Directorate: Curriculum FET

Term 1: Week 7
Grade 12 ACCOUNTING
Solutions

Topic: Company Analysis and interpretation & Audit reports

SOLUTIONS

BASELINE ASSESSMENT
Identify the relevant financial statement where you will find the following information.

Total amount owing to creditors Statement of Financial Position

Total amount of the loan either received or paid. Cash Flow Statement

Unissued number of shares. Notes: Statement of Financial Position

Income tax expense for the financial year Stement of Comprehensive Income

Statement of Financial Position Note

Amount received for the issue of new shares Cash Flow Statement

Total cash paid to shareholders in respect of dividends Cash Flow Statement

The portion of the loan that must be paid in the next financial year. Statement of Financial Position

Total amount paid to SARS for Income tax Cash Flow Statement

Gross profit for the year Stement of Comprehensive Income

Note: Statement of Financial Position

Fixed assets purchased during the financial year Cash Flow Statement

ACTIVITY 1: Using Financial Indicators to complete the Income Statement

Sales 7 612 500
Cost of sales 7 612 500 x 100/175 (4 350 000)
Gross profit subtract 3 262 500
Operating income 7 612 500 x 16% 1 218 000

Gross operating income add 4 480 500

Operating expenses GOI – OP (2 805 750

Operating profit 22% x 7612 500 1 674 750

Interest income 22 250
Profit before interest expense add 1 697 000
Interest expense Balancing figure (97 000)
Net profit before income tax 448 000 x 100/28 1 600 000
Income tax (448 000)
Net profit after income tax subtract 1 152 000

Gr 12 Accounting Term 1, 2021 1

ACTIVITY 2: Using financial indicators to complete a Statement of Financial Position

CURRENT ASSETS 2 016 000

Inventories 924 000

Trade and other receivables 1 006 000
Cash and cash equivalents 86 000

EQUITY & LIABILITIES

ORDINARY SHAREHOLDERS’ EQUITY 9 500 000

Ordinary share capital 8 825 000

Retained income 675 000

NON-CURRENT LIABILITIES 950 000

Loan 950 000

CURRENT LIABILITIES 840 000

Trade and other payables 704 000

Shareholders for dividends 136 000

ACTIVITY 3:

3.1 Comment on the overall liquidity position of the company. Quote THREE relevant financial
indicators (with figures).

Any THREE valid indicators:

The current ratio increased from 1,7 : 1 to 1,8 : 1
The acid-test ratio decreased from 1,3 : 1 to 0,9 : 1.
The stock-holding decreased from 68 to 52 days.
The debtors' collection period increased from 30 to 47 days.

Expected responses, e.g.:

• The business is liquid/should have no problem in paying off its short-term debts.
• Although the liquidity is good, the debtors are taking too long to pay.

3.2 The directors decided to change the dividend pay-out policy in 2020. Provide calculations that
indicate the policy change.

In 2019, the company paid 40 cents (DPS) of 112 cents (EPS) – 36%
In 2020, the company paid 105 cents (DPS) of 107 cent (EPS) – 98%
OR pay out increased from 36% to 98% four marks

For one mark each:

DPS increased from 40 to 105 cents (by 65 cents) per share
EPS decreased from 112 to 107 cents (by 5 cents) per share

Gr 12 Accounting Term 1, 2021 2

 Explain the effect of this change of policy on the company. State TWO points.

TWO valid points ✓✓ ✓✓ Part-marks for unclear / incomplete answers

• Retained income decreased and this could affect future growth (expansion) of the business.
• It would influence the share price / increase demand for the shares
• It could motivate shareholders to vote for the directors at the AGM

• Cash flow problem (one mark)

3.3 One of the directors feels that the company should pay back the loan as soon as possible. What
are your views about this? Quote and explain TWO relevant financial indicators with figures.

The debt/equity ratio is 0,3 : 1 / decreased from 0,4 : 1 to 0,3 : 1.

The business is lowly geared. Low risk. They are not making much use of loans compared to own
capital.

The ROTCE dropped from 13% to 11%.

The company is receiving a return (11%) that is less than the interest rate (14%) (negatively geared).
They are not using the loans effectively to generate a profit. It was a good decision to pay back the
loan.

3.4 Explain why the shareholders are satisfied with the market price of the shares on the JSE. Quote
figures/financial indicators.

• Increased from 777 cents to 960 cents./ increased by 183 cents

• The market price is higher than the NAV of 775 cents
• There is a demand for shares in this company.
• Investors are interested in buying shares.

ACTIVITY 4:

AUDIT REPORT
4.1 Briefly explain the role of an independent auditor.

• Protects the interests of the shareholders

• Appointed by the shareholders to express an independent opinion on whether the financial
statements are a true and fair reflection of the company’s financial position

4.2 What type of report did Ivory Limited receive? Explain your answer.

Disclaimer of opinion ✓
Valid explanation ✓✓
• There is insufficient evidence to express an opinion as the donation of R350 000 could not
be verified.
• Inventory overstated/operating expenses understated

Gr 12 Accounting Term 1, 2021 3

 4.3 To whom is this audit report addressed?

Shareholders

4.4 State TWO possible consequences for the independent auditor if he had NOT mentioned the
donation in his report.

• He could face a disciplinary hearing by the professional body.

• He may not be reappointed as an external auditor.
• He may be charged/fined/lose his licence to practise.

4.5 State ONE consequence that this report would have on the company.

• It can create negative publicity, which can lead to a poor image.

• It can result in the loss of investor confidence/potential investors.
• Existing shareholders may want to sell their shares which can result in the decrease in the
demand of shares.
• The directors will be held accountable.
• Directors can get a vote of no confidence.

4.6 How will this report affect the price of shares?

Shareholders might want to sell their shares which can lead to a drop in share price/drop in demand
can result in drop in share price.

4.7 Explain why the independent auditors mentioned IFRS in the audit report.

• The financial statements must be comparable to those prepared by companies

internationally.
• To comply with the requirements of the company’s act

4.8
(a) Explain the need for corporate social investment.

• It is a recommendation of the King Code that will ensure the goodwill, loyalty and support of
the community.
• It shows good corporate social responsibility.
• Compliance with the triple bottom line

(b) What do you understand by the triple bottom line?

It is a recommendation of the King Code which encourages companies to focus on profit, people
and planet so that aims, and objectives are realised in a desirable manner.
(c) Which component of the annually published financial statements should contain details of
the donation to the Covid-19 Food Parcel Relief?

The directors’ report

Gr 12 Accounting Term 1, 2021 4