Directorate: Curriculum FET

Gr 11 ACCOUNTING Term 2: Week 5

Topic: Analysis and Interpretation of Financial Statements (Partnerships)

You already know about the ... This lesson will enable you to...
• Preparation of Financial Statements • understand the reason for Financial Statements
• Financial indicators covered in Gr 10 • identify the relevant information from the financial
• Users of Financial statements covered in statements to be able to calculate the financial
Gr 10 indicators

Use your TEXT BOOK to read about: Alternative digital resources:

Partnerships: Via Afrika Gr 11 Study Guide (ENG/AFR)
• Analysis and interpretation of bit.ly/Gr11ViaENG
financial statements
Lucem Publishers Gr 11 Teachers Guide
Study examples and explanations for the (text book & workbook in one)
bit.ly/Gr11LucemAE
calculation and interpretation of the
financial indicators.
Gr 11 Study& Master Video &
PPT lessons

Gr11PShip/VSkap

STEPS FOR CALCULATING FINANCIAL INDICATORS:

1. Identify the focus of the question (what need to be
analysed/calculated), e.g. profitability
2. Write down the correct formula (the formula can be
derived from the instruction/question) DID YOU KNOW?
The name of the indicator will
3. Insert the amounts/numbers into the formula lead you to the figures to be
4. Complete the calculation(s) used, e.g.
% Operating profit on Sales
5. Display your answer correctly. Indicate the 'unit', e.g.
percentage (%)/ratio/days, etc. Income Statement
6. Compare the current year’s indicator(s) (your answers)
to that of the previous year (given).
7. Indicate the tendency (did it increase/decrease/improve/
deteriorate?)
8. Make suggestions (if required) on the improvement or
changes that the business could introduce.

Gr 11 Accounting Term 2, 2020 1

Financial indicators covered in Grade 10:

Financial Where to find the

Category Formula
indicator figures
Profitability Gross profit on Gross profit X 100
sales Sales 1
Is business operations
being efficiently Net profit X 100 Statement of
managed and controlled? Net profit on sales Sales 1 Comprehensive
income
Operating profit Operating profit X 100
on sales Sales 1
Solvency
Can the business pay off Statement of
Solvency ratio Total assets: Total liabilities
all its debts comfortably Financial Position
and continue to exist?
Liquidity Current ratio Current assets : Current Liabilities
Can the business pay off
its current debts (Current assets – inventory) : Current Statement of
comfortably? liabilities Financial Position
Acid test ratio
OR
(Debtors + Cash) : Current liabilities
Return Net profit:
Are the owner(s) earning Net profit X 100 Statement of
a fair amount in relation Ave. Owners’ equity 1 Comprehensive
to their investment? Return on equity income
Owners’ equity:
Statement of
Financial Position

ACTIVITY 1:
The information relate to Tito Traders. Their financial year ends on 28/29 February each year.

INFORMATION:
Extract from the Statement of Comprehensive Income for the year ended 29 February 2020
Sales 1 980 000
Cost of sales 1 237 500
Operating profit 396 000

Extract from Statement of Financial Position on 29 February 2020

Current assets ?
Inventories (trading stock only) 210 000
Trade and other receivables 62 000
Cash and cash equivalents 18 000
Owner’s equity 1 560 000
Non-current liabilities 340 000
Current liabilities 160 000

Gr 11 Accounting Term 2, 2020 2

ACTIVITY 1: Answer sheet
Calculate the ratios/financial indicators for the year ended 29 February 2020.
Show all calculations to the nearest ONE decimal point.

1.1 % Gross profit on sales

1.2 % Gross profit on cost of sales

1.3 % Operating profit on sales

1.4 Current ratio

LET’S LOOK AT THE NEW GR 11 FINANCIAL INDICATORS:

LIQUIDITY indicators:
1. Stock It is the number of times in a the year stock Cost of sales = … times p. yr
can be sold out ('turned over' in cash) Ave. Trading Stock
turnover It indicates the 'age' of the stock. [(Opening + Closing stock) ÷ 2]
rate (In reality stock will not sold 'out' as it is replaced in time) OR ½ (Opening + Closing stock)

• Period in days/months for which enough

2. Stock stock is on hand
Average Stock X 365 (or 12)
holding • Assists in ordering stock on time. Cost of sales 1
period Hint: Read the question to determine whether to multiply
by 12 (months) or 365 (days)

EXAMPLE:
Statement of Comprehensive Income(SCI*) Statement of Financial Position ...(SFP*)
Sales (all on credit) 2 400 000 2020 2019
Cost of Sales (1 809 000) Trading Stock 78 000 56 000
*Abbreviated for these examples
From SCI
Stock turnover rate:
Cost of Sales = 1 809 000 = 1 809 000 = 27 times per year
Ave. trading stock ½ (56 000 + 78 000) 67 000

From SFP

Stock holding period: Ave Stock x 365 (or 12) = 67 000 x 365 (or 12) = 13,5 days (0,4 months)
Cost of Sales 1 809 000

Gr 11 Accounting Term 2, 2020 3

 Debtors (beginning + end of year) ÷ 2

3. Average • Gives an indication of the number of days Average trade debtors X 365
Debtors debtors take to pay their accounts (debt) Credit sales
collection • It shows how effective debt is 'collected' If no credit sales are given, assume total
period from the debtors. sales are on credit

EXAMPLE:
Statement of Comprehensive Income(SCI*) Statement of Financial Position ..(SFP*)
Sales (all on credit) 2 400 000 2020 2019
Cost of Sales (1 800 000) Trade Debtors 107 000 126 000
Trade Creditors 149 400 165 000
*Abbreviated for these examples
From SFP

Average Trade Debtors X 365 = ½(126 000 + 107 000) X 365 = 116 500 X 365 = 17,7 days
Credit sales 1 2 400 000 2 400 000

From SCI

4. Average • Indicates the number of days the Average trade creditors X 365
Creditors business takes (on average) to pay Credit purchases 1
Payment its creditors / amounts payable to
Use the Cost of Sales figure if
Period short term creditors credit purchases are not given

Average Trade Creditors X 365 = ½(149 400 + 165 000) X 365 = 157 200 X 365 = 31,9 days
Credit purchases 1 1 800 000 1 800 000

RISK indicators:
• Indicates the extent to which the Non-current Liabilities : Owner’s equity
business is dependent on Partnership equity (Capitals + Current accounts)
5. Debt/equity
borrowed capital/loans
ratio ENSURE that your answer is given as:
• Degree of risk
.... : 1

RETURN on investment - indicators

Financial indicators applicable to Partnerships ONLY
Return on total • Determines how profitable the
Net profit X 100
partner’s PARTNERS' investment in the
Average Owners’ equity 1
equity business is
• Can be compared to the interest ½ (Capital + Current a/c of each
partner for both fin. years)
rate of an alternative investment

One partner's Salary, Bonus, Interest

on capital and share of profit

Return on ONE • Determines the return on investment Amount earned by a partner X 100
partner's for a specific partner The partner’s average equity* 1
investment • The amounts for the specific partner
have to be used * Use only one partner's opening and closing equity
• Compare it to an alternative
investment and with that of other
partners

Gr 11 Accounting Term 2, 2020 4

EXAMPLE:
A. Net profit as per Statement of Comprehensive Income (Income statement) R686 950

B. Figures extracted from Statement of Financial Position (Balance Sheet) on 29 February 2020
TOTAL 2020 2019
Capital: Kay 1 010 000 480 000 530 000
Capital: Lynn 650 000 360 000 290 000
Current account: Kay 145 240 172 040 (26 800)
Current account: Lynn 223 910 185 010 38 900

C. Extract from the partners’ Current Accounts on 29 February 2020

KAY LYNN
Total primary distribution 236 800 157 600
Share in remaining profit 54 040 58 510
Drawings 92 000 70 000

Required:
1. Calculate the % return earned by the business for 2020.
2. Calculate the % return earned by partner Kay for 2020.

Solution: Net profit from SCI

1. % Return on total partners’ equity:

Net profit X 100 = 686 950 X 100

Average owners’ equity 1 ½ (1 010 000 + 650 000 + 145 240 + 223 910) 1

= 686 950 X 100 = 67,7%

1 014 575 1 Amounts from SFP (2019 + 2020)
2. % Return earned by Kay
Amount earned by the partner (Kay) X 100 = 236 800 + 54 040 X 100
Partner’s average equity (Kay) 1 ½ (1 010 000 + 145 240) 1

290 840 X 100 = 50,4%

577 620 1 Only use amounts for Kay

ACTIVITY 2
The information relates to the partnership owned by Martin and Giovanni. The financial year ended
on 29 February 2020.
INFORMATION:
A. Extract from the Statement of Comprehensive Income – 29 February 2020
Sales 1 751 100
Cost of sales 1 167 400
Gross profit 583 700
Net profit for the year 358 130

B. Extract from the partners’ Current Accounts on 29 February 2020

Martin Giovanni
Total primary distribution 56 000 50 520
Share of remaining profit 16 640 36 000

Gr 11 Accounting Term 2, 2020 5

C. Extract from the Statement of Financial Position on 29 February 2020
2020 2019
Partners Equity 800 000 860 000
Capital: 620 000 710 000
Martin 310 000 310 000
Giovanni 310 000 400 000
Current Accounts (Cr balances) 180 000 150 000
Earnings: Martin 72 640 69 540
Giovanni 86 520 72 800
Loan: Sure Bank 350 000 280 000
Current Liabilities (Trade Creditors) 115 300 98 700

ACTIVITY 2: Answer sheet

2.1.1 Debt/equity ratio

2.1.2 Creditors payment period

2.1.3 % Return of total partners’ equity

2.1.4 % Return earned by Martin

ACTIVITY 3
You are provided with the financial statements of Stanlee Traders, with partners STAN and LEE .
Calculate the financial indicators as listed in the ANSWER SHEET for the 2019 financial
year.
INFORMATION for STANLEE TRADERS
STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 30 June 2019
R
Sales (60% on credit) 2 378 250
Cost of sales (all stock bought on credit) (1 321 250)
Gross profit 1 057 000
Other income 230 000
Operating expenses (780 000)
Operating profit 507 000
Interest income 22 000
Interest expense (on loan) (75 540)
Net profit 453 460

Gr 11 Accounting Term 2, 2020 6

STATEMENT OF FINANCIAL POSITION (BALANCE SHEET) ON 30 JUNE 2019
ASSETS 2019 2018
Non-current assets 1 579 000 1 720 000
Fixed/Tangible assets 1 259 000 1 440 000
Fixed deposits 320 000 280 000
Current assets 520 000 504 000
Inventories (all trading stock) 210 000 240 000
Trade and other receivables (all debtors) 252 000 192 000
Cash and cash equivalents 58 000 72 000
TOTAL ASSETS 2 099 000 2 224 000
EQUITY AND LIABILITIES
Owners’ Equity 1 329 000 1 340 000
Capital (note 1) 1 210 000 1 270 000
Current accounts (note 2) 119 000 70 000
Non-current liabilities 562 000 548 000
Mortgage loan: Josh Bank (14% p.a.) 562 000 548 000
Current liabilities 208 000 336 000
Trade and other payables (all creditors) 208 000 336 000
TOTAL EQUITY AND LIABILITIES 2 099 000 2 224 000

NOTES TO THE FINANCIAL STATEMENTS ON 30 June 2019

1. CAPITAL TOTAL STAN LEE
Balance at beginning of year 1 270 000 700 000 570 000
Movements (60 000) (140 000) 80 000
Balance at end of year 1 210 000 560 000 650 000

2. CURRENT ACCOUNTS TOTAL STAN LEE

Profit per Income Statement 453 460 219 330 234 130
Partners’ salaries 224 000 116 000 108 000
Interest on capital (8% p.a.) 104 800 56 000 48 800
Bonus 30 000 30 000
Primary distribution 358 800 172 000 186 800
Share of remaining profit 94 660 47 330 47 330
Drawings (361 460) (160 000) (201 460)
Retained income for the year 92 000 59 330 32 670
Balance at beginning of year 27 000 18 000 9 000
Balance at end of year 119 000 77 330 41 670

Activity 3: Answer sheet

3.1.1 % Operating expenses on sales

3.1.2 % Net profit on sales

Gr 11 Accounting Term 2, 2020 7

 3.1.3 Mark-up % achieved

3.1.4 Current ratio

3.1.5 Acid-test ratio

3.1.6 Solvency ratio

3.1.7 Stock turn-over rate

3.1.8 Stockholding period

3.1.9 Debtors collection period

3.1.10 Creditors payment period

3.1.11 Debt / equity ratio

3.1.12 % return earned by Stan

3.1.13 % return earned by the business

Gr 11 Accounting Term 2, 2020 8