Accounting Grade 12

AccountingGrade 12

Paper 1

Presented by Mrs. J de Meillon

Exam GuidelinesACCOUNTING GRADE 12 2021• https://www.education.gov.za/2021Grade12ExamGuidelines.aspx• Paper 1 : Financial Reporting and Evaluation

o Income Statement (Statement of Comprehensive Income) of Companies – with adjustments

o Balance Sheet (Statement of Financial Position) of Companieso Cash Flow Statement of Companieso Analysis and interpretation of financial statements of companies

§ Profitability§ Liquidity§ Solvency§ Debt-equity§ ROSHE§ ROCE§ NAV§ EPS§ DPS§ Dividend payout rate

o Corporate governance, Ethical behavior, professional bodies and code of conduct of companies.

Income Statement / Statement of Comprehensive Income

o NET Sales – Cost of Sales = Gross Profit + Operating Income – Operating Expenses = Operating Profit for the year + Interest Income – Interest Expense – Tax = Net Profit for the year.

o ONLY nominal accounts section – EXCEPT dividends on ordinary shares.

o Remember to add • Trading stock deficit / surplus• Depreciation• Provision for bad debts adjustment.• Profit / Loss on sale of asset

Always calculate AFTER all other adjustments taken into account

Income Statement ADJUSTMENTS o Directors fees and Audit Fees

• The directors will enter into contracts with the company in terms which they will be paid fees for their services. Directors’ Fees (e) + will be debited and Bank / Accrued expenses credited with payments / outstanding amounts.

• The fees paid to the independent auditor will be debited to the Audit Fees (e) + will be debited and Bank / Accrued expenses credited with payments / outstanding amounts.

o Salaries and Wages• An employee on leave was omitted from the Salaries / Wages Journal– Debit Salaries and Wages (e) + with total GROSS Salary / wages– Debit Contribution accounts (e) + / Salaries and Wages with Contribution as well. – Credit Creditors for Salaries with NET salary / wages– Credit SARS (PAYE) – deduction – Credit Pension Fund CL – deduction + contribution– Credit Medical Aid CL – deduction + contribution– Credit UIF CL – deduction + contribution

Balance Sheet Note: Trade and other payables

o Rent Income Adjustment• Rent was paid one month in advance. Note: rent has increased with 10% per

month on 1 November 2019. Total on Pre-Adjustment Trial Balance R114 750.

8𝑦 + 5 𝑦 + !"!""

𝑦 = 114 750

8y+5y+0,5y=11475013,5y=114750

Y=8500Y + 10% = 9 350

Mar ’19

Apr ’19

May ’19

Jun ‘19

Jul ‘19

Aug ’19

Sept ‘19

Oct ‘ 19

Nov ‘ 19

Dec’ 19

Jan ’20

Feb’20

Mar ‘ 20

+ 10%

13 Months = R114 750

8 Months normal rent 5 Months rent + 10%

OR

8(100%) + 5(110%) = 114 750800% + 550% = 114 7501 350% = 114 750

𝟏𝟏𝟎𝟏 𝟑𝟓𝟎

𝒙 𝟏𝟏𝟒 𝟕𝟓𝟎 = 9 350

NOTES to the BALANCE SHEET

3. FIXED/TANGIBLE ASSETS Land & buildings Equipment Total

Carrying value at beginning of year

2 417 500 144 000 2 561 500

Cost 2 417 500 314 000 2 731 500

Accumulated depreciation - (170 000) (170 000)

MovementsAdditions at cost - - -

Disposals at carrying value (24 000 – 13 800)

- (10 200) (10 200)

Depreciation - (30 800) (30 800)

Carrying value at end of year 2 417 500 103 000 2 520 500

Cost 2 417 500 290 000[1] 2 707 500Accumulated

depreciation[3]- (187 000)[2] (187 000)

[1] 314 000 – 24 000 = 290 000[2] 170 000 – 13 800 + 30 800 = 187 000

Pre-adjustm

entadjustm

entPost-adjustm

ent

7. ORDINARY SHARE CAPITAL Authorised Share Capital 1 200 000 Ordinary SharesIssued Shares:

900 000 Shares in issue at the beginning of the year 7 785 000120 000 Shares issued during the year at R9,50 each 1 140 000

(170 000) Shares repurchased at AIP of R8,75 (1 487 500)850 000 Shares in issue at the end of the year 7 437 500

Amount on Balance sheet

Average Issue Price (AIP)

= '()*+ ,*-. /*+01 (2 34*513 6- 63301708915 (2 34*513 6- 63301

= (" "#$ %%%&' '(% %%%)(*%% %%% &'+% %%%)

= R8,75


8. RETAINED INCOMEBalance at the beginning of the year 3 200 000Net Profit AFTER tax (final amount on the Income Statement) 1 080 000Repurchase of Shares 50 000 x R2,60 (130 000)Ordinary share dividends (1 487 000)Interim / Paid (dividends on ordinary shares from nominal section in Trial Balance) 675 000Final / Recommended 1 450 000 x 56 cents 812 000


OR calculate from Income Tax amount.

Income Tax = 420 000 28%

Before Tax = 100% :;;<𝑥 420 000 = 1 080 000

-Tax = 28%After Tax =72%

Repurchase Price – AIPR9,60 – R7,00 = R2,60

Balance Sheet

ASSETS NoteNon-current assets 1 707 300

Fixed/Tangible assets 3 1 359 900Financial assets: Fixed deposit

Fixed deposit (420 000 + 46 200 – 118 800) 347 400Current assets 1 320 965

Inventory (879 000 – 14 700 + 2 520) 4 866 820Trade and other receivables(113 100 – 3 390 + 3 900 + 6 300) 5 119 910

Cash and cash equivalents(207 935 + 6 000 + 1 500 + 118 800) 6 334 235Total assets 3 028 265EQUITY AND LIABILITIESShareholders’ equity 2 212 922

Ordinary share capital 7 1 621 800Retained income 8 591 122

Non-current liabilities 112 745Loan from Wheels Finance Ltd (180 000 + 11 945 – 79 200) 112 745

Current liabilities 702 598Trade and other payables (246 000 + 60 000 + 9 390 + 17 400 + 20 608) 9 623 398Shareholders for dividends* 270 000Current portion of loan* 79 200

Total equity and liabilities 3 028 265

BALANCE SHEET (STATEMENT OF FINANCIAL POSITION) ON …..

* Could be shown under Note for Trade & other payables

Difficult Loan Adjustment• The Loan was received on 1 September 2017.• This loan is to be repaid over 6 years in equal monthly installments with the effect

from 1 October 2017. All repayments have been made.• Interest is NOT capitalized and has been paid in full. • Current balance on year-end - 28 February 2020, R1 376 000

Mar ’17

Apr’17

May’17

Jun’17

Jul’17

Aug’17

Sept’17

Oct’17

Nov’17

Dec‘17

Jan‘18

Feb‘18

5 months

Mar ’18

Apr’18

May’18

Jun’18

Jul’18

Aug’18

Sept’18

Oct’18

Nov’18

Dec’18

Jan’19

Feb’19

12 months

Mar ’19

Apr’19

May’19

Jun’19

Jul’19

Aug’19

Sept’19

Oct’19

Nov’19

Dec’19

Jan’20

Feb’20

12 months

6 years = 72 Months – (5 + 12 + 12) = 43 left over12 months of the 43 will be current portion of loan

'+(, x 1 376 000 = 384 000

CASH FLOW STATEMENT• In inflationary times – expect that rising selling prices will generate sufficient

cash to compensate cost of running the business. Not always true.• A recession (fewer sales are made) will add to liquidity, solvency and cash

flow problems.• Income Statement and Balance Sheet are prepared according to the

accrual and matching principle and as a result the financial statements are“contaminated” by the adjustments making it difficult to see exactly how themoney is flowing.

• Cash flow provides users of financial statements with information of allfinancial resources. Particularly cash generated from operations,investments and financing activities.

Basic layout of Cash flow statementCASH FLOW STATEMENT FOR THE YEAR ENDING…..

Cash generated from operations

Cash effects of investment activities

Cash effects of financing activities

Net change in cash

Operations:Main income-earning

Investing:Establishment of infrastructure of a company

Financing:Change in debt and capital funding

Buying and selling stock Investing in Land and Buildings

New issue of shares

Paying creditors Purchase / Sale of assets Repurchase / Buy back of shares

Receiving payments from debtors

Fixed deposits Increase loan

Paying all expenses Repayment of loan

SARS Income Tax New issue of shares

Shareholders for dividends

CASH FLOW STATEMENT FOR THE YEAR ENDING…CASH EFFECTS OF OPERATING ACTIVITIES 19 810Cash generated from operations 1 72 050Interest Paid (400 + 9 200 – 760) (8 840)Dividends Paid (7 000 + 10 000 – 5 600) (12 000)Income Tax Paid (2 300 + 23 500 – 5 600) (31 400)

TRADE AND OTHER PAYABLES 2019 2020

Trade Creditors 31 350 29 900SARS (Income Tax) 2 300 2 700Shareholders for dividends 7 000 5 600Accrued Expenses 400 760

41 050 38 960

From Income Statement From Nominal Accounts Section or additional information = interim paid

Cash flow statement - Operating Activities

1. CASH GENERATED FROM OPERATIONSProfit BEFORE tax 40 000Adjustments for: Depreciation 23 000Interest Expense 9 200Operating Profit before changes in working Capital 72 200Change in working capital (150)(increase) / decrease in inventory (70 000 – 63 000) 7 000(increase) / decrease in debtors (34 000 – 39 700) (5 700)increase / (decrease) in creditors (31 350 – 29 900) (1 450)

72 050

EXTRACT OF BALANCE SHEET 2019 2020Inventories 70 000 63 000Trade and other receivables *Excluding SARS Income Tax

34 000 39 700

Trade and other payables *Excluding SARS Income Tax; Shareholders for dividends and interest NOT capitalized (Accrued Expense)

31 350 29 900

CASH FLOW FROM INVESTING ACTIVITIES 58 300Fixed assets purchased(62 700 + 4 800 + 12 000 – 56 000)

23 500

Proceeds of sale of fixed assets * Asset disposal ALWAYS at carrying value

4 800

(Increase) / decrease in Fixed deposit 30 000

Cash flow statement - Investing Activities

FIXED ASSETS PURCHASED (Note 3)Carrying value at the beginning of the year *balance sheet previous year

56 000

Purchases BALANCING FIGURE ** 23 500Disposals at carrying value (4 800)Depreciation *from the Income Statement (12 000)Carrying Value at the end of the year** Balance sheet current year

62 700

CASH EFFECTS OF FINANCING ACTIVITIES 168 000Proceeds from issuing of NEW shares @ issue price*additional shares issued during year.

816 000

Repurchase of shares @ purchase price(80 000 x (4,80 + 0,80)

(448 000)

Increase / (repayment) of loan*change on balance sheet

(200 000)

Cash flow statement - Financing Activities

Share Capital• The business has an authorised share capital of 900 000 ordinary shares• 500 000 shares were issued on 1 March 2020. (R2 352 000 balance of Ordinary

share capital on 1 March 2020.)• On 1st May 2020 an additional 160 000 shares were issued. R816 000 was

received and deposited.• On 1st September 2020, 80 000 shares were repurchased from a dissatisfied

shareholder at R0,80 above average share price. (AIP)

Average Issue Price (AIP)

= '()*+ ,*-. /*+01 (2 34*513 6- 63301708915 (2 34*513 6- 63301

= (+,$+ %%%&#'- %%%)($%% %%% &'-% %%%) = R4,80

Cash flow statement - COMPLETEDCASH FLOW STATEMENT FOR THE YEAR ENDING…

CASH EFFECTS OF OPERATING ACTIVITIES 19 810

Cash generated from operations 1 72 050

Interest Paid (400 + 9 200 – 760) (8 840)

Dividends Paid (7 000 + 10 000 – 5 600) (12 000)

Income Tax Paid (2 300 + 23 500 – 5 600) (31 400)

CASH FLOW FROM INVESTING ACTIVITIES 58 300Fixed assets purchased(62 700 + 4 800 + 12 000 – 56 000)

23 500

Proceeds of sale of fixed assets * Asset disposal ALWAYS at carrying value

4 800

(Increase) / decrease in Fixed deposit 30 000CASH EFFECTS OF FINANCING ACTIVITIES 168 000Proceeds from issuing of NEW shares @ issue price *additional shares issued during year.

816 000

Repurchase of shares @ purchase price (80 000 x (4,80 + 0,80) (448 000)Increase / (repayment) of loan *change on balance sheet (200 000)NET CHANGE IN CASH AND CASH EQUIVALENTS *** Balancing Figure ***246 110Cash and Cash Equivalents beginning of year * take into account bank overdraft (- 46 000 + 180 000)

134 000

Cash and Cash Equivalents end of the year. 112 110

+

+

=

+

STEP 1

• KNOW the formulae REGARDLESSof the formulae sheet!!

• Calculate and determine answer

STEP 2

• QUOTE figures and compare with previous year

STEP 3

• Comment on possible reason and possible solution

Interpretation of Financial Statements


Profitability and Operating Efficiency

Gross Profit on SalesGross Profit on cost of salesOperating Profit on SalesOperating expenses on SalesNet Income on Sales

goods are sold for less thanmark-up policy (stock clearance sales)Compare to the mark-up policyAre expenses being well managed?avoid too much discountCompare with ⅓ of the percentage gross profit on sales. If the percentage differs greatly from this, the expenses are too highcost control•It indicates whether the expenses have maintained constant in relation to sales.


LIQUIDITY ( "#$$%&' ())%')"#$$%&' *+,-+.+'+%)

∶ "#$$%&' *+,-+.+'+%)"#$$%&' *+,-+.+'+%)

)

Current RatioAcid - Test RatioRate of stock turnover / Stockholding periodDebtors’ collection periodCreditors’ payments

If ratio is too high• there is too much stock• wrong stock• prices too high

If ratio is too lowbusiness cannot pay its short-term debts using current assets. It can be due to:• obsolete stock• stock valued higher than

realistic value• Debtors could take too

long to pay – offer discounts for early payments

• Creditors are paid too soon


SOLVENCY( ())%')*+,-+.+'+%)

∶ *+,-+.+'+%)*+,-+.+'+%)

)

TOTAL ASSETS / TOTAL LIABILITIES

This ratio refers to the business’s degree of solvency – in other words whether the business will be able to pay its long-term debtsThis means that the assets should be more than the liabilities.

Is the business??Solvent – can meet long term

debts

ORInsolvent – will not be able to pay

back debt in the future

Example DBE/SEPTEMBER 2021

Current Ratio is also part of liquidity.


DEBT / EQUITY It shows the ratio between borrowed capital and own capital. It gives an indication of how the business is financed through borrowed capital (loans) and own capital (shares)

It shows the creditworthiness and ability to raise more finance. (will the bank give more loans to the business?)

It shows the degree of risk the business has placed itself in. (paying back loans with interest puts the business at great financial risk). If the profit drops, the loan and interest has still to be paid

When is it favourable for a business to use borrowed capital (loans)? If the ratio is less than 1:1Example If the ratio is 0,7:1 • This means the business is a low risk / favourably geared / high geared / has a good credit rating (creditworthy)

If the ratio is more than 1:1Example: If the ratio is 1,2:1 • This means the business is a high risk / unfavourably geared / low geared has a bad credit rating (not creditworthy)


RETURN ON TOTAL CAPITAL EMLOYED(ROTCE)

This ratio is used to comment on loans.

This return should be higher than the interest rate paid on long-term

loans.This return should be considered

with the debt/equity ratio.

This ratio indicates whether the business has a return on capital employed that is higher or lower than the interest paid on loans.

The company should earn a higher return on this capital than the

interest rate they pay on the loan.

When are conditions favourable to borrow funds? It will depend on the degree of risk involved in raising loans (interest rate) favourable / unfavourable gearing.Should the company sell more shares or borrow from the bank for expansion?* If the interest rate is higher than the ROTCE, the company should sell more shares.

(Example Interest on loan = 26% and ROTCE = 17%)* Borrow more funds if the interest rate is lower than the ROTCE

(Example: Interest on loan = 13% and ROTCE = 20%)

Example DBE/SEPTEMBER 2021

General Knowledge that current interest

rate is 10.5% MUST be aware of this!

Negative gearing because the ROTCE is LESS than the interest rate AND decreased


RETURN ON SHAREHOLDERS EQUITY(ROSHE)

This indicates what percentage profit was made on the money

invested by the shareholders

When will shareholders be satisfied with the

return?If the percentage is

higher than interest on alternative investments,

e.g. fixed deposits


EARNINGS PER SHARE (EPS) & DIVIDENDS PER SHARE

A portion of all the earnings may be retained by the company for future expansion and the shareholders will not benefit immediately with a dividend payout.

The amount paid to them in dividends represent their immediate benefit.

Compare EPS with DPS difference is what has been retained by the business. Calculate the DPS as a % of EPS to indicate the % of earnings being distributed to the shareholders in the form of dividends

𝐷𝑃𝑆𝐸𝑃𝑆 𝑥

1001

Compare to the previous year / to other companies this will indicate a good / bad investment.

Can be used to comment on dividend pay-out policy

Directors want to keep shareholders happy / retain loyalty of existing shareholders

Example of when to quote EPS and DPS

𝐷𝑃𝑆𝐸𝑃𝑆

𝑥1001


NET ASSET VALUE(NAV)

It indicates the actual value of the shares according to the financial

statements of the companyThe true value of the shares increases as the company

accumulates wealth.The NAV per share has an effect on the market price of the share.

Changes in the NAV per share could be caused by additional shares issued:• the new shares should be issued

at a higher value. • If the new shares are not sold at

a higher price, it will depress the net asset value of the shares.

• If shares are repurchased at a price in excess of the average price, it will also have an effect on the net asset value.

When will it profitable for a shareholder to sell shares?If the market value is higher than the NAV of a share, it will be profitable for a shareholder to sell his shares.

Example of when to quote NAV and refer to Market Price (JSE)

Can also ask if this is a good investment /buy more shares

ETHICS, GOVERNANCE and ROLE OF PROFFESSIONAL BODIES

• This can be integrated into all relevant topics. • This question will be based on short scenarios or case studies.• Practical problem-solving recommendations • Internal control issues should be practically related to the accounting and

recording procedures

Corporate Governance• Effective, responsible and ethical management of a company.• The board of directors and CEO – How did they manage business or what

did they do wrong?• Need for two types of directors with the emphasis on ‘executive’ as used in

CEO.• Work of specific committees to ensure accountability and transparency.

o Audit committeeo Remunerations committeeo Ethics committee

• Pollution / environmental awareness• Skills development / wealth and job creation or support of community

projects Corporate social investment

Responses should be based on common sense and LOGICAL courses of action – case study based – NOT specific policies studied as fact.

Professional bodies

• Need for a code of conduct.• Professional development and disciplinary roles.• What may lead to a POSSIBILITY of dismissal from a professional body in

the event of misconduct.• SAICA – South African Institute of Charted Accountants

Ø SAICA provides support, advice and services to its members throughout their professional lives. SAICA members are business advisors, business leaders and entrepreneurs.

• SAIPA – South African Institute of Professional AccountantsØ Professional Accountants (SA) have an important role to play as trusted

business advisors. They will benefit from the support of its professional accountancy organization, SAIPA, which play an active role in enforcing professional codes of conduct and providing continuous education.

g

Parrot study all formats / layouts of

Statements and Notes

Remember do what you know

best first.

Parrot study all the formulae for the analysis regardless of

the formulae sheet. Be able to identify when to

use which ratio

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Accounting Grade 12