; make constant reference to the explanatory notes, but avoid
referring to the suggested answers before completing an activity.

Compare your answers to the suggested answers and do your corrections in a different colour ink
pen/pencil. Note that you will learn more by discovering your weaknesses (when you get things
wrong), and making an effort to understand why your thinking was out of line.

The activities provided may not be sufficient to perfect your skills. Always refer to similar questions
from past examination papers for this purpose.

Become familiar with the use of the Answer Book and prepared writing material as this is the trend
with all Accounting examinations.

PRE-AMBLE:

Analysis and interpretation is covered in Term 1, under Companies and is integrated in other topics
across the curriculum e.g. Inventory Valuation.
It features mainly in the Accounting P1 (Financial Reporting and Evaluation) and in certain topics of
P2 (Managerial accounting and internal controls).
Recent trends on this topic show a spread of questioning techniques that rely on a clear
understanding, insight and analytical thinking using financial and non-financial information,
including all financial statements.

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PRIOR KNOWLEDGE (Content you would have covered in previous Grades)
• Basic Analysis and Interpretation of the Financial Statements of a Sole Trader as introduced in
Grade 10;
• Analysis and Interpretation of Partnership’s Financial Statements done in Grade 11.
• Analysis and Interpretation of information from different topics of the curriculum covered in
Grade 10 and 11.

A REFLECTION OF THE YEAR-END CYCLE OF ACTIVITIES

PRE-ADJUSTMENT
ADJUSTMENTS
TRIAL BALANCE

POST-ADJUSTMENT TRIAL
CLOSING TRANSFERS
BALANCE

FINANCIAL STATEMENTS

STATEMENT OF STATEMENT OF FINANCIAL

COMPREHENSIVE INCOME POSITION
(Income Statement) (Balance Sheet)
Note to the Financial Statement

CASH FLOW STATEMENT

ANALYSIS AND INTERPRETATION

5

3. ANALYSIS AND INTERPRETATION OF
FINANCIAL/NON-FINANCIAL INFORMATION

3.1 Concepts and notes

Analysis and interpretation

A process that extracts relevant information from company’s Financial Statements which are
interpreted to meet a particular need at a particular point in time.
Analysis and interpretation is done to provide information that is useful for the purpose of decision
making.
Users and the reasons for it
Users Reasons
Shareholders Will the business be profitability now and in future?
Financial institutions Will the business be able to pay its debt?
(suppliers of short term credit)
Financial institutions Will business be able to pay long term loan and
(suppliers of long term credit) interest?
South African Revenue Services Is the business paying correct tax?
Management (Directors) Is the business performing as expected?
Customers Is the business going to be around in future?
Auditors Does the financial statements fairly present the results
of the business?
Employees or Unions Does the business have a long term growth prospects
to ensure continued employment?
Information from the Financial Statements is used to calculate the required financial indicators
and analysis/interpretation is then done
After calculating, interpret the results by comparing results to:
Financial indicators of the same business in previous years (meaningful)
Competitors
Markets in the same industry

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Area of analysis Description
Profitability Indicate if a company is generating a profit and an adequate return on assets
and equity.
Indicates how efficiently assets are being used and how effectively operations
are being managed.
Liquidity Focuses on the company’s ability to pay short-term obligations (e.g. creditors,
short-term loans, shareholders for dividends and SARS).
Solvency The ability of a company to pay off all its debts
Return Shows shareholder’s fair/unfair earnings on amount invested.
Risk and gearing Indicate how a company is financed, if they will be able to meet long-term
obligations, and the risk factor.
Share price and Used to see how a company is performing compared to others in the same
market prospect industry and to compare the company’s performance from one year to the
next.

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Financial Indicators are calculated using information extracted from the Financial Statements.
Financial Statement Direction Items extracted Financial indicators
Statement of Profitability Sales % gross profit on sales
Comprehensive Income Cost of sales % gross profit on cost of
Operating expenses sales
Operating profit % net profit on sales
Net profit after tax % operating expenses on
sales
% operating profit on sales
Return Net profit before tax Earnings per share
indicators Net profit after tax Dividends pay-out rate
Interest expense % Return on shareholders’
equity
% Return on Capital
Employed
Statement of Financial Liquidity Current assets Current ratio
Position Current liabilities Acid test ratio
And Notes to the Stock turnover rate
Statement: (Average) Stock holding
Ordinary share capital period
Retained income Average debtors’ collection
Trade and other period
receivables Average creditors’ payment
Trade and other payables period

Solvency Total assets Solvency ratio

Total liabilities Net assets = Assets –
Net assets Liabilities
(Shareholders Equity)
Risk and Non-current liabilities Debt/equity ratio
Gearing Shareholders’ equity % return on total Capital
Employed
Interest rate on loans*
Return Shareholders’ equity % return on shareholders’
Non-current liabilities equity
Total Capital Employed Dividends per share
Share dividends Interest rate on investments*
Share price Share capital Net asset value (NAV)
Number of shares Issue price/Share price
Shareholders’ equity Average share price
Market price (Securities
Exchange)*
* external financial indicators which are given in the Question
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Financial Indicators are calculated using information extracted from the Financial Statements to
get a specific answer.
Classification Financial Indicators Formulae Answer Integration

Profitability % Gross profit on Gross profit x 100 %

Income Statement
sales Sales 1

% Gross profit Gross profit x 100 %

on cost of sales Cost of sales 1
(mark-up %)
% Operating profit Operating profit x 100 %
on sales Sales 1
% Operating Operating expenses x 100 %
expenses on sales Sales 1
% Net profit on Net profit x 100 %
sales Sales 1

Solvency Solvency ratio Total assets : Total liabilities Ratio = BS

:1

Liquidity Current ratio Current assets : Current liabilities Ratio = BS

:1
Acid test ratio Current assets - inventories : Current Ratio= BS
liabilities :1
Stock turnover rate Cost of sales Times IS/BS
Average Stock
(Average) Stock Average Stock x 365 OR 12 Days / IS/BS
holding period Cost of sales 1 months
Average debtors Average Debtors x 365 OR 12 Days / IS/BS
collection period Credit Sales 1 months
Average creditors Average Creditors x 365 OR 12 Days / IS/BS
payment period Credit Purchases 1 months

Return % Return on Net profit after tax x 100 % IS/BS

Shareholders’ Average Shareholders’ Equity 1
Equity (ROSHE)

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 % Return on Net profit before tax + interest on loan x 100 % IS/BS
Capital Employed Average Capital Employed 1
(ROTCE)
Capital Employed is:
Aver Shareholders Equity + Average
Loans
Earnings Per Net profit after tax x 100 Cents IS
Share Number of issued shares 1
Return Dividends Per Interim +Final dividends x 100 Cents Note 8,RI
Share Number of issued shares 1
Net Asset value per Shareholders’ Equity x 100 Cents B/S, Note 7
share Number of issued shares 1 and 8

Dividend pay-out Dividends for the year x 100 % I/S, Note 7

rate Net profit after tax 1 and 8

Dividends per share x 100

Earnings per share

Financial risk/ Debt -equity ratio Non-current liabilities : Shareholders’ Ratio = BS

Gearing (gearing) equity :1

Key:

BS =Balance I/S = Income RI = Retained Income

sheet statement

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BASELINE ACTIVITY
The formula sheet used in the assessment/examination is given below.
REQUIRED:
Give the name of every formula listed in this formula sheet (Number 1 – 25).
GRADE 12 ACCOUNTING FINANCIAL INDICATOR FORMULA SHEET

1. Gross profit X 100 15. Gross profit X 100

Sales 1 Cost of sales 1
2. Net profit before tax X 100 16. Net profit after tax X 100
Sales 1 Sales 1

3. Operating expenses X 100 17. Operating profit X 100

Sales 1 Sales 1

4. Total assets : Total liabilities 18. Current assets : Current liabilities

5. (Current assets – Inventories) : Current 19. Non-current liabilities : Shareholders’
liabilities equity
6. (Trade and other receivables + Cash and cash equivalents) : Current liabilities
7. Average trading stock X 365 20. Cost of sales
Cost of sales 1 Average trading stock
8. Average debtors X 365 21. Average creditors X 365
Credit sales 1 Cost of sales/Credit Purchases 1

9. Net income after tax X 100 22. Net profit after tax X 100
Average shareholders’ equity 1 Number of issued shares 1

10. Net income after tax + Interest on loans X 100

Average Shareholders’ equity + Average non-current liabilities 1

11. Shareholders’ equity X 100 23. Dividends for the year X 100
Number of issued shares 1 Number of issued shares 1
12. Interim dividends X 100 24. Final dividends X 100
Number of issued shares 1 Number of issued shares 1

13. Dividends per share X 100 25. Dividends for the year X 100
Earnings per share 1 Net income after tax 1

14. Total fixed costs .

Selling price per unit – Variable costs per unit

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BASELINE ACTIVITY ANSWER
1. 2. 3. 4. 5.

6. 7. 8. 9. 10.

11. 12. 13. 14. 15.

16. 17. 18. 19. 20

21. 22. 24. 24. 25.

CHECK YOUR ANSWERS AGAINST THE NOTES BELOW

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 FINANCIAL INDICATORS, FORMULA, EXPLANATIONS AND WORKED
EXAMPLES

3.2 PROFITABILITY

3.2.1 Gross profit on sales (gross margin)

Profit 100
Sales
X 1
=%
Indicates the percentage by which the total selling price is greater than the cost price. Decrease in
this financial indicator:
• Pressure on Selling Price possible due to competition or low demand.
• Upward pressure on costs as result of inflation or other cost factors

3.2.2 Gross profit on cost of sales (Gross mark-up)

Gross Profit 100
Cost of Sales
X 1 % =
Mark-up on CP should equal to this %, if not, it can be as a result of:
• Shrinkage
• Products not correctly marked
• Discounts

3.2.3 Net profit on Sales (net margin)

Net Profit 100
Sales
X 1
= %
• If the answer is 10%, this means that for every R1 in sales, 10 cents is profit
• The faster the turnover, the greater the accumulation of 10 cents and the larger the ultimate net
profit.

3.2.4 Operating expenses on Sales

Operating Expenses 100
Sales
X 1
= %
• Indicates how much of the sales is used to cover running expenses.
• Trends are favourable if this is dropping or at least consistent.

3.2.5 Operating profit on Sales

Operating Expenses 100
Sales
X 1
= %
• Indicates how much of the Sales end up as profit
• Trends are favourable if profit is increasing or at least consistent

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WORKED EXAMPLES
FINANCIAL INFORMATION
KHOZA LTD.
The financial year ended on 28 February 2021.

INFORMATION:
A. Share Capital
The business has an authorised share capital of 1 125 000 ordinary shares.
The total issued share capital on 28 February 2020 was 600 000 ordinary shares.
75 000 ordinary shares were issued on 1 March 2020.

B. Extract from the Income Statement on 28 February 2021:
Sales 7 728 000
Cost of sales (4 830 000)
Gross profit 2 898 000
Operating income
Operating expenses (1 506 960)
Operating profit 1 777 440
Interest expense (200 940)
Net profit before income tax 1 576 500
Income tax (472 950)
Net profit after income tax 1 103 550

C. Information from the Balance Sheet on 28 February
28/02/2021 28/2/2020
Non-current assets 10 421 550 9 566 100
Fixed assets 10 121 550 9 266 100
Financial assets 300 000 300 000
Current assets 1 459 800 1 588 050
Inventories 627 000 482 550
Trade debtors 825 000 712 500
Cash and cash equivalents 7 800 393 000
Shareholders’ equity 9 336 000 7 641 750
Ordinary share capital 8 741 250 7 440 000
Retained income 594 750 201 750
Non-current liabilities 1 500 000 2 400 000
Current liabilities 1 045 350 1 112 400
Trade creditors 616 800 932 400
Shareholders for dividends 330 000 180 000
Bank overdraft 98 550 0

D. An interim dividend of R270 000 was paid and a final dividend was declared.

E. Credit sales amount to 30% of the total sales.
Credit purchases amounted to R3 622 500.
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WORKED EXAMPLE 1
PROFITABILITY FINANCIAL INDICATORS

Use information on PAGE 14 to calculate the following financial indicators. Round off your answers
to one decimal point

a. % Gross profit percentage on sales
b. % Operating expenses on sales
c. % gross operating income on sales
d. % Net profit after tax on sales
e. % Gross profit percentage

a. % Gross profit percentage on sales

2 898 000
7 728 000
x 100 = 37,5%

b. % Operating expenses on sales

1 506 960
7 728 000
x 100 = 19,50%

c. % gross operating income on sales

386 400
7 728 000
x 100 = 5%

d. % Net profit after tax on sales

1 103 550
7 728 000
x 100 = 60%

e. % Gross profit on cost of sales (mark-up %)

2 898 000
4 830 000
x 100 = 60%

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3.3 LIQUIDITY

3.3.1 Current Ratio

Current Assets: Current Liabilities

• Indicates whether the business can meet its short-term obligations or not.
• Should not be too high – this means funds are tied up in stock which could be more effectively
used

3.3.2 Acid Test Ratio

Current Assets – Inventory: Current Liabilities

OR
Trade and other receivables + Cash and Cash Equivalents : Current Liabilities
• If too low the business will not be able to meet its short-term obligations.
• Should not be too high – this means funds are not effectively used, or should be invested to
generate more income.

3.3.3 Stock turnover rate

Cost of Sales
Average Inventories
= times per year
• If stock turnover is too high, the business may run out of stock.
• If stock turnover is too low, stock may become obsolete.
• This is also dependent on the type of goods being sold.
• The business needs to look at ways to increase its sales to create a higher rate of stock
turnover.

3.3.4 Average Stock holding period Stock holding period (Use final stock not average)

Average Inventories 361 Closing Inventories 365

Cost of Sales
X 1
= days Cost of Sales
X 1
= days
• The faster the sales the less number of days the stock is kept.
• This is also influenced by the type of goods being sold.

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3.3.5 Average debtors’ collections period

Average Debtors 361

Credit Sales
X 1
= days
• Indicates how long debtors take to settle their accounts.
• It is compared to the credit terms of the business, to assess effective control.
• A generally accepted period is 30 days. Indicates final test of liquidity.

3.3.6 Average creditors’ payment period

Average Creditors 361

X =
Cost of Sales /Credit Purchases days
1

Indicates how long the business takes to pay its creditors. It is compared to the credit terms of the
supplier. A generally accepted period is 90 days.

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WORKED EXAMPLE 2
LIQUIDITY FINANCIAL INDICATORS’

Use information on PAGE 14 to calculate the following financial indicators. Round off your answers
to one decimal point.

i. Current ratio
ii. Acid test ratio
iii. Stock turnover rate
iv. Average stock holding period
v. Average debtors collection period
vi. Average creditors payment period

i. Current ratio
1 459 800 : 1 045 350
= 1,4 : 1

ii. Acid test ratio

832 800  832 800

(1 459 800 – 627 000) : 1 045 350 Or (825 000 + 7 800) : 1 045 350
= 0,8 : 1

iii. Stock turnover rate

4 830 000
= 8,7 times
1/2 (482 550 + 627 000)
554 775

iv. Average stock holding period (in days)

1/2 (482 550 + 627 000)

x 365 = 41,9 days Or 365 / 8,7
4 830 000

v. Average debtors collection period

774 600

1/2 (932 400 + 616 800)

x 365 = 121 days
30% x 7 728 00
2 318 400

vi. Average creditors payment period

774 600
x 365 = 58,5 days
1/2 (932 400 + 616 800)
4 830 000

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3.4 SOLVENCY
3.4.1 Solvency ratio
Total Assets : Total Liabilities

• Indicates whether the business can meet (pay) its liabilities (Non-Current Liabilities
and Current Liabilities).
• A business is solvent if its total assets exceeds its total liabilities
3.4.2 Net Asset = Total Assets – Total Liabilities

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WORKED EXAMPLE 3
SOLVENCY FINANCIAL INDICATORS
Use information on PAGE 14 to calculate the following financial indicators. Round off your answers
to one decimal point.

1. Solvency ratio
2. Net Assets (solvency)

1. Solvency ratio

11 881 350 2 545 350

(10 421 550 + 1 459 800) : (1 500 000 + 1 045 350) = 4,7 : 1

2. Net Assets (solvency)

11 881 350 – 2 545 350 = 9 336 000

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3.5 RETURN
3.5.1 % Return on Shareholders’ Equity

Net Profit after tax 100

X =
Average Owner’s Equity 1 %
• Indicates the % return owners’ have received for investing in the business
• It answers the question of whether the owners should have invested elsewhere
• Compare to % returns that could be achieved at financial institutions (alternative investment)

3.5.2 Earnings per share (EPS)

Net Profit after tax 100

Number of Shares Issued
X 1
= cents
• Establish whether purchasing shares were worthwhile and whether the company has long term
sustainability and growth potential.

3.5.3 Dividends per share (DPS)

Ordinary Share Dividends 100

Number of Shares Issued
X 1
= cents
• Earnings are distributed to shareholders as dividends but some are retained for future growth.

3.5.4 Net Asset value per share (NAV)

Ordinary Shareholders Equity 100

Number of Shares Issued
X 1
= cents
• It represents the intrinsic value of the share i.e. a more realistic value based on the performance
of the undertaking over the years and growth within the business, including acquisition of assets
and issue of additional shares.

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WORKED EXAMPLE 4
RETURN FINANCIAL INDICATORS
Use information on PAGE 14 to calculate the following financial indicators. Round off your answers
to one decimal point

a. % Return on shareholders’ equity
b. Earnings per share (EPS)
c. Dividends per share (DPS)
d. Net asset value per share (NAV)

% Return on shareholders’ equity

1 103 550
x 100 = 13%
a. 1/2 (9336000 + 7 587 450)
8 3461 725

Earnings per share (EPS)

1 103 550
b. x 100 = 163,5 cents or 164 cents
675 000

Dividends per share (DPS)

c. 270 000 + 330 000

x 100 = 89 cents (88,9 %)
675 000

Net asset value per share (NAV)

d. 9 336 000
675 000
x 100 = 1383,1 cents

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3.6 FINANCIAL RISK/GEARING

3.6.1 Debt-equity ratio (gearing)

Non-Current Liabilities: Shareholders Equity

• Provides insight into capital structure of the business.
• A ratio of 0,55:1 indicates that for every R1 capital invested by shareholders, 55c was raised
through long-term loans.
• It also indicates the business ability to raise additional capital through Long-term loans.
• A lower ratio indicates that the business has a higher creditworthiness and should therefore be
able to obtain additional financing easier

3.6.2 % Return on total capital employed

Net Profit Before Tax 100

Average Shareholders+ Average Loans
X 1
=
%
• Compare to last year and indicate whether it improved or deteriorated
• Is it above or below the interest rate on loans?
• Above indicates positive gearing – therefore favourable to use loans
• Below indicates negative gearing – unfavourable to use loans – may pay loans off quickly
• It’s favourable to make use of borrowed capital when interest rates are lower than the return
that can be earned by the business in using those funds.

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WORKED EXAMPLE 5
RISK/GEARING FINANCIAL INDICATORS

Use information on PAGE 14 to calculate the following financial indicators. Round off your answers
to one decimal point.

i. Debt/equity ratio
ii. % Return on average capital employed (ROTCE)

i. Debt/equity ratio

1 500 000 : 9 336 000 = 0,2 : 1 (0,16 : 1)

ii. Return on average capital employed (ROTCE)

1 777 440
1 576 500 + 200 940
x 100 = 17,1%
1/2 (9336000+1 500 000 + 7 587 450 + 2400 000)
10411725

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WORKED EXAMPLE 6
COMMENTING ON FINANCIAL INDICATORS

INFORMATION
The following information appeared in the accounting records of Blom Ltd for the financial year
ended 28 February 2021

2021 2020
Current ratio 3,6:1 2,8:1
Acid test ratio 0,5:1 0,7:1
Rate of stock turnover 3,7 times 5 times
Average debtors collection period 28 days 35 days
Return on shareholders’ equity 16% 18%
Earnings per share 45 cents 54 cents
Dividends per share 22 cents 44 cents
Gross profit on cost of sales 70% 65%
Gross profit on sales 28% 32%
Net profit after tax on sales 12% 15%
Operating profit on sales 16% 21%
Return on total capital employed 12% 14%
Debt-equity ratio 0,6:1 0,3:1
Interest rate on long-term loans 13% 12%
Interest on fixed deposit 8% 8%
Net asset value per share 335 cents 346 cents
Market price per share 347 cents 340 cents

REQUIRED:
1. Comment on the profitability of the business. Quote TWO financial indicators (with figures).
2. Directors feel that the business will experience difficulty in meeting its short term debts in the
next financial year. Explain why you either agree or disagree with them. Quote THREE financial
indicators with figures to support your opinion.
3. Although shareholders are satisfied with their % returns, they are concerned about the change
in dividend pay-out policy. Explain why they are satisfied with their % returns. Provide TWO
possible reason for the change in the dividend pay-out rate.
4. The directors took the decision to increase the loan during the year. Explain why this was a poor
decision. Quote relevant financial indicators in your explanation.
5. The company paid R3,50 per share to repurchase 50 000 shares during April 2020. This was
R0,75 above the average share price. Explain whether the shareholder received a fair price for
his shares. Quote TWO financial indicators with figures.

25
SOLUTION WORKED EXAMPLE 6
COMMENTING ON FINANCIAL INDICATORS

1. Comment on the profitability of the business. Quote and explain TWO relevant financial
indicators (with figures).
• An increase in the mark-up % (gross profit on cost of sales) has caused a decrease in the
% GP on sales (32% to 28%);
• NP after tax also decreased from 15% to 12% (by 3% points); operating profit dropped
from 21% to 16%.
2. Directors feel that the business will experience difficulty in meeting its short term debts in
the next financial year. Explain why you either agree or disagree with them. Quote THREE
financial indicators with figures to support your opinion.
• Current ratio increased (2,8:1 to 3,6:1);
• Acid test ratio dropped (0,7 : 1 to 0,5 : 1);
• a clear indication on stock not moving (stock piling) ; also reflected by the decrease in the
STR from 5 times to 3,7 times.
3. Although shareholders are satisfied with their % returns, they are concerned about the
change in dividend pay-out policy. Explain why they are satisfied with their returns. Provide
TWO possible reason for the change in the dividend pay-out rate.
• ROSHE: Although it decreased (from 18% to 16%) it is still better than any alternative
investments such as a fixed deposit which fluctuates around 8%.
• Last year the company distributed 81,5% of the EPS as DPS.
• This year it was only 49%. An indication that the company has decided to retain a greater
portion of the earnings.
• They wanted to use the resources for future expansions of the business. They plan to
address cash flow issues. Equalization of dividends, over the long term.
4. The directors took the decision to increase the loan during the year. Explain why this was a
poor decision. Quote relevant financial indicators in your explanation. (8)
• An increase in the financial risk. Debt/Equity increased from 0,3 : 1 to 0,6 : 1.
• The ROTCE dropped from 14% to 12%. It is now less than the interest on loan (13%).
• Meaning that the company is negatively geared.
5. The company paid R3,50 per share to repurchase 50 000 shares during April 2020. This
was R0,75 above the average share price. Explain whether the shareholder received a fair
price for his shares. Quote TWO financial indicators with figures.
• He received more than the NAV which is now 335 cents.
• It is also higher than the NAV at the beginning of the year (346 cents).
• It is also close to the market price at the end of the year (347 cents; 340 cents last year).
• Looking at trends, although the NAV is declining, the MP is increasing; an indicator of
investor confidence.

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3.7 INTERPRETATION BEYOND FINANCIAL INDICATORS

In addition to using financial indicators as a basis for interpretation, candidates’ understanding and
insight is extended into critically analysing the actual amounts and trends of specific sections of the
different financial statements.

3.7.1 THE DIVIDEND PAY-OUT POLICY:

• A comparison of the percentage of Earnings (per share) distributed as Dividends (per share) is
required (DPS/EPS x 100).
• The difference would reflect the percentage of earnings that the directors want to retain (as part
of equity).
• At times, they may also decide to declare dividends that exceeds the earnings of the current
financial year (> 100% of EPS).
• Possible questions would generally require:
˚ A calculation and comparison of this pay-out rate (as a %);
˚ Possible reasons for directors making this adjustment.
˚ Possible consequences of these decisions on the shareholders or the business

3.7.2 % SHAREHOLDING AND MAJORITY SHAREHOLDING

• This refers to a shareholder owning more than 50% of the issued shares in a company.
• The number of shares is used in the calculation (shares are issued at different prices over time,
so the amount may not be meaningful).
• A change in the number of shares (increase/decrease) will affect this percentage.
• It must be noted that a single shareholder may not necessarily own more than 50% of the
shares, which means that a group of shareholders can decide to influence decisions by voting
together.
• Possible questions will include:
˚ Calculate this shareholder’s % shareholding before / after any changes in the share capital
(number of shares)
˚ The effect of the change in issued shares on his/her % shareholding
˚ If he/she is not the majority shareholder, how many shares must he/she buy from any new
issue of shares, to become the majority shareholder.
˚ More than 50% is: 50% + 1 share Or 50% + 100 shares (if assumed share issued in
batches of 100 shares) Or 51% of issued shares.
˚ The motivation to become the majority shareholder (Reasons)
˚ Ethical issues (manipulating changes to the share capital).

27
WORKED EXAMPLE 7
PAY-OUT POLICY AND MAJORITY SHAREHOLDING
INFORMATION

A. Details of share capital

2021 2020
Number of shares 1 275 000 975 000
Ordinary Share Capital R 9 105 000 R 6 825 000

B. Velile a senior director on the Board, owns 525 000 shares on 1 March 2020.
Additional shares were issued on 30 June 2020.
Velile was on holiday and missed the opportunity to purchase any shares.
Financial Indicators calculated
2021 2020
Earnings per share (EPS) 147 cents 168 cents
Dividends per share (DPS) 126 cents 87 cents
Interest rate on fixed deposits 6,5% 6%

1.Calculate Velile’s percentage shareholding before and after the issue of additional shares on 30
June 2020.

2. Explain why Velile would be disappointed that he was not able to purchase any additional
shares when these shares were issued.

3. Velile convinced the CEO to repurchase 240 000 shares from a close friend who was not
interested in being a shareholder of the company on 1 March 2021.

3.1 Explain the effect of this re-purchase on Velile’s % shareholding.

3.2 Explain why the other shareholders would be concerned about this transaction, after they
received inside information about the share buyback.

4. Show the change on the dividend pay-out rate by doing a calculation.

5. Provide TWO possible reasons why the directors decided to change the trend of previous year.

6. Will the shareholders be satisfied with this change on policy? Provide TWO points.

28
SOLUTIONS: WORKED EXAMPLE 7
PAY-OUT POLICY AND MAJORITY SHAREHOLDING

Calculate Velile’s percentage shareholding before and after the issue of additional shares on 30
June 2020.

• Before share issue: 525 000/975 000 = 53.8%

• After share issue : 525 000/1 275 000 = 41.2%

Explain why Velile would be disappointed that he was not able to purchase any additional shares
when these shares were issued.

• He lost his status as a majority shareholder.

• As the majority shareholder, he was able to influence many decisions, including appointments
of key directors.

Shareholding
Explain the effect of this re-purchase on Velile’s % shareholding.

• The total number of shares would decrease from 1 275 000 – 240 000 to 1 035 000 shares.
• Velile’s % shareholding: 525 000/1 035 000 = 50,7%. Velile regain his majority status.

Explain why the other shareholders would be concerned about this transaction, after they re-
ceived inside information about the share buyback.

• Ethical issue – inside information used.

• He has used his position (senior director) to influence the re-purchase of shares
• He wants to regain his majority status.

Show the change on the dividend pay-out rate by doing a calculation.

2020: 87/168 = 51.8% 2021: 126/147 = 85.7%

29
Provide TWO possible reasons why the directors decided to change the trend of the previous year.

• To satisfy shareholders, who may be concerned about the decrease in profitability.

• They have no strategic plans for growth.
• They are in the process of balancing the dividends distributed over the last 5 years.

Will the shareholders be satisfied with this change on policy? Provide TWO points.
• Shareholders may be satisfied – they received a higher dividend (better returns than last
year; they may be relieved that they are getting some money back before deciding to sell their
shares. No confidence in the long term prospects of he business
• They may be concerned that the company is paying a larger dividend when they are
experiencing problems with profitability
• They may be concerned that directors do not have plans for growth – addressing the
profitability problem of the business

30
4. CONSOLIDATION ACTIVITIES
ACTIVITY 1 (Adapted from Nov 2018 DBE QP) (53 Marks; 42 Minutes)

You are provided with information about Vooma Limited for the past two financial years ended 30
June. The company is situated in KZN and trades in racing bikes.

REQUIRED:
NOTE: Provide figures or financial indicators (ratios or percentages) and
comparisons with the previous year to support comments or explanations.

1.1 Calculate the following for 2018:
1.1.1 % operating expenses on sales (2)
1.1.2 Acid-test ratio (4)
1.1.3 % return on shareholders’ equity (4)

1.2 Cash flow and financing activities:

1.2.1 Explain why the directors are satisfied with the improvement in cash and cash equivalents
since 1 July 2016. (3)

1.2.2 Decisions and gearing in 2018:
Identify THREE decisions that the directors made to pay for land and buildings.
Explain how these decisions affected: (6)
- Capital employed
- Financial gearing (Quote TWO indicators.) (6)

1.2.3 From the Cash Flow Statement identify ONE decision made by the directors in 2017 that
they did NOT make in 2018, besides the points mentioned above. Give a possible reason for
the decision in 2017. (3)

1.3 Dividends, returns and shareholding for the 2018 financial year:
• On 1 July 2017 there were 800 000 shares in issue.
• On 31 December 2017 interim dividends were paid.
• On 1 January 2018, 200 000 shares were issued to existing shareholders.
• On 30 June 2018 final dividends of 75 cents per share were declared on all shares, but have
not yet been paid.

1.3.1 Calculate: the total interim dividends paid in the 2018 financial year
Calculate: the interim dividends per share paid in the 2018 financial year.

31
1.3.2 Calculate total dividends earned by Dudu Mkhize for the 2018 financial year. Her
shareholding is:
SHARES PURCHASED PURCHASE PRICE
31 August 2016 380 000 shares R7,00
1 January 2018 110 000 shares R20,00
TOTAL 490 000 shares
(5)

1.3.3 On 1 January 2018 each shareholder was offered two shares for every five shares owned.
Dudu did not buy enough shares to become the majority shareholder.
Calculate the minimum number of additional shares that Dudu should have bought.
(3)
1.4 The directors decided to buy land and buildings in two other provinces in 2018 to solve the
problem of low sales that they had previously had in KZN.

1.4.1 Explain:
• Why it was necessary to purchase properties in other provinces instead of in KZN
(2)
• Whether the decision to purchase these properties had the desired effect on sales
(3)
• Another strategy they used to solve the problem of low sales
(3)

1.4.2 The CEO, Ben Palo, wants to communicate other good news to the shareholders at the
AGM. Give advice on what he should say about the following topics:
• Earnings per share (3)
• % return earned (3)
• Share price on the JSE (3)

INFORMATION FOR THE YEAR ENDED 30 JUNE:

A. FIGURES IDENTIFIED FROM INCOME STATEMENT:
2018 2017
Sales R13 182 000 R7 740 000
Number of bikes sold 1 750 bikes 900 bikes
Mark-up % 58% 72%
Cost of sales 8 330 000 4 500 000
Gross profit 4 852 000 3 240 000
Operating expenses 1 900 000 1 500 000
Depreciation 412 000 275 000
Income tax 819 000 444 000
Net profit after tax 1 911 000 1 036 000

32
B. EXTRACT FROM BALANCE SHEET ON 30 JUNE:

2018 2017
Fixed assets (carrying value) R12 154 000 R8 031 000
Investments 625 000 600 000
Current assets 2 427 000 2 090 000
Inventories 1 652 000 1 250 000
Trade and other receivables 365 000 820 000
SARS: Income tax 0 15 000
Cash and cash equivalents 410 000 5 000
Shareholders’ equity 12 112 000 7 191 000
Non-current liabilities (Loan) 1 850 000 2 600 000
Current liabilities 1 244 000 930 000
Trade and other payables 420 000 515 000
Shareholders for dividends 750 000 280 000
SARS: Income tax 74 000 0
Bank overdraft 0 135 000

C. CASH FLOW STATEMENT:
2018 2017
Cash flows from operating activities R1 850 000 R1 046 000
Cash generated from operations 3 322 000 1 989 000
Interest paid ? (260 000)
Dividends paid (520 000) (254 000)
Income tax paid ? (429 000)

Cash flows from investing activities (4 560 000) (167 000)

Purchases of land and buildings (4 840 000) 0
Sale of fixed assets ? 383 000
Change in investments ? (550 000)

Cash flows from financing activities 3 250 000 (400 000)

Share capital issued 4 000 000 0
Shares repurchased 0 (1 000 000)
Change in non-current liabilities (750 000) 600 000

Cash and cash equivalents: Net change 540 000 479 000
Opening balance (130 000) (609 000)
Closing balance 410 000 (130 000)

33
D. FINANCIAL INDICATORS:
2018 2017
Mark-up % achieved 58% 72%
Operating expenses on sales ? 19,4%
Debt-equity ratio 0,2 : 1 0,4 : 1
Acid-test ratio ? 0,9 : 1
Return on shareholders’ equity ? 14,4%
Return on capital employed 20,8% 17,8%
Earnings per share 208 cents 130 cents
Dividends per share ? 70 cents
Dividend pay-out rate 50% 54%
Net asset value per share 1 211 cents 899 cents
Market price on stock exchange 2 800 cents 2 100 cents
Interest on loans 12% 12%

34
ACTIVITY 2
(Adapted from June 2019 DBE QP) 42 Marks; 34 Minutes)

2.1 Choose a term from the list below that answers the specific following questions. Write only the
term next to the question numbers (2.1.1 to 2.1.4) in the ANSWER BOOK.

gearing; return on equity; solvency; liquidity; profitability

2.1.1 Is the business able to pay off all its debts?
2.1.2 Can the business pay off short-term debts in the next financial year?

2.1.3 Will shareholders be satisfied with the benefit that they receive for investing in the
company?
2.1.4 To what extent is the company financed by loans or borrowed capital?
(4)

2.2 KULFI LTD

information for the financial year ended 28 February 2019 is provided.
Where financial indicators are required to support your answer, quote the financial indicator and
actual figure/ratio/percentage and trends.

REQUIRED:

2.2.1 Calculate the following financial indicators on 28 February 2019:
• Acid-test ratio (4)
• Debt-equity ratio (4)
• % return on average shareholders’ equity (ROSHE) (5)

2.2.2 The shareholders are satisfied with the improvement in the liquidity position.
Quote THREE financial indicators (with figures) to support this statement. (6)

2.2.3 The company increased the share capital by R840 000, and the loan by R550 000.
• Explain how this affected the gearing and risk of the company. Quote TWO financial
indicators. (5)
• Provide TWO possible reasons why the business may need additional funds. (4)

35
 2.2.4 The directors decided to decrease the dividend pay-out percentage.

• Provide calculations to show the change in the pay-out rate. (4)

• Give ONE reason why many shareholders were satisfied with the change in
policy. Quote figures. (2)

2.2.5 On 1 March 2018 Martha owned 475 000 shares in the company. She did not
purchase any shares from the shares issued on 1 May 2018.

• Explain how the repurchase of the shares benefited Martha’s shareholding. Quote
figures. (4)

INFORMATION:

A Share capital:

• There were 900 000 ordinary shares in issue on 1 March 2018.

• An additional 100 000 ordinary shares were issued on 1 May 2018.
• On 1 October 2018 the company repurchased 60 000 shares at R9,00 per share. The
average share price at the time was R8,04.


B. Dividends

• Interim dividends of 25 cents per share were paid on 15 September 2018.

• Final dividends were declared on 28 February 2019.

C. Extract from Income Statement for the year ended 28 February 2019:

R
Depreciation 123 600
Interest expense 143 000
Income tax (at 30% of the net profit) 293 100

36
D. Extract from Balance Sheet on 28 February 2019:

2019 2018
R R
Fixed assets (carrying value)* 8 775 720 8 430 720
Fixed deposit: Flay Bank 150 000 100 000
Current assets 996 480 684 300
Inventories 448 000 281 000
Trade and other receivables (Note 1) 288 300 378 300
Cash and cash equivalents 260 180 25 000
Shareholders’ equity ? 7 341 500
Ordinary share capital 7 557 600 7 200 000
Retained income 311 000 141 500
Loan: Home Bank 1 400 000 850 000
Current liabilities 553 600 923 520
Trade and other payables (Note 2) 553 600 781 000
Bank overdraft 0 142 520
* Old equipment was sold at carrying value, R111 800, for cash.

Note 1: Trade and other receivables: 2019 2018
Debtors’ control 288 300 367 000
SARS: Income tax 0 11 300

Note 2: Trade and other payables: 2019 2018
Creditors’ control 325 000 421 000
Shareholders for dividends 206 800 360 000
SARS: Income tax 21 800 0

E. The following financial indicators were calculated on 28 February:

2019 2018
Current ratio 1,8 : 1 0,7 : 1
Acid-test ratio ? 0,4 : 1
Debtors’ collection period 28 days 39 days
Creditors’ payment period 60 days 60 days
Debt-equity ratio ? 0,1 : 1
Return on shareholders’ equity (ROSHE) ? 10.2%
Return on total capital employed (ROTCE) 12,9% 14,4%
Earnings per share (EPS) 71 cents 83 cents
Dividends per share (DPS) 47 cents 80 cents
Net asset value per share (NAV) 837 cents 816 cents
Market value per share 840 cents 807 cents
Interest rate on loans 13,5% 13,5%

37


ACTIVITY 3
(Adapted from November 2019 DBE QP) (52 Marks; 42 Minutes)

3.1 SUNSET LTD
The financial year ended on 28 February 2019.

REQUIRED:

3.1.1 Calculate financial indicators for the year ended 28 February 2019:
• % operating profit on sales (4)
• Net asset value per share (4)
• Debt-equity ratio (4)

INFORMATION FOR SUNSET LTD:

A. Information from Income Statement on 28 February 2019:

Sales R8 725 000

Gross profit 3 525 000
Depreciation 408 000
Operating profit 2 033 900
Interest expense 441 000
Income tax 477 900
Net profit after tax 1 138 000

B. Information from Balance Sheet on 28 February:

2019 2018
Fixed assets (carrying value)* R11 835 100 R10 658 000
SARS: Income tax 18 000 Cr 63 000 Dr
Shareholders’ equity 8 625 000 10 065 000
Ordinary share capital 7 724 000 9 300 000
Loan: Funza Bank 3 500 000 2 800 000
Shareholders for dividends 372 000 195 000
*NOTE: Fixed assets were sold at carrying value, R490 000.

38
C. Share capital and dividends:

SHARE CAPITAL NUMBER OF DETAILS OF SHARES
SHARES
2018 1 March 1 500 000 In issue at R6,20 per share
30 April 300 000 Repurchased at R6,90 per share
2019 1 January 40 000 New shares issued
28 February 1 240 000 In issue

DIVIDENDS DIVIDENDS PER SHARE
Final 2 March 2018 Paid 13 cents
Interim 31 August 2018 Paid 35 cents
Final 28 February 2019 Declared 30 cents

39
3.2 HORIZON LTD and OPTIMA LTD

Refer to Information D to F.
Mike Mbele owns shares and is a director in both these companies.
He recently invested another R420 000 in each company by buying shares on the JSE at market
value as follows:

HORIZON LTD OPTIMA LTD

R8,40 R4,00

REQUIRED:
NOTE: Provide figures, financial indicators or calculations in EACH case to support your
comments and explanations.
3.2.1 Purchase of shares:
• Explain why directors should be interested in the price of their companies’
shares on the JSE. (2)
• Calculate the number of additional shares in Horizon Ltd that Mike was
able to buy on the JSE in 2019. (3)
• Comment on the price that Mike paid for these shares and give TWO reasons
why he might have been satisfied to pay this price. (6)

3.2.2 Dividends and earnings:

• Explain your opinion on which company has the better dividend
pay-out policy. (6)
• Compare and comment on the % return on equity earned by EACH company. (4)
• Mike feels that the earnings per share (EPS) of Optima Ltd is much
better than that of Horizon Ltd. Explain why he feels this way. (5)

3.2.3 Refer to the Cash Flow Statements.

The poor economy has negatively affected Horizon Ltd more than Optima Ltd.

• Explain TWO decisions taken by the directors of Horizon Ltd in response
to the state of the economy, and how these decisions will affect the
company in future. (6)
• Explain TWO decisions taken by the directors of Optima Ltd that affect
risk and gearing. Quote and comment on TWO financial indicators. (8)


D. Shareholding of Mike Mbele in two companies:

40
 HORIZON LTD OPTIMA LTD
Number of shares bought in 2017 580 000 shares 1 430 000 shares
Total shares issued by each company 1 240 000 shares 2 600 000 shares
Additional shares bought by Mike ? 105 000 shares
Mike’s % shareholding before buying 46,8% 55,0%
additional shares

E. Financial indicators and additional information on 28 February 2019:

HORIZON LTD OPTIMA LTD
Earnings per share (EPS) 97 cents 83 cents
Dividends per share (DPS) 65 cents 80 cents
Debt-equity ratio 0,1 : 1 0,7 : 1
% return on average equity 6,2% 18,2%
% return on average capital employed 9,4% 15,1%
Net asset value (NAV) 750 cents 445 cents
Additional information:
Interest rate on loans 12,0% 12,0%
Interest on investments 6,5% 6,5%

F. Extracts from Cash Flow Statements for year ended 28 February 2019:

HORIZON LTD OPTIMA LTD
Cash flows from investing activities R2 700 000 (R2 730 000)
Purchase of fixed assets 0 (1 580 000)
Sale of fixed assets 1 800 000 0
Change in investments 900 000 (1 150 000)

Cash flows from financing activities (2 670 000) 4 000 000

Proceeds of new shares 0 200 000
issued
Shares repurchased (1 070 000) 0
Cash effects of long-term loan (1 600 000) 3 800 000

41
ACTIVITY 4
(Adapted from November 2020 DBE QP) (18 Marks; 14 Minutes)

USANDA LIMITED
The financial year ended on 28 February 2021.

REQUIRED:
Calculate the following financial indicators for the year ended 28 February 2021:

4.1 % operating profit on sales (2)

4.2 Acid-test ratio (4)
4.3 Debt- equity ratio (4)
4.4 Return on average shareholders’ equity (ROSHE) (4)
4.5 Dividend pay-out rate (%) (4)

INFORMATION:

A: Extract: Statement of Comprehensive Income: on 28 February 2021:

Sales R17 800 000

Operating profit 2 262 100
Interest on loan (capitalised) 270 000
Net profit before tax 1 777 000
Net profit after tax 1 243 900

Extract: Statement of Financial Position:

28 February 2021 29 February 2020

Fixed assets (carrying value) R13 650 600 R13 590 000
Current assets 659 500 1 067 500
Inventories 276 500 373 200
Trade and other receivables 262 300 539 600
Cash and cash equivalents 120 700 154 700
Shareholders’ equity 9 891 400 11 985 000
Ordinary share capital 9 555 000 11 220 000
Retained income 336 400 765 000
Loan: VBC Bank (see E) ? 2 080 000
Current liabilities 611 900 592 500
Trade and other payables 252 100 185 700
Bank overdraft 0 90 000
SARS: Income tax 19 800 69 300
Shareholders for dividends 340 000 247 500

42
Share capital:

DATES NUMBER OF DETAILS OF SHARES

SHARES
1 March 2020 1 650 000 In issue
30 October 2020 50 000 Additional shares issued
27 February 2021 335 000 Shares repurchased at R9,50
each
28 February 2021 1 365 000 In issue

D .Dividends and earnings:

• An interim dividend was paid on 31 August 2020.

• A final dividend of 20 cents per share was declared on 28 February 2021.
• Total dividends for the year amounted to R835 000.
• Earnings per share (EPS) on 28 February 2021 was 74 cents.

E. Loan: VBC Bank

• The balance on 1 March 2020 was R2 080 000.

• Monthly instalments of R35 000, including interest, were paid.
• Interest capitalised amounted to R270 000.

43
ACTIVITY 5
(Adapted from November 2020 DBE QP) 35 Marks; 28 Minutes)

5.1 Choose the question from COLUMN B that matches a category of financial indicators in
COLUMN A. Write the letter (A–E) next to the numbers (5.1.1-5.1.4) in the ANSWER BOOK.

COLUMN A COLUMN B
5.1.1 Liquidity A. Is the business managing expenses effectively to
increase profitability?
5.1.2 Risk and gearing B. Is the investment in the company better than
investing in fixed deposit?
5.1.3 Return to shareholders C. Will the company be able to pay off its current
debts?
5.1.4 Operating efficiency D. Will the company be able to pay off all its debts
using existing assets?
E. How is the company managing loans or borrowed
capital?
(4)
5.2 SCI-FI GEEKS LTD

The business trades in electronic equipment purchased from China. The information relates
to the past two financial years, ended 31 March. The COVID-19 lockdown has negatively
affected sales over the current financial year.
REQUIRED:

5.2.1 Liquidity:
The directors are satisfied with the improvement in the current ratio and the acid-test ratio.
Explain why you would disagree with them. Quote TWO financial indicators
in your response. (6)

5.2.2 Dividends:
• The directors changed the dividend policy for the current financial year.
Comment on the dividend per share over the two years. Quote figures. (2)
• Explain the change in the dividend payout rate and give a reason for this change.
Quote figures. (4)
• A shareholder felt that they should be satisfied with the dividends they received,
as it is better than last year. Explain why you agree with him. Quote figures. (3)

44


5.2.3 Comment on the risk and gearing for both years.

Quote TWO financial indicators (with figures). (6)

5.2.4 Existing shareholders are dissatisfied that the new shares issued on 1 April 
2020 were sold to the CEO, Ida Shark. Give TWO reasons why you consider
their feelings to be justified. Quote figures. (6)

5.2.5 The Cash Flow Statement reflected a positive change of R980 000. Provide
TWO points why this should still be a concern to directors. Quote figures. (4)

INFORMATION:

A. Financial indicators and additional information:

2021 2020
Mark-up % achieved 60% 60%
% net profit before tax on sales 13,9% 20,3%
Current ratio 2,4 : 1 1,1 : 1
Acid-test ratio 1,0 : 1 0,4 : 1
Stockholding period 102 days 32 days
Average debtors’ collection period 46 days 31 days
Average creditors’ payment period 60 days 60 days
Earnings per share 58 cents 130 cents
Dividends per share 72 cents 90 cents
Dividend payout rate 136,5% 69%
Debt-equity ratio 0,4 : 1 0,3 : 1
Return on average shareholders’ equity 17,7% 31,6%
Return on total capital employed 23,2% 39%
Net asset value per share 332 cents 409 cents

Market price of shares on stock exchange 410 cents 540 cents

Interest rate on loans 13,5% 13,5%
Interest rate on fixed deposits 6,8% 7,8%

B. Share capital:

• On 1 April 2020 the company issued an additional 250 000 shares.

• On 31 March 2021 there were 1 250 000 shares in issue.

45
C. Extract from the Cash Flow Statement on 31 March:

2021 2020
Cash flows from operating activities (148 080) 910 000
Cash generated from operations 1 281 620
Interest paid (232 000)
Taxation paid (272 700)
Dividends paid (925 000)
Cash flows from investing activities 101 580 (300 000)
Cash flows from financing activities 1 026 500 (100 000)
Sale of shares 375 000 0
Change in loan 651 500 (100 000)
Cash and cash equivalents: Net change 980 000 510 000
Opening (330 000) (840 000)
Closing 650 000 (330 000)

46
5. ANSWER BOOK
ACTIVITY 1 ANSWER SHEET

1.1 CALCULATION OF FINANCIAL INDICATORS FOR 2018

1.1.1 Calculate: % operating expenses on sales

Workings Answer

(2)

1.1.2 Calculate: Acid-test ratio

Workings Answer

(4)

1.1.3 Calculate: % return on shareholders’ equity

Workings Answer

(4)

47
1.2 EXPLANATIONS ON CASH FLOW STATEMENT

1.2.1 Explain why the directors are satisfied with the improvement in cash and cash equivalents
since 1 July 2016. Quote figures.

(3)

1.2.2 Identify THREE decisions that the directors made to pay for land and buildings.


Decision 1 (with figures)
Decision 2 (with figures)
Decision 3 (with figures)

(6)

Explain how these decisions affected the capital employed in the 2018 financial year. Quote
figures.

Explain how these decisions affected the financial gearing in the 2018 financial year. Quote TWO
indicators and their figures.

(6)

1.2.3 From the Cash Flow Statement identify ONE decision made by the directors in 2017 that
they did NOT make in 2018, besides the points mentioned above. Give a possible reason for the
decision in 2017.

48

Decision (with figures) Possible reason

(3)
1.3 DIVIDENDS, RETURNS AND SHAREHOLDING

1.3.1 Calculate: Total interim dividends paid for the 2018 financial year

Workings Answer

(6)
Calculate: Interim dividends per share for the 2018 financial year
Workings Answer

(6)

1.3.2 Calculate total dividends earned by Dudu Mkhize for the 2018 financial year.

Workings Answer

49
1.3.3 Calculate the minimum number of additional shares that Dudu should have bought.


Workings Answer

(3)

1.4.1 Explain why it was necessary to purchase properties in other provinces instead of in KZN.

(2)
Explain whether the decision to purchase these properties had the desired effect on sales.
Quote figures.

(3)

Explain another strategy they used to solve the problem of low sales. Quote figures.

(3)
1.4.2 Give advice on what Ben Palo should say about the following topics:
Advice on what to say on earnings per share:

(3)

Advice on what to say on % return earned:

(3)

50

Advice on what to say on share price on the JSE:

(3)

51
ACTIVITY 2 ANSWER SHEET

2.1
2.1.1
2.1.2
2.1.3
2.1.4

(4)

2.2 KULFI LTD
2.2.1 Calculate: Acid-test ratio

Workings Answer

(4)

Calculate: Debt-equity ratio

Workings Answer

(4)

Calculate: % return on average shareholders’ equity (ROSHE)

Workings Answer

(6)

52
2.2.2 The shareholders are satisfied with the improvement in the liquidity position.
Quote THREE financial indicators (with figures) to support this statement.

(6)

2.2.3 The company increased the share capital by R840 000, and the loan by R550 000.
Explain how this affected the gearing and risk of the company. Quote TWO financial
indicators.

(5)
Provide TWO possible reasons why the business may need additional funds.

(5)
2.2.4 Provide calculations to show the change in the pay-out rate.

(4)
Give ONE reason why many shareholders were satisfied with the change in
policy. Quote figures.

(2)

53
2.2.5 Explain how the repurchase of the shares benefited Martha’s shareholding. Quote
figures.

(4)

54
ACTIVITY 3 ANSWER SHEET

3.1
SUNSET LTD

3.1.1
Calculate financial indicators for the year ended 28 February 2019:
% operating profit on sales
Workings Answer

(4)
Net asset value per share
Workings Answer

(4)
Debt-equity ratio
Workings Answer

(4)

3.2 HORIZON LTD and OPTIMA LTD

3.2.1 Explain why directors should be interested in the price of their companies’
shares on the JSE.

(4)
Calculate the number of additional shares in Horizon Ltd that Mike was able to
buy on the JSE in 2019.
Workings Answer

(4)

55
 Comment on the price that Mike paid for these shares and provide TWO
reasons why he might have been satisfied to pay this price.
Comment (with figures):

Reason 1 :

Reason 2:

(6)

3.2.2 Explain your opinion on which company has the better dividend pay-out policy.
Quote figures.

(6)
Compare and comment on the % return on equity earned by EACH company.
Quote figures.

(4)
Mike feels that the earnings per share (EPS) of Optima Ltd is much better
than that of Horizon Ltd. Explain why he feels this way. Quote figures or
calculations.

(5)

56
3.2.3 Explain TWO decisions taken by the directors of Horizon Ltd in response to
the state of the economy, and how these decisions will affect the company in
future.
Decision 1 (with figures):

Decision 2 (with figures):

Effect on Horizon Ltd in future:

(6)
Explain TWO decisions taken by the directors of Optima Ltd that affect risk and
gearing. Quote and comment on TWO financial indicators.
Decision 1 (with figures):

Decision 2 (with figures):

Quote and comment on TWO financial indicators that affect risk and gearing.

(8)

57
ACTIVITY 4 ANSWER SHEET

USANDA LIMITED
Calculate financial indicators for the year ended 28 February 2021:

4.1 % operating profit on sales
Workings Answer

4.2 Acid-test ratio

Workings Answer

4.3 Debt- Equity ratio

Workings Answer

4.4 % return on average shareholders’ equity (ROSHE)

Workings Answer

4.5 Dividend pay-out rate (%)

Workings Answer

58
ACTIVITY 5 ANSWER SHEET
5.1
5.1.1
5.1.2
5.1.3
5.1.4

(4)
5.2 SCI-FI GEEKS LTD

5.2.1
The directors are satisfied with the improvement in the current ratio and the acid-test ratio.
Explain why you would disagree with them. Quote TWO financial indicators in your response.

(6)

5.2.2
Comment on the dividend per share over the two years. Quote figures.

(2)

Comment on the dividend per share over the two years. Quote figures.

Give a reason for this change.

(4)

59
A shareholder felt that they should be satisfied with the dividends they received as it is better
than last year. Explain why you agree with him. Quote figures.

(4)

5.2.3 Comment on the risk and gearing for both years. Quote TWO financial indicators
(with figures).

5.2.4 Existing shareholders are dissatisfied that the new shares issued on 1 April 2020
were sold to the CEO, Ida Shark. Give TWO reasons why you consider their
feelings to be justified. Quote figures.

(6)
5.2.5 The Cash Flow Statement reflected a positive change in R980 000. Provide TWO
points why this should still be a concern to directors. Quote figures.

(4)

60
6. SUGGESTED ANSWERS AND MARKING GUIDELINES
ACTIVITY 1
SUGGESTED ANSWERS AND MARKING GUIDELINES

1.1 CALCULATION OF FINANCIAL INDICATORS FOR 2018

1.1.1 Calculate: % operating expenses on sales

Workings Answer
1 900 000 x 100
14,4% ✓✓
13 182 000
(2)
1.1.2 Calculate: Acid test ratio
Workings Answer

775 000 two marks

(2 427 000 ✓ – 1 652 000 ✓) : 1 244 000 ✓

0,6 : 1 ✓

Or: (410 000 + 365 000) : 1 244 000

one mark one mark one mark

(4)

1.1.3 Calculate: % return on shareholders’ equity (use average equity)

Workings Answer

1 911 000 ✓ x 100

19,8% ✓
9 651 500 ✓✓

(4)

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1.2 EXPLANATIONS ON CASH FLOW STATEMENT

1.2.1 Explain why the directors are satisfied with the improvement in cash and cash equivalents
since 1 July 2016. Quote figures.
ONE valid point ✓✓ relevant figure/s ✓
Response for three marks (i.e. comment on two financial years):
• Large negative balance of R609 000 (at end of 2016 financial year) improved to positive
R410 000 (at end of 2018 financial year) / improved by R1 019 000. OR
• Large overdraft of R609 000 (at end of 2016) improved to R130 000 / by R479 000 by the end
of the 2017 financial year.
• Improvement continued in 2018; the overdraft was eradicated, and C&CE were positive R410
000 at end of 2018 financial year.
• Response for two marks (i.e. comment on one financial year):
• In 2018 financial year, C&CE increased from R5 000 to R410 000 / by R405 000 OR:
• In 2017 financial year, overdraft of R609 000 decreased to R130 000 / by R479 000 OR:
• In 2018 financial year, overdraft of R130 000 was eliminated, C&CE improved to positive R410
000 / by R540 000.

(3)

1.2.2 Identify THREE decisions that the directors made to pay for land and buildings.

Points (with figures)
Decision 1 ✓Issued shares (rights issue): R4m✓
(with figures)
Decision 2 ✓Sale of fixed assets R305 000✓
(with figures)
Decision 3 ✓Cash generated from operations; part of R1,85m ✓
(with figures) / increase of R804 000
Any other valid point • Items that may influence cash generated from operations
e.g. R3,32m
• Increase in sales R5,4m / due to lower mark-up 72% to 58%
• Tax not paid R74 000
• Better collection from debtors (820 000 – 365 000)

(6)

62
Explain how these decisions affected the capital employed in the 2018 financial year. Quote
figures. Any ONE of: (with figures) ✓✓
• TCE increased by R4,171m / from R9,791m to R13,962m / by 29,9%
• OSHE increased by R4,921m / by 68,4% / OSC increased by R4m
• Loan decreased by R750 000
Explain how these decisions affected the financial gearing in the 2018 financial year. Quote TWO
financial indicators and their figures.
TWO relevant financial indicators ✓ ✓ figures and trend ✓ ✓

• Debt/equity ratio improved (decreased) from 0,4: 1 to 0,2:1

• ROTCE improved/increased from 17,8% to 20,8% while interest rate is 12%
(6)

1.2.3 From the Cash Flow Statement identify ONE decision made by the directors in 2017 that
they did NOT make in 2018, besides the points mentioned above. Give a possible reason for the
decision in 2017.

Any one decision ✓ Possible reason ✓
(with figures) ✓
Repurchase of shares, R1m Satisfy shareholders / improve certain financial
indicators; EPS; DPS; NAV
Issued no shares (i.e. Nil) Maintain ROSHE or EPS or DPS; economic
climate not conducive to expansion in previous
year
Increased the loan by R600 Because they did not issue shares
000
(3)

1.3 DIVIDENDS, RETURNS AND SHAREHOLDING

1.3.1 Calculate: Total interim dividends paid for the 2018 financial year

Workings Answer
✓ ✓ ✓
520 000 – 280 000 R240 000

Calculate: Interim dividends per share for the 2018 financial year
Workings Answer
240 000 ✓ x 100 30 cents ✓
800 000 ✓ one part correct
accept 30 or R0,30
(6)

63
1.3.2 Calculate total dividends earned by Dudu Mkhize for the 2018 financial year.

Workings Answer
✓ ✓ ✓ ✓
(380 000 x 0,3) + (490 000 x 0,75)
481 500 ✓

114 000 two marks 367 500 two marks

(5)

1.3.3 Calculate the minimum number of additional shares that Dudu should have bought.

Workings Answer
✓ ✓ 10 001 or 10 002
500 000 – 490 000 +1 or +2 or + 100 or 51% OR 10 100
1 000 000 shares x 50% Dudu’s shares OR 20 000 ✓

OR: 500 001 – 490 000

OR: Accept all figures above in addition to the 110 000
already bought,

500 000 – 380 000 +1 or +2 or + 100 or 51%

= 120 001 / 120 002 / 120 100 / 130 000

Response for one mark:
She could have bought 152 000 shares (i.e. 380 000 x 2/5)

(3)

1.4.1 Explain why it was necessary to purchase properties in other provinces instead of in KZN.
Any valid explanation ✓✓

To increase their target market / to increase sales /

to generate new customers /
to expand to areas where there is lots of money /
because they exhausted the market in KZN /
too much competition in KZN / low profits in KZN /
to diversify their business operations (e.g. rental income) /
because of better value for money in other provinces

64

Explain whether the decision to purchase these properties had the desired effect on sales. Quote
figures.
Identify positive effect ✓ Figures ✓✓

Sales increased by 850 bikes / from 900 to 1 750 / by 94,4%

OR by R5,442m / from R7,74m to R13,18m / by 70,3%
(3)
Explain another strategy they used to solve the problem of low sales. Quote figures.
Identify positive effect ✓ Figures ✓✓

Decrease in MU% from 72% to 58% / by 14% (led to increased sales)

OR Decreased selling prices reduced from R8 600 to R7 533 / by R1 067
(3)

1.4.2 Give advice on what Ben Palo should say about the following topics:
Advice on what to say on earnings per share:
Explanation/trend ✓ Figures ✓✓

EPS increased by 60% / from 130c to 208c / by 78c (compared to R28 or R12,11)
(3)
Advice on what to say on % return earned:
Explanation/trend ✓ Figures ✓✓

ROSHE (is above returns on alternative investments) increased from 14,4% to 19,8%
(3)
Advice on what to say on share price on the JSE:
Explanation/trend ✓ Figures ✓✓

Market price increased R21,00 → R28,00

Exceeds NAV R8,99 → R12,11
(3)

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ACTIVITY 2
SUGGESTED ANSWERS AND MARKING GUIDELINES
2.1

2.1.1 Solvency ✓
2.1.2 Liquidity ✓
2.1.3 Return on equity ✓
2.1.4 Gearing ✓
(4)

2.2 KULFI LTD

2.2.1 Calculate: Acid test ratio

996 480 one mark – 448 000 one mark

548 480 two marks

(288 300 ✓ + 260 180 ✓) : 553 600 ✓ = 0,99: 1 or 1 : 1 ✓

(4)
Calculate: Debt-equity ratio

1 400 000 ✓ : (311 000 ✓ + 7557 600✓)

7 868 600

= 0,2 : 1 ✓ (0,17 : 1)

(4)
Calculate: % return on average shareholders’ equity (ROSHE)

293 100 x 70/30

683 900 ✓ x 100

½ ✓ (7 341 500P + 7 968 600 ✓) 1
7 655 050
= 8,9% ✓ (5)

66
2.2.2 The shareholders are satisfied with the improvement in the liquidity position.
Quote THREE financial indicators (with figures) to support this statement.

THREE valid indicators (with trend) ✓✓ ✓✓ ✓✓

Current ratio increased from 0,7 : 1 to 1,8 : 1

Acid test ratio increased from 0,4 : 1 to 1 : 1
Debtors collection period improved from 39,5 days to 28,1 days

(6)

2.2.3 The company increased the share capital by R840 000, and the loan by
R550 000.
Explain how this affected the gearing and risk of the company. Quote TWO
financial indicators.
TWO valid indicators ✓✓ ✓✓ Comment ✓

Debt/equity ratio moved from 0,1 : 1 to 0,2 : 1

ROTCE decreased from 14,4% to 12,9%

The company is lowly geared (not making extensive use of loans)

Increasing the loan has caused the company to be negatively geared as the
interest rate is 13,5%. The business is not making effective use of the money
borrowed to increase profitability.
(5)
Provide TWO possible reasons why the business may need additional funds.

TWO points ✓✓ ✓✓

The business could invest in fixed assets to improve efficiency

They could have done so the address any overdraft concerns
Fund could be needed to address liquidity issues such as paying creditors or
acquiring more stock to improve sales
Need to pay more dividends to satisfy shareholders
Possibly invest in fixed deposits (although interest would not be good)
(4)

67
2.2.4 Provide calculations to show the change in the pay-out rate.

In 2018: 80/83 x 100 = 96,4% ✓✓ of EPS was distributed as dividends

In 2019: 47/71 x 100 = 66,2% ✓✓ of EPS was distributed as dividends (4)
Give ONE reason why many shareholders were satisfied with the change in
policy. Quote figures.
Any ONE valid explanation ✓ Relevant figures ✓
Cash earnings from dividends decreased by 33 cents per share because the
company is retaining money for capital growth. (2)
Explain how the repurchase of the shares benefited Martha’s shareholding.
2.2.5 Quote figures.

ONE point ✓✓ figure (calculation) ✓✓

After the issue of additional shares, she now owns 47,5% of the shares
475 000/1 000 000.
After the repurchase, she once again became the majority shareholder.
475 000/940 000 = 50,5% (4)

68
ACTIVITY 3
SUGGESTED ANSWERS AND MARKING GUIDELINES

3.1 SUNSET LTD

3.1.1 Calculate financial indicators for the year ended 28 February 2019:

% operating profit on sales

Workings Answer

2 033 900 ✓ x 100 23,3% ✓✓

8 725 000 ✓
(4)
Net asset value per share
Workings Answer
8 625 000 ✓ x 100 695,6 cents ✓✓
1 240 000 ✓
(4)
Debt-equity ratio
Workings Answer
✓ ✓
3 500 000 : 8 625 000 0,4 : 1 ✓✓

(4)

3.2 HORIZON LTD and OPTIMA LTD

3.2.1 Explain why directors should be interested in the price of their companies’ shares
on the JSE.
Any ONE valid comment ✓✓ one mark for partial or incomplete answer

It shows public confidence in the company.

Compare to other companies.
Shareholders will want to have capital growth on their investment.
Directors will be judged on the performance of the shares as this reflects the
performance of the company.
(2)
Calculate the number of additional shares in Horizon Ltd that Mike was able to
buy on the JSE in 2019.
Workings Answer
✓ ✓ ✓
R420 000 ÷ R8,40 50 000 shares
(3)

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 Comment on the price that Mike paid for these shares and provide TWO reasons
why he might have been satisfied to pay this price.
Compare price paid to NAV ✓✓ Reasons ✓✓ ✓✓
HORIZON:
JSE Price exceeds NAV by 90 cents (R8,40 – R7,50)
• Valid reasons for HORIZON:
• He wants to be the majority shareholder
• He can have more influence over decisions by board of directors
• JSE price reflects public demand for the shares
• He feels that there is potential for high returns

OPTIMA:
JSE Price is lower than NAV by 45 cents (R4,45 – R4,00)
Valid reasons for OPTIMA Ltd:
• The JSE price is a good deal compared to NAV
• Optima is earning higher returns for him
(6)

3.2.2 Explain your opinion on which company has the better dividend pay-out policy.
Quote figures.
Choice of company: Either Horizon Ltd OR Optima Ltd ✓
Reason: Either retaining funds OR rewarding shareholders ✓
Figures: Horizon Ltd pays out 67% (65c of 97c earned) ✓✓
While Optima Ltd pays out 96% (80c of 83c earned) ✓✓
(6)
Compare and comment on the % return on equity earned by EACH company.
Quote figures.
Comment ✓ Figures ✓
Horizon Ltd is nor performing well: ROSHE 6,2% below interest rate (6,5%)
Comment ✓ Figures ✓
Optima Ltd is performing well: ROSHE 18,2% above interest rate (6,5%) (4)

70
 Mike feels that the earnings per share (EPS) of Optima Ltd is much better than
that of Horizon Ltd. Explain why he feels this way. Quote figures or calculations.
Quote

EPS of Horizon Ltd 97 cents ✓

Quote EPS of Optima Ltd 83 cents ✓

Compare EPS of both companies to:

Share value OR to number of shares owned OR % ROSHE OR: Net Profit ✓
Identify figures for any one comparison below ✓✓

Horizon Ltd Optima Ltd

Cost of shares is high 750c or 840c Cost of shares is low 445c or 400c
(Earnings yield is 12,9% or 11,5%) (Earnings yield is 18,7% or 20,8%)
EPS is earned on 580 000 shares EPS is earned on 1 430 000 shares
R562 600 R1 186 900
% ROSHE is 6,2% % ROSHE is 18,2%
NP after tax is R1 202 800 NP after tax is R2 158 000
(97c x 1 240 000 shares) (83c x 2 600 000 shares) (5)

3.2.3 Explain TWO decisions taken by the directors of Horizon Ltd in response to the state
of the economy, and how these decisions will affect the company in future.
Decisions: TWO valid decisions ✓✓ Figures ✓✓

Sold fixed assets R1 800 000 / No new assets were purchased, R0

Did not issue new shares, R0
Reduced investments R900 000
Loan repaid R1 600 000

Effect on Horizon Ltd in future: must relate to a decision above

Any one valid comment: ✓✓ one mark for partial or incomplete answer

The infrastructure / size of the company is decreasing which will affect future profit.
The reduced infrastructure / size of the company could lead to cost savings (or
increased profit).
Saving on interest / less risk. (6)

71
Explain TWO decisions taken by the directors of Optima Ltd that affect risk and gearing.
Quote and comment on TWO financial indicators.
Decisions: Two valid decisions ✓✓ Figures✓✓

Increased loan R3 800 000

Sold shares R200 000
Shares repurchased R0

Quote and comment on TWO financial indicators that affect risk and gearing.
Financial indicators with figures ✓✓

Comment on risk ✓ high / medium / low / increased risk low/high geared.

Comment on gearing ✓ Positive gearing /
ROTCE is higher than the interest rate of 12%

Debt-equity ratio: 0,7 : 1 ROTCE 15,1% exceeds interest rate (12%)

Valid comment: There is positive gearing and high/medium risk
OR: This will increase risk and gearing but it is still positive
OR: Gearing increases a lot, but still positive (8)

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ACTIVITY 4
SUGGESTED ANSWERS AND MARKING GUIDELINES

USANDA LIMITED
Calculate financial indicators for the year ended 28 February 2021:

4.1 % operating profit on sales

Workings Answer
2 262 100 x 100
12,7%✓✓
17 800 000 1
(2)
4.2 Acid-test ratio
Workings Answer
(659 500 – 276 500) two marks
or (262 300 + 120 700) two marks
0,6 :1✓
383 000✓✓ : 611 900✓ (4)
4.3 Debt- equity ratio
Workings Answer
✓ ✓ 0,19 : 1
1 930 000 : 9 891 400 Or
0,2 : 1 (4)
4.4 % return on average shareholders’ equity (ROSHE)
Workings Answer
1 243 900 ✓ x 100
½ (11 985 000 ✓ + 9 891 400 ✓)
11,4%✓
21 876 400
10 938 200 two marks (4)
4.5 Dividend pay-out rate (%)
Workings Answer
495 000/1 650 000 = 30 cents
30 cents + 20 cents; one mark each
67,6% ✓
or
50 cents ✓✓ x 100
67,1%
74 cents ✓ 1
Accept 67% / 68%

OR 835 000 x 100 (2021 Total. div)

1 243 900 1 (2021 NPATax) (4)

73
ACTIVITY 5
SUGGESTED ANSWERS AND MARKING GUIDELINES

5.1 5.1.1 C✓
5.1.2 E✓
5.1.3 B✓
5.1.4 A✓ (4)

5.2 SCI-FI GEEKS LTD

5.2.1 The directors are satisfied with the improvement in the current ratio and the
acid-test ratio. Explain why you would disagree with them. Quote TWO financial
indicators in your response.
Financial indicators ✓✓ Figures ✓✓ Explanation ✓✓

The stock holding period increased from 32 days to 102 days (or 70 days).
Average debtors’ collection period increased from 31 days to 46 days (15 days)
The difference between current ratio (2,4 : 1) and acid test ratio (1,0 : 1) reflects
that there is an over-investment in stock.

Any ONE valid explanation; part marks for incomplete /unclear explanation

Too much liquid assets (cash) tied up in stock; stock piling / Electronic
equipment can easily become obsolete due to advancements in technology
rendering the stock unsaleable.
The business has relaxed / neglected its collection policies and these impacts
on the cash flow of the business.
(6)

74
5.2.2 Comment on the dividend per share over the two years. Quote figures.
ONE valid comment with figures ✓✓
The DPS dropped from 90 cents (in 2020) to 72 cents (in 2021)
Shareholders received 18 cents less; or a 20% drop. (2)
Explain the change in the dividend pay-out rate. Quote figures.
Explanation ✓✓

The dividend pay-out rate increased from 69% (90/130) to 136,5% or 72/58
(accept 124,1%) / or a 98,4% increase from the previous year /t
Give a reason for this change.
ONE valid point ✓✓

Directors attempted to please the shareholders for the low profitability

Compensation for using funds retained in previous financial years.
No plans for growth / expansions (to retain additional funds)
(4)

A shareholder felt that they should be satisfied with the dividends they received
as it is better than last year. Explain why you agree with him. Quote figures.

Explanation ✓✓ figure ✓

EPS dropped from 130c to 58c (by 72 cents / 55%) but DPS dropped from 90c
to 72c (by 18 cents / 20%)
If the policy was maintained at 69% of EPS, they would have received 40 cents.
The drop in the market price from 540 cents to 410 cents reflects a dividend
yield (DPS/MP) of 17,7% this year compared to 16,7% last year.
(3)
Comment on the risk and gearing for both years. Quote TWO financial
5.2.3
indicators (with figures).
Financial indicators with figures ✓✓ ✓✓ Explanation ✓✓

Debt/equity ratio increased from 0,3 : 1 to 0, 4: 1 (or by 0,1 : 1)

ROTCE decreased from 39% to 23,2%

Increased borrowing not effectively used to increase / improve profitability

Although still positively geared (interest rate 13,5%), the drop in profitability /
downward trend is a concern. (6)

75
5.2.4 Existing shareholders are dissatisfied that the new shares issued on 1 April
2020 were sold to the CEO, Ida Shark. Give TWO reasons why you consider
their feelings to be justified. Quote figures.

TWO reasons ✓✓ ✓✓ financial indicators and figures ✓✓

The CEO bought the shares at R1,50 each (375 000/250 000); exercising
undue influence over the issue price; receiving preferential treatment;
against the Companies Act which requires that shares be advertised; lack of
transparency;
The market price is 410 cents; NAV is 332 cents; Company lost out on potential
additional funding as shares could have been sold at a price in that range, or on
the stock exchange.
(6)

5.2.5 The Cash Flow Statement reflected a positive change in R980 000. Provide
TWO points why this should still be a concern to directors. Quote figures.
TWO points (with figures) ✓✓ ✓✓

Cash flow from operating activities is (148 080)

Large increase in loan, 651 500; high interest payment (232 000) contributed to
negative cash flow from operation
Very high payment for dividends (925 000)
Cash from investing activities, 101 580
Additional shares issued, 375 000
(4)

76
7. EXAMINATION GUIDANCE

1. The Analysis and interpretation questions are tested across almost all topics in both papers
where calculations / comment / decision / advice are required.
2. The Financial Indicators Formulae Sheet is attached to your question paper to help you in what
you have learnt not to give you answers.
3. Do not rely on the formula sheet totally, as the names of the financial indicators are not
provided. E.g. If the question requires you to calculate the current ratio, the formula sheet will
show: Current Assets : Current Liabilities, and not mention current ratio.
4. You should read the sub-questions carefully and highlight the relevant information such as
verbs (what are you expected to do) and key dates to ensure that you use the correct financial
indicator in your calculations.
5. Identify the relevant financial indicators to comment on specific questions.
6. Extract the appropriate information from the financial information given, to calculate financial
indicators.
7. Understand the requirements of the question, such as comment, give advice, provide the trend,
justify his actions etc. and give an appropriate answer.
8. Do not comment on the negative – use positive.
9. Be knowledgeable so that it is easy to work backwards using the given information.
10. Don’t rely on rote learning or mindless memorising without insight.
11. The marks allocated in a question are an indication of the length of the expected answer.

77
8. GENERAL STUDY AND EXAMINATION TIPS

1. Note that Accounting content is now assessed/split into TWO papers;

• P1 Financial Reporting and Evaluation 150 marks 2 hours
• P2 Managerial accounting and internal controls 150 marks 2 hours
2. It is important to be familiar with the specific content for each paper so that you can plan
effectively for examinations. Note that certain topics are relevant to both papers and some may
be integrated within one paper and question.
3. Obtain the examination guidelines, exemplar papers and many past examination papers to form
the basis of your study programme.
4. Prepare a functional study time table and focus on specific topics at different intervals. Align
this to time management; exploring short-cuts for calculations, frequently asked predictable
questions and recommended responses for interpretive questions.
5. Pay close attention to the language used in past papers such as key vocabulary and action
verbs.
6. For calculations, always show all workings – they carry many part marks.
7. Familiarise yourself with the structure and layout of Questions. They follow the same pattern
which is: Appetizer, Required, Information.
8. Note that the ANSWER BOOK is a vital part of the Question Paper, as many amounts and
details will be included for most Questions. This is a time-saving device. Ensure that you include
these amounts in your final answers, where relevant.
9. Always arrive at least 30 minutes before the commencement of the paper. You will then be able
to easily take care of all the administration requirements and to make effective use of your 10
minutes reading time.
10. Use the reading time to get a global picture of the paper, and identify where you wish to start
(according to your strengths). You already have the ANSWER BOOK to assist in this regard.
Simply go to the relevant pages for that Question.
11. You can also answer the sub-questions in any order; always inserting what is given, working
from the simple to the more challenging.
12. Write legibly and neatly; markers must be clear about your answers.
13. Keep your comments short and to-the-point. The mark allocation is your guide about the length
of your response.
14. Have your own stationery and a good calculator (even a spare – just in case).

78
9. ACKNOWLEDGEMENTS

The Department of Basic Education (DBE) gratefully acknowledges the following officials for giving
up their valuable time and families, and for contributing their knowledge and expertise to develop
this this study guide for the children of our country, under very stringent conditions of COVID-19.

Writers:
Poobie Govender, Mbangwa Shabalala, Beauty Mpanza, Tabile Nobhala, Nosipho Sicwetsha,
Vuyisile Deluhlazo and Nomsa Bikitsha.

DBE Subject Specialist: Percy Masango

The development of the Study Guide was managed and coordinated by Ms Cheryl
Weston and Dr Sandy Malapile.

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