11 ACC All Memos NEW ERA Copy AutoRecovered
11 ACC All Memos NEW ERA Copy AutoRecovered
11 ACC All Memos NEW ERA Copy AutoRecovered
Accounting
Grade 11
Teacher’s Guide
Authors
Diane Woodroffe, Trevor Hall, Pravin Singh
Joe Ramsamy, Hanif Aboobaker
PREFACE
COPYRIGHT
This publication includes images from Corel Print House ™ Magic 4 which are protected by the copyright
laws of the USA, Canada and elsewhere. Used under licence.
All rights reserved. No part of this publication may be copied or reproduced or transmitted in any form or
by any means, electronic or mechanical, including photocopying, recording or any information storage and
retrieval system without the written permission of New Generation Publishers.
ISBN: 978-1-920321-85-7
CONTENTS
SELECTING TASKS:
This textbook comprises a variety and an extensive number of Tasks. It is not possible for every learner to
undertake every Task in this book. However, every examination will comprise easy, moderate or difficult
questions. Learners should aim at practice at each level.
Learners, with the help of their teachers, should aim at selecting the appropriate Tasks as follows:
1. Undertake all the Tasks that cover the essential prior knowledge and the basics of the topic.
2. Undertake one or two easy comprehensive Tasks to develop confidence in the topic.
3. Then move on to more difficult Tasks to extend your capabilities.
4. In preparing for examinations, check on the errors you have made in some of the Tasks you have already
done, and also do one or two of the other Tasks that you have not already done.
In order to assist you in selecting the Tasks, the following icons are provided in each Task:
Tasks covering essential basics of the topic. These Tasks must be completed by the learners.
The attention of teachers is drawn to the official CAPS document. This sets out the recommended time-lines
for covering the curriculum content.
For your convenience, this is summarised in the table below, with reference to the specific relevant pages in
the Learner’s Book.
As stated above, please note that a considerable number of Tasks have been provided in the Learner’s Book
and it is not possible for all these Tasks to be completed in an academic year. Teachers must select the most
appropriate Tasks for incorporation in lessons and for learners’ homework. Teachers should also assist learners
in selecting additional Tasks for revision, remedial, study or extension purposes.
NOTE:
Learners cannot do all the Tasks in the Learner’s Book – select what is appropriate for your learners out of
the following sections.
OVERALL IMPORTANT ISSUES TO
WEEK SUB-PARTS EXTRA RESOURCES
TOPIC COVER
1 Reconcilia- Bank As so much of banking is cov- Copies of bank state-
tions Reconciliation. ered by internet today, these ments.
Pages 64 – 89 concepts including EFT’s must Newspaper articles on
TASK 3.3 & 3.4 be covered. banking fraud.
& 3.5 Very important to cover inter-
TASKS 3.11, nal control – Bank Reconcilia-
3.12, 3.13, tion is an important internal
3.15, 3.16, 3.17 control tool.
2 Reconciliations Bank Reconcilia- Errors. Copies of bank state-
tion. Pages 89 – Post-dated cheques received ments.
108 TASKS 3.16, and issued. Newspaper articles on
3.17, 3.19, Stale cheques. banking fraud.
3.21, 3.24 Previous month’s reconciliation.
CLASS TASK
3.23
3 Reconciliations Creditors Draw on the knowledge learnt Actual statements is-
Reconciliation. under Bank Reconciliation to sued by shops / busi-
Pages 108 – 120 show that the Creditors’ Rec- nesses.
TASKS 3.27, onciliation follows the same
3.28, 3.29, principle.
3.30, 3.31, 3.32 Very important to cover inter-
nal control.
4 Fixed assets Depreciation and Learners often experience diffi- Use the classified sec-
General Ledger culties with this section. Draw tion of the newspaper
accounts. on their knowledge that when together with car ad-
Sale of an asset trading stock was sold the ac- verts to show how
at the beginning count was credited. Similarly depreciation reduces
of the year. the asset account must be the value of the as-
Pages 121 – 134 credited. However, the compli- sets.
TASK 4.1, 4.2, cation is the accumulated de-
4.3, 4.4, 4.6, preciation account which must
4.7, 4.9 also be cancelled. Use the dia-
gram on page 129 to explain.
5 Fixed assets Sale of an asset Learners need to understand
during or at the the concept of the book value
end of the year. and as the asset is being sold
Pages 134 – 139 after the beginning of the year
TASKS 4.10, they need to depreciate for the
4.11, 4.12, relevant period of time. Make
4.13, 4.14, use of time lines to calculate
4.16, 4.17, the number of extra months.
4.18, 4.19, Learners need to learn and fol-
4.20, 4.21. 4.23 low the 5 steps involved in the
asset disposal process.
NOTE:
Learners cannot do all the Tasks in the textbook – select what is appropriate for your learners out of the
following sections.
OVERALL IMPORTANT ISSUES TO
WEEK SUB-PARTS EXTRA RESOURCES
TOPIC COVER
1 Partnerships Analysis and This topic was already intro- PAGES 272-288
interpretation. duced in Grade 10 so you will FORMULAS
Profitability. need to revise the old ratios
Pages 263 – 273 and then introduce the new ra-
TASKS 7.3, 7.5, tios – in particular the return
7.6, 7.8, 7.10, on owners’ equity.
13, 7.17, 7.19, Try to get learners to under-
7.21 stand what the ratios mean so
that they do not just have to
learn a lot of formulae. This
understanding will go a long
way to helping them when they
have to comment on the ratios.
2 Partnerships Analysis and The return ratio must be com- This would be a good
interpretation. pared to alternative invest- time to expose learn-
Return and li- ments. These rates do differ ers to the role of the
quidity. from bank to bank but also monetary council and
Pages 273 – 284 very importantly they are con- their adjustment of
TASKS 7.24, trolled by the monetary coun- the interest rates in
7.25 cil. the country.
Liquidity is an extremely im-
portant concept for the learn-
ers to understand. However, it
is too simplistic just to focus on
the current ratio and the acid
test ratio. Learners need to
understand the flow of money
by buying goods, selling the
goods, collecting the money
from the debtors and then pay-
ing their creditors.
3 Partnerships Analysis and in- Learners need to make the
terpretation. necessary calculations but also
Solvency. be able to comment on the ra-
Debt : equity. tios and use them to make
Consolidation. meaningful decisions in the
Pages 285 – 316 business.
4
Clubs Difference be- Take note that learners only Use examples from
tween a non- have to cover the ledger ac- the community.
profit making counts and the Receipts Schools are also a
concern and a and Payments Statement very good example of
profit making for clubs. However, they a non-profit making
concern. need to understand the differ- concern.
Subscriptions or ence between the different
Membership Fees forms of operation. Use the
account. learners’ experiences from their
Pages 317 – 327 communities of sports clubs or
other non-profit making con-
cerns.
NOTE:
Learners cannot do all the Tasks in the textbook – select what is appropriate for your learners out of the
following sections.
IMPORTANT ISSUES TO
WEEK OVERALL TOPIC SUB-PARTS EXTRA RESOURCES
COVER
1
Cost ac- Costing
concepts.
It is important that learners un- Allow learners time to
derstand the difference between make fudge, cake, a
counting Page 380 – 386 the different costs as well as the sandwich, or some-
TASKS 9.1, 9.2, calculation and meaning of thing that they have
9.4, 9.5 break-even. to cost.
Of particular importance is the
difference between what cost
items are and what assets are.
2 Cost accounting Introduce the Make sure learners understand
TASKS 9.6, 9.8, General Ledger the flow from raw materials to
9.9. accounts Work-in-progress to the Fin-
Pages 387 – 397 ished Goods Stock accounts.
3 Cost accounting General Ledger Analysis is Grade 12 work but it
TASKS 9.10, accounts. will really help if you allow the
9.11, 9.12, Introduce anal- learners to start engaging with
9.13, 9.14, ysis of produc- the different costs and the
9.15, 9.19 tion costs. movement over the year.
Page 397- 408 Introduce internal control
and ethics throughout.
4 Portfolio Allow learners time to work on
their portfolio/files.
5 Budgeting Introduction and It is important that learners un- Allow learners to draw
Cash Budget of derstand the concept of the up their personal
a cash only busi- cash budget and which items budget.
ness. are included. This is very im- Analyse the state
Pages 409 – 418 portant in that they have to budget, school budget
TASKS 10.1, distinguish between items for or any other budget
10.2, 10.3 the Cash Budget and the Pro- that is relevant to your
jected Income Statement. learners.
6 Budgeting Cash budget or a Introduce the Debtors’ Collec- Allow learners to dis-
business that tion Schedule. Make sure the cuss the national
buys and sells for learners understand the function budget.
cash and on of the Debtors’ Collection Sched-
credit. ule and how important it is in
Pages 418 – 435 making internal control deci-
TASKS 10.5, sions.
10.6, 10.7, Make sure learners understand
10.8, 10.10, the link between the Credi-
10.11, tors’ Payment Schedule and
the Debtors’ Collection Sched-
ule.
7 Budgeting Projected In- It is important that learners can
come State- draw up the Cash Budget and
ment. Projected Income Statement
Pages 435 – 444 simultaneously. This requires a
thorough understanding of the
function of each.
Internal control and ethics is
to be covered throughout.
NOTE:
Learners cannot do all the Tasks in the textbook – select what is appropriate for your learners out of the
following sections.
OVERALL IMPORTANT ISSUES TO
WEEK SUB-PARTS EXTRA RESOURCES
TOPIC COVER
1
VAT Concepts and cal-
culations.
It is essential that learners can
calculate VAT using the inclu-
Draw on learners’
knowledge of buying
Pages 491 – 497 sive or the exclusive system. items in the shop and
paying VAT.
Also draw on their
knowledge of calcu-
lating cost of sales.
2 VAT Invoice or receipt It is essential that learners un- Make use of current
base. derstand the workings of VAT newspaper articles
Bad debts. and how returns or bad debts concerning VAT and
Fraud. will affect the amounts. VAT fraud.
Pages 497 – 503 Ethics is to be integrated into
this topic.
3 – 10 Revision and ex- Make use of extra Tasks in the
ams different Modules.
Use Modules 13 and 14 for ex-
tra Tasks.
Use past papers.
Expected responses - Need for a code of ethics: to guide business dealings, to assure customers of quality of
service. Advantage of establishing a code of ethics: to get acceptance from customers and other stake-
holders. How this should be communicated to the stakeholders: Brochure, notice displayed in appropriate
place, web-site and advertisements.
Expected responses - What should be included in the code of ethics: Quality of service, care of customers,
treatment of employees, consideration of the environment.
1.2.4 Consider the business principles of Shell provided above. Which principle impresses you
the most? Explain.
Various responses possible – depends on opinion – select from the principles displayed, with reasons.
1.2.5 What are the likely consequences for a business if it does not follow its own code of
ethics or business principles?
Lost customers, decreasing profits, fines for non-compliance with the law (e.g. environmental abuse), im-
prisonment for breaking the law (e.g. failure to pay VAT to SARS).
1.2.6 Search the newspapers, business brochures or the Internet for an example of a code of
ethics or business principles for a South African business. (You might well notice that
many businesses opt for a much more concise code than does Shell – this is a matter of
choice). Present this to the rest of the class.
Responses will depend on the codes chosen. Teachers may direct learners to the Business Report sections
of the newspapers as codes of ethics are often printed with annual financial statements; or they may be
incorporated into advertisements. Learners with access to the Internet will find these on the websites of
large businesses (use a search engine such as Google). If learners have difficulty in accessing this infor-
mation, Teachers can amend the Task to a selection of advertisements which reflect good business practice.
1.3.2 What consequences would there be for South Africa if we provide ‘lousy service’?
The country would get a poor reputation. This will affect the economy, e.g. tourists will not visit, which
leads to a loss of foreign exchange and employment opportunities; potential investors from other countries
will place their capital in more efficient countries – this will negatively affect employment, growth and
standard of living in South Africa.
Case 1 The infected employee has constitutional rights, e.g. privacy, employment. The employer should
guide and educate all employees in accepting this and in understanding the nature of HIV/AIDS.
Failure to accept this could lead to their leaving this business.
Case 2 Mr Robb should be summoned to a disciplinary hearing to determine his guilt or otherwise and to
determine the nature of severity of the offence and the appropriate consequence. Mr Robb must
be given an opportunity to defend himself. However, he could lose his job if he is found to be
guilty. The business could consider legal action against the employee as well, which could lead
to imprisonment.
Case 3 One possible response: The partners should seriously look at ways of improving efficiency and
profitability, and should involve employee representatives in this process. They should explain to
employees that if the business cannot solve its profitability problem, it might well have to be sold
or closed down.
Case 4 One possible response: The farmer should consider the ethical dilemma, i.e. profits as against
environmental issues. Before taking drastic action, he should involve environmental experts in
exploring other options – this is likely to be a problem for other farmers too.
Case 5 One possible response: The gifts are actually bribes. It appears that this might be done without
the knowledge of the ship owners. This is not likely to give the business a good reputation and
could have serious consequences. Although these bribes lead to an inflow of income which is
needed to pay wages of employees, the business owners should look at more ethical ways of
improving income.
Case 6 Miss Steele should be called to a disciplinary hearing to determine her guilt or otherwise and to
determine the nature of severity of the offence and the appropriate consequence. Miss Steele
must be given an opportunity to defend herself. The extenuating circumstances should be taken
into account in determining her sentence. However, she could lose his job if she is found to be
guilty. The business could consider legal action against the employee as well, but a degree of
empathy might be appropriate if the reason is genuine.
Case 7 One possible response: The owners do have a right to move their business to a more suitable
location. They also have a responsibility to their current employees. It appears that 100km is
too far to transport them each day. The owners might well have to offer the employees severance
packages or provide them with notice or assistance in finding alternative employment.
Case 8 One possible response: The doctor has a moral and ethical responsibility to his patients. It
appears this is a problem that is very difficult to solve. If he increases his fees, he will lose
patients. If he does not go on the course, he will not be better able to serve them. He should
try to form an alliance with a doctor who is going on the course to give him feedback from the
course, and he should use local expertise, e.g., from large hospitals in South Africa, to assist him.
Case 9 Affirmative action is an accepted process in South Africa in order to redress inequities of the past
(opportunities in past eras favoured certain race and gender). A thorough and fair interview
process should be held. If one candidate is clearly more suitable than the other, then that person
should be preferred for the post. However, in terms of South African law, an assessment will be
made of the business’ move towards employment equity. A black female person should get the
post if she meets the qualifications, and the business has a shortage of employees from this
particular group.
Case 10 This might well be construed as unfair business practice as it unduly influences the decision-
making process of potential customers. There has been a high profile case of this nature in recent
times in South Africa. Competitors have a right to complain to the competition board and they
can take legal action. If the competitors can prove that they suffered financially as a result of
this practice, they can have a claim to damages.
Does Bernie Ebbers deserve to spend the rest of his life It was and is a brutally competitive business, so you ab-
in prison? You decide. But first, consider the full extent solutely had to match WorldCom’s efficiencies.
to which history’s greatest financial fraud affected lives How? By firing people, for starters. AT&T fired tens of
– it’s far greater than most of us realise. In fact, Bernie thousands in the late 1990s as it tried frantically to match
is still costing people money. WorldCom’s infuriatingly low costs. Of course, those em-
ployees didn’t need to be fired (at least not then), but it
Unless his long-shot appeal succeeds, WorldCom’s for- was too late for them once the fraud was revealed.
mer high-living CEO will serve 25 years in a federal prison
without the possibility of parole (though he could get Other telecom players did the same thing, and some did
about four years off for good behaviour). He’s 63, so Jay more. Qwest wound up committing accounting fraud,
Leno’s joke from 2002 – about Ebbers spending his re- and Global Crossing was under investigation and ended
tirement years in a gated community of a different kind up declaring bankruptcy, its value going to zero. Those
– looks prophetic. Just for the record, Ebbers insists that companies had plenty of their own problems, but the re-
underlings committed an $11 billion fraud without his lentless pressure to match a major competitor which
knowing a thing about it. Right, said the jury. couldn’t be legitimately matched – undoubtedly made
matters worse.
Sympathy has focused on the thousands of WorldCom
employees who lost not only jobs and medical insurance That’s some of the damage the fraud caused while
but also 401(k) accounts invested heavily in company WorldCom was flying high. Much more followed once
stock. Next in line for sympathy come the company’s the fraud was revealed and WorldCom filed for bank-
shareholders, including many pension funds, which lost ruptcy. Many suppliers immediately stopped getting
billions. But the truth is, the universe of folks who got paid, which was bad for all and terrible for some – local
whacked by the fraud is far larger. carriers were no longer being paid to complete World-
Com calls, yet it was illegal for those carriers not to com-
Suppose your firm had been competing against World- plete them. For equipment vendors and every other kind
Com between 1999 and 2002. Lots of companies were, of supplier to a company with $35 billion of revenues,
primarily AT&T but also Global Crossing, Qwest, Sprint, the result was more fired people and more clobbered
and a bunch of smaller players. WorldCom was lying shareholders.
about its expenses, but you didn’t know it. All you knew
was that the company seemed to be incredibly efficient, But the effects of the fraud still weren’t complete, for
consistently making money while under-pricing you. WorldCom was eventually allowed to emerge from
1.11.2 Briefly explain the negative and positive points relating to the Engen refinery.
Negative: The emissions are poisonous and can cause cancer; the refinery has not taken steps such as
erecting monitoring devices on their fences to assess the potential danger.
Positive: They have shut down the refinery to inspect every aspect of the refinery.
1.11.3 If you were one of the owners (shareholders) of this refinery, would you support the
closure of the refinery? Explain.
Yes / No depending on reasons. Expected responses:
No, because shareholders have invested in the company and will lose financially were it to close, it would
also mean that many employees will lose their jobs, but if it remains open then the poisonous emissions
must be rectified, even if it costs extra for the company to rectify it.
Or Yes
If the costs of rectifying the problem lead to financial losses, the business will not be sustainable. Also:
Fuel prices are regulated by the Government, so Engen might well want to negotiate with the Government
for assistance in covering all its costs including the costs of rectifying the emissions.
1.12.3 What do you think that the managing directors of cigarette manufacturing companies
are saying to the Australian Government in response to this proposed new law?
They will not be happy. They will probably argue that their businesses affect a number of developing
countries, that they provide employment and benefit the economies in terms of tobacco exports. The
Australian Government might not regard these as legitimate arguments.
Transparency is good. But why is it good? to mouth commitment sometimes in inverse proportion
Surely not as an end in itself. to their compliance.
Rather, like King 1, it is part of an evolution towards
In theory, the timely disclosure of material information ever-improving standards. Consider recent develop-
allows investors to act on it by the purchase or sale of ments in more mature and liquid markets:
shares. In practice, most shares on the JSE (Johannes-
burg Securities Exchange) are so thinly traded that the "Investment professionals worldwide believe the quality
ability of large investors to build or unwind their positions of financial reporting has declined slightly in the past four
is constrained. years Respondents [70 000 members of the Association
for Investment Management & Research] showed the
In theory, comprehensive disclosure allows shareholders greatest dissatisfaction with statements of companies'
to praise or censure corporate actions. On praise there cash flow and shareholders' equity ... More than two-
is no limitation. On censure there is limited purpose, be- thirds said companies' practice of giving authority of
cause it can rarely unravel what boards have already de- shareholders. Boards lead and control companies. And
termined. boards are inclined to perpetuate themselves by the di-
rectors they nominate.
Take, for example, executive remuneration. In practice,
the authority of boards eclipses the shareholders. The
system, as it stands, does not work badly. What should
be asked is whether it can work better. King 2 is not the
final word on corporate governance, enabling companies
In practice, there are inevitably unspoken conflicts, be- To rebuild investor confidence, Governments of the Or-
cause of the frequency with which directors owe their ganisation for Economic Co-operation and Development
appointments to the influence of a dominant shareholder intend "to encourage greater shareholder activism, in-
whose interests they might be tempted discreetly to ad- cluding ... participation in the nomination and election of
vance earnings guidance increased the likelihood of ma- board members and the approval of remuneration
nipulation of earnings reports." schemes".
There is no stipulation on the content of the responses expected from learners, nor on the conclusions which
they reach. Teachers should ensure that different opinions from learners are tabled in an orderly fashion, and
that learners seriously consider the OPV (‘Other Point of View’) and that they CAF (‘Consider All Factors’), both
of which are concepts promoted in the de Bono Thinking Skills Programme.
There is no stipulation on the content of the responses expected from learners, nor on the conclusions which
they reach. Teachers should ensure that different opinions from learners are tabled in an orderly fashion,
1.17.2 Explain why it is important for the Competition Commission to bring the problem un-
der control as soon as possible.
Taxpayers’ money is used to pay for these large contracts. Inflated prices mean that the Government is
not getting the most value from using taxpayers’ money. Also, for large contracts there are not many
companies in the country who can build large structures such as football stadiums. The agreement (or
cartel) between the biggest five companies means that the Government’s finances are being ‘milked’.
Smaller companies might also be disadvantaged because the bigger companies are getting all the contracts.
This is unfair business practice.
1.17.3 What is the Competition Commission planning to do about the companies who are not
co-operating? Do you agree with this? Explain.
The Commission wants to impose the stiffest penalties that they can. They also want the local or national
Government to stop dealing with these companies. The Commission is offering a leniency period for com-
panies to ‘own up’ about their offences so that the problem can be solved. (Learners might agree or
disagree with this strategy; some might think that the companies should be de-registered).
CHECKLIST
Yes – profi- Requires more
SKILLS Complete
cient attention
Explain what is meant by the words: ‘ethical’,
‘moral’, ‘dilemma’ and ‘sustainable’.
Understand the concepts of accountability, trans-
parency, fairness, responsible management and
good corporate governance.
Understand and explain why it is necessary for
businesses to establish codes of ethics or important
values and codes of conduct.
Offer opinions on ethical scenarios and cases relat-
ing to a business.
Consider ethical aspects relating to all topics stud-
ied in the Grade 11 curriculum.
This Task focuses on the debate of black economic empowerment. You are provided with an article which
appeared in The Business Report on 18 August 2005.
Required:
• Why was it necessary for the Government to ensure that Black Economic Empowerment (BEE) is adopted
in this country?
• What is your opinion about the BEE concept?
Black Economic Empowerment (BEE) seeks to give in- poor must convert them into income, to spend on satis-
creased ownership and control over businesses to histor- fying their immediate needs.
ically disadvantaged persons (HDPs) and to increase the
procurement spending going to BEE firms. Indeed, sec- The implication is that an empowerment scheme that
tion 2(f) of the Competition Act states that one of its gives (or sells at a favourable price) shares to poor peo-
purposes is "to promote and maintain competition in or- ple will not necessarily increase the wealth of the recipi-
der to promote a greater spread of ownership, in partic- ents. Sadly, the shares will most likely be sold and
ular to increase the ownership stakes of HDPs". thereby converted into income to be spent on food,
transport, accommodation and clothing.
Certainly, increasing ownership stakes of wealthy and
even middle-income HDPs is easy enough, but the chal- The proceeds of these shares will yield short-term bene-
lenge is to make BEE deals broad based to the extent fits, and arguably the poorest households would benefit
that they empower the masses. But can BEE really ad- the most, if extra income were presumed to be most
dress the problem of poverty that affects so much of beneficial to those with the least of it. But the empow-
South Africa's population? erment exercise will be a one-off shot in the arm, a pov-
erty relief effort rather than empowerment in the sus-
Poverty, or being very poor, indicates a shortage of both tainable sense that was intended by empowerment leg-
wealth and income, where the wealth of a household islation (including the Competition Act).
might be the accumulated stock of assets acquired by
inheritance and by means of spending flows of income. Nor will businesses involved in such transactions be able
to claim the BEE credentials for creating a class of poor
Importantly, wealth can be converted back into income black shareholders: in all likelihood, those already privi-
by selling assets, ideally in later years of life, as older leged will have bought the shares from their original re-
family members retire and, in the absence of any wage cipients.
income, might have to survive by liquidating their stocks
of accumulated wealth as well as relying on savings. There are difficulties in ensuring that the benefits of BEE
transactions are spread widely and to the poorest. That
Unfortunately for the poverty stricken, each day might is surely the reason structures have been devised to hold
be a quest for survival, in which any assets acquired shares on behalf of the ultimate beneficiaries. For exam-
might have to be sold to finance consumption, rather ple, some transactions involve partnership arrange-
than being accumulated as wealth. For households on ments, workers' participation schemes that facilitate em-
or below the poverty line (whatever level of income that powerment or the sale of shares to employee groups or
might be), consumption is equal to income and savings union groups. These difficulties apply not only to the
are therefore zero. In fact, if a household's income is not private sector, but also to the sale of shares in state en-
sufficient to finance consumption in a particular period, terprises.
then it must resort to dis-saving, or selling of any liquid
assets. Naturally, it seems the Government would still prefer to
have control and sustainable ownership in these organi-
Economists refer to a concept known as the "marginal sations passing to HDPs. But for the Government there
propensity to consume". This is the measure of a con- are other options: giving away shares to the public (on
sumer's tendency to spend a certain portion of but the the understanding that those who need the money in-
poor must lead a hand-to-mouth existence and so they stead will resell them); or selling them to the highest
will tend to spend all (100%) of their income - in other bidders and then applying the proceeds to its expendi-
words, their marginal propensity to consume is 1. ture programmes.
Reporting on black economic empowerment (BEE) initia- The level of reporting is confined to the basic one liners
tives by public companies is slowly becoming a reality that are required by King 2 and they never venture any
that needs to be faced. further information because in reality not much is done
to contribute to BEE. Once the storm of anger settles,
In the current economic climate in South Africa, any the bargaining stage sets in with its principle: "What
company that does not contribute in a substantive man- contribution can we make to BEE that will gain us the
ner to BEE will have its sustainability questioned. When maximum points on the BEE scorecard with minimum ef-
you forecast the cash flow of a company that does not fort?"
contribute to BEE, it would diminish because the under-
lying business of the company would depend on the level This stage sees companies taking action such as unsus-
of contribution to BEE relative to the Department of tainable BEE deals, appointing more black directors in
Trade and Industry or charter targets, and also how far non-executive positions on their boards and creating BEE
ahead of its competitors the company is. subsidiary/joint venture structures that may be fronts.
Stakeholders need to be informed on the level of BEE The key reporting feature of this stage is to describe the
contribution by the company because this would affect legal form of the deals, but not necessarily the economic
the returns on their investment. When one explores the substance of the deal, and also outline the policies and
trends on BEE reporting in annual reports, there has intentions that will be implemented in the future. There
been great improvement from the early 1990s. is little information on the actual state of BEE within the
company at a particular point in time.
In the beginning, the trend was to put all BEE-related
initiatives to the corporate social responsibility section of When the stage of bargaining fizzles because the strate-
the annual report. During this period, BEE was equated gies and plans lack substance, the depression stage
with social responsibility and was not really seen as a clouds the company. This usually occurs after the com-
business imperative. However, we have recently seen panies have gone through a broad-based rating that
BEE being dealt with in the main body of the annual re- evaluates the substance of their initiatives. This is a pe-
port in a prominent position. riod where the lessons of sustainable BEE slowly filter to
the marrow of the company.
The other trend that is good is the separate sustainability
report, which highlights the key sustainability issues a The company is in a reporting limbo as it rehashes its
company faces. BEE is one of the issues that gets cov- intentions to BEE contributions but still no BEE progress
ered within the report. gets reported, or sometimes the level of reporting on BEE
may even be decreased. The final stage is the one of
What is interesting to note is the correlation of the BEE acceptance. This occurs when the company finally em-
stages (based on Elisabeth Kubler-Ross theory) that the braces BEE wholeheartedly. The level of reporting re-
company is in, ranged against the quality of the reports flects congruence between the company's intention, the
produced. policies that are articulated internally and externally, and
the action that is taken to make the company's BEE in-
The first stage that companies go through when they en- tention and policy a living reality.
counter BEE is denial. They genuinely do not believe that
BEE is applicable to them and therefore do nothing to The reports at this stage reflect a refreshing honesty and
contribute to BEE. At this stage there is no reporting on transparency, which in turn give the stakeholders an in-
BEE. dication of the BEE direction the company is taking. This
is a stage where the company's BEE report becomes a
Once the heat of the trickle-down effect of BEE descends record of the footprints it is making in its BEE journey
on them, they move to anger. During this stage, com- over time.
panies feel a lot of resentment and rage, which leads
them to believe that BEE is reverse discrimination and
that it is an unfair process imposed on them.
Mzwanele Jimmy Manyi was appointed this week by la- why labour minister Membathisi Mdladlana is introducing
bour minister Membathisi Mdladlana as the new chair- a national roving inspectorate unit and the director-gen-
man of the Commission for Employment Equity. He was eral review system with a clear aim of conducting highly
born in 1964 in Meadowlands, Soweto. He is married to specialised inspections and effective monitoring mecha-
Stella and they have three children aged 19, 17 and nine. nisms.
His education includes both Technikon and graduate What should we expect from your team?
schools of business at Wits University, the University of We will be working closely with the inspectorate. Also,
Cape Town and Harvard. He has over 20 years' experi- the social partners at Nedlac have agreed to support and
ence in the corporate environment, mainly in blue chip implement employment equity in the workplace.
firms and multinationals. His experience spans key sec-
tors of the economy, including banking. He worked for Do you have any mandate from the minister?
seven years at executive level for Barclays plc and the I have his full support. In fact, the terms of reference of
Nedcor Group, where he ran the business banking divi- this commission are stipulated in the Employment Equity
sion, business development, black economic empower- Act. The key issue about this commission is to advise
ment (BEE) and Government relations. the minister on employment equity and the code of good
practice.
Manyi also worked for four years at Toyota South Africa
where he was appointed general manager. For 10 years Has the Department committed any resources to
he worked for Anglo American both as a mining and an the commission, either in terms of human re-
exploration geologist. He says he has just joined the in- source or finance?
formation and communication technology sector, armed The secretariat in the Department will be assisting us.
with a lot of business experience. He is the director of The back-up that I have seen so far is adequate for me
BEE and corporate affairs at IBM. Manyi serves on sev- to deliver. I have also noticed that the turnaround time
eral bodies including Nedlac and the Black Management is quick with staff in the Department responding quickly
Forum and is a director of various companies. to requests from members of the commission.
Why is employment equity important for South Is Government afraid of acting against the private
Africa? sector to enforce the law?
Employment equity is a business imperative. It has to We cannot say that. In the next few weeks the first em-
work hand in hand with skills development. If we suc- ployment equity prosecutions will take place in the Dur-
ceed in growing our economy by 6%, we need to have ban labour court against some Newcastle clothing man-
trained enough black managers. Any company that ufacturers. While Government's role is not to be draco-
wants to succeed in the next 10 to 15 years should have nian, it is incumbent upon employers to comply with the
its demographics in place. law, especially after several corrective measures have
taken place.
What needs to be done to promote understanding
of the Employment Equity Act? Are these cases a foretaste of things to come?
There needs to be a road show to encourage companies It will be sad if business forces Government to have a
and employers in general to comply with the law and heavy hand. The only role Government can have is to
submit their equity reports to the department of labour. regulate and regulate, and we should remember that
Employers should respect the law that they have agreed Government doesn't want to do that. Part of our appeal
to at Nedlac, the forum for business, Government, labour to business is to take employment equity seriously to
and the community. With regard to broad-based Black avoid a situation where we are forced to advise the Min-
Economic Empowerment, we need to ensure that there ister to be tough. Business is first to complain about
is alignment between the codes of good practice on em- crime, and it is lawlessness if business does not comply
ployment equity and what is happening within the De- with legal provisions. We will not allow a situation where
partment of Labour. this country is turned into a banana republic.
What have you inherited in your new role as chair- What is your advice to workers feeling frustrated
man of the Commission for Employment Equity? at the slow pace of employment equity transfor-
I have inherited a lot of information from the outgoing mation?
commission, especially quantitative analysis of the status I would urge them to get out of the victim mentality.
of employment equity within the workplace. I know how People must take responsibility for their development.
many black managers are lacking at middle management Also, people can pick up a phone and contact the inspec-
and executive management levels. Our job is to check torate of the Department of Labour. But that
what the issues are and what needs to be done.
Required:
• Why was it necessary for the Government to ensure that the EEA was passed by parliament?
• What is your opinion about employment equity and affirmative action?
The Employment Equity Act (EEA) has two main func- disadvantage employees. It also prohibits employers
tions. Firstly, it enforces affirmative action. That is, it from discriminating unfairly against applicants for em-
requires employers to recruit and develop black, female ployment. Such unfair discrimination could include, but
and disabled people as a means of correcting the disad- is not limited to, discrimination on arbitrary or subjective
vantages caused by the "old South African dispensation". grounds such as race, gender, family responsibility, reli-
Affirmative action aims to give people from these popu- gion, age, disability, opinion, and trade union affiliation.
lation groups the chance to gain the knowledge, skills
and/or work experience of which history deprived them. However, where discrimination takes place for the pur-
poses of promoting affirmative action, such
However, the biases and discrimination that character-
ised the "old South Africa" have not died out, and still
exist in the hearts and minds of many people. Therefore,
the second function of the EEA is to prohibit unfair dis-
criminatory acts that demean, persecute or otherwise
The SAPS claimed that it was merely carrying out its Em- However, the employer was not required to follow its dis-
ployment Equity Plan (EE Plan) in accordance with the ciplinary code rigidly:
law. The court noted however, that the SAPS had also
undertaken not to erect absolute barriers against ad- - The term "Dutchman" was racist in the sense that it
vancement of employees from non-designated groups. connoted white supremacy. While this might not be
seen as being as serious as terms such as "kaffir", it
Also, while there were no vacant posts for non-desig- was still unacceptable;
nated employees at the time, there were vacant posts - The employer had the right to deviate from its discipli-
for members of designated groups. However, no appli- nary code when circumstances called for this;
cations from members of designated groups had been - The CCMA commissioner had improperly interfered
received. The SAPS was therefore ordered to promote with the employer's right to impose discipline;
the white males. - The dismissal was fair.
In Oerlikon electrodes SA v CCMA and Others (2003 9 From this judgment it is clear that the courts will not al-
BLLR 900), the Labour Court was asked to review an low employers to practice racism unless it is done in the
award made by a CCMA commissioner relating to the dis- name of genuine affirmative action. Even moderate
missal of an employee for using racist language. The forms of racism will not be tolerated in South African
arbitrator had found the dismissal to be unfair partly be- workplaces. Employees may, under certain conditions,
cause the employer's disciplinary code did not provide be fired even if the employer's disciplinary code does not
for dismissal on a first offence of using racist language. provide for dismissal.
This Task focuses on the E-commerce fraud. The rise of electronic business has been a feature of the 21 st
century. Regrettably, this has led to further opportunities of business fraud. You are provided with an article
which appeared in the Business Report on 18 July 2005.
Required:
• In your opinion, who is accountable to eliminating this type of fraud?
• Would you purchase goods on the Internet with a credit card? Explain.
Washington - After enjoying phenomenal growth in its have changed the way they behave online as they try to
first 10 years, Internet commerce faces new challenges avoid these problems. Among the other findings of the
as consumers' fears of viruses, spyware and a range of survey:
fraud schemes continue to grow.
• 81% said they stopped opening e-mail attachments
The e-commerce revolution led by companies like eBay unless they are sure these documents are safe;
and Amazon.com, both created a decade ago, has made • 48% have stopped visiting sites that they fear might
the Internet a permanent part of the world of commerce. deposit unwanted programs on their computers;
But even as more consumers join the rush, many are
growing fearful about maintaining their privacy, protect-
ing their personal data and the potential of falling victim
to nefarious elements in cyberspace.
In the 12 months to May 2005, an estimated 73 million One in four said they found new programs on their com-
US adults who use the Internet said they received an puters that they did not install or new icons that seemed
average of more than 50 phishing e-mails in the past to come out of nowhere, with one in five saying their
year, Gartner said. That was up 28% from a prior survey. starting point, or home page, had inexplicably changed.
Also, some 2.4 million online consumers reported losing "These survey results show that as Internet users gain
money directly because of the phishing attacks, although experience with spyware and adware, they are more
most said this was repaid by banks or credit card issuers, likely to say they are changing their behaviour," said
the Gartner survey indicated. Pew's Susannah Fox.
Online retail sales in the US market, the world's most "But what is more alarming is the larger universe of peo-
developed, amounted to $141.4 billion (R billion) in ple who have struggled with mysterious computer prob-
2004, according to the National Retail Federation. Some lems, but have no idea why. Internet users are increas-
forecasts see that figure hitting $331 billion by 2010. ingly frustrated and frightened that they are not in
charge of their Internet experience." - AFP
Required:
• In your opinion, who is accountable to eliminating this type of abuse?
• Why has the Government gazetted regulations in this regard now? Was this sort of abuse not apparent in
previous decades?
Pretoria – Wolf-whistlers beware. In terms of the code, nothing confers the authority or
obligation on employers to take disciplinary action
Amendments to the country’s sexual harassment laws against non-employees. But a non-employee who is a
now outlaw wolf-whistling and enable employers to lay victim of sexual harassment may lodge a grievance with
charges of sexual harassment against offenders. the employer of the harasser “where the harassment had
taken place in the workplace or in the course of the har-
The Amendments to the Code of Good Practice on the asser’s employment”.
handling of sexual harassment cases in the workplace
were gazetted on Friday. The guide for employers has According to the code, sexual harassment in the working
as its aim the elimination of sexual harassment in the environment is a form of unfair discrimination. It is,
workplace and provides the appropriate procedures to therefore, prohibited.
deal with the problem and prevent its recurrence.
Unwelcome conduct includes physical, verbal or non-ver- Non-verbal conduct includes unwelcome gestures, inde-
bal actions. Physical conduct ranges from touching to cent exposure and the display of or sending by electronic
sexual assault and rape, as well as strip-search by, or in or any other means sexual explicit pictures or objects.
the presence of, the opposite sex.
Jackie Branfield of the Action Desk for Abuse Against
Verbal conduct includes “unwelcome innuendos, sugges- Women and Children said: “This new amendment is one
tions, hints, sexual advances, comments with sexual way of making sure that women are treated with the re-
overtones, sex-related jokes or insults, graphic com- spect and dignity they deserve.”
ments about a person’s body made in their presence or
to them, inappropriate inquiries about a person’s sex life,
Required:
• In your opinion, who is accountable to eliminating this type of abuse?
• In your opinion, what has caused this sort of abuse to occur in recent times?
• How can this be stopped?
The sale of organs by living donors – one of the greatest avoid exploitation – might be the only way to solve the
medical taboos – is increasing worldwide, yet in South global shortage of human organs and counter the black
Africa debate on the issue has hardly begun. market trade.
Visiting South Africa in 1998 and 1999, University of Cal- They argue that it is futile to try to stop this illegal traf-
ifornia medical anthropology professor Nancy Scheper- ficking of kidneys, that desperate people will not be de-
Hughes warned that the poorest areas of the world were terred by laws and that it would be more sensible to cre-
becoming kidney warehouses of sorts and South Africa a ate an ethical market in organs.
transplant tourism destination.
The only country where the sale of human organs is al-
At one conference, Scheper-Hughes was accused of lying lowed is Iran.
and was shouted down.
Revulsion
But now, South Africa’s most prestigious private health
care group, Netcare, is at the centre of criminal proceed- A bioethics professor at the Open University of England,
ings focused on this spectacularly lucrative trade. Janet Radcliffe-Richardson, further argues that the ob-
jections to the idea of regulated organ sales are based
The proceedings have attracted worldwide publicity and
on an immediate gut reaction of revulsion and horror at
will fuel international debate surrounding the sale of or-
the idea. She also says that objections on the grounds
gans by living donors.
that regulated trade would exploit the poor do not hold
up.
Scheper-Hughes advocates tighter measures to combat
and prohibit the sale of organs, arguing that people who
“They (victims of poverty) have too few choices open to
sell their organs are exploited victims of poverty and des-
them. So why do you go in and reduce their choices
peration.
further, taking away their right to decide for them-
selves?” said Radcliffe-Richardson.
Tragedy
“The division of the world into organ buyers and organ On related arguments that organ donation should be
sellers is a medical, social, and moral tragedy of immense purely altruistic, Radcliffe-Richardson said, “If a father
and not yet fully recognised proportion,” said Scheper- who saves his daughter’s life by giving her a kidney is
Hughes. altruistic, it is difficult to see why his selling a kidney to
pay for some other operation to save her life should be
But, in the UK, a growing number of kidney specialists considered less so.”
who previously condemned the idea of selling organs,
argue that payments to living donors – controlled to
This Task focuses on the ethical debate surrounding monopolies and their potential to control and fix prices.
You are provided with an article which appeared in the Business Report on 28 June 2005.
Required:
• Why is it necessary for the Government to intrude with regard to monopolies?
• What can the Government do to keep prices under control?
• What is your opinion on the SAA case? Do Comair and Nationwide Airlines have a valid complaint?
• Is paying bonus commissions the same as a bribe? Explain.
Johannesburg - The Government was poised to crack Complaints have been levelled by downstream manufac-
down on South Africa's monopolies and cartels by raising turers against Sasol and Mittal Steel South Africa for us-
the level of competition, while stimulating development ing the import parity pricing mechanism, which they say
in the downstream industries, trade and industry minis- is responsible for inflating prices.
ter Mandisi Mpahlwa said yesterday.
An import-parity price model is based on a practice of
In a veiled reference to firms such as Telkom, Mittal Steel fixing the price of a domestically produced good to be
South Africa (which dominates the steel industry) and equivalent to that of an imported product. In other
Sasol (the petrochemicals group) Mpahlwa said the Gov- words, shipping costs and import tariffs are added to the
ernment would work towards bringing direct competition price of a home-made product, to make it equal to the
to these local giants to force them to lower the prices price of an imported good.
that they charged their customers.
Mpahlwa said the strategy of reducing costs for manu-
The banking industry, which is dominated by four big facturers would be accompanied by the provision of spe-
lenders, is another sector that is on the radar screens of cific incentives to assist struggling downstream indus-
the competition authorities because of its perceived tries.
steep fees.
Earlier this month, Lumkile Mondi, the chief economist at
"The Government intends sending a strong message to the Industrial Development Corporation, told Business
all sectors and firms in the economy that there must be Report that one of the reasons South Africa failed to at-
increased competition to promote the growth of down- tract meaningful foreign direct investment was the high
stream and value-adding economic activity, which holds barriers to entry in some of the domestic industries.
the key to a sustainable and job-creating economy," said
Mpahlwa. "In particular, the Government is focused on Mondi said a plan that slashed transport, energy and tel-
lowering the costs of key resource-based inputs and tel- ecommunications costs would crowd in investment and
ecommunication prices." boost economic growth and employment.
To prevent the high concentration of pricing power, Increases in the cost of essential inputs such as water,
Mpahlwa said a concerted effort would be made to electricity and telephones often ran above the country's
strengthen competition laws and to eliminate the contro- inflation target of between 3% and 6% a year. In some
versial import-parity pricing model that compelled down- instances, these high costs were responsible for sucking
stream industries to pay exorbitant prices for key inputs the life out of manufacturers already struggling from the
such as steel and chemicals. impact of the strong rand and increased import compe-
tition from Asia's low-cost producers, such as India and
In many respects, the dominance of the steel and chem- China.
ical sectors by a few large companies is responsible for
stifling development in downstream industries such as
construction, plastics, rubber and paint, most of which
are labour intensive.
South African Airways (SAA) lodged an appeal with only preference to those of its rivals and that they were able
a few hours to spare on Friday against the R45-million to influence customer preferences in that regard.
fine imposed by the Competition Tribunal for abusing its
dominant position in the local airline market. Complaints over the incentive scheme were received
from Comair and Nationwide Airlines. The case follows
SAA has appealed both the Tribunal’s finding and pen- a complaint lodged by Nationwide in 2001. According to
alty. The carrier had until close of business on Friday to I-Net this entitles the two affected airlines to proceed
appeal against the ruling, though it had said at the outset with a civil claim against SAA in the High Court – if they
it would appeal. can prove that they suffered damages as a result of the
abuse during the relevant period.
The fine is the biggest ever handed out by the Tribunal.
The appeal from South Africa is all-encompassing, taking
It found that the incentive schemes offered by the airline
on virtually every aspect of significance, from the Tribu-
were unlawful and a prohibited practice. The abuse of
nal’s definition of the market to its finding of abuse and
dominance relates to two incentive schemes for travel
the fine itself.
agents that SAA operated.
Meanwhile, Shan Ramburuth, the acting commissioner at
The first involved a system whereby agents were paid a
the Competitions Commission, says: ‘The commission
bonus commission if they made sales above a certain
will consider cross-appealing the Tribunal’s decision with
specified target. The other involved rewarding travel
respect to the penalty. We would argue that it’s too low.’
agency staff with SAA tickets on the number of airline
The Competition Appeal Court will determine a date on
tickets they sold.
which to hear the appeal.
I-Net reports that the Tribunal found the schemes gave
agents a commercial incentive to sell tickets of SAA in
Required:
• What is the nature of the investigation into the car industry?
• Why is the Competition Commission concerned about this?
Pretoria - National Automobile Dealers' Association "We will co-operate fully [with the commission] and
(Nada) representatives met officials from the competi- should there be any specific allegation against McCarthy
tion commission yesterday, following the release last dealers, these allegations must be substantiated because
week of the findings of the commission's investigation we have no information at our disposal about this," said
into the motor industry. Pretorius.
Gary McCraw, Nada's executive director, declined to Teresita van Gaalen, the managing director of Subaru
comment further until the organisation had received South Africa, said all the company's dealers had received
feedback from its legal advisers. letters from the commission about their referral to the
competition tribunal.
Major dealership groups have also been coy in their re-
action to the commission's findings. She reiterated that Subaru South Africa was "absolutely
unaware" of having being involved in any anti-competi-
Brand Pretorius, the chairman of McCarthy Motor Hold- tive practices and intended to defend itself at the tribunal
ings (MMH), said the company was awaiting guidance hearing.
from its suppliers.
The commission said last week that evidence revealed
Pretorius referred to the consent order agreement that BMW South Africa, DaimlerChrysler South Africa,
reached last year between Toyota South Africa and the General Motors South Africa, Nissan South Africa and
commission, in which Toyota South Africa agreed to pay Volkswagen South Africa and their dealers entered into
an administrative penalty of R12 million and discontinue franchise and dealer agreements that contained a num-
minimum resale price maintenance, a euphemism for ber of restrictions on competition.
price-fixing. He said Toyota South Africa handled this
matter on behalf of its dealers.
The price-fixing by car makers is just one aspect of our The second example concerns the Smart car, but it ap-
motor industry that should be investigated, from CB Rog- plies to most other cars in the UK. Some time ago, my
ers, Durban. daughter in the UK considered buying one of these cars.
At the time, the cheapest model was priced at just over
More important would be an investigation into why our £6 000 (R74 495). Just why then are we asked to pay
cars are so outrageously overpriced. To give just two R122 000?
examples: When my nephew emigrated to Australia, he
bought a new car that was imported into Australia from It can't be transport costs, because these apparently
South Africa. He was amazed to find that its price was don't feature in our car exports to Australia. So, is it all
R55 000 less than in South Africa. Government tax or is it simply greed?
One does not have to be an economist to see that there Isn't it about time someone challenged the greedy car
is something fundamentally wrong here. How is it that manufacturers and produced a local "people's car" at an
this car, which is assembled in South Africa from compo- affordable price?
nents manufactured in and transported all the way from
Japan, can be transported back across the world to Aus- CB Rogers, Durban
tralia to be sold at such a vastly cheaper price?
Required:
• What is money-laundering?
• Why is it necessary for countries not to gain a reputation for being open to money-laundering?
• In your opinion, is the US Government justified in banning the banks suspected of money-laundering, or
have they over-reacted? Explain.
Washington - The United States has moved to banish money or engage in similar corruption: we will cut you
from the country two foreign banks suspected of helping off from the US financial system."
the Iraqi regime of Saddam Hussein, before its ouster
last year, launder money siphoned from the UN oil-for- The action against Infobank is seen as an implicit warn-
food program. ing to Belarus President Alexander Lukashenko, who is
reported to have close ties to people running the pri-
The Treasury Department on Tuesday formally desig- vately-owned bank his Government licensed to engage
nated Infobank of Belarus and First Merchant Bank, op- in foreign exchange transactions.
erating in Turkish-controlled northern Cyprus, as institu-
tions of "primary money laundering concern," which ef- US officials believe Infobank was at the heart of a
fectively shuts them out of the US financial system. scheme run by Saddam Hussein and his closest associ-
ates to use the oil-for-food program to extract bribes
The designation means the targeted banks cannot main- from foreign contractors, impose illegal surcharges on
tain any correspondent accounts in the United States, a them, and plainly smuggle out oil in violation of UN sanc-
key tool for conducting business in the country. In addi- tions.
tion, US banks have been instructed to keep an eye out
for attempts by the two targeted banks to get access to The former Baghdad regime was able to pocket that way
the American market through intermediaries. $10.1 billion (R67.6 billion) between 1997 and 2002, ac-
cording to US congressional estimates.
"Today's designation alerts the global financial commu-
nity of the threat posed by these entities," Treasury Un-
dersecretary Stuart Levey said in a brief statement.
Required:
• Why would a business want to employ illegal immigrants?
• Why does the Government feel it is necessary to control employment of immigrants?
• What is a quota?
• In your opinion, is this a good policy by the Government? Explain.
South African companies employing foreigners need to there is a known shortage of a particular skill.
ensure that they obtain the right working visas – or
heads of companies could find themselves behind bars. Ebrahim says that the amendments to the Immigration
Act have sought to open the door to foreign skilled pro-
Zahida Ebrahim, an associate in the immigration law unit fessionals. “The Government’s objectives in this regard
at Sonnenberg Hoffman Galombik, says that under the are laudable and the changes to the Act are indeed
amended Immigration Act, companies that are first-time promising,’ says Ebrahim.
offenders face a fine or a jail sentence up to a year – for
the individual responsible for running the business. For example, the 2% remuneration penalty is lifted. Em-
ployers previously had to pay it when hiring foreign pro-
Second offenders face a fine or jail sentence up to two fessionals. Now quota permits are a set number of per-
years, while third-time offenders face mandatory jail mits which are issued for specific positions in particular
time of up to three years. market sectors, generally where skills have been identi-
fied as scarce.
The Government has been criticised for the difficulties Article shortened
companies have in bringing in foreign skills, even when
Required:
• Why would people lie about their qualifications?
• Why is it necessary for the Government to intrude in this matter?
The Government is devising new guidelines to deal with their position with bogus qualifications could be sued by
qualifications and other credential cheats, a seminar on their employers for damages on the basis of misrepre-
qualifications fraud in the workplace heard this week. sentation. In addition, it was relatively easy to dismiss
them following established procedures because they had
Public Service and Administration Department anti-cor- lied about their qualifications. The courts had determined
ruption specialist Maphethang Foolo said plans were well that checking the credentials of a job applicant was per-
advanced for the public service to verify the credentials fectly legal, Dicks said
of all new employees.
Leon Esterhuyse, a forensic document specialist, said
Once implemented, the new guidelines would require all forgeries were widespread and that employers should
Government departments to check all the documentation verify documents' validity.
of incumbents prior to appointments being finalised.
A variety of means were used to tamper with documents,
"At present there is no uniform policy in place which including the use of chemicals to remove the ink from
means that some departments check documentation documents such as degrees and diplomas prior to them
only after an appointment has been made, while some being altered to suit the ends of the forger, Esterhuyse
check ahead of time," she told the seminar organised by said.
credentials verification company Kroll MIE.
Another programme in the pipeline was to link corrupt Kroll MIE marketing manager Elmarie Liebenberg said
employees to the Government's Persal payment system. more than one in ten of all job applicants lied about their
qualifications.
"Once the anti-corruption measure has been imple-
mented, individuals found guilty of corruption will be "There is growing pressure on job applicants to cheat
tracked through the Government's Persal payment sys- because of widespread unemployment." Liebenberg said
tem. It will ensure that everybody within the service is the quality of many forged or fraudulent qualifications
aware of that individual's previous transgressions related was such that it was impossible for a human resources
to bribery and corruption." manager to tell whether it was the real thing or not. –
Sapa
Speaking at the same seminar, DeLoitte legal senior part-
ner Murray Dicks said employees who had secured This article was originally published on page 3 of The
Cape Times on October 04, 2004
Required:
• Why was it necessary for the Consumer Affairs (Unfair Business Practices) Act to be applied in this case?
• Have you had any personal experience of misleading advertising? Explain.
• In your opinion, should penalties be applied to businesses which mislead customers through false adver-
tising, or should the buyers be more vigilant?
A notice in the Government Gazette said the "opportuni- They affect poor rural consumers who don't have jobs
ties" to be investigated included, but were not confined and are keen to get involved to get a living to sustain
to, typing, addressing envelopes and labels, filling enve- their families but are faced with problems and lose their
lopes, gathering names and addresses, administrative money," he said.
opportunities, compiling data and direct sellers of con-
sumer goods "who did not truthfully identify themselves,
the firm and their products in any advertisements".
Required:
• Why was it necessary for the Consumer Affairs (Unfair Business Practices) Act to be applied in this case?
• Have you had any personal experience of misleading advertising? Explain.
• In your opinion, should penalties be applied to businesses which mislead customers through false adver-
tising, or should the buyers be more vigilant?
Cape Town - The average fee earned by executive direc- information is important for workers as they continue to
tors, excluding gains from share options, increased from challenge the growing wage gap within their workplaces.
an average of R2.6 million in 2003 to R3.7 million last
year. This amounts to a 38% increase. Directors' excessive remuneration should matter to cor-
porations as this elitism is not sustainable in the long run.
In 2003 it took a worker earning the average minimum Despite the importance of wage income for households,
wage 111 years to earn what the average director earns companies insist on keeping wage levels depressed. This
in one year. With the huge increase in executive direc- clearly indicates that not all the interests of its stakehold-
tors' fees last year, it takes that same worker 150 years ers are regarded as equally important.
to earn the average annual fee of a director.
The excessive remuneration of directors should indicate
This emerges in the latest directors' fees survey con- to shareholders that the current notion of corporate gov-
ducted by the Labour Research Service and it is a trend ernance and corporate social responsibility as vehicles
that should be of concern to organised labour, corpora- and mechanisms for corporate transformation is defec-
tions and the Government as well as civil society. tive.
Johannesburg - While most remuneration committees annual report noted on the remuneration committee's
are typically made up of three to five people, Mittal Steel mandate.
South Africa's committee had just one local director, ac-
cording to its latest annual report. The King 2 Code on corporate governance does not dic-
tate the number of directors who should sit on a remu-
Last year the committee, made up of non-executive di- neration committee.
rectors Khotso Mokhele and Aditya Mittal, held five meet-
ings. Mittal attended none of them. A footnote indicates Charl Kocks, a director of CA-Ratings, the local agency
that Mittal, "with the committee's consent", appointed a that offers corporate governance ratings, said there was
director of the company to participate on his behalf. This no clear answer when it came to how large or small this
director is not named. committee should be.
This flies in the face of the JSE Securities Exchange's list- He said the remuneration team was particularly im-
ings requirements, which call for the names of the remu- portant because "unfortunately, the modern practice is
neration committee members to be disclosed. When for directors' remuneration [and that of senior manage-
asked, Mittal Steel South Africa said Aditya Mittal had ment] to be determined before the shareholders opine
named one of the company's foreign directors, Inder Da- on the directors' remuneration at the annual general
lia, to act on his behalf. Dalia had "mostly" attended meeting".
meetings by telephone.
"[It] makes no logical sense, yet so it is. And it is, in
The JSE further asks for the committee's mandate and labour law terms, difficult to get a refund from someone
the number of meetings held to be disclosed. The who has already spent it on the fourth Rolls-Royce.
company complied with these requirements and indi- The basic problem is that people are potentially deciding
cated that the committee, which was arguably under- on their own salaries using other people's money." Kocks
staffed, had a broad and difficult mandate to fulfil. said that since the remuneration committee needed to
be made up of people considered wise, tough, independ-
"The committee is primarily responsible for assisting the ent, free of bias and more, "the number of people on the
board on human resources and remuneration policies, committee will be equal to or less than the suitably qual-
succession planning and the appointment as well as ified directors available".
terms and conditions of service of the executive direc- Articled shortened
tors, and other members of senior management," the
Maybe what you could do if you wanted an executive for That's of course assuming that you haven't got one of
a big group of shops or banks is recruit several top ex- those media executives with a Koos Bekker-type remu-
ecutives from the media sector, where they are currently neration package that runs to the hundreds of millions of
on special offer at a fraction of the price, then reskill rands.
them so that they'd be able to deal with irate customers
rather than irate newspaper readers.
If Basson was given 20% less, would he cut back his For instance, there would be little point in my retaining
efforts by 20%? And would Shoprite's earnings and the local remuneration consultants, "Options R Us", to
share price drop by the same amount? come up with a detailed justification for a million rand
package for me.
It is very possible that in a number of instances - perhaps
Pick 'n Pay's Sean Summers or Edcon's Steve Ross – the It wouldn't get beyond my editor. She would laugh and
share price would take a considerable knock if the top remind me of the vow of poverty we journalists take and
executive departed, as would the profit performance, at not even bother to pass it on to someone who might pass
least initially. it on to one of the lowliest of the members of the Inde-
pendent Newspaper Group's remuneration committee.
This possibility should raise concerns about the need to
make succession planning more public. Mind you, high- By contrast, being effectual and being a chief executive
lighting the existence of replacements would take from means that you don't have to bother with these mundane
the aura of unique ability that is often used to justify the hurdles. And you certainly don't have to worry about
payment of these huge packages. shareholders getting involved.
In my lack of understanding of this gravity-defying re- Given their short-term fixation, these shareholders are
muneration situation I take some comfort from com- only too happy to rubber stamp any remuneration
ments made a few years ago by William McDonough, the cheque and will certainly not bother to look for the un-
former president of the New York Federal Reserve Bank. derlying economic logic that might explain supply and
demand in this particular market.
"I can find nothing in economic theory that justifies this
development. I am old enough to have known the chief
executives of 20 years ago and those of today. I can
And it’s not only at Highveld Steel that workers are scru- Gasp. Under present conditions that would mean the
tinising executive pay with increasing interest. In the Pick ’n Pay’s Sean Summers would get about R138 040
latest round of wage negotiations from Eskom to Pick ’n a year instead of the roughly R10,7 million he was paid
Pay, the pay packages of the top men (and a few last year.
women) are attracting more and more attention from
their employees.
The Pick 'n Pay strike threatened for today has brought number of employees. How much this ratio rises or falls
to the fore important questions of profit, productivity, is the indication of a rise or fall in productivity.
and the wage and welfare gap.
This has a direct bearing on labour relations, and on the
Productivity, in particular, is one term much bandied perceptions of workers and their unions. For here is the
about these days. It is generally said to be the key to root of the growing wage and welfare gap.
affluence. Yet what exactly does it mean, whose afflu-
ence is being talked about and what is the effect on la- Productivity in South Africa has increased fairly rapidly
bour relations? and more wealth has been created nationally. At the
same time, jobs have been shed in record numbers.
Like so many statistical references, productivity can be-
come mired in the verbal mumbo jumbo employed by Fewer workers are producing more profit. Highly profit-
statisticians and economists. able companies have employed more workers, but prof-
its have risen at an even faster rate, with the result that
But in simple terms, it means the level of output of the productivity records arise.
various factors of production: land, labour and capital.
Shareholders and company bosses tend to take a keen
This is usually reduced, since the costs of land and capi- interest in such calculations. So too do trade unions and
tal are usually subtracted, to the level of output per their members.
worker employed. And output, in its turn, is usually
measured by profit accruing. For, as unions argue, with justification, it is workers who
are the primary source of profit and productivity. In this
In other words, for most purposes - and certainly in the they are in accord, not only with Karl Marx, but also with
retail trade - productivity is the measure of how much the great liberal economists such as Adam Smith and Da-
profit each worker produces for any given enterprise - a vid Ricardo from whom Marx took the labour theory of
calculation made by dividing the total profit by the value.
But Business Report has shown bosses are capable of As Mduduze Mbongwe, the South African Commercial
increasing their remuneration even when profits, let Catering and Allied Workers' Union deputy general sec-
alone productivity, fall. However, any fall in profit is al- retary, points out, the improvement in profitability was
most always used as justification for freezing or lowering used to justify a 19% increase in the remuneration of
the wages or wage rises of workers. chief executive Sean Summers.
It is against this background that the threatened strike This seems to bring his annual pay packet up to R12 mil-
of Pick 'n Pay workers should be seen. lion. It also resulted in the company declaring a 20.8%
dividend to shareholders, the bulk of whom are in the
This major retailer has a relatively good reputation in higher-paid, upper reaches of management.
terms of labour relations and has responded to the strike
threat by pointing out, correctly, that it is one of the In contrast, the union's flat rate demand would add only
highest payers in its sector. R3 million more per month to the company's wage bill
than the chief executive's annual package. In fact, the
The company also points out that more than a quarter of total annual cost of the union's flat rate demand would
its 32 089 full-time employees also own shares or have be little more than R156 million.
share options in the company. The higher up the corpo-
rate ladder workers climb, the more their shares and op- Deducted from the operating profit last year, this in-
tions. crease would leave the company with an operating profit
of R858.8 million. Given these facts, the workers and
But this is a low-paid sector and it is one in which Pick 'n their union see their demands as almost too fair.
Pay has made steadily increasing profits. From 2003, the
Cape Town - If Pick 'n Pay gave in to workers' unrealis- "Pick 'n Pay's management had to defend their position
tically high pay demands, it could have a detrimental im- for the benefit of the whole country," Walker stressed.
pact on South Africa's inflation, analysts said on Friday.
If the retail group were to give in to Saccawu's demands,
Members of the South African Commercial, Catering and it could cause a ripple effect with not just other food re-
Allied Workers' Union (Saccawu) went on strike on Fri- tailers, but other industries. Walker said the acceptance
day, affecting about 150 Pick 'n Pay stores. Yesterday of the union's demands would also set a precedent for
there was no sign of an end to the strike. next year's negotiations.
"If it is 12% this year it could just as well be 12% next
The retail chain is offering workers a 7.9%, or R310, a year. This is unrealistic and could lead to the whole coun-
month increase, whichever is greater. But Saccawu is try bearing the brunt of it. Twenty thousand workers
demanding an increase of 12%, or R400, a month, can't dictate to [a population of] 44 million," Walker said.
whichever is greater.
John Loos, a senior economist at Absa, said were Pick 'n
Evan Walker, retail analyst at Andisa Securities, said alt- Pay to give in to a 12% pay hike, there could be two
hough a protracted strike could have a negative impact possible scenarios. For one, the increased labour cost
on Pick 'n Pay's profits, the issue stretched much further. could be passed on straight to the consumer, which could
push up inflation. The other option was for the retailer
"Adhering to the union's wage demands could necessi- to cut back on staff.
tate Pick 'n Pay to pass on the extra cost to consumers,
as management's ultimate job was to make returns for
shareholders," Walker said.
TOPIC: REMUNERATION
Required:
• In your opinion, are the requirements by the Johannesburg Securities Exchange a step in the right direc-
tion? Explain.
• Why is it necessary for South Africa to ensure that its standards are higher than those of other major
countries?
• What prompted other securities exchanges (bourses) in the rest of the world to follow the JSE in its ap-
proach?
Required:
• Should it be a responsibility of businesses to have plans or initiatives for HIV/AIDS?
• What is your opinion on testing for HIV/AIDS in the workplace?
• Is this necessary or is this an invasion of privacy? Explain.
Johannesburg – When Martin Vosloo told his colleagues At De Beers, about 10% of staff, or about 1 000 workers,
that he was infected with the virus that causes Aids, are infected with the virus. The Aids project is run in
some spat in his face and threatened to kill him. close collaboration with the miners’ union. “De Beers is
a model in the mining industry. No other company gives
That was about six years ago, soon after Vosloo, 48, ARVs to its workers and their spouses even after they
joined South Africa’s power utility, Eskom. “They spat in leave employment,” says Archie Palane, the National Un-
my face. I was called names and on two occasions I had ion of Mineworkers’ deputy general secretary. “In other
to flee because I was threatened with death,” said companies, when workers are found to have Aids, they
Vosloo, a healthy-looking white South African. become among the first to go when retrenchments
come”.
Social stigma and denial are major challenges in the fight
against the disease in South Africa, the country with the The New York-based Global Business Coalition (GBC),
highest number of people living with HIV/Aids in the which groups 200 international companies fighting the
world. Years on, the hostility is fading for Vosloo, who impact of Aids, says Eskom, De Beers and Anglo are
now leads a support group for HIV-infected work ers at global trendsetters. About 40 South African firms have
Eskom, where about one in 10 of the 30 000 workers is joined the GBC, including Barloworld, Telkom, SABMiller,
infected with the virus. Sappi, FirstRand, Old Mutual and Liberty Group, and
many run similar Aids programmes for their workers.
Several big firms, such as Eskom, De Beers, the world’s
biggest diamond producer, and mining company Anglo “We are not yet doing enough to start winning the war,
American have in the past few years stepped up efforts but Eskom, De Beers and Anglo American are at the very
to test their workers for HIV, and treat infected staff in a front edge of testing and treatment worldwide,” says
bid to save their bottom lines. They say Aids hurts busi- Richard Holbrooke, a former US ambassador to the UN
nesses as workers die, requiring others to be hired and and head of the GBC.
trained. Sickness results in lost working hours. Most
workers who die are in the 30 to 50 age group, when But the biggest challenge is being faced by small firms.
they are at their most economically productive. “Most people in Africa work in businesses that employ
less than 20 people, and these have no real programmes
New figures say more than 6,5 million of South Africa’s to deal with Aids. It’s a complicated problem.”
47 million people may now be HIV positive. Amid rising
anger over a slow response to the disease, the Govern- A recent survey shows most mid-sized South African
ment launched an antiretroviral (ARV) campaign in 2003, firms are turning a blind eye to HIV/Aids despite fore-
the second largest worldwide after Brazil’s. casts that the epidemic is set to ravage the country’s
workforce. Just half of business owners surveyed have
But the drugs haven’t reached many, and companies a formal strategy to tackle Aids and of those, over a third
have had to help battle the disease. Eskom says it pays have no one to oversee that policy, the Grant Thornton
for ARV drugs for its HIV-infected workers and their in- 2005 Business Owners Survey shows. Shane, the owner
fected spouses. De Beers does the same, even after the of a car repair garage and petrol station, says he has few
workers have left employment. resources to tackle Aids amongst his staff of 15.
The power firm, which runs a testing and counselling “I do not know their status and it’s really not my prob-
clinic, ties performance bonuses for its managers on how lem,” says Shane, who declined to give his full name and
many of their staff have visited its testing and counselling the name of his business. “Maybe if one falls ill we will
clinic. know, but we’ve never had testing here,” says Shane.
Holbrooke says he has no immediate answers for small
Anglo says it aims to lift the rate of testing this year to firms. But starting “opt out” testing where workers are
50% from 21% in 2004 for its South African workers. routinely offered HIV tests – is an important step, he
“Testing is key because early detection means loss of says. Those who do not wish to be
man hours due to sickness or death is minimised,” says
Brian Brink, Anglo American’s senior vice-president in
charge of health.
This Task focuses on Transparency. It also provides an opportunity to integrate your learning in Science and
Geography.
You are provided with an article which appeared in the Business Report on 30 May 2005.
Required:
• Shell has been very transparent in terms of its corporate responsibility. In your opinion, does this create a
good or bad impression of the business? Explain.
• Do you agree with the opinion expressed by the chief executive, Jeroen van der Veer? Explain.
• It appears that the company faces some ethical dilemmas. It acknowledges that it engages in some nega-
tive practices, i.e. certain ‘blots on its report card’. Why would the company knowingly engage in these
practices? Explain their dilemma. Which groups of stakeholders does this affect?
Extended Activity:
Place yourself in the position of the chief executive, Jeroen van der Veer. Using presentations in the form of
a poster or PowerPoint, visually communicate the improvement in corporate responsibility issues to the direc-
tors and shareholders of Shell.
Shell spills less but bribery rises again
By Stephen Voss May 30, 2005
London – Royal/Dutch Shell, Europe’s second-largest oil represents a 5% reduction from 1990. Meeting that goal
company, has reported fewer oil spills and worker ‘will depend on improvements in energy efficiency and,
deaths, no change in greenhouse gas emissions and a for a large part, on further flaring reductions.
rise in bribes in an assessment of its corporate responsi-
bility. Last year 37 people were killed working for Shell, down
from 47 in 2003. Two were staff and 35 were contrac-
The company, which operates in 140 countries, spilled 6 tors. Shell, which employs about 112 000 staff, used
600 tons of liquids in 2004, down from 6 700 tons in armed security in 13 countries, down from 16 countries
2003. US offshore pipelines damaged by Hurricane Ivan in 2003. Six contractors were killed in incidents such as
spilled 1 500 tons alone, making it overshoot a target of kidnappings last year, including five in Nigeria.
6 100 tons.
‘Contractor safety in Nigeria and Russia pose a particular
The growth of the energy companies in the decades challenge,’ the report said. Shell said it had 2.6 injuries
ahead will depend on their ability to operate with integ- per million working hours of employees and contractors
rity and to listen to “society’s expectation,” chief execu- in 2004, the same rate as the previous two years, and
tive Jeroen van der Veer said in the Shell report pub- missing a target on 2.4.
lished yesterday.
More accidents at big construction projects in Nigeria,
The report describes environmental and safety perfor- India and Russia offset fewer injuries at its US lubricants
mance in 2004, a year when high oil prices focused at- business. Shell staff or intermediaries paid or accepted
tention on the world’s reliance on polluting, fossil fuel 16 bribes last year, contravening its policy, the reports
energy sources. said. That was double the number in 2003, and four
times the number for 2002.
The main blot on Shell’s environmental report card was
flaring of natural gas in Nigeria, which the company said Shell, which has a policy of not making political pay-
it would not phase out until 2009, a year later than ments, said it made one mistake in 2004 when it paid a
planned, partly because the Nigerian Government had US industry association that contributed 10% to a politi-
been slow to pay its share in building gas pipelines. Its cal action committee.
operation faced 9.2 million tons of gas, down 100 000
tons from 2003, but it missed a target of 9 million tons. Shell cancelled 64 contracts last year because they could
Shell’s greenhouse gas emissions were unchanged from not match its business principles, most often because of
a year earlier at 112 million tons of carbon dioxide equiv- health, safety and environmental issues. Brazil and the
alent. US had the most contracts cancelled.
Therefore, this Module, devoted to Internal Control should not be done as a full Module in class. The following
is a suggested proposal as to how to integrate the Tasks in this Module into your other topics. Please
remember that the best learning will be something current that the learners are able to relate to, so you are
strongly urged to bring in as many current case studies as you can.
2.2.2 What do you understand by the term ‘Objectives’ in the context of a school or a business
organisation?
Specific aims that an organisation has in order to achieve its mission.
2.2.3 What do you understand by the term ‘Strategies’ in the context of a school or a business
organisation?
Ways in which an organisation will operate in order to achieve its objectives and mission.
2.2.4 Why is it necessary for a school or a business organisation to explicitly state and com-
municate their Mission Statement, Objectives and Strategies to stakeholders?
So that all stakeholders can understand how they can play a role in helping an organisation succeed in its
purposes – a guide to influence the behaviour of all stakeholders.
2.2.5 Why is it not advisable for the owners to draw up their own Mission Statement and
Objectives without consulting stakeholders?
In this case, stakeholders might not accept the mission and objectives as they might feel that their opinions
are not valued.
2.2.6 Who, in a school or business organisation, should be responsible for ensuring that the
organisation attempts to comply with its stated Mission statement, objectives and
strategies?
Every person. However, the Governing body or Board of directors is ultimately accountable for ensuring
that the organisation achieves its mission and objectives.
2.2.8 Apart from the profit motive, list the other objectives that, in your opinion, are im-
portant for business organisations to adopt for themselves.
Honesty and integrity in business dealings.
Good customer care and support.
Fair treatment of employees.
Environmental concern – no negative impact on the environment.
A variety of other answers possible.
2.3.2
Ways of minimising the
No. Risk Who is responsible or accountable?
risk
Regular checks of electrical
installations. Install fire The maintenance personnel. However, the owners
1. Fire alarms and fire hydrants. are also ultimately accountable for ensuring that
Insurance cover can reduce these employees discharge their responsibilities.
the negative financial effect.
Security guards, alarm
The security personnel. However, the owners are
systems, creation of an
2. Theft also ultimately accountable for ensuring that these
awareness of the potential
employees discharge their responsibilities.
problem.
Good systems of internal
The accounting and internal audit personnel.
control so that one person
3. Fraud Owners accountable for ensuring that these
serves as a check on
employees discharge their responsibilities.
another.
Good safety measures. The supervisors or managers. Owners are
4. Injury Insurance cover can reduce accountable for ensuring that these employees
the negative financial effect. discharge their responsibilities.
Good business planning,
e.g. putting aside financial
Economic reserves to cater for difficult
5. The owners and senior managers.
downturn times. Good service and
advertising to boost the
number of customers.
Natural disasters,
e.g. flood, Drills to minimise damage,
6. The owners and senior managers.
earthquakes, secure structures.
tsunami
7. A variety of other valid responses is expected and is not limited to the above.
TYPE OF
DESCRIPTION
CONTROL
1 C
2 A
3 D
4 B
•Proper documentation
Proper documentation – ensuring that the evidence of each transaction is properly recorded.
•Proper authorisation
Proper authorisation – ensuring that only certain responsible people are given the right to permit
transactions to occur.
2.7.2 If you were Jock, list the ways in which you could prevent Dee from defrauding this
business.
Allocate some of Dee’s duties to a part-time employee, e.g. depositing of cash, checking arrival of stock.
Jock should do monthly checks of stock, debtors and cash.
Use an auditor to cross-check documents, e.g. cash slips to deposit slips.
Calculate financial indicators from the financial statements (e.g. mark-up %) to identify problem areas.
2.7.3 Your Teacher will get suggestions at random from the class. If you have not thought
of certain points, add these to your lists.
Write the different suggestions on the white/black board.
2.8.2 What items will you spend your initial capital on in each business, and what assets will
need to be safeguarded in each business to achieve your objectives?
Display cabinets/fridges, security systems, furniture, cash registers, initial stock, set-up expenses, e.g.
advertising / insurance.
2.8.3 What procedures will you establish in these businesses in order to ensure that you
achieve your objectives? Allocate these procedures to Aboo Baker and to the sales
assistants.
Aboo Baker:
He must supervise the conduct of the assistants (check that they adhere to working hours).
He must check cleanliness of the kiosks.
He must check cash received to the sales documents.
He must ensure that the cash is deposited in the bank.
He must alert the owners to any problems.
He must ensure that the assistants are paid on due date.
He must ensure that the appropriate stocks are ordered.
Sales assistants:
They must treat customers with courtesy, they must ensure cash is properly documented.
They must arrive at work on time.
They must take care of business assets and stock.
They must ensure that the kiosk is clean and well-maintained.
2.8.4 How would you check that the procedures are being carried out and that the assets are
safeguarded in your absence?
Variety of responses possible, e.g. random checks, employ an internal auditor.
2.9.2 Why then, in your opinion, and based on information given are the environmental
groups opposed to the manufacturing process? Discuss fully.
The corn used in the process is not grown but is genetically manufactured.
This probably means that it has not been fully tested and what side-effects it brings and what is going into
the manufacturing process.
They are also upset as the consumers have not been informed that the corn is genetically engineered.
2.9.3 Do you believe that Cargill Dow is acting in an ethical manner? Why? Discuss fully.
No, as they are not correctly informing the consumers.
They are exploiting the consumers by misleading them i to believing they are buying environmentally friendly
products.
2.10.2 If you were a stakeholder in the business organisation, how does this auditor’s opinion
affect your opinion of the business?
It would reassure me that the financial information is reliable or unreliable, and will provide me with an
indication as to whether my investment in the business is secure
2.10.3 Does the independent auditor express an opinion on whether or not fraud has oc-
curred in this business? If not, explain why the independent auditor has not done so.
No – the independent auditor does not check every transaction – he merely gets an overall opinion on
reliability and that the accounting systems are in place.
2.10.6 What would you regard as an acceptable qualification for an independent auditor?
Explain how to obtain this qualification.
Chartered Accountant – CA (SA)
University degree, e.g. B Com
Post-graduate study, e.g. Diploma in Accounting
CA Board exam – for entry into the profession
2.10.7 If the independent auditor is negligent in carrying out his duties and expressing his
opinion, what consequences should the auditor face?
Various opinions possible, e.g. damage claims (if error or negligence), imprisonment (if fraud involved), de-
registration from the profession and withdrawal of his qualification.
2.10.8 Why is it not compulsory for sole traders and partnerships to have their financial
statements audited by an independent auditor?
They can check their own books themselves if they wish to do so.
2.10.10 The independent auditor charges the business a fee for the service of auditing the
books and the financial statements. This fee is based on the time spent in the au-
diting process by the independent auditor and his team. In your opinion, does this
affect the reliability of the audit report and the opinion expressed therein? Explain.
Possibly – the auditor could lose his appointment the following year if the owners or directors do not like
his opinion.
However, he is expected to rise above this concern and apply his mind ethically and responsibly to his task
of expressing an opinion on which others can rely.
2.11.2 In your opinion, why does example 1 reflect a negotiable salary, whereas the other
two posts reflect a definite salary? What is meant by a negotiable salary? What ap-
proximate salary would you estimate for Example 1?
Negotiable.
This will be determined by agreement between the employer and the employee; they are obviously looking
for the best person possible and will be prepared to increase their offer depending on the qualities of the
applicant they want to secure; a CA is a professional – one of the hallmarks of a professional is that he/she
earns what he/she is ‘worth’, i.e. in line with the quality of contribution to the organisation; expected salary
anywhere between R400 000 and R600 000, possibly more.
2.12.2 The debtors’ collection period for 20.8 is 45 days (the figure for the previous year
was 30 days).
Opinion: Yes
Reasons:
Debtors are taking longer to pay.
This has a negative effect on the cash flow of the business – encourage debtors to pay quicker.
2.12.3 The creditors’ payment period has changed from 29 days (in 20.7) to 30 days in 20.8.
Opinion: Yes / No
Reasons:
This is more or less the same.
Need to check that cash is being received from debtors before paying creditors.
2.12.4 In comparison to the previous year, the stock turnover rate has decreased from 6
times to 3 times.
Opinion: No
Reasons:
If stock turnover rate has decreased it means stock is being sold quicker.
2.12.5 Gross profit on cost of sales was 50% in 20.7, but it is 40% in 20.8.
Opinion: Yes
Reasons:
A lower mark-up will result in lower net profit.
2.12.7 Motor vehicle expenses have increased by 6% over the past year.
Opinion: Yes
Reasons:
An increase in motor expenses means higher expenses and less profit.
Investigate the reasons for this.
It could be that the vehicle is getting old and needs to be replaced.
2.12.9 The telephone expenses have increased by 25% from 20.7 to 20.8.
Opinion: Yes
Reasons:
Increase in telephone costs means less profit.
Private calls need to be controlled.
2.12.10 Debtors allowances as a percentage of gross sales was 1% in 20.7, but this has in-
creased to 2% in 20.8.
Opinion: Yes
Reasons:
Need to investigate why more goods are being returned.
Could indicate a quality problem which will result in bad publicity for the business.
List the checks you would expect the Internal Auditor to perform in order to check that pur-
Member C
chases of stock in each department are properly valued, recorded, and accounted for.
Assess the internal control system with regard to stock – which employee is handling which task.
At random:
- Check that orders are made only by designated authorised personnel.
- Check that the order form agrees with the goods received note and the invoice.
- Check that goods are counted by a separate person when they enter the premises.
- Check that returns are entered on a goods return note and that this agrees with the credit note received
from the supplier.
- Check that the invoices and credit notes are properly recorded in the CJ and CAJ.
- Check posting of CJ and CAJ to GL and CL.
- Check creditors listing agrees with control account.
- Check that the cost of sales is correctly calculated and entered on each sales transaction selected.
- Check that stock counts are done regularly and that these agree with the stock sheets and the balances
on the Trading stock account.
- Check that stock deficits/surpluses are properly investigated by responsible personnel.
- Check that write-offs in the GJ are properly authorised by a designated person.
- Check arithmetical accuracy of Trading stock account and stock records.
List the checks you would expect the Internal Auditor to perform in order to check that fixed
Member D
assets in each department are properly valued, recorded and accounted for.
Assess the internal control system with regard to fixed assets – which employee is handling which task.
At random:
- Check that orders for fixed assets are made only by designated authorised personnel.
- Check that assets are counted by a separate person.
- Check that the order form agrees with the goods received note and the invoice when they enter the
premises.
- Check that returns are entered on a goods return note and that this agrees with the credit note received
from the supplier.
- Check that the invoices and credit notes are properly recorded in the CJ and CAJ.
- Check posting of CJ and CAJ to GL and CL.
- Check that fixed asset counts are done regularly and that these agree with the Fixed Asset Register and
the balances on the fixed asset accounts.
- Check that depreciation, disposals and write-offs of fixed assets are properly authorised by responsible
personnel and are properly entered in the GJ, GL and Fixed Asset Register.
Use the following assessment rating scale to report the learner’s results:
Rank 7 6 5 4 3 2 1
Outstand- Not
Meritorious Substantial Adequate Moderate Elementary
ing achieved
% 80 – 100% 70 – 79% 60 – 69% 50 – 59% 40 – 49% 30 – 39% 0-29%
Mark 14 - 16 12 - 13 10 - 11 9 7-8 6 0-5
CHECKLIST
Requires
Yes – pro-
SKILLS more at- Complete
ficient
tention
To appreciate the value of setting objectives.
Understand the risks associated with running a business.
To understand the concept ‘internal control’.
Understand the difference between fraud and error.
To appreciate the need for internal control.
Devise systems for internal control.
Understand the role of independent and internal auditors.
To explore career opportunities in Accounting and Auditing.
3.1.3 Will Ashley’s bank balance be the same as that of the bank statement? Explain.
No.
The bank has already deducted the charges from Ashley’s account.
Ashley’s books will not have reflected the charges.
3.1.4 If not, what would the balance in the bank statement be?
2 660 – 124 = R2 536
3.1.5 Ashley’s financial records would have to be updated with the charges appearing on the
bank statement. In which journal would he record this?
CPJ
3.1.6 After updating his financial records, will Ashley’s bank account balance be the same as
that of his account at the Bank? Explain.
Yes.
His bank account balance of R2 660 will decrease by R124 thus giving him a balance of R2 536.
3.4.2 Calculate the bank balance as per the bank statement. Indicate whether the bank bal-
ance is favourable or unfavourable.
Total deposits R19 400
Total cheque payments 2 900
Favourable B/S balance R16 500
3.4.3 From Joe Duffy’s point of view, is the bank balance an asset or a liability?
Asset
3.4.4 From the bank’s point of view, is the bank balance an asset or a liability?
Liability
3.4.5 Compare the bank balances in 3.4.1 and 3.4.2 above. What conclusion can you draw
from these?
Both balances are equal – all deposits appear on the bank statement and all cheques issued have been pre-
sented to the bank.
3.4.6 Refer to the payment of R1 500 in the CPJ on 06-05. This amount also appears on the
bank statement. What does this imply?
The cheque has been presented to the bank for payment.
3.4.7 Refer to the payment of R1 500 in the CPJ on 06-05. This amount appears on the bank
statement on 10-05. Explain the difference in the dates.
Joe Duffy issued the cheque on the 06th; the payee presented the cheque on the 10th.
The payee can present the cheque to the bank at any time after he has received the cheque.
The cheque is no longer valid after six months when the cheque becomes stale.
3.4.10 Assume that the deposit of R5 400 does not appear on the May bank statement. What
would this imply?
The books of Joe Duffy and the bank would not be in balance.
3.4.11 Give a possible reason for the deposit of R5 400 not appearing on the bank statement.
The deposit is late – the amount was deposited after the bank statement had been completed.
3.4.12 Assume that the cheque for R600 does not appear on the May bank statement. What
would this imply?
The books of Joe Duffy and the bank would not be in balance.
3.4.13 Give a possible reason for the cheque for R600 not appearing on the bank statement.
The payee has not yet presented the cheque to the bank for payment.
3.6.3 What, in your opinion, makes a person engage in fraud of any sort? Do you believe they
are justified in their opinion?
Learners to give their own opinions.
Suggestions:
It is unethical and unlawful.
People are often driven to this type of crime due to greed or due to their personal circumstances, e.g. hunger,
etc.
However, it does entail a degree of intelligence to be involved in this type of crime – can they not put these
skills to better use?
Perhaps it is so lucrative and the sentences are not very high.
3.6.4 How can customers making use of the internet banking facility assist the banks in reduc-
ing the amount of fraud? Discuss as many measures as you can.
Do not give out your pin or banking details.
Do not let anybody else work on your internet banking.
Log off when you are finished.
Do not respond to emails that ask for private details and pin codes.
Do not accept email from people you do not know.
Be vigilant at all times.
Etc.
3.6.5 In your opinion what is the effect of fraud of this nature on the economy of the country.
Even if the clients are insured, somebody is losing and this has a negative effect.
This results in higher premiums which causes hardships to people.
So much money is spent on security that could be better spent elsewhere.
Has a negative effect on tourism and investment in the country.
3.8.1 State three reasons which indicate that this bank statement refers to a private individual
and not a business concern.
• It is addressed to a private individual and not to a business.
• The Autobank cash withdrawal at Cascades.
• Electronic banking payment in respect of salary.
• A business would make deposits more regularly.
• Etc.
3.8.2 Complete the missing details marked ‘*’. Indicate overdrawn amounts with a ‘-’. E.g. -
R19
Refer to the bank statement.
3.8.3 Mr G. Van Rover made a deposit of R250 on 24 March 20.6. Give one possible reason why
this deposit does not appear on the bank statement.
The bank statement is dated 23rd while the deposit was made on the 24th.
3.8.5 Which transaction indicates that Mr G. Van Rover does internet banking?
Internet payment to Telmok.
3.8.6 Are electronic payments/transfers safer than writing out cheques? Explain.
Yes.
Cheques can fall in the wrong hands.
Cheques can be lost or stolen.
Electronic payments are cleared quicker than cheques.
Etc.
3.9.2 Compare the balance in the bank account to the balance you calculated on the bank
statement in the previous Task.
Bank statement balance is R3 615.35 while the bank account balance is R4 035.49.
3.9.3 Discuss potential problem areas and why the balances do not agree.
R250 commission which was deposited on the 23rd does not appear on the bank statement.
Cheque no. 424 for R2 500 in respect of rates and taxes does not appear on the bank statement.
R42.45, R579, R789, R1 210 and R49.69 appear on the bank statement but do not appear in the CPJ.
3.9.4 Process entries that you deem are necessary in order to correct the situation above. You
are required to give an explanation as to why you are processing the entries.
R250: Record in the Bank Reconciliation Statement (credit side) as an outstanding deposit. The deposit
appears in the CRJ but not on the bank statement.
R2 500: Record in the Bank Reconciliation Statement (debit side) as an outstanding cheque. The cheque
appears in the CPJ but not on the bank statement.
R42.45: Record in the CPJ as interest on overdraft. The interest appears on the bank statement but not in
the CPJ.
R579: Debit/stop order – record in the CPJ.
R789: Debit/stop order – record in the CPJ.
R1 210: Debit/stop order – record in the CPJ.
R49.69: Bank charges – record in the CPJ.
Updated CPJ total: 10 754.65 + 42.45 + 579 + 789 + 1 210 + 49.69 = R13 424.79
Updated bank balance: 238.91 + 14 551.23 – 13 424.79 = R1 365.35
Suggestion: Allow students who are struggling with this concept to draw their own diagram using
drawings, pictures from magazines or the internet to demonstrate this concept.
Suggestion: Groups can work on a poster to show in picture format the journey of a cheque or a
dishonoured cheque or a credit card purchase and pin them up on your classroom wall.
•Why?
You will give yourself a bad name and could end up been blacklisted. This could have a negative result next
time you apply for credit.
•Explain to her what the consequences are of her approach to writing out cheques when she
does not have the money in the account.
Even if people owe you money, it is not an excuse to write out cheques without having the money in the
account.
Note to Teachers:
The one column method can also be used.
3.15. All businesses should prepare bank reconciliation statements regularly. Provide two rea-
4 sons for this.
• Confirms the accuracy of all transactions recorded in the cash journals and the balance in the bank account.
• Keeps track of outstanding cheques, deposits, r/d cheques, bank charges, debit orders, etc.
• Identifies errors/omissions in the cash journals.
• Identifies errors/omissions in the bank statement.
R/d cheques
Debit orders
(before receipt of
Interest on
Final totals
Electronic
No. ment)
ceived)
Skill check!
• If learners have not mastered this skill encourage them to prepare the Bank Reconciliation
Statement for numbers 3 and 5.
Note to Teacher:
Learners need to understand the difference between receiving a post-dated cheque and paying a post-dated
cheque. When a post-dated cheque is received, it cannot be deposited until the due date. This causes a
problem as the cheque can be lost or mislaid if it is not put in a safe place and that you remember to deposit
it on the date of the cheque.
When a business issues a post-dated cheque, they regard it as if the amount has already been taken out of
the bank and therefore it is recorded in the Cash Payments Journal immediately. The date written on the
cheque is not relevant.
Note to Teacher:
Error no. 8:
The error was discovered immediately by the teller. He/she did not process the deposit. The deposit has
however been recorded in the CRJ. This deposit will have to be deleted and the figures adjusted accordingly.
3.19.7 Show how the bank balance of R18 033 was arrived at.
Opening bank balance 17 232
Amount understated [99]
Amount overstated 900
Bank balance 18 033
[1]
14 320 + 500 + 1 548 + 996 – 8 440
[1`]
150 + 2 700 + 630 – 962 – 1 340
3.25.3 What evidence do the banks require their clients to produce when opening an account
or confirming their identity on existing accounts?
Personal particulars: identity document; utility bill to serve as proof of residence.
3.25.6 What is going to happen to the bank accounts of clients who have not been verified?
Banks may freeze accounts.
3.26.2 The bookkeeper, I.M. Idle, has not prepared a Bank Reconciliation Statement for the
past two months. She says she has been too busy.
Problem:
The preparation of a bank reconciliation statement is an important part of the work of a bookkeeper as it
ensures that the figures in the books are correct, and it aids internal control.
Solution:
Speak to the bookkeeper and get her to acknowledge how important this Task is.
Warn her that she faces dismissal if she does not carry out this duty.
3.26.3 You notice that the bank statement reflects a dishonoured cheque of R5 500. This is in
respect of a cash customer who paid by cheque for goods bought on a sale. This cus-
tomer cannot be contacted. He has provided a false phone number on the back of the
cheque.
Problem:
The sales assistant should not have accepted a cheque for a large amount such as this.
Cheques should not be accepted from unknown customers.
Solution:
Institute a policy in the business which precludes sales assistants from accepting cheques.
Get assistance from the bank in tracing this customer, and refer it to the police if necessary (this is a fraud
case).
3.26.4 The bank statement reflects a deposit of R10 000 made into the account of Bestbuy
Stationers. You have no knowledge of the person who has deposited this amount.
Problem:
This money might not belong to Bestbuy Stationers.
This money must not be used until the source is checked as it will have to be repaid if an error is detected in
future.
Solution:
Contact the bank – ask them to check the source and report back to Bestbuy Stationers.
3.26.5 A cheque was made out to a creditor, R. Dummer, for R5 000 six months ago. This
cheque has never been recorded in any bank statement for the past six months.
Problem:
It appears that R. Dummer has never received this cheque or he has lost it and has forgotten about the amount
Bestbuy Stationers owed him.
Solution:
Contact R. Dummer – offer to cancel the cheque and issue him with a new one as the old cheque is stale.
3.26.7 The bank statement reflects a direct transfer to TV Supplies for R12 000. On further
investigation, you find that these were for assets ordered by a senior manager, B.A.
Crooke.
Problem:
This could be an unauthorised payment.
Solution:
Check who authorised the payment, check that the asset is recorded in the fixed assets register, and check
that the asset is physically on the property.
If fraud is detected, B.A. Crooke should be placed through a disciplinary hearing and he should be charged
with fraud. He could face dismissal.
3.26.8 A customer, Ivor Kwerry, asks why his payment last week for R1 000 was not deducted
from the balance on his latest account. He produces receipt number 10245 to prove his
payment. You investigate and you find that all the receipt numbers for the past month
have been numbered in the sequence 367 to 488.
Problem:
It appears that I. Kwerry has been issued with a false receipt, and that someone in the business has pocketed
the cash.
Solution:
Ask I. Kwerry to identify the person to whom he paid the cash.
If fraud is suspected, the employee should be placed through a disciplinary hearing and charged with fraud.
The employee faces dismissal.
As a gesture of goodwill, Kwerry’s account should be adjusted so that he is not disadvantaged.
3.26.9 A stop-order for R6 000 in favour of Nastee Rentals appears in the bank statements 13
times over the last 12 months. The business rents its property from Nastee Rentals.
Problem:
It appears Nastee Rentals has processed an additional stop-order incorrectly.
Solution:
Ask them for a refund.
If they fail to do this, then instruct the bank not to honour the next payment to Nastee Rentals.
3.26.10 The bank charges on the bank statements for 20.5 were R4 100. For 20.6 the total
was R8 400.
Problem:
It appears that bank charges might be increasing unreasonably.
Solution:
Make an appointment to see the bank manager.
Query the calculation of the charges with the bank.
If the rates have been increased by the bank, the business has the right to choose another bank.
Therefore the principle of the Creditors Reconciliation is very similar to that of the Bank, and this is one of the
reasons why this section has now been included into Grade 11 (it was in Grade 12 under the NCS). However,
you are urged to discuss internal control at each step with the learners as you work through these Tasks.
(b) Discuss two methods that the bookkeeper could use to check the accuracy of the
information.
1. Check that the balance on the Creditors Control account agrees with the total on the Creditors List.
2. Check the business’s records with the statements received from the supplier.
It will be a good idea, at this stage to role-play this concept. Have 2 learners, one the buyer and one the
seller and let them make the respective entries for transactions that take place. In this way you can demon-
strate the role of one being the Debtor and the other the Creditor.
Scenario 2:
3.33.3 What are the implications of the actions of the clerk and cashier? Also indicate why the
books will not be in balance.
They are stealing money from the business – this could result in a loss of profits.
Payments to creditors are reflected incorrectly in the Creditors Ledger as the discount is not shown.
Cheque payments are not matched with total payments in the CPJ.
3.33.4 What control measures can you put in place to rectify this situation?
Verify cheques with the amounts shown on the statement and the ledger.
Get a third person to check entries in the CPJ and posting from the CPJ.
3.33.5 What action do you intend taking against the clerk and the cashier?
Lay criminal charges against them.
Reprimand them.
Dismiss them (provided all legal requirements have been met).
3.34.2 This is unethical. Harry should be made aware of this. Jennifer will earn the business a poor repu-
tation, which will not be good for his business in the long run.
3.34.3 This is unethical. Harry’s business relies on the support of the community. He should not cause
them to travel far distances to get their uniforms. The primary school children will eventually be in
a high school. It makes good business sense for him to encourage their parents to support his
business even if it does not make him much profit at this stage.
3.34.4 This reflects poor internal control. Harry is being naïve to think that Jennifer is doing this job properly.
Although errors can be made in the counting of stock, which could lead to a big shortage in one
month and a surplus in the next, it is unlikely that surpluses will occur regularly. Harry should
supervise the stock count and he should rotate his staff on this task to ensure that there is no
opportunity for fraud.
3.34.5 This is unethical of Harry. The supplier is doing the right thing by passing on the saving to the
retailer. However, they would expect that this saving be passed on to the customer as well. When
information on the cost reductions reaches the public, Harry will get a poor reputation for not placing
the interests of his customers first, which will affect the sustainability of his business.
3.34.6 This is unethical and may be considered as a bribe. Harry should support the suppliers who have
helped him grow his business over the past decade. Harry has no idea at this stage what Bennie’s
prices will be (they might well be more than 20% higher than the prices of his existing suppliers),
and the quality of Bennie’s stock is still to be verified. He could stock a limited supply of Bennie’s
uniforms to assess if the public approves. However, he must realise that he should not discard
suppliers who have supported him for a very long time.
3.34.7 This reflects poor internal control. There is opportunity for Jennifer to commit fraud without anyone
detecting this, as she handles all aspects of the buying, receiving and paying for stock. One obvious
example is that she could order stock that is not necessary and take this home. Harry’s business
would then be paying for stock that was never sold. In view of Jennifer’s financial difficulties, it does
not make sense to rely on her honesty.
Requires
Yes – profi-
Skills more atten- Complete
cient
tion
Updating of cash journals.
Posting to the Bank account.
Preparation of a Bank Reconciliation Statement.
Identify and explain why some entries do not appear in the
Bank statement.
Identify and explain why some entries do not appear in the
Cash receipts and cash payments journals.
Process entries for post-dated cheques received and issued.
Process a bank reconciliation statement taking last month’s
bank reconciliation into consideration.
Process entries for stale cheques.
Correct errors in the business’ books.
Correct errors made by the bank on the bank statement.
Appreciate the need for completing a bank reconciliation
statement.
The impact of internet on the banking world.
Completion of general journal entries to record errors or items
left out of the Creditors Control.
Completion of the Creditors Reconciliation Statement.
Understand the need for internal control mechanisms in Cred-
itors control and Bank Reconciliation.
Identify unethical behaviour in relation to Creditors and bank-
ing.
This Module, therefore, focuses on the sale of fixed assets. Learners are required to process the sale entries,
including pro-rata depreciation, making use of alternative methods of depreciation, by completing an Asset
disposal account in order to calculate the profit or loss on the sale of the asset. This is generally a section
that learners experience difficulties with. We have attempted to explain the method visually as well, in order
to help learners to understand the why and how. We suggest you take time working through Asset disposal
because, besides getting a question on its own, it often becomes an adjustment in financial statements.
Lastly, the Module will look at the recording of the fixed assets in the Balance Sheet. Again, this was covered
in Grade 10 but now learners have to incorporate the sale (disposal) of the asset. Confusion often appears in
the learners’ minds over the different figures, i.e. cost, book value and selling price. Take time to explain each
and reinforce that the disposal of the fixed asset is shown in the note to the Balance Sheet at book value.
This is because fixed assets are reported in a Balance Sheet at book value.
Of great importance in any discussion on Fixed Assets are the following 2 topics:
• Internal control mechanisms put into place to ensure adequate control of your assets.
• Ethical issues relating to fixed assets.
Tasks have been included on these 2 topics. Some are questions on their own, i.e. Task 4.24 and 4.25 but
the topics have also been integrated into the other tasks. You are urged to spend time discussing these two
very important topics throughout this Module and as far as possible to bring in relevant situations in your
particular context.
4.2.2 What is the effect on the Accounting equation when the vehicle is bought on credit?
Asset: +; Liabilities: +; Owners’ Equity: 0
4.2.3 What is the double entry when the creditor is paid for the vehicle?
Dr Creditors control, Cr Bank
4.2.5 Are the following statements true or false? Give a reason for your decision.
(a) Servicing of the vehicle is debited to the vehicles account.
False – Dr Vehicle expenses (expense).
The fixed cost method, however, is not realistic. Assets generally lose their greatest value at the outset and
then it diminishes. You are urged to refer to the SARS wear and tear allowances to indicate how SARS controls
the maximum amount that can be written off in a particular year.
Allow learners to debate which method is more suitable for a business but re-enforce to them the concept of
consistency, in that, once they have adopted a particular method they cannot change.
Equipment:
80 000 x 20% = R16 000
15 800 x 20% for 11/12 = R 2 897
2 000 x 20% for 9/12 = R 300
16 000 + 2 897 + 300 = R19 197
EQUIPMENT B5
20.4 20.5
Mar 1 Balance b/d 80 000 Feb 28 Balance c/d 97 800
31 Bank CPJ 15 800
June 1 Creditors control CJ 2 000
97 800 97 800
20.5
Mar 1 Balance b/d 97 800
EQUIPMENT B5
20.6 20.7
Sept 1 Bank CPJ 110 000 Feb 28 Balance c/d 110 000
110 000 110 000
20.7 20.8
Mar 1 Balance b/d 110 000 Feb 28 Balance c/d 142 000
June 30 Bank CPJ 20 000
20.8
Feb 28 Bank CPJ 12 000
142 000 142 000
20.8
Mar 1 Balance b/d 142 000
[1]
400 000 – 62 500 = 337 500 x 25% [4]
110 000 x 15% x 6/12
[2]
140 000 x 25% x 6/12 [5]
110 000 x 15%
[3]
540 000 – (62 500 + 101 875) x 25% [6]
20 000 x 15% x 8/12
540 000 – 164 375 = 375 625 x 25% [7]
142 000 x 15%
Note:
• The depreciation rate was not given so it has to be worked out as follows:
Vehicle: diminishing balance method is us. But for the first year, it is the same as the cost method:
62 500
/250 000 x 100 = 25% p.a.
• Equipment: on cost. But the equipment was only bought half way through the year, therefore, the depre-
ciation figure given of R8 250 is for half year. Double the depreciation to find what it would have been for
the year i.e. 16 500/110 000 x 100 = 15% p.a. An alternative way would have been to calculate R8 250 as a
percentage of R110 000 and then double that. Learners must realise that percentages are quoted per
annum, so there must be a doubling of the 6 months depreciation written off.
4.9.2 Explain the entry of R30 000 on the credit side of the Accumulated depreciation on
vehicles account.
Total depreciation written off the vehicle from the time of purchase up to 1 January 20.5.
4.9.3 What is the book value of the vehicle on the 1 January 20.5?
BV = CP – ACC DEP R45 000 = (R75 000 – R30 000)
4.9.4 If you were going to sell the vehicle would the original cost or the book value guide you
in setting the selling price? Why?
Book value.
Vehicles lose value, so you are unlikely to sell at the original cost price. The book value is a guide as to
what price you could sell it for.
4.9.5 Assume that Hugo Cash Solutions decide to sell the vehicle on 1 January 20.5, what
entry(ies) would have to be made? (Hint: When you sold trading stock what entry
would you have put through the ledger?) Make the necessary entry(ies).
Allow the learners time to debate and discuss.
You are hoping they will realise that it is not only the vehicle at cost that needs to be credited but that
entries must also be made in the Accumulated depreciation account.
4.9.6 Hugo sells the vehicle for R50 000 for cash. Make the necessary entries.
There are various options at this stage.
Allow them to experiment and not give them the Asset disposal account at this stage – rather let them
reason out possible methods and double entries.
4.9.7 Explain why you think Hugo sold the vehicle for more than the book value.
Various options – good condition, low mileage, extra features, e.g. radio, mag wheels, supply and demand,
etc.
Suggestion:
Photostat the following diagram, enlarging it to A3 size and pin it up on your classroom wall or let a group of
learners design their own poster.
ASSET DISPOSAL
20.5 Jan 1 20.5 Jan 1
Accumulated Dep on Vehicles
20.5 Jan 1 20.5 Jan 1
Balance R30 000 Asset disposal
Motor Vehicle R75 000
R30 000
Asset disposal
R30 000
4.10.3 What is the function of the Asset Disposal account? Why is it better to open this sep-
arate account?
It brings together all the entries to do with the vehicle and the sale thereof – matching principle. It is then
easier to work out if a profit or loss has been made on the sale. Need CP, ACC DEP, SP in ONE A/C. ☺
4.10.5 If you sell the vehicle for R50 000 cash, what entries are necessary?
Dr Bank and Cr Asset disposal
4.11.5 What entries are in your books after completing the sale entries in connection with
the vehicle?
Only the profit on sale has a balance. The vehicle and accumulated depreciation have been closed off.
4.11.6 What would happen to the Profit on disposal of asset account in the financial state-
ments?
Closed off to the Profit and Loss account at the end of the financial year.
4.12.2 Why was only R24 000 debited to the Accumulated depreciation account?
Only the Accumulated depreciation on the vehicle sold must be debited to the account.
4.12.3 What was the book value of the Toyota on 1 January 20.5?
R16 000 (R40 000 – R24 000).
4.12.6 What would happen to the Vehicles and Accumulated depreciation accounts?
Balanced off to show the balance of the vehicles still remaining.
4.12.8 Why was the entry for the selling price not recorded in the General Journal?
It was sold for cash; therefore it was recorded in the CRJ.
RECORD OF DEPRECIATION
Accumulated depre-
Date Depreciation Book value
ciation
28 Feb 20.2 R25 000 R25 000 R100 000
28 Feb 20.3 20 000 45 000 80 000
28 Feb 20.4 16 000 61 000 64 000
DEPRECIATION N
20.5 2
Feb 28 Acc dep on vehicle GJ 16 960 PROFIT & LOSS GJ 16 960
RECORD OF DEPRECIATION
Accumulated depre-
Date Depreciation Book value
ciation
28 Feb 20.3 R26 500 R26 500 R106 000
28 Feb 20.4 21 200 47 700 84 800
28 Feb 20.5 16 960 64 660 67 840
49 600 49 600
Mar 1 Balance b/d 43 600
*Can be combined.
DEPRECIATION N
20.2 20.2
Feb 28 Acc dep on equip. GJ 1 200 Feb 28 Profit and Loss a/c GJ 9 920
Acc dep on equip. GJ 8 720
9 920 9 920
[1]
81 500 – 8 700 = 72 800 x 10%
RECORD OF DEPRECIATION
Accumulated depre-
Date Depreciation Book value
ciation
28 Feb 20.2 R870 R 870 R7 830
28 Feb 20.3 870 1 740 6 960
28 Feb 20.4 870 2 610 6 090
30 Nov 20.4 653 3 263 5 437
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 28 FEBRUARY 20.5
3. Fixed/Tangible Assets
Equipment
Carrying value at beginning of year 37 690
Cost 81 500
Accumulated depreciation (43 810)
Movements (13 370)
Additions at cost -
Disposals at carrying value (5 437)
Depreciation (7 933)
Carrying value at end of year 24 320
Cost 72 800
Accumulated depreciation (48 480)
[1
30 000 x 10% x /12
10 [2]
130 000 – 30 000 = 100 000 x 20% [3]
12 000 + 5 000
NOMINAL ACCOUNTS SECTION
DEPRECIATION N
20.5 20.6
Dec 31 Acc dep on vehicles GJ 5 000 Feb 28 Profit and Loss GJ 28 450
20.6
Feb 28 Acc dep on vehicles GJ 20 000
Acc dep on equip. GJ 3 450
(2 400[1] + 1 050[2])
28 450 28 450
[1]
30 000 – 14 000 = 16 000 x 15% [2]
14 000 x 15% x 6/12
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 28 FEBRUARY 20.6
3. Fixed/Tangible Assets
Land and
Vehicles Equipment Total
Buildings
Carrying value at beginning of year 360 000 94 000 16 000 470 000
Cost 360 000 130 000 30 000 520 000
Accumulated depreciation - (36 000) (14 000) (50 000)
Movements 40 000 (38 000) 10 550 12 550
Additions at cost 40 000 - 14 000 54 000
Disposals at carrying value - (13 000) - (13 000)
Depreciation - (25 000) (3 450) (28 450)
Carrying value at end of year 400 000 56 000 26 550 482 550
Cost 400 000 100 000 44 000 544 000
Accumulated depreciation - (44 000) (17 450) (61 450)
[1]
30 000 x 15% x 9/12 = 3 375 [2]
12 000 + 3 375 = 15 375
[3]
84 000 - 14 000 – 30 000 = 40 000 x 15% = 6 000 [4]
14 000 x 15% x 6/12 = 2 100
[5]
260 000 – 136 000 = 124 000 x 20% = 24 800 [6]
40 000 x 20% x 2/12 = 1 333
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 28 FEBRUARY 20.6
3. Fixed/Tangible Assets
Vehicles Equipment Total
Carrying value at beginning of year 124 000 28 000 152 000
Cost 260 000 70 000 330 000
Accumulated depreciation (136 000) (42 000) (178 000)
Movements 13 867 (11 050) 2 817
Additions at cost 40 000 14 000 54 000
Disposals at carrying value - (14 625) (14 625)
Depreciation (26 133) (10 425) (36 558)
Carrying value at end of year 137 867 16 950 154 817
Cost 300 000 54 000 354 000
Accumulated depreciation (162 133) (37 050) (199 183)
4.23.2 Give a reason why Land and buildings are not depreciated?
Generally, Land and buildings increase in value and do not decrease. Principal of Prudence “conservative”
4.23.5 Present an argument in favour of using the diminishing balance method rather than
the fixed instalment (cost) method for calculating depreciation.
Various answers possible.
More realistic – assets lose their greatest value in the early years and can never be worth nothing.
Solution:
Establish a policy in the business to make it clear that employees do not take assets off the property unless
authorised to do so by a senior person.
Each employee must sign that they understand this policy and that disciplinary action may be taken against
those who fail to comply.
Solution:
Establish a policy in the business for three quotes to be obtained before any large asset is purchased.
The final decision should be made by a senior person or preferably by a group of senior persons in the
organisation.
3. You ask an administrative assistant to use the Fixed Asset Register to compile a list of
desks and chairs owned by the business, and their book value. You find that the book
value does not agree with the cost and accumulated depreciation in the ledger – the list is
understated by R10 000.
Problem:
The Fixed assets register forms an important part of the internal control processes in a business.
It appears that the person responsible for this register has not been doing his/her job properly.
Solution:
The employee should be reprimanded and told to update the register immediately.
A senior person should check the register to see that the totals for cost, accumulated depreciation and book
value agrees with the balances in the general ledger.
4. You count the number of office chairs in the business to be 125. The Fixed Asset Register
reflects the total number to be 175.
Problem:
There appears to be theft.
Security appears to be a major problem.
Solution:
Investigate the possible ways in which the assets could have been removed, and try to identify which chairs
have gone missing and from which department.
Code each asset clearly to cross-check with the fixed assets register, and mark each item to discourage
theft.
Consider installing security cameras.
5. The owner of the business, Barry Best, has authorised the purchase of ten new computers
for the sales office. He asks an admin assistant, M. Bezzle, to get three quotes and buy
from the cheapest supplier. On arrival of the computers, you process a cheque in favour
of Shifty Computers for R80 000. A week later, you notice that a new laptop computer has
been delivered after hours by Shifty Computers for M. Bezzle.
Problem:
There is a possibility that M. Bezzle has placed the order with the business of one of his friends or a family
member, after giving him information on the price quoted by the competing businesses.
Solution:
Inspect the quotes obtained from each business, and question them if necessary. Investigate the acquisition
of the laptop by M. Bezzle.
He should be able to provide proof of payment.
He should be informed that, as he was entrusted with an important task involving large funds, he should
be seen to be conducting himself in an ethical manner.
Solution:
Investigate the possibility of selling the cars for the best price possible.
If financing of new cars is a problem, the business could investigate leasing their cars.
7. Two employees report that the desk-top computers and printers were stolen from each of
their offices. There was no forced entry and the insurance company is refusing to process
any claim on the insurance policy.
Problem:
It appears that the employees are not careful with regard to the securing of the assets entrusted to them.
Their offices should be locked when they are not there.
Solution:
The business must establish a policy whereby each employee agrees to look after the assets entrusted to
him/her.
If negligence occurs, the employees should be held responsible for the cost in terms of the policy.
In this case, an investigation needs to occur in order to determine whether the employees were at fault or
not.
Without a policy in place, the business will probably not be able to claim compensation from the employees
– they should be disciplined and given a written warning.
8. The owner of the business, Barry Best, has bought a yacht for himself for R900 000. He
bought this out of the profits of the business. Barry wants you to record the yacht in the
Fixed Assets Register and to record the depreciation on this asset in the Profit and Loss
account.
Problem:
Although Barry is entitled to use the profits of the business for his own use, a yacht cannot be regarded as
a business asset for a stationery concern.
He would be defrauding SARS for income tax purposes if he recorded the depreciation as a business ex-
pense.
Solution:
Barry must not record the yacht in the name of the business.
He must record it in his own name.
The depreciation should not be regarded as a business expense.
Note:
It is believed that some businesses might buy a yacht for advertising purposes, e.g. publicity through entry
in the Cape to Rio race.
However, in such cases, SARS will need to give approval for allowance of the deduction of expenses for tax
purposes.
Requires
Yes – profi-
Skills more atten- Complete
cient
tion
Conduct a survey, analyse the results and present a
report.
Calculate depreciation, accumulated depreciation,
book value on fixed assets that have been sold dur-
ing the financial year.
Draw up a fixed asset register.
Identify and explain the GAAP concepts relating to
depreciation.
Explain and draw up an Asset disposal account.
Making the necessary entries in the financial state-
ments.
Discuss internal control procedures required to effec-
tively control the assets.
Discuss ethical issues relating to fixed assets and to
be able to determine what constitutes unethical
practice.
• Retail business
- This type of business deals in merchandise, e.g. supermarkets, music stores, stationers, etc.
- Stock sales are recorded in the ‘Sales’ account.
• Sole proprietor
- This business is owned by one person.
- The capital invested is made by the sole owner.
- Profits belong to him.
• Partnership
- This business is formed by between 2 – 20 persons.
- Each partner invests capital and/or his skills in the business.
- Risk is shared amongst the partners.
- Profits/losses are shared between partners in an agreed proportion.
- Partners are liable for the debts of the partnership.
• Company
- This form of ownership has the capacity to raise large capital as shares are offered for sale to the public.
- Owners are called shareholders who receive a dividend for their investment in the company.
- A company offers limited liability to shareholders.
- A company is managed by directors.
- In the eyes of the law a company is a regarded as a legal person.
- A company is regulated by the provisions of the Companies Act.
5.1.2 Briefly explain why a person would want to form a partnership rather than a sole propri-
etorship.
• More capital can be raised.
• Additional skills/expertise improves profit potential.
• Risk is shared
• The workload is shared.
• Easy to form – no legal formalities are required except for a partnership agreement.
• Personal contact with clients/customers can still be maintained.
• Etc.
5.2.3 The steps he will have to put in place before admitting a partner into his business.
He will have to draft a Partnership Agreement, he could ask an accountant or lawyer to assist, or he could
obtain a basic format of an agreement from a website such as www.formville.com (see template attached at
the end of this Module); he must establish the amount of capital required of the new partner, his share in the
business and how profits/losses will be shared, and how decisions are to be made in the business.
5.5.2 Calculate how much each partner must contribute from personal funds in order to pay
the creditors.
Net amount owing = 100 000 – 10 000 = R90 000
Jean: 2/4 x 90 000 = R45 000
Ben: 1
/4 x 90 000 = R22 500
Sipho: 1/4 x 90 000 = R22 500
5.6.2 In developing the partnership agreement, what points must they include? Make a list.
Refer to Task 5.4, No. 5.4.4.
5.6.3 Present your list to the rest of the class. Amend your list with responses from other
groups in your class.
Various answers are possible. Ensure the learners justify their answers.
5.6.4 If you know an accountant or a lawyer, ask him/her to assist you in getting a basic format
for a Partnership Agreement. Compare this document to the list that you have compiled
in 5.6.2 and 5.6.3.
Various answers are possible. Ensure the learners justify their answers.
Note:
The Teacher must ensure that the learners are guided through these different scenarios. The learner’s an-
swers will often indicate personal or family experiences with partnerships; the TV programmes they watch
and their personal experiences that lead them to the values and ethics that they are formulating for them-
selves.
Always persuade the learners to see the situation from two different points of view, e.g. the business owners
and the customer or employee; each of the different partner’s points of view, etc. At all times learners should
display an awareness of principles of ethics, internal control and good common sense.
DRAWINGS: SMIT B5
20.4 20.4
Feb 28 Balance b/d 54 000 Feb 28 Current a/c: Smit GJ1 54 000
DRAWINGS: RAJ B6
20.4 20.4
Feb 28 Balance b/d 42 000 Feb 28 Current a/c: Raj GJ1 42 000
CAPITAL: CONNOR B2
20.2
Mar 1 Balance b/d 80 000
Dr DRAWINGS: DELPORT B5 Cr
20.2 20.3
Mar 31 Bank 2 100 Feb 28 Current a/c: Delport GJ2 24 000
Apr 30 Bank 1 200
May 31 Bank 2 000
Jun 30 Bank 1 300
Jul 31 Bank 2 200
Aug 31 Bank 3 200
Sept 30 Bank 1 200
Oct 31 Bank 1 400
Nov 30 Bank 1 500
Dec 31 Bank 4 300
20.3
Jan 31 Bank 1 200
Feb 28 Bank 2 400
24 000 24 000
5.11.4 Comment on the current account balances. Do you think that Delport would be satisfied
with the situation? Explain.
Yes.
His capital contribution is higher than Connor’s.
He receives 60% of the net profits while Connor gets 40%.
Delport has limited his drawings to R24 000 which resulted in a larger balance in his current account.
He has only withdrawn 16% of his earnings (24 000/153 000 x 100).
Connor, on the other hand, has withdrawn 33% of his earnings (35 700/107 000 x 100).
Alternate answers may apply.
CLOSING TRANSFERS
28 Profit and loss account F2 520 000
Appropriation account F3 520 000
Transfer of net profit
28 Appropriation account F3 413 750
Salary: S. Sishi N8 120 000
Salary: Z. Zinhle N9 240 000
Bonus: Z. Zinhle N10 20 000
Interest on capital N11 33 750
Closing transfers
28 Appropriation account F3 106 250
Current a/c: S. Sishi B3 53 125
Current a/c: Z. Zinhle B4 53 125
Net profit shared in profit shar-
ing ratio
28 Current a/c: S. Sishi B3 96 000
Current a/c: Z. Zinhle B4 115 000
Drawings: S. Sishi B5 96 000
Drawings: Z. Zinhle B6 115 000
Transfer of drawings to current
accounts
DRAWINGS: S. SISHI B5
20.9 20.9
Feb 28 Balance b/d 96 000 Feb 28 Current a/c: S. Sishi GJ5 96 000
DRAWINGS: Z. ZINHLE B6
20.9 20.9
Feb 28 Balance b/d 115 000 Feb 28 Current a/c: Z. Zinhle GJ5 115 000
SALARY: Z. ZINHLE N9
20.9 20.9
Feb 28 Current a/c: Z. Zinhle GJ5 240 000 Feb 28 Appropriation a/c GJ5 240 000
5.17.2
OWNERS’
No. ASSETS = LIABILITIES
EQUITY +
1. 0 ±R3 000 0
2. +R2 000 +R2 000 0
3. 0 -R50 000 +R50 000
4. +R1 300 +R1 300 0
5. +R6 000 +R6 000 0
6. 0 -R800 +R800
7. +R1 500 +R1 500 0
8. -R7 000 -R7 000 0
9. -R2 200 -R2 200 0
5.18.3
OWNERS’
No. ASSETS = LIABILITIES
EQUITY +
1. -R33 000 -R33 000 0
2. 0 ±R12 000 0
3. +R3 000 +R3 000 0
4. 0 -R1 400 +R1 400
5. +R9 000 +R9 000 0
6. 0 -R7 000 +R7 000
7. +R5 500 +R5 500 0
8. -R6 000 -R6 000 0
9. -R66 000 -R66 000 0
• What figures should be reflected in the financial statements for Debtors each year? [i.e. Provision for bad
debts should be deducted off Trade debtors in the note to the Balance Sheet for Trade & other receivables
to show net trade debtors, 20.5 = R38 000 (40 000 – 2 000); 20.6 = R57 000 (60 000 – 3 000); 20.7 =
R42 750 (45 000 – 2 250); 20.8 = R62 700 (70 000 – 4 000 – 3 300)].
• What figures will affect the Income Statement each year? (i.e. Provision for bad debts adjustment, 20.5 =
R2 000 (expense); 20.6 = R1 000 (expense); 20.7 = R750 (income); 20.8 = R1 050 (expense).
• What will the entries look like in the General Journal at the end of each financial year? i.e.
For 20.7:
Provision for bad debts – Debit XXX
Provision for bad debts adjustment – Credit XXX
Decrease in provision.
2 000 2 000
20.6 20.5
Feb 28 Balance c/d 3 000 Mar 1 Balance b/d 2 000
20.6
Feb 28 Provision for bad debts
adjustment GJ 1 000
3 000 3 000
20.7 20.6
Feb 28 Provision for bad debts Mar 1 Balance b/d 3 000
adjustment GJ 750
Balance c/d 2 250
3 000 3 000
20.8 20.7
Feb 28 Balance c/d 3 300 Mar 1 Balance b/d 2 250
20.8
Feb 28 Provision for bad debts
adjustment GJ 1 050
3 300 3 300
20.8
Mar 1 Balance b/d 3 300
5.19.2
Year ending ASSETS = OWNERS’ EQUITY + LIABILITIES
28 Feb 20.5 -R2 000 -R2 000 0
28 Feb 20.6 -R1 000 -R1 000 0
28 Feb 20.7 +R750 +R750 0
-R4 000 -R4 000 0
28 Feb 20.8
-R1 050 -R1 050 0
• What figures should be reflected in the financial statements for Debtors each year? [i.e. Provision for bad
debts should be deducted off Trade debtors in the note to the Balance Sheet for Trade & other receivables
to show net trade debtors, 20.5 = R96 000 (100 000 – 4 000); 20.6 = R124 800 (130 000 - 5 200); 20.7
= R86 400 (90 000 – 3 600); 20.8 = R71 040 (86 000 – 12 000 – 2 960)].
• What figures will affect the Income Statement each year? (i.e. Provision for bad debts adjustment, 20.5 =
R4 000 (expense); 20.6 = R1 200 (expense); 20.7 = R1 600 (income); 20.8 = R640 (income).
• What will the entries look like in the General Journal at the end of each financial year? i.e.
5.20.2
Year ending ASSETS = OWNERS’ EQUITY + LIABILITIES
28 Feb 20.5 -R 4 000 -R4 000 0
28 Feb 20.6 -R1 200 -R1 200 0
28 Feb 20.7 +R1 600 +R1 600 0
-R12 000 -R12 000 0
28 Feb 20.8
+R640 +R640 0
5.21.3
ASSETS = OWNERS’ EQUITY + LIABILITIES
Update depreciation -3 750 -R3 750 0
Cost price -18 000 -18 000 0
Accumulated depreciation +15 750 +15 750 0
Selling price +1 600 +1 600 0
= Profit / loss on disposal -650 -650 0
Deprecation on remaining assets -80 500 -80 500 0
5.23.2 Assume that interest is capitalised on the loan and the fixed deposit. Use the following
table to indicate the year-end adjustments that you would make on 28 February 20.7.
5.24.2 Assume that interest is capitalised on the loan and the fixed deposit. Use the following
table to indicate the year-end adjustments that you would make on 28 February 20.7.
5.25.6 Explain how the following figures would arise in the Pre-adjustment Trial Balance:
Provision for bad debts adjustment R400
The provision for bad debts was increased from R300 to R700.
Depreciation R600
Depreciation on the fixed asset that was sold during the year amounted to R600. This was entered on the
date of sale.
[1]
This could also be charged to Donations or Ad- Adjusted provision = 23 000 x 5%
vertising. = R1 150
[2]
(75 000 – 20 000) x 6% x 2/12 = 550 Increase = 1 150 – 900
75 000 x 6% x 10/12 = 3 750 = R250
[7]
4 300 Stock figure = 122 500 – 5 800 – 2 400
Accrued amount = 4 300 – 4 000 = R300 = R114 300
[3]
6 x 8 000 = 48 000 Deficit = 114 300 – 102 300
Deferred amount = 49 600 – 48 000 = R12 000
= R1 600 [8]
162 000 – 30 000 – 123 600 x 10% = 840
[4]
1 140 12 x 4 = R380 30 000 x 10% x 6/12 = 1 500
[5]
Debtors = 23 300 + 200 – 500 2 340
= R23 000
AGREEMENT OF PARTNERSHIP
A. Parties to the Agreement: This Agreement is made between the following parties:
Name: _________________________________________ ID number:________________________
and
B. Purpose: All parties to this agreement agree to begin, and carry on, a Partnership for the following
purposes:
2.1
2.2
2.3
3. Start-up capital: The start-up capital of the Partnership will be R________________ (in words:
______________________________________________________).
4. Capital contributions: Each partner of the Partnership will contribute the following property,
services, or cash to help complete this total amount:
6. Decisions: Each and every partner will have an equal right to manage and control this Partnership.
All Partnership decisions will have to be made by unanimous vote. The partners can select one
member of the Partnership to carry on the day-to-day operations of the Partnership.
7. Bank account: The Partnership will maintain a bank account, on which cheques may be signed
by either all of the partners, or by the partner selected to carry on the day-to-day operations of the
Partnership.
9. Audit: The books of the Partnership will / will not be (delete whichever is not applicable) subject
to an annual audit. The appointment of auditors is to be unanimously agreed by all partners.
10. Sharing of profits and losses: The profits and losses of the Partnership will be shared by all of
the partners as follows:
11. Withdrawal: If any member withdraws from the Partnership for any reason, including death, then
the Partnership may continue and be operated by the remaining partners. The withdrawing partner,
or their representative, will be obligated to sell their interest in the Partnership to the remaining
partners or their representatives, while the remaining partners or their representatives will be obli-
gated to buy that interest. The value of the withdrawing partner's interest will be their share pro-
portionate to the total value of the Partnership. The total value of the Partnership will be determined
by an independent appraisal that must be made within ninety days of the partner's withdrawal. All
members of the Partnership, including the member who withdraws, will share the cost of this ap-
praisal equally.
12. Transfer of Partner’s interest: No member of the Partnership may transfer or sell any or all of
their interest in the Partnership to any other party without the prior, written, approval of the re-
maining partners.
13. Termination: The Partnership may be terminated at any time upon the unanimous agreement
among the members. Upon the termination, the members will agree to apply the assets and money
of the Partnership in the following order:
a. Pay all debts owed by the Partnership.
b. Distribute the partners’ income accounts to them in the proper, proportionate amount.
c. Distribute the partners’ capital accounts to the partners in the proper, proportionate amount.
d. Distribute any assets that remain in accordance with the profit-sharing ratio.
14. Resolution of disputes between partners: If there is any dispute between the partners related
to this written agreement will be settled by mediation. If any mediation is unsuccessful, then the
dispute will be settled according by binding arbitration.
16. Modification: No modification of this agreement will be considered effective unless it is in writing,
and is signed by all members of the Partnership. This agreement will bind and benefit all the
partners and any successors. This document, and any attachments, will constitute the entire agree-
ment between the partners. This agreement will be governed and enforced according to the laws
of South Africa.
Requires
Yes – profi-
Skills more atten- Complete
cient
tion
Define a partnership.
Identify the difference between a sole proprietor and
a partnership as a form of business ownership.
Explain the accounting cycle relating to a partnership.
Explain the term joint and several liability for debts as
it applies to partners.
Identify essential parts of a partnership agreement.
Draw up partners’ capital, current and drawings ac-
counts in the ledger.
Draw up an Appropriation account in the ledger.
Explain the difference between primary and secondary
distributions to partners.
Explain how partner’s salaries, interest on capital, di-
vision of remaining profit/loss and drawings are rec-
orded in the ledger and journals.
Define and explain GAAP concepts and how they relate
to year-end adjustments.
Record year-end adjustments in the general journal
and ledger.
Record closing transfers in the general journal and
ledger.
Explain and prepare the three types of trial balances
applicable to a financial year-end.
Analyse entries relating to partnerships under the Ac-
counting Equation.
Prepare a set of partnership final accounts.
Comment on and evaluate internal control in a part-
nership context.
Comment on and evaluate ethical behaviour in a part-
nership context.
6.3.2 In groups, list the ways in which the users of the financial statements and the econ-
omy would be affected if accountants did not ‘follow the rules’ of GAAP at all times.
Various answers are possible, e.g. if figures are unreliable, investors will not entrust their money to busi-
nesses – this would affect employment offered and consequently standard of living.
6.3.3 In your group, decide how the professional institutes should act should one of their
members be guilty of not following GAAP or the professional procedures laid down.
Various answers are possible, e.g. the guilty members should face a disciplinary inquiry to explain their
actions and, if necessary, the guilty members should have their membership of the institute removed, de-
pending on the severity of the offence and whether or not this is a repeated offence.
Suggestion: Photostat the following examples of financial statements, enlarge them to A3 size
and pin them up on your classroom wall.
Suggestion: Learners must be able to identify and use the correct format for drawing up financial
statements. You may wish to cut pieces of paper with the different sections and let them put them
together (similar to doing a puzzle) and have a competition between the groups to see if they can
better their own time.
Other operating
Operating profit
income
Interest income
ASSETS
EQUITY AND
LIABILTIES
Non-current liabili-
ties Non-current assets
Sample of suggested word blocks on notes to the balance sheet for puzzle game:
INTEREST INCOME
INTEREST EXPENSE
4. INVENTORIES
Trading stock 217 600
Consumable stores on hand 1 400
219 000
5. TRADE AND OTHER RECEIVABLES
Net trade debtors 40 280
Trade debtors 42 400
Provision for bad debts [2 120]
Income receivable / accrued 3 130
Expenses prepaid 2 660
46 070
6. CASH AND CASH EQUIVALENTS
Savings account 20 000
Petty cash 2 000
Cash float 1 000
23 000
6.7.2 Penn is worried about the balances on the current accounts. Do you agree? Explain.
Yes. Lukhan is withdrawing more than his earnings while Penn is retaining a large amount in the business.
A positive balance increases the net worth of the partners.
A negative balance decreases partner’s equity.
The partners need to discuss this – a review of the partnership agreement may be necessary where limits
could be set on withdrawals by partner.
Any other suitable answer.
6.7.3 Lukhan is worried that the business is not carrying enough stock to satisfy its custom-
ers. Do you agree? Explain.
Open-ended question.
Ideally a business selling household appliances should carry a large variety of stocks.
Learners may also comment on the trading stock deficit amount of R13 200.
Note also that carrying large stocks ties up working capital and also exposes merchandise to damage,
mishandling, obsolescence and theft.
If many customers are being turned away because of the lack of stock then the situation needs to be dealt
with.
Any other suitable answer.
6.8.1 In your opinion, have Harry and Claire made the right decision in employing Miss I.
Trye? Explain. If not, how do they solve the problem regarding the accuracy of the
financial statements?
Use discretion – learners must justify their answer.
6.8.2 List the errors that Miss I. Trye has made. What are the main principles that she does
not understand?
Errors made by Miss I. Trye, e.g.:
• Audit fees have been omitted from the Income Statement.
• Stock purchases have not been recorded.
• The calculation of gross profit is incorrect – she included the sale of packing materials and income from
services rendered in the calculation.
• The fixed deposit matured has been entered in the Income Statement.
• Interest income and interest expense have not been shown separately at the bottom of the Income
Statement.
• Drawings of partners have been recorded in the Income Statement as operating expenses.
• The purchase of equipment has been recorded in the Income Statement.
• Trading stock has been reflected as a non-current asset in the Balance Sheet.
• Consumable stores on hand have not been included under Inventory
• Bank overdraft has been entered as a non-current liability.
• The long-term loan has been reflected as a current liability – no mention has been made that the loan
is repayable within 12 months.
• The drawings of partners have not been considered in the calculation of current account balance.
• Interest on capitals calculated wrongly.
HARICLAIRE SUPPLIES
BALANCE SHEET / STATEMENT OF FINANCIAL POSITION AS AT 28 FEBRUARY 20.9
ASSETS Note
Non-current assets 361 800
Tangible assets /Fixed assets [334 000 + 4 800] 3 338 800
Financial assets: Fixed deposit [43 000 – 20 000] 23 000
Current assets 208 540
Inventories [122 000 – 4 500 + 24 000] 4 141 500
Trade and other receivables 5 65 040
Cash and cash equivalents 6 2 000
Total assets 570 340
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 28 FEBRUARY 20.7
1. INTEREST INCOME
on current account 600
from investments 880
1 480
2. INTEREST EXPENSE
On loans 18 000
18 000
4. INVENTORIES
Trading stock 53 000
Consumable stores on hand 740
53 740
6.9.3 If you were Debbie or David, would you consider going into this business full-time?
Use discretion.
Learners must justify or give reasons why they have made their decision.
(At this stage it is not absolutely essential that they calculate percentage or ratios to comment but it
would help – depends on their prior knowledge).
• Profit is good.
• In comparison to the capital invested the partners are earning a good return.
• Loans are low – low risk.
• Solvent business.
• No liquidity problems – can pay off the current liabilities with the current assets.
• Etc.
6.10.2 The bookkeeper feels that the partners are taking too much in the form of drawings.
She feels this is placing a strain on the cash resources of the business. Do you agree?
Explain.
Use discretion. Learners must justify their answer.
Possible answers:
• Usha has withdrawn R120 000 of a profit of R142 000 (84.5%) while Victor withdrew R143 000 of a
profit of R202 000 (70.8%).
• No – they are entitled to withdraw the profits.
• Yes, as the percentage is high and will have impact on the cash flow and expansion.
6.11.2 In your opinion, should the partners be satisfied with the amount they are each
earning from the business? Explain.
Use discretion as there is no right or wrong answer. However, learners must justify their answers.
Possible answers:
• Jack earned R117 000 on an investment of R300 000 (39%). Lynn earned R99 000 on an investment
of R100 000 (99%).
• Yes, these returns are very good – far more than they would receive in a bank.
• No, they would expect more. Jack might not be happy that Lynn is earning more than he is.
Note:
The capital balances changed at the end of the year; hence the average capital was not used in this
calculation. The accuracy is not essential at this stage, but rather that the learners realise the importance
of comparing the return to what they earn in a financial institution.
4. INVENTORIES
Trading stock [210 000 – 2 800] 207 200
Consumable stores on hand 600
207 800
5. TRADE AND OTHER RECEIVABLES
Net trade debtors 19 950
Trade debtors 21 000
Provision for bad debts [1 050]
Income receivable / Accrued income 1 600
Prepaid expenses 950
22 500
6. CASH AND CASH EQUIVALENTS
Savings account 12 000
Bank 4 600
Cash float 1 000
17 600
6.12.1 Work in pairs: Inspect the figures in the financial statements. Make a list of the main
points that should interest the partners. Share your list with the rest of the class.
Various answers are possible. Allow the learners time to engage with the documents and their discussions
are more important than a right or wrong answer. Encourage them to justify their comments.
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 28 FEBRUARY 20.6
8. CURRENT ACCOUNTS G. GOLD R. REEF Total
Profit per Income Statement 163 991 63 663 227 654
Partners’ salaries 130 000 51 000 181 000
Partner’s bonus 20 000 0 20 000
Interest on capital 12 000 12 000 24 000
Primary distribution of profits 162 000 63 000 225 000
Final distribution of profits 1 991 663 2 654
Drawings during year (150 000 + 610) (150 610) (70 000) (220 610)
Retained income for the year 13 381 (6 337) 7 044
Retained income at beginning of year 5 000 6 000 11 000
Retained income at end of year 18 381 (337) 18 044
6.13.2 In your opinion, should the partners be satisfied with their earnings? Explain.
Learners own opinions.
Possible answers:
In total, the partners have earned a profit of R227 654 on a capital of R300 000 (76%) – this is a good
return in comparison with the financial institutions.
The partners each earned R12 000 interest on capital. This means that their partners’ capital must have
been equal.
Learners can assess the individual returns as well.
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 28 FEBRUARY 20.7
8. CURRENT ACCOUNTS A. Zuma B. Zuma Total
Profit per Income Statement 162 578 128 052 290 630
Partners’ salaries 65 000 65 000 130 000
Partner’s bonus 15 000 - 15 000
Interest on capital 24 000 24 000 48 000
Primary distribution of profits 104 000 89 000 193 000
Final distribution of profits 58 578 39 052 97 630
Drawings during year* [107 000] [119 990] [226 990]
Retained income for the year 55 578 8 062 63 640
Retained income at beginning of year 1 000 1 500 2 500
Retained income at end of year 56 578 9 562 66 140
*B. Zuma: 89 990 + 30 000
6.14.2 Write a brief explanation to the partners on how much they could each withdraw from
the business.
Various answers are possible.
• The learners could say that they could just increase their salaries and interest and withdraw more during
the year.
• However, they need to note that the cash balance is only R10 400 and if they are going to withdraw
more, it will result in a bank overdraft.
• Therefore if they need to earn more, they should aim to improve the profitability of the business by any
of the following:
- Increase sales.
- Decrease cost of sales (obtain another supplier).
- Increase the mark-up percentage.
- Decrease expenses.
- Etc.
6.16.1 RM STATIONERS
INCOME STATEMENT / STATEMENT OF COMPREHENSIVE INCOME
FOR YEAR ENDED 28 FEBRUARY 20.3
Note
Sales [800 500 – 9 200] 791 300
Cost of sales [418 500]
Gross profit 372 800
Income from services rendered 41 000
Commission income [39 600 + 1 400] 41 000
Other operating income 51 260
Rent income [41 600 – 3 200] 38 400
Discount received 12 860
Gross operating income 465 060
Operating expenses [209 301]
Salaries and wages 147 000
Advertising [5 150 – 600] 4 550
Discount allowed 1 500
Motor expenses 7 450
Bad debts [1 220 + 180] 1 400
Postage and office stationery [2 460 + 560] 3 020
Packing materials [8 740 – 1 900] 6 840
Insurance [8 640 – 375] 8 265
Sundry expenses [7 540 + 375] 7 915
Trading stock deficit 3 240
Provision for bad debts adjustment 481
Depreciation 17 640
Operating profit 255 759
Interest income 1 5 355
Profit before interest expense 261 114
Interest expense / Financing cost 2 [19 200]
Net profit for the year 8 241 914
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 28 FEBRUARY 20.3
1. INTEREST INCOME
from investments [4 070 + 905 ] 4 975
on current account 380
5 355
2. INTEREST EXPENSE
on loan 19 200
19 200
4. INVENTORIES
Trading stock [122 800 – 560 – 3 240] 119 000
Consumable stores on hand 1 900
120 900
6.16.3 The partners are worried that they will not be able to settle the immediate debts. Do
you agree? If so, what solution can you provide to solve the problem?
The immediate debts amount to R53 195 and the business has R155 914 in current assets. However, a
large portion of the current assets is tied up in inventory. Without the inventory the business has R35 014
to pay the R53 195. Therefore, if they do not sell the stock, they will experience problems paying the debts.
Possible solutions:
• Take out an overdraft.
• Increase the loan.
• Reduce the stock by having a sale.
• Cash in the fixed deposit – if possible.
• Etc.
6.17.2 • Consider your answer in 6.17.1 above and explain how the financial statements
should be adjusted at this year-end. Provide your reasons.
Financial assets in the Balance Sheet will be entered as R80 000 (100 000 – 20 000).
R20 000 will be entered under Cash and cash equivalents.
6.17.4 • Consider your answer in 6.17.3 above and explain how the financial statements
should be adjusted at this year-end. Provide your reasons.
The loan amount in the Balance Sheet under Non-current liabilities will be entered as R48 000 (60 000 –
12 000).
R12 000 will be entered under Trade and other payables as a current portion of loan or short-term loan.
6.17.6 • Consider your answer in 6.17.5 above and explain how the financial statements
should be adjusted at this year-end. Provide your reasons.
Add to Bank (if favourable) OR subtract from Bank (if unfavourable); Add to Creditors control.
The cheque only becomes valid only on 31 May 20.6 but the entry has already been recorded in the CPJ for
February 20.6.
To represent a true state of affairs (Prudence concept) the entry in the CPJ is reversed as the amount has
not yet been deducted from the trader’s bank account.
Teachers are advised to vary the approaches that their learners use, but they should require learners to get
practice at using the direct method (with adjustments in brackets) to familiarise them with examination tech-
nique.
Due to time constraints, it is not advisable to use the extensive T-accounts or the extended worksheet method
during exams.
[1]
152 580 x 20% = R30 516
Accumulated depreciation = 142 400 + 30 516 = R172 916
Carrying/Book value = 152 580 – 172 916 = -R20 336
Accumulated depreciation cannot be greater than the cost of the vehicles. An asset cannot be reflected as
a negative value in the Balance Sheet – its value should be kept to at least R1. The calculation for depre-
ciation (20%) therefore falls away. In order to show a book/carrying value of R1 depreciation amounting
to R10 179 has to written off in the current period. This figure is arrived as follows:
Cost price at beginning of year = R152 580
Accumulated depreciation at beginning of year = 142 400
Carrying/Book value at beginning of year = R10 180
Depreciation for the year = 10 179
Carrying/Book value at end of year = R 1
[2]
Gee: [240 000 – 25 000] x 5% x 4/12 = R3 583
240 000 x 5% x 8/12 = 8 000
R11 583
Kay: 160 000 x 5% = R8 000
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 28 FEBRUARY 20.5
1. INTEREST INCOME
from investments [1 925 + 187] 2 112
on current account 150
on overdue accounts [125 + 70] 195
on savings account 420
2 877
2. INTEREST EXPENSE
on loan [17 250 + 1 956] 19 206
19 206
4. INVENTORIES
Trading stock [53 460 – 1 460] 52 000
Consumable stores on hand 740
52 740
6.18.3 The partners ask you for your impressions on these financial statements. Provide
three of your main opinions based on the information provided in these financial
statements.
Various answers:
Possible answers:
• Owners’ returns (Gee: R116 139 on an investment of R215 000 ÷ R240 000 = 54%). (Kay: R52 556
on investment of R160 000 = 32.5%).
• Profitability of the business – mark up; net profit as a % of sales, expenses as a % of sales – do not
need to work out the percentages but can comment on them.
• Risk – loan in comparison to owners’ equity.
• Solvency – assets are more than the liabilities.
[1]
[30 000 + 10 000] x 15% x 4/12 = 2 000] + [30 000 x 15% x 8/12 = 3 000]
Total interest = 2 000 + 5 000 = 5 000
Accrued amount = 5 000 – 3 000 = R2 000
[2]
8 000 – 4 720 = 3 280 x 10% = 328
Total accum. dep. = 4 720 + 328 = 5 048
[3]
62 000 – 22 500 = 39 500 x 10% = 3 950
4. INVENTORIES
Trading stock [104 000 – 260 – 370 – 16 570] 86 800
Consumable stores on hand 560
87 360
5. TRADE AND OTHER RECEIVABLES
Net trade debtors 5 747
Trade debtors [5 400 + 800 – 150] 6 050
Provision for bad debts [210 + 93] [303]
Prepaid expenses 910
6 657
6. CASH AND CASH EQUIVALENTS
Savings account 6 000
Bank [12 100 + 2 500] 14 600
20 600
6.19.2 In your opinion, have Tando and Timm made the right choices with regard to the
operation of this business and with regard to their studies at university? Explain.
Various options – learners need to give reasons for their answers.
Possible answers:
• Yes, as they are earning an income and gaining experience.
• No, as they need to concentrate on their studies.
6.19.3 In your opinion, how can this Tando and Timm use their business to make a positive
contribution to their local community? How will this affect their profits?
Making a difference to the community:
Various answers are possible, e.g.:
• They could advertise messages on their T-shirts, e.g. AIDS awareness, SPCA.
• They could sponsor prizes in local events, e.g. school competitions.
• They could expand their business and employ more people.
• They could publicise their efforts to safely dispose of waste materials, or they could devote these to a
secondary industry.
• The effect on profit could well be positive – although there will be extra expenses, these might well be
offset against additional income resulting from increased public awareness in their business.
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 28 FEBRUARY 20.6
1. INTEREST INCOME
from investments [1 000 + 227] 1 227
on current account [150 + 164] 314
on savings 1 265
2 806
2. INTEREST EXPENSE
on loan 2 600
on mortgage 26 345
28 945
• How can Clinton and Bush use their business to make a positive contribution to their local
community? How will this affect their profits?
- They could advertise good causes in their shop, e.g. support of housing projects, SPCA.
- They could sponsor prizes in local events, e.g. school competitions.
- They could expand their business and employ more people.
- The effect on profit could well be positive – although there will be extra expenses, these might well be
offset against additional income resulting from increased public awareness in their business.
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 28 FEBRUARY 20.7
1. INTEREST INCOME
on current account 200
on fixed deposit [4 500 – 900] 3 600
on savings account [1 100 + 62] 1 162
on overdue debtors 40
5 002
2. INTEREST EXPENSE
on mortgage loan 16 800
on loan (Ross) 3 000
19 800
6.21.3 Provide examples of how you have applied the following principles in preparing the
financial statements (give one example of each application).
• Historical cost principle
Valuation of land and buildings.
• Rule of prudence
Depreciation written off, debtor being declared insolvent, stock shortage, provision for bad debts.
• Going-concern principle
Physical stock taking.
• Materiality
Delivery charges.
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 28 FEBRUARY 20.6
1. INTEREST INCOME
on fixed deposit [3 906 + 296] 4 202
on current account 314
4 516
2. INTEREST EXPENSE
on loan [49 500 + 4 748[1]] 54 248
on overdraft 545
54 793
[1]
422 060 x 13.5% x 1/12 = R4 748
6.22.3 The accountant of the business feels that the business is wasting money on staff
development and the HIV awareness programme as these are not benefiting the
business. Do you agree? Explain.
Various answers possible.
In the long term these programmes benefit both the community and the business.
The business is giving back to the community – for this it gets publicity.
This enhances the image of the business.
This may result in an improvement in profitability.
Etc.
6.23.2 David and Thabo want to solve the financial problems of Power Sports by admitting a
new partner. The financial results of 20.7 are much better than 20.8. They tell the
accountant to delay in preparing the 20.8 financial statements until they finalise the
agreement with the new partner.
This is completely unethical.
The partners may be accused of fraud if they hide information from a prospective new partner.
The accountant should not agree to delay the publication of the financial statements.
6.23.4 The partners decide that they do not have time to do a physical count of the fixed
assets each year. They decide to install security cameras instead.
This is an internal control matter.
Stock has to be counted in order to compare to the balance on the Trading stock account in order to identify
shortages as soon as they occur.
Cameras will only identify a culprit once the partners know when the incident occurs.
The partners will probably not have the time to sit watching hours of video recordings. Doing the physical
counts is much more effective.
6.23.5 Thabo has paid for entertainment expenses but he has not bothered to keep the doc-
uments. He says this was to benefit the partnership.
This is an internal control matter.
The expenses might well be genuine but Thabo will have to prove this by presenting the vouchers.
He cannot submit vouchers for private drinks and meals.
SARS will also disallow the expenditure as a tax deduction if the vouchers are missing.
6.23.6 David has taken over a fully depreciated vehicle at the book value of R1.00. The ve-
hicle had been used for delivering goods to customers.
This is both an internal control and ethical matter.
A vehicle worth R1.00 might well still serve the purpose for which it was bought, even if the asset is fully
depreciated.
The business will have to replace the vehicle at current market price which could be over R200 000.
This will affect the financial position of the partnership as a whole.
6.23.7 The partners decide to take drawings in the form of trading stock rather than cash.
They feel that cash would have to be recorded as it affects the bank reconciliation
whereas they do not have to make an entry for the trading stock.
This is both an internal control and ethical matter.
All transfers of stock to partners must be recorded as drawings to ensure that the correct financial position
is calculated.
Also, if no entry is made for the stock taken, it will increase the value of the trading stock deficit and reduce
the net profit which is taxable.
The taking of the stock without recording it in order to reduce profit and tax will be regarded as tax evasion
which is illegal.
(b) The employees want to resign but they have no alternative employment in the area. Why
are they dissatisfied?
The shop assistants got only a 4% increase in their wages.
They are not subject to PAYE deductions because their R2 600 per month wages are below the taxable
threshold, and they do not get any of the standard benefits regarding medical aid and provident fund.
The qualified pharmacist is earning less than R100 000.
For a person of his/her qualifications this is very low, especially as he is also running the business on a daily
basis.
The partners are together earning almost R1.6m.
The partners are not looking after their employees properly.
(c) You are told that the commission expense comprises payments to Billy Bell and other
individuals. These payments are made by the partners, Flue and Virus, to secure lucrative
contracts (tenders) to supply hospitals in the province with medical supplies.
The amounts of R130 000 are not ‘commission’.
They are in fact bribes which are illegal.
The partners may be accused of corruption, as well as the persons such as B. Bell who are paid these
amounts.
If this becomes known to the public, the business and the partners will get a very poor reputation.
(d) The partners feel that their donations to a local clinic and sponsorship of the local soccer
club will increase the ‘goodwill’ which the community would have for the pharmacy and
gain them more customers. Is this a good strategy?
Yes: Supporting local communities is a very good strategy because the local community will tend to support
the business in future.
‘Corporate social investment’ by the business in encouraging good, healthy activity through the soccer club
(R71 000) and encouraging better health care through the clinic (R60 000) are most worthwhile causes,
although they might get criticised for the amounts being so low in comparison to the profit earned of almost
R1.6m.
(g) You are told that the Shady Nightclub does not check identity documents of the people
who want to get in. How will this affect Pinevalley Pharmacy?
The Pharmacy will get a bad reputation amongst parents in the community who want to bring their children
up to respect the law.
They are likely to protest and attract negative publicity to the Pharmacy, a business which professes: ‘Your
health is our concern’. In order to retain its reputation, the Pharmacy should rent out its unused premises
to a business which does not clash with its own line of business.
Alternatively, they should sell the portion of the property that they do not need.
(h) Consider the following statement: Although the partners of Pinevalley Pharmacy have
made very impressive returns on their capital investment in the business, the business is
not sustainable, i.e. it will not last very long into the future. Do you agree?
Yes.
The partners have indeed made an excellent return of R1.574m net profit on their capital investment of
R2.7m, which is more than a 50% return.
However, the pharmacy may well lose its good employees or the employees may deliberately decide to
reduce the quality of their work if they are legitimately dissatisfied.
Without a qualified pharmacist the business cannot continue.
The pharmacy is also accused of corruption (i.e. tax evasion and bribery) which could land the partners in
jail or face large fines imposed by the courts.
The loss of goodwill through the nightclub could also be a major concern.
Furthermore, the partners are making such a good return that a potential competitor is likely to enter the
area.
If the competitor applies a reasonable mark-up percentage, Pinevalley Pharmacy will be driven out of busi-
ness very quickly.
6.25.3 Answer the following questions. In each case explain, provide a reason and quote
figures (where possible) to support your answer.
(a) Have the partners controlled their fixed assets well?
No.
• The delivery vehicles are very old. They are valued at R1.00 each as they are fully depreciated. The
vehicles and might well be a danger to other road-users in view of the crash that occurred. The partners
should not have used a driver without the required driver’s licence.
• The computers were not properly secured. Seven of them had been stolen without any sign of breaking
and entering. This is extremely negligent of the employees. Policies should be put in place to require
employees to take due care over the assets entrusted to them. These computers will now need to be
replaced which will cause further financial strain to the business.
Requires more
Skills Yes – proficient Complete
attention
Identify various groups or people who are interested
in the financial statements of a business.
Understand important characteristics of financial
statements.
Explain basic rules of GAAP.
Identify GAAP applications and explain each one.
Distinguish between operating, financing and
investing activities.
List year-end procedures in the correct sequence.
Draw up a basic format of an income Statement
(Statement of Comprehensive Income) and a
Balance Sheet (Statement of Financial Position) with
Notes.
Work out year-end adjustments to be entered in
preparing the financial statements.
Understand the difference between normal
adjustments in the books and Balance Sheet
adjustments.
Understand the effect of year-end adjustments on
the Accounting equation.
Draw up an Income Statement (Statement of
Comprehensive Income) and Notes for a
partnership.
Allocate the net profit to partners in accordance with
the partnership agreement and draw up an
Appropriation Statement.
Draw up a Balance Sheet (Statement of Financial
Position) and Notes for a partnership.
Identify errors and correct the errors in financial
statements.
Reflect on the figures in the financial statements and
express general opinions.
Explain and express opinions on internal control
issues relating to partnerships.
Explain and express opinions on issues affecting
business ethics relating to partnerships.
Teachers should also provide opportunities for learners to mark their own work from time to time, guided by
their Teachers, so that they gain an understanding of the marking process which should also enhance their
examination techniques.
Learners do not need to do every Task in this Module, but they should do all the Tasks indicated by the symbol
in order to understand the essential basics of financial indicators, their calculation and interpretation.
Learners should not memorise formula for the financial indicators. All the financial indicators are based on
Accounting logic. If learners understand the concepts of profitability, solvency, liquidity, gearing and return,
and where these are located in the financial statements, they should find the logical calculation of the financial
indicators much easier to understand and remember.
Teachers are urged to nurture their learners through the essential and relatively easy Tasks denoted by
through to the more challenging Tasks denoted by or . The challenging Tasks are inserted in
this Module to challenge and extend the more capable learners.
From the previous Tasks in this Module, learners should have become aware that financial statements are
prepared with a major purpose in mind, i.e. to provide information that enables the owners and other stake-
holders to assess the performance of the business and to make appropriate decisions based on that infor-
mation.
• How profitable is this undertaking? The owner can see whether the capital that has been invested in the
undertaking is providing the highest possible return. He/she must consider whether it would be more
rewarding to invest his capital elsewhere. (This is done by calculating the net profit as a percentage of the
capital invested).
• How efficient is the purchasing policy, the stock control policy and the sales policy of this undertaking?
(Calculate the percentage of the gross profit and net profit on the turnover).
• Are the current expenses (operating expenses) within acceptable limits? Compare the percentage of gross
profit on turnover with the percentage of net profit on turnover.
• Has the business sufficient liquidity to pay creditors if the business deteriorated and is placed under pres-
sure? The ratio of current assets to current liabilities must be monitored with great care.
• Is there a pattern of progress, deterioration or even stagnation in the activities of the business undertaking?
This is done by comparing figures, ratios and results with those of previous years and also by comparing
these with particulars of other similar business undertakings).
• Do the financial statements reflect good internal control over assets, expenses, income, etc., or are there
areas of concern which need attention?
• Do the financial statements reflect any positive contribution to the local community or the environment?
Not only is this the ‘right thing to do’ but the business’ sustainability could depend on it.
7.4.2 The gross profit of R120 000 is very good. The business has sets its prices very well in
order to earn this gross profit.
Assessment of gross profit depends on the volume of goods sold – consider or compare to the cost of sales
or sales.
7.4.3 The operating expenses of R90 000 are satisfactory. The business has controlled them
well.
Assessment of operating expenses depends on the size of the business and sales volume – consider or compare
to Sales.
7.4.4 The debts of the business that must be repaid within the next year amount to
R105 000. The business can easily settle these debts.
Assessment of current liabilities depends on resources available to settle the debts – consider or compare to
current assets or liquid assets (debtors or cash).
7.4.5 All the debts of the business amount to R300 000. The business can repay these with-
out a problem.
Assessment of all debts depends on the volume of all the assets of the business – consider or compare to total
assets.
7.4.6 The business has trading stock on hand amounting to R60 000. This is sufficient to
satisfy the needs of the customers.
Assessment of stock depends on the volume of goods traded during a year – consider or compare to credit
purchases, or if this figure is not available, Cost of Sales (this will equal purchases if stock levels are fairly
constant).
7.4.7 The trade debtors amount to R36 000. They are settling their debts on time and the
business is controlling them well.
Assessment of trade debtors depends on how much is sold to them each month – consider or compare to
credit sales per month.
7.4.8 The trade creditors amount to R40 000. They are being paid in accordance with normal
credit terms.
Assessment of trade creditors depends on how much is bought from them each month – consider or compare
to credit purchases, or if this figure is not available, Cost of sales (this will equal purchases if stock levels are
fairly constant).
7.4.9 It is good business practice for a business to dump waste materials in a nearby river as
there are no cost implications.
There is a cost implication – the effect on the environment.
This will have to be cleaned up.
The community will end up paying through the municipality or through volunteer work.
This practice will cause a business to lose support from the community, which will affect its sustainability.
7.4.10 A business should always try to achieve the highest mark-up percentage possible.
A business has to apply prices that are competitive, otherwise sales will decline.
If the business is a monopoly with not competition, high mark-ups will lead to consumer resistance.
7.5.2 If you calculate their batting averages, who appears to be the more successful batsman
in this series?
Kallis’ average = 512 ÷ 6 = 85.3
Amla’ average = 665 ÷ 10 = 66.5
According to the averages, Kallis appears to be more successful.
7.5.3 Amla might be upset that you have made your decision based on the averages. What
factors might make the averages misleading?
He opens the batting – has to face fast bowlers.
He played on all the pitches, some of them might have been difficult to play on.
He has played more often – fatigue could occur.
Note to Teacher:
Teachers should stress that financial indicators are not an exact science, but they do give clues as to areas of
interest or concern.
PART B
Profitability Return Solvency Liquidity
Gross profit as a percent- Net profit as a percent- The Rand amount of net The Rand amount of net
age of sales. age of average owners’ assets, i.e. total assets current assets, i.e. cur-
Gross profit as a percent- equity. minus total liabilities. rent assets minus current
age of cost of sales. The amount earned by The ratio of total assets liabilities.
Operating profit as a per- each partner. to total liabilities. The ratio of current as-
centage of sales. sets to current liabilities.
Operating expenses as a
percentage of sales.
Net profit as a percent-
age of sales.
7.7.2 CD Stores:
(a) Calculate net profit as a percentage of owners’ equity at the beginning of the year.
240 000 x 100 = 60%
400 000 1
(b) Calculate net profit as a percentage of owners’ equity at the end of the year.
240 000 x 100 = 20%
1 200 000 1
(d) Which of these three calculations is the more reliable one to use? Explain.
Average owners’ equity.
Equity changes throughout the year as profits are earned and as the owners invest extra capital.
The average will therefore be more accurate.
(e) Use the financial indicators you have calculated in order to comment on the return earned
in this business. Should the owners be satisfied with this return? Explain briefly.
Yes.
Compare with alternative investments (e.g. a Fixed deposit or shares on the stock exchange). A 30% return
is very favourable.
Alternative investments could earn a much lower return than 30% - compare with the current bank rates.
7.7.3 EF Stores:
(a) Calculate net assets.
(360 000 + 60 000 + 270 000) – (180 000 + 300 000)
690 000 – 480 000 = R210 000
(b) Calculate the solvency ratio (i.e. total assets : total liabilities).
690 000 : 480 000 = 1.4 : 1
(c) Use the financial indicator you have calculated in order to comment on the solvency situa-
tion of the business. Should the owners be satisfied? Explain.
Yes.
Assets are 40% higher than liabilities.
The business should not have too much trouble in settling its debts.
7.7.4 GH Stores:
(a) Calculate net current assets.
720 000 – 340 000 = R380 000
(b) Calculate the current ratio (i.e. current assets : current liabilities).
720 000 : 340 000 = 2.1 : 1
(e) Use the financial indicators you have calculated in order to comment on the liquidity situa-
tion of the business. Should the owners be satisfied? Explain.
The business should not have a liquidity problem.
The current assets are more than twice the current liabilities as indicated by a current ratio of 2.1 : 1.
However, when one excludes the inventories, the liquid assets are lower than the current liabilities as indicated
by an acid-test ratio of 0.9 : 1.
This could be a concern if the business is not able to sell any of its stock, which is unlikely.
7.7.5 IJ Stores:
(a) Calculate average stock for the year.
(140 000 + 180 000) ÷ 2 = R160 000
(b) Estimate how long it will take the business to sell its closing stock, assuming sales and cost
of sales remain constant in future.
Average daily cost of sales = 800 000 ÷ 365 = R2 192
Closing stock = R180 000
Number of days of stock on hand = 180 000 ÷ 2 192 = 82 days
Alternative calculation:
180 000 x 365 days = 82 days
800 000
(c) Calculate how many times the business had to re-order stock during the year, i.e. the turn-
over rate of stock (use average stock in your calculation).
800 000 ÷ 160 000 = 5 times
7.8.4 Calculate the stock holding period (period for stock on hand) at the end of 20.7.
94 000 x 365 = 85.8 days
400 000 1
7.8.5 Calculate the debtors collection period for 20.7. Use average debtors in your calcula-
tion.
½[64 000 + 75 000] x 365
760 000 1
69 500 x 365 = 33.4 days
760 000 1
7.8.6 Calculate the creditors payment period for 20.7. Use average creditors in your calcula-
tion.
OR
½[51 000 + 69 000] x 365
400 000 1 ½[51 000 + 69 000] x 365
60 000 x 365 = 54.8 days 384 000 1
400 000 1 60 000 x 365 = 57.0 days
384 00 1
7.8.7 Comment on your calculations. Bear in mind this is a furniture shop and their suppliers
offer them 60 days credit. Has the business controlled its working capital effectively?
Explain. The corresponding calculations for the previous year are:
The business should not experience any liquidity problems. In fact, the current ratio and acid-test ratio
have both increased from the previous year, and now appear to be too high. This means that the business
has excess current assets which are not earning a return.
The turnover rate of stock has increased from 2.5 to 3.9 which indicate that a greater volume of goods was
sold, while the stock on hand has declined from an excessive 143 days to 85.8 days. This is sufficient to
satisfy customers’ needs.
Debtors are taking a little too long to pay. They should be restricted to one month but are usually paying
after 33 days. However, this is an improvement from the 44 days of the previous year.
Creditors are being paid before the credit terms expire, which could cause strain on liquid assets. However
this is a far better result than the 90 days of the preceding year which would have earned them a poor
reputation with their suppliers.
7.9.4 Calculate the stock holding period (period for stock on hand) at the end of 20.9.
19 000 x 365 = 14 days
490 000 1
7.9.7 Comment on your calculations. Bearing in mind this is a grocery shop, has the business
controlled its working capital effectively? Explain. The corresponding calculations for
the previous year are:
The current and acid-test ratios appear to be very low, and they have declined from the previous year. This
could indicate possible liquidity problems, especially if all the stock could not be sold. However, the business
has operated with low liquidity rates in the past, which means it could do so in future.
Stock on hand for 14 days might be appropriate as certain perishables (e.g. bread) need to be re-stocked
daily, while durables (e.g. minerals or canned items) could be re-stocked monthly.
The business is selling goods on credit to selected customers, and their debtors are paying promptly in 29.7
days, which is much better than the 52 days of the previous year.
The creditors are now being paid in 23.1 days, rather than the 28 days in 20.8. This could be extended to
one month depending on the credit terms provided by the suppliers.
7.10.2 Assuming you earn interest only, how much will you earn during the year ended 31
December 20.7?
7% x 20 000 = R1 400
7.10.5 Assuming you accept her offer on 1 January 20.8, how much profit will you make dur-
ing the year ended 31 December 20.8?
Interest income = 7% x R70 000 = R4 900
Interest expense = 4% x R50 000 = R2 000
Profit = R2 900
7.10.7 Taking all the above into account, will you borrow the money from your grandmother?
Explain.
Yes. It pays to borrow at 4% because I would be earning 7% on the amount invested, which increases the
overall return on equity to 7.25%.
7.10.8 If your grandmother charges interest of 8% p.a. will you accept her offer? Explain,
quoting figures to support your answer.
No - the interest rate on the loan is higher than the rate on the investment.
I would earn less than I did before taking out the loan.
Interest income = 7% x R70 000 = R4 900
Interest expense = 8% x R50 000 = R4 000
Profit = R900
% Return on equity drops to 2.25%.
7.10.9 Reflect on your calculations. Under what conditions will it be favourable to make use
of the loan from your grandmother, i.e. under what conditions will your return be
‘geared up’ as a result of utilising the loan?
If the money borrowed can be utilised at a rate higher than the rate on the loan, my returns will be ‘geared
up’.
SUGGESTED RUBRIC
Criterion: Level 1 Level 2 Level 3 Level 4
One or two indica-
Comparison of fi- No valid compari- Three indicators All four indicators
tors compared ex-
nancial indicators son done to previ- compared explicitly compared explicitly
plicitly to previous
to previous year. ous year. to previous year. to previous year.
year.
Comparison well
Comparison done
Comparison of Comparison done done highlighting
No valid compari- but poor explana-
Partner A’s return but differential be- the differential be-
son done between tion on the differen-
to Partner B’s re- tween the partners tween the partners
the partners. tial between the
turn. not convincing. and possible rea-
partners.
sons.
Comparison done Comparison well
Comparison done
Comment on re- but knowledge of done indicating
No valid comment but knowledge of
turns compared to returns on alterna- knowledge of re-
or comparison returns on alterna-
returns on alterna- tive investments turns on alternative
done. tive investments
tive investments. and opinion not investments and
and opinion is poor.
clear. opinion.
Comment on de- Clear explanation of
No valid explana- Risk and/or gearing Risk and/or gearing
gree of financial risk and gearing in-
tion of risk or gear- mentioned, but mentioned, but not
risk as indicated by cluding considera-
ing. poorly explained. convincingly ex-
the debt/equity ra- tion of interest
plained.
tio. rates.
*[700 000 x 10% x 6/12] + [900 000 x 10% x 6/12] = 35 000 + 45 000 = 80 000
7.13.2 Calculate the percentage return earned by the business for the year ended 28 Febru-
ary 20.4.
Average equity = [700 000 + 6 000 + 900 000 + 14 000] + [500 000 – 8 000 + 700 000 + 8 000] ÷ 2
= 1 620 000 + 1 200 000 = 2 820 000 ÷ 2 = R1 410 000
486 000 x 100 = 34.3%
1 410 000 1
7.13.3 Calculate the percentage return earned by each partner for the year ended 28 Febru-
ary 20.4.
Chetty:
Earnings = 120 000 + 80 000 + 60 000 = R260 000
Average equity = (700 000 + 6 000 + 900 000 + 14 000) ÷ 2 = R810 000
260 000 x 100 = 32.1%
810 000 1
*140 000 – 80 000 = 60 000 OR (500 000 x 10% x 6/12] + [700 000 x 10% x 6/12] = 60 000
7.13.6 In your opinion, should the business repay its loans as soon as possible? List the main
points for and against this proposal, and explain your recommendation.
No.
The return earned by the business exceeds the interest rate.
It is advisable to make use of loans.
The debt/equity ratio has remained constant, so there has been no increase in financial risk of borrowing.
7.14.2 Calculate owners’ equity at the beginning and end of the year, and calculate the aver-
age for the year.
7.14.3 Calculate the percentage return earned by the business for the 20.9 financial year.
335 500 x 100 = 37.5%
893 750 1
7.14.5 Calculate the percentage return earned by each partner for 20.9.
Bester: 181 500 x 100
500 000 + 30 750 1
181 500 x 100 = 34.2%
530 750 1
7.14.9 What is the profit-sharing ratio that is stipulated in the partnership agreement?
Bester : Wilton = 1 : 1
7.14.10 The loan from Sharon Bester, Barry’s cousin, is repaid in equal annual instalments
on the same date each year. Explain how the loan will be treated in the financial
statements for 20.9.
Non-current loans = R300 000
Current loans = R60 000
7.14.11 Comment on the drawings and the current account balances of the partners at the
end of the year. Should the partners be satisfied?
Bester will not be happy.
He could have drawn R51 500 but did not.
Wilton has overdrawn by R65 000.
This is placing strain on the liquidity situation, and accounts for why Wilton is earning such a high per-
centage return.
Effectively she has invested less in the business, while Bester has invested more.
7.14.12 The partners wish to open a second branch. Suggest ways in which they can raise
finance in order to do this. Should they take out further loans?
Consider:
• Positive gearing effect – interest rate lower than return earned by the business.
• Low cash situation – Debt : equity = 0.3 : 1
• Conclusion – make use of loan.
7.16.4 Which business would you choose to join as a one-third partner? Remember that you
will have to contribute one-third of the equity (capital). Compare your decision and
the reasons for this decision with those of the learner sitting next to you in class.
Consider points in favour of AA Attire:
• Higher percentage return.
• Positive gearing effect.
• Less capital to contribute (1/3 of R450 000 = R150 000, rather than 1/3 of R810 000 = R270 000).
Solvency
No. Description Formula Liquidity
Returns
ficiency
Gross profit x 100
1. % gross profit on sales ✓ ✓
Sales 1
% gross profit on cost Gross profit x 100
2. ✓ ✓
of sales Cost of sales 1
% operating expenses Operating expenses x 100
3. ✓ ✓
on sales Sales 1
% operating profit on Operating profit x 100
4. ✓ ✓
sales Sales 1
Net profit x 100
5. % net profit on sales ✓ ✓
Sales 1
6. Net assets Assets – Liabilities ✓
7. Solvency ratio Total assets : Total liabilities ✓
8. Net current assets Current assets – Current liabilities ✓
9. Current ratio Current assets : Current liabilities ✓
10. Acid-test ratio (Receivables + Cash) : Current liabilities ✓
Cost of sales
11. Stock turnover rate ✓ ✓
Average stock
Average stock x 365
12. Stock holding period ✓ ✓
Cost of sales 1
Debtors x 365
13. Debtors collection period ✓ ✓
Credit sales 1
Solvency
Liquidity
No. Description Formula
Returns
ficiency
Creditors payment pe- Creditors x 365
14. ✓ ✓
riod Cost of sales* 1
Creditors x 365
OR: ✓ ✓
Credit purchases 1
Net profit x 100
15. % return on equity ✓
Average equity 1
Partners’ salary + Interest on capital +
Amount earned by a
16. Share of remaining profit or – Share of ✓
partner
remaining loss
% return earned by a Amount earned by partner x 100
17. ✓
partner Partner’s equity 1
18. Debt : equity ratio Non-current liabilities : Owners’ equity ✓
(b) You are told that the total sales increased by R500 000 in 20.6. Comment on the
financial indicators calculated in part (a) above. Should the partners be satisfied?
Explain, quoting financial indicators to support your answer.
The mark-up percentage dropped from 90% to 75% which led to an increase in customers and therefore
sales went up by R500 000. This strategy worked well for the business. Although the percentage gross
profit on sales decreased to 42.9% this was because of the lower mark-up percentage and increased total
sales.
The operating expenses were well-controlled. As a percentage of the bigger sales volume the expenses
decreased from 29.7% to 27.9%. This increase in efficiency consequently led to the business earning an
increased operating profit of 14.9% of sales, up from 12.8% in the previous year).
7.18.2 (a) Calculate the following financial indicators from the Balance Sheet for 20.6 (the
ratios in brackets relate to the previous year):
Solvency ratio (20.5: 2.9 : 1)
(1 641 000 + 140 000 + 400 000 : (240 000 + 218 000)
2 181 000 : 458 000 = 4.8 : 1
(b) Comment on the financial indicators calculated in part (a) above. Should the
partners be satisfied? Explain, quoting financial indicators to support your an-
swer.
The solvency ratio increased from 2.9 : 1 to 4.8 : 1 due to the significant decrease in the liabilities. This
means that the business is in a much stronger solvency position as its assets outweigh the liabilities by
almost 5 times.
The current ratio has decreased significantly from 5.4 : 1 to 1.8 : 1 due to the decrease in all the current
assets and the high bank overdraft in 20.6. However, the business is still liquid as the current assets are
almost double the current liabilities. The business has financial assets which can be cashed in, or it can
increase loans in the event of an emergency.
The acid-test ratio has reduced from 2.1 : 1 to 0.8 : 1 but the business might be a lot more efficient in
managing its resources now because the debtors have decreased significantly despite the increase in sales.
The business should be able to manage as the liquid assets are 80% of the current liabilities, and it does
have other assets that it can use in the medium to long-term to repay the bank overdraft.
7.18.3 (a) Calculate the following financial indicators relating to working capital (net cur-
rent assets) for 20.6 (the days in brackets relate to the previous year):
Stock holding period (20.5: 44 days)
½[225 000 + 285 000) x 365
1 352 000 1
255 000 x 365 = 68,8 days
1 352 000 1
The debtors collection increased from 69 days to 89 days. This means that debtors are not being well-
controlled despite the increase in sales. The partners can still try to get this figure down to the normal
credit terms of 30 days.
The creditors are being paid faster, now in 40 (or 42) days compared to the 60 days of the previous year.
The creditors will be happier with this, and it might be the reason for the bank overdraft in 20.6.
7.18.4 (a) Calculate the debt / equity ratio for 20.6 (the ratio for the previous year was 0.4
: 1).
240 000 : (1 520 000 + 203 000) = 0.1 : 1
(b) Comment on the debt / equity ratio. Should the partners be satisfied? Explain,
quoting financial indicators to support your answer.
The debt/equity ratio has dropped from 0.4 : 1 to 0.1 : 1 which indicates a lower degree of financial risk in
20.6. The R400 000 decrease in the loan has led to a significant saving on interest expense. However the
interest on the loan is 11.5% and as the business is earning a bigger return than this, it might be profitable
to make use of more loans, particularly if these can be used to replace the overdraft where interest rates
are a lot higher. The business could gear up profits even further if they make use of loans.
7.18.5 (a) Calculate the following financial indicators relating to the percentage returns for
20.6 (the percentage in brackets relate to the previous year):
% Return earned by the business (20.5: 16.5%)
313 000 x 100
½[1 520 000 + 1 400 000 + 203 000 + 70 000] 1
313 000 x 100 = 19.6%
1 596 500 1
(b) Comment on the percentage returns calculated in part (a) above. Should the part-
ners be satisfied? Explain, quoting financial indicators to support your answer.
Yes, they should be satisfied because all of these returns exceed returns on alternative investments.
The business’ return increased from 16.5% to 19.6% which indicates a positive trend. Young’s return has
improved from 16% to 22.1% which is now a very good return. Old’s return decreased slightly from 17%
to 16.5% and he is now earning a significantly lower return than Young. This is probably due to the increase
in his capital investment of R120 000 as the interest on capital appears to be low (5%).
The profit-sharing ratio is 3 : 2 while there is only a 10% difference in their capital. Old is earning a
significantly lower salary and bonus than Young is, which might be based on the hours worked by them,
but he might want to ask for a change in the profit sharing ratio to approximately 1 : 1 to address the
imbalance in their returns.
6 385 x 100
Percentage return: Mickey
½[160 000 + 130 000 + 5 000 + 1 385] 1
6 385 x 100
4.3% ↓ 12%
148 193 1
47 885 x 100
Percentage return: Minnie
½[36 000 + 90 000 + 1 000 + 11 215] 1
47 885 x 100
69.3% ↑ 30%
69 108 1
777 600
Stock turnover rate
½[259 200 + 247 500]
777 600
3 times 3 times
253 350
22 000 x 365
Debtors collection period 74 days ↑23 days
108 864 1
7.19.3 The business changed its mark-up % in 20.6. Was this a good strategy? Explain.
Mark-up percentage in 20.6 is 40% compared to 30% in 20.5. This is a good strategy because the cost of
sales increased from R714 000 to R777 600. Increasing the mark-up percentage did not negatively affect
the operating profit.
7.19.4 Comment on the operating efficiency and internal control exercised by the business
• Compare operating expenses of 20.5 to 20.6 (26% → 29.4%, unfavourable / unsatisfactory.)
• Compare operating profits of 20.5 to 20.6 (6% → 7%, favourable / satisfactory.)
• There is an improvement in the expenses.
• There is an improvement due to the mark-up strategy.
• The control of debtors declined (23 days → 74 days)
• Control of stock and creditors has generally remained constant.
• Comment on specific concerns, e.g. stock written off, control of individual expenses, etc.
7.19.5 Quote the appropriate indicators and comment on the returns. Should the partners
be satisfied?
• Compare the business’ return in 20.5 to 20.6 (17% → 25%, favourable.)
• Compare to alternative returns (25% exceeds interest rates from fixed deposits).
• Compare Mickey’s return in 20.5 to 20.6 (12% → 4.3%, unfavourable.)
• Compare Minnie’s return in 20.5 to 20.6 (30% → 69.3%, favourable.)
Mickey should not be happy. His return is very low in relation to the amount he has invested. The part-
nership agreement should possibly be re-negotiated. Although Minnie earned a high return, she is not
earning much if her partners’ salary is excluded.
7.19.6 In your opinion, is this advisable based on the figures in the financial statements?
Explain.
The following points should be considered:
• The profits are too low at the moment.
• Decide on strategies to increase profits.
• Decide on strategies to decrease expenses.
7.19.9 Should this business continue to rent their premises, or should they buy the property?
The owner of the property might sell for R410 000.
If the premises are rented:
• No repairs and maintenance need to be paid for.
• Rent is less costly than the interest on a bond.
Group member B
20.9 20.8 Comment
This has been constant and there are no solvency
Solvency ratio 2.3 : 1 2.2 : 1
problems.
Favourable. This was too high in 20.8 but has im-
Current ratio 3.4 : 1 10.5 : 1 proved. Although, it has improved it is still too
high.
Unfavourable. This is still acceptable but it must
Acid-test ratio 0.8 : 1 1.1 : 1
not decline any further.
Stock turnover rate 3.2 times 1.8 times Favourable. More efficient levels.
Stock holding period 114 days 199 days Favourable. More efficient levels.
45 (on year-
end debtors) Becoming unfavourable. Some debtors are start-
Debtors collection
34 days (on 29 days ing to take too long to settle their debts. Must not
period
average allow this to increase beyond 30 days.
debtors)
45 days (us-
ing COS)
Creditors payment Or Acceptable as it is still within 60 days credit terms,
50 days
period 56 days but could still make full use of the 60 day period).
(using credit
purchases)
See suggested marking grid above.
Group member C
20.9 20.8 Comment
Percentage return – busi- Positive trend. Compare to alternative returns
26.5% 18.5%
ness (e.g. fixed deposit.)
Percentage return – Dozi 27.4% 14.0% Increased significantly.
Percentage return – Idle 24.8% 25.0% Almost no change.
Debt equity 0.7 : 1 0.8 : 1 Positive gearing compares favourable to 26.5%.
Decreased. Very little being reinvested in the busi-
Income retained 1.0% 8.0%
ness (mainly due to Idle over-drawing).
Drawings: Dozi 79.4%
Drawings: Idle 139.3%
See suggested marking grid above.
(b) The change in the mark-up percentage obviously caused a problem for the busi-
ness. Explain what happened and how the problem can be solved.
The extra 10% on the mark-up has apparently caused customers to shop elsewhere.
The sales decreased significantly in total from R5 950 000 to R4 860 000, which caused the gross profit to
drop by R290 000.
7.21.2 Apart from selling paint the partners decided to offer a painting service since 20.3
(a) Calculate the profit made from the painting contracts for 20.4 (the corresponding
figure for 20.3 was R90 000).
R720 000 – 54 000 – 144 000 = R522 000
(b) The painters are threatening to resign. What appears to be the problem? What
advice would you offer to the partners?
The business has taken advantage of the painters they have employed.
Although the fee income has risen 4 times from R180 000 to R720 000, they are each earning only R27 000
(up from R18 000).
The painters’ wages were 40% of the profit earned on the painting contracts in 20.3, but despite their
increases, this percentage dropped to 10.3% in 20.4.
These financial statements are probably not published, so the painters are probably sensing from the size
of the jobs they are doing that they are not being fairly paid or they are being over-worked.
Advice:
Consider employing another 2 or 3 painters and determine a more reasonable way of paying the painters,
e.g. if painting contract income goes up by a certain percentage, so should the wages paid to the painters
in total.
(c) In March 20.4 the municipality levied a fine on the partners of R200 000. The
painters had been disposing of the paint waste in the local river and the fish and
plant life had died. What would you say to the partners?
The partners have been negligent.
They should not allow their business to abuse the environment as someone else (i.e. the municipality) would
have to clean up the mess, and someone else might be bearing the cost of the clean-up (i.e. the residents
who pay rates to the municipality).
The municipality has done the right thing by levying the fine.
The partners must ensure that their employees clean up their mess properly and responsibly, even if it costs
more to dispose of the waste in the proper way.
7.21.3 Consider the salaries and wages to the manager and shop assistants. There were 4
shop assistants in 20.3. One of them resigned and was not replaced.
(a) Are the partners likely to experience any problem relating to these employees?
The salaries per assistant increased from R50 000 to R53 000, an increase of 6%.
They might not be happy with this despite the fact that it approximately equal to the inflation rate in current
times.
The goods sold in 20.4 were 77% of those sold in 20.3 (judging from cost of sales), so the partners should
make them understand that if customers decline, then workers might have to be retrenched accordingly.
The manager received only a 2% increase so it is clear he will not be happy.
These financial statements might not be published for all to see, but the partners are earning substantial
profits despite not working at the shop.
If the employees sense that they are not being fairly treated, they might well resign or become de-motivated
and less efficient.
7.21.4 Consider the donations made by the partners through this business.
(a) Why would the partners have made a sizable donation to Toti Primary School in
20.3?
It is appropriate for businesses to support the local community as the community in turn supports the
business, especially if profits are significant.
It is disappointing that something similar has not happened in 20.4.
Maybe this is what is causing a drop in goodwill from the community in 20.4.
7.21.5 Consider the working capital items, i.e. stock, debtors and creditors. Have these items
been efficiently controlled or not? Explain.
The stock turnover rate has increased from 8 to 12 times, which means they have enough stock to last 1
month.
Whilst this means the stock is being efficiently controlled, they must ensure that the stock does not run out,
especially if suppliers have production problems.
The trading stock deficit dropped from R70 000 to R54 000 which indicates better control but is still not
ideal, especially for large items like paint.
The debtors are not being properly controlled.
The collection period has worsened from 35 days to 50 days, whereas they should be paying in accordance
with normal credit terms of 30 days.
Bad debts increased from R36 800 to R66 300 which indicates poor control.
Discount allowed dropped from R13 000 to R5 000 and this could be used as a strategy to make debtors
pay more quickly.
The creditors need not be paid so quickly. They are being paid after 15 days whereas normal credit terms
of 30 days were applied in 20.4.
(b) Identify those that have not been well-controlled and provide evidence in each
case.
Entertainment of clients has increased from R8 000 to R35 000.
Security guards dropped from R36 000 to R18 400 (probably not wise).
Motor vehicle expenses increased from R32 000 to R56 000.
Depreciation probably due to extra assets bought, so does not get controlled in the same way as expenses
which affect cash.
• Prices have been increased. Mark-up percentage has increased from 50% to 100%.
• Sales increased by 22% in 20.7, probably because of increased advertising (from 8% to 15% on
sales), the higher mark-up or the change in the lines of clothing sold, or a combination of these factors.
• Operating profit has increased by 30%, so the overall effect has been positive.
• Operating expenses on sales has a favourable trend from 40% to 30% indicating good control despite
the increase in sales volume.
• Certain individual line items showed good control, e.g. electricity & water (3% to 1% on sales), trading
stock deficit (4% to 1%).
• A remuneration policy needs to be investigated and implemented as the managers and the assistants
are not being treated equally (10% increase compared to 4%).
• Interest is having a positive gearing effect on the net profit. Although, the operating profit on sales
decreased from 15% to 12%, there was a positive trend in the net profit on sales from 8% to 10%.
Solvency
• The current ratio has improved from the previous year as it has declined from 3.5 : 1 to 2 : 1.
• The acid-test ratio has decreased from 1.6 : 1 to 0.7 : 1. Although this is relatively acceptable for the
moment, it could also lead to liquidity problems if this declines further.
• The stock turnover rate (1.5 to 3.6 times p.a.), and stock levels (240 to 100 days) have improved,
although for a clothing store keeping more than 3 months’ stock could be risky.
• Debtors are extremely well controlled (paying in 22 days which is lower than 30 days’ normal credit
terms).
• Payment of creditors is slow. This has improved from 90 days to 70 days, but this could still lead to
a bad reputation.
Rate of stock turnover (note that stock at the begin- 3.8 times 6.2 times
(k)
ning of the year was R221 000)
996 800~
½(305 000 + 221 000)
996 800
263 000
Suggestions are
well thought out
and are valid
Suggestions are with convincing
Suggestions are
Suggestions satisfactory but explanation, in-
OVERALL ADVICE FOR IMPROVE- valid, but not
have little or no might not focus cluding points on
MENT & SUSTAINABILITY entirely convinc-
validity. on the major as- internal control
ing.
pects. and concern for
stakeholders and
wider commu-
nity.
Working:
Requires
Yes – profi-
Skills more atten- Complete
cient
tion
Identify information in the financial statements that is
relevant to partners in a business.
Identify information in the financial statements that is
relevant to other stakeholders.
Understanding the need to use financial indicators in
interpreting financial statements.
Understand the concepts of mark-up, profitability, sol-
vency, liquidity, gearing and return.
Understand what is meant by internal control, business
ethics and sustainability.
Use logical reasoning to calculate financial indicators for
mark-up and profitability from the Income Statement.
Use logical reasoning to calculate the financial indicator
for solvency from the Balance Sheet.
Use logical reasoning to calculate the financial indica-
tors for liquidity and control of working capital items
from the Balance Sheet.
Use logical reasoning to calculate the financial indica-
tors for returns earned by the business as a whole and
by each partner from the current account note.
Use logical reasoning to calculate the debt/equity ratio
from the Balance Sheet.
Basic and simple interpretation of the results of the fi-
nancial statements of a partnership enterprise using fi-
nancial indicators.
More advanced analysis and interpretation of financial
statements, including sustainability of a business.
While the majority of the entries are the same as what have already been learnt, you need to focus on what
is different, i.e. some different ledger accounts, surplus as against a profit or deficit as against a loss, Receipts
and Payments Statement, Income and Expenditure Statement, etc.
You can branch out from clubs to other forms of non-profit corporations, e.g. schools, charity concerns, etc.
The learners can all relate to schools with their school fees, government grants and the expenses that have
to be run. This could be a good opportunity to show the learners what it costs to run a school and that if
textbooks, stationery, desks, etc. are destroyed, there needs to be an income to buy more – their parents
have to pay increased school fees. Try to reinforce on the learners the need to be accountable and responsible
for facilities they have the use of.
As an alternative, you may also help learners to interview a member of your school staff (or any Teacher) who
is a member of his / her club in another area.
The skills of interviewing somebody in order to conduct a research is important for the learners to experience,
so we advise you not to ignore this Task.
The cash budget will be a good revision of that section of work which was introduced in Grade 10 and will be
added to in Grade 11.
In this Module, learners will need to apply the GAAP principle of Matching in order to make the necessary
adjustments. Allow them to do this baseline Task individually to ensure that they have the necessary
knowledge and skills as this will be applied in clubs, particularly in connection with Membership Fees and
Tennis Balls / Refreshments accounts. If they have the necessary skills and knowledge, it will be a simple
adaptation to apply this same principle to the new types of accounts when doing the books of non-profit
organisations.
Before proceeding onto the membership fees account, it may be necessary to revise the REVERSAL CONCEPT
from Grade 10 work. This can be done as a separate lesson or informally, depending on your class.
You can use the following illustrative activity to revise this aspect:
Adjustments:
1. An unused storeroom has been let for the whole of the financial year at a rent of R3 000 per month.
Make the necessary adjustment entry to the rent income figure.
2. R1 200 is still owing for commission to Cato Ridge Stores. This is for cleaning materials sold on consign-
ment basis.
3. Stationery on hand on 28 February 20.5 is R180.
Required:
• Open all necessary accounts to record the balances / totals and the adjustments.
• Journalise the adjustment entries in the general journal and post to the ledger.
• Close off all necessary accounts on 28 February 20.5
• Process the reversal entries in the general journal on 1 March 20.5 and post to the ledger.
Solution:
GENERAL LEDGER OF CATO RIDGE STORES
BALANCE SHEET SECTION
Dr ACCRUED INCOME/INCOME RECEIVABLE B Cr
20.5 20.5
Feb 28 Commission income GJ 1 200 Mar 1 Commission Income GJ 1 200
COMMISSION INCOME N
20.5 20.5
Feb 28 Profit and loss a/c GJ 25 000 Feb 28 Total b/f 23 800
Income receivable GJ 1 200
25 000 25 000
Mar 1 Income receivable GJ 1 200
Suggestion: Photostat the following diagram, enlarging it to A3 size and pin it up on your classroom
wall or let a group of learners design their own poster.
SPORTS CLUB
BUSINESS
Draws up an Income
Owner entitled to profits –
statement to determine
reward for investment
PROFIT or LOSS
[1]
Income & Expenditure: (79 x 250) + (8 x 250) + (2 x 150) = 19 750 + 2 000 + 300 = 22 050
[2]
Bank: (8 x 250) + (2 x 150) + [(80 – 1 – 2 – 2) x 250] + (6 x 250) = 2 000 + 300 + 18 750 + 1 500 = 22
550
[3]
2 x 250 = 500
Note:
Either the Bank or the Income and Expenditure figure has to be calculated; the other becomes a balancing
figure.
CALCULATION OF BANK:
8 new members x R250
2 new members x R150
80 old members minus 1 expelled minus 2 still owing; minus 2 who paid last year x R250
6 members already paid for next year
The Bank figure shows the actual cash received for this year, last year plus next year. Any amounts not paid
are not included and the amounts received in advance at the beginning of the year would have appeared in
the Bank last year.
The Income and Expenditure figure shows the amount that should have been received for this year. One
member was expelled, leaving 79 from last year plus the 10 new members - of which some paid R250 and
some R150.
As there is no instruction concerning the Entrance Fees account, it is closed off to Income and Expenditure
Account. If the instruction was to capitalise, then the account would have been closed off to the Accumulated
/ Capital Fund account.
[1]
8 x 300 [2]
4 x 240 [3]
5 x 240 [4]
12 x 300
[5]
(50 x 240) + (6 x 300) + (90 x 300) + (10 x 210) + (25 x 120) + (4 x 240)
= 12 000 + 1 800 + 27 000 + 2 100 + 3 000 + 960 = 48 900
ENTRANCE FEES N
20.7 20.7
Dec 31 Income & Expenditure GJ 10 500 Dec 31 Bank (35 x 300) CRJ 10 500
8.8.2 How many members does the badminton club have on 31 October 20.5?
R44 000 ÷ R200 = 220 members
8.8.3 If there were 250 members last year, do you think the committee should be concerned
and why?
Yes.
Membership has dropped by 30, i.e. from 250 to 220 – less revenue (income).
8.9.2 Give a reason for the amount of R2 000 on the debit side.
Refund to members due to resignation or overpayment.
8.9.3 Calculate the amount received this year from members who owed money for last year.
12 000 – 4 000 = R8 000
8.9.5 The membership fees for the last two years were R500 per member per year and is
unchanged for the current year as well as next year.
• Calculate the number of members in the club at the end of the current year.
113 500 ÷ 500 = 227 members
• Calculate the number of members at the beginning of the year.
4 000 ÷ 500 = 8
8 + 227 = 235
Dr MEMBERSHIP FEES N Cr
20.5 20.5
Jan 1 Accrued income GJ 0 Jan 1 Deferred income GJ 3 300
Dec 31 Deferred income GJ 1 100 Dec 31 Bank CRJ 269 500
Income & Expenditure GJ 277 200 Accrued income GJ 5 500
278 300 278 300
8.10.1 How much of the money that is reflected in the bank statement was for entrance fees?
R276 000 – R6 500 = R269 500 (note there were 13 new members: 240 at the beginning, -1 left and 252
at the end = 13 new members.)
Therefore entrance fees amount to R6 500, i.e. (13 x R500).
8.10.2 How much of the money that is reflected in the bank statement was for membership
fees?
R269 500
8.10.3 How much is still outstanding for membership fees at the end of the year?
R5 500
8.10.4 How much should the club have earned for membership fees this year?
R277 200
8.10.5 What measures should the treasurer introduce to ensure that the members pay at the
beginning of the year?
• Make an appeal at the AGM – at the end of this year or before the start of next financial year.
• Send out written notices.
• Send SMS messages to members, etc.
8.10.6 What control measures should be introduced next year in order to ensure that accu-
rate records are being kept of all membership fees?
• A pre–numbered receipt book should be used only for membership fees received.
• A reconciliation must be done at least once a month and then reminders sent out.
Any other valid answer.
8.11.3 The members of the Health and Racquet club have complained that some equipment
appears to be missing making their workouts difficult. Suggest two ways to rectify
this situation from happening again.
• CCTV cameras.
• Metal detectors (or scanners) for individuals who enter or leave the premises.
• Visibility of security guards at strategic areas within the premises.
[1]
8 000 x 20% x 9/12 [2]
12 000 x 20% x 3/12 [3]
5 000 + 1 200
MEMBERSHIP FEES N
20.6 20.6
Jan 1 Accrued income GJ 650 Jan 1 Deferred income GJ 455
Dec 31 Deferred income GJ 200 Dec 31 Bank CRJ 9 560
Income & Expenditure GJ 9 880 Accrued income GJ 195
[76 x 130] Honorarium GJ 130
M/fees written off GJ 390
10 730 10 730
Note:
Accrued income/Income receivable on 31 December is the balancing figure.
[1]
2 x 250 = 500 [2]
177 + 20 – 2 = 195 x 280 = 54 600
Note: Accrued income/Income receivable on 31 December is the balancing figure.
SOCCER BALLS N
20.5 20.5
Jan 1 Soccer balls on hand GJ 100 Dec 31 Donation GJ 550
Dec 31 Bank CPJ 3 600 Soccer balls on hand GJ 195
Creditors control CJ 2 800 Income & Expenditure GJ 5 755
6 500 6 500
REFRESHMENTS N
20.5 20.5
Jan 1 Stock of refreshments GJ 750 Dec 31 Donation GJ 230
Dec 31 Bank CPJ 1 200 Bank (sales) CRJ 24 700
Creditors control CJ 19 200 Stock of refreshments GJ 520
Membership fees GJ 280
Income & Expenditure GJ 4 020
25 450 25 450
ENTRANCE FEES N
20.5 20.5
Dec 31 Accumulated fund GJ 5 000 Dec 31 Bank (20 x R500) CRJ 10 000
Income & expenditure GJ 5 000
10 000 10 000
CLUB EQUIPMENT B3
20.8
Dec 31 Bank 4 000
Creditors for equip. 16 000
ENTRANCE FEES N2
20.5
Dec 31 Bank 12 000
REFRESHMENT SALES N3
20.5
Dec 31 Bank 17 600
RENT PAID N4
20.8
Dec 31 Bank 8 800
REFRESHMENT PURCHASES N5
20.8
Dec 31 Bank 4 200
Creditors for refresh. 5 200
BANK CHARGES N7
20.8
Dec 31 Bank 480
Note to Teacher:
The following are TWO additional Tasks on interpretation of Membership fees account.
Information:
Study the ledger accounts below and answer the questions which follow:
ENTRANCE FEES N
20.8 20.8
Dec 31 Accumulated fund 1 050 Dec 31 Bank 1 050
Note:
The membership fee is R65 per member per year. Each new member pays an entrance fee of R150 before
being accepted as a member. All the new members joined at the beginning of the year and no members
resigned from the club.
1. How many new members joined at the beginning of the 20.8 financial year?
7 (R1 050 ÷ 150)
2. How many members does the club have, excluding those written off?
R7 150 ÷ 65 = 110 members
3. What will the figure be for ‘Membership fees’ in the Receipts and Payments Statement?
R7 025 Receipt and R35 Payment (Receipts and payments shows the bank figures).
4. There is a figure of R7 150 on the debit side of the Membership Fees Account. Explain why
the detail of this contra account (Profit and Loss) is incorrect and explain what the correct
details should be.
Income and Expenditure – as this is a club. Profit and Loss is used for trading concerns.
5. Give one possible explanation for the entry of R35 on the debit side of the Membership
Fees account.
Refund, dishonoured cheque.
6. Give one possible explanation for the entry of R30 on the credit side of the Membership
Fees account.
Refreshments donated in lieu of membership fees
7. How many members paid their 20.9 membership fees during 20.8?
R390 ÷ R65 = 6 members
8. Explain why there is an Income Receivable entry on both sides on the Membership fees
account.
On the Dr side on the 1 January: This is a reversal entry from last year.
On the Cr side on 31 December: This is the adjustment entry for this year.
9. Explain why it is unlikely that there will be an Income receivable entry in the Entrance fees
account.
New members generally have to pay in full before they become members.
The club increases the subscriptions by R10 each year. The subscriptions for 20.5 amounted to R140 per
member. The committee writes off accrued subscriptions that are not received during the following year.
Questions:
1. What figures, together with their descriptions, would appear in the Statement of Receipts and Payments?
2. What figures, together with their descriptions, would appear in the Income and Expenditure account?
3. How many members, who were in arrear in 20.4, paid their outstanding subscriptions?
4. Give 2 possible reasons for the Bank figure of R150 on the debit side.
5. How many members settled their 20.5 subscriptions during 20.5?
6. Explain why Income receivable appears on the debit side on the 1 January but on the credit side on 31
December.
7. How many members did the club have during 20.5?
2. What figures, together with their descriptions, would appear in the Income and Expenditure
account?
R34 440 under Income – Subscriptions
R520 under Expenses – Subscriptions written off
3. How many members, who were in arrear in 20.4, paid their outstanding subscriptions?
R780 – R520 = R260 ÷ R130 (subs in 20.4) = 2 members paid
4. Give 2 possible reasons for the Bank figure of R150 on the debit side.
Refund, dishonoured cheque.
6. Explain why Income receivable appears on the debit side on the 1 January but on the credit
side on 31 December.
On 1 January on the Dr side – reversal from the previous year.
On the 31 December on the Cr side – adjustment for the current year.
Receipts Expenditure
No. Receipts Payments
Capital Current Capital Current
(i) 850 625 225
(ii) 66 250 58 750 7 500
1. 8 000 8 000
2. 900 900
3. 800 800
4. 2 500 2 500
5. 140 140
6. 540 540
7. 3 750 3 750
8. 5 752 5 752
9. 5 012 5 012
10. 1 500 3 200
11. 2 900 2 900
ACCOUNTING PROCEDURES
Suggestion: Photostat the following diagram, enlarging it to A3 size and pin it up on your class-
room wall or let a group of children to design their own poster.
1. INTEREST INCOME
from investments 84
84
2. INTEREST EXPENSE
on loans [5 630 + 5 620]* 11 250
11 250
*75 000 x 15% = R11 250
4. INVENTORIES
Refreshments 2 620
Consumable stores on hand 125
2 745
5. RECEIVABLES
Income receivable/Accrued income [900 + 84] 984
984
6. CASH AND CASH EQUIVALENTS
Savings account 1 194
Bank 867
2 061
7. ACCUMULATED FUND
Balance at beginning of financial year 162 225
Net surplus for the year 10 715
Entrance fees capitalised 18 000
Balance at the end of the financial year 190 940
8. PAYABLES
Expenses payable/Accrued expenses [5 620 + 330] 5 950
Current portion of loan 20 000
Deferred income/Income received in advance 2 100
28 050
4. INVENTORIES
Consumable stores on hand [48 – 48 + 38 + 43] 81
81
5. RECEIVABLES
Accrued income/Income receivable
(1 080 – 1 080 + 960] 960
960
6. CASH AND CASH EQUIVALENTS
Savings account at X Bank [948 + 2 400 + 58] 3 406
Bank [1 250 + 71 183 – 57 924] 14 509
17 915
7. ACCUMULATED FUND
Balance at beginning of financial year 53 256
Net surplus for the year 22 147
Entrance fees capitalised 17 320
Balance at the end of the financial year 92 723
8. PAYABLES
Creditors [300 – 300 + 1 980 + 840] 2 820
Deferred income [840 – 840 + 360] 360
Current portion of loan (84 000 – 12 000 ÷ 2) 36 000
39 180
*[300 – 3 x 360] + [20 x R360] + [6 x 6 x R30] + [2 x 5 x R30] = 106 920 + 7 200 + 1 080 + 300 = 115
500
Notes to the financial statements for the year ended 30 September 20.7
1. INTEREST INCOME
from investments [(900 – 450 + 720*] 1 170
from savings account (21 – 21 + 66) 66
from municipality 20
1 256
2. INTEREST EXPENSE
on loan 1 050
1 050
*(9 000 x 12% x 6/12) + (3 000 x 12% x 6/12)
4. RECEIVABLES
Deposit for water and electricity [670 – 280] 390
Prepaid expenses [23 – 23] -
Income receivable [5 250 + 66 + 720] 6 036
[or 1 911 – 1 440 – 450 – 21 + 5 250 + 66 + 720 ]
6 426
NOTE TO TEACHER:
The following is an extra Task involving financial statements of clubs.
Required:
From the following information extracted from the books of the Lions Sports Club draw up:
1. The Membership fees account.
2. The Income and Expenditure Statement for the year ended 31 December 20.5.
3. The Balance Sheet at 31 December 20.5.
Information:
LIONS SPORTS CLUB
POST-CLOSING TRIAL BALANCE ON 31 DECEMBER 20.4
Fol Debit Credit
Accumulated fund 138 532
Club property and buildings at cost 109 204
Equipment at cost 50 800
Accumulated depreciation on equipment 12 160
Loan from the City Council (16% p.a.) 14 400
Creditors 540
Income received in advance (membership fees) 1 440
Accrued income (membership fees) 1 080
Accrued expenses (interest on loan) 576
Prepaid expenses (stationery and stamps) 24
Club blazers in stock (at cost) 4 800
Bank 1 740
167 648 167 648
Additional information:
1. Entrance fees amounted to R180 per member. Entrance fees must be used to defray current expenses.
2. On 31 December 20.4, 150 members were registered. A further 20 members enrolled during January
20.5. Membership fees amounted to R360 per member per year.
3. A member still owing R360 for 20.4 disappeared and the amount must be written off. This member’s
membership was terminated as from 1 January 20.5. The balance of the outstanding membership
fees for 20.4 was received, but there were still membership fees outstanding for 20.5.
5. The grant from the Local Board must be used by the club to defray current expenses.
6. Included in the amount for wages was R2 960 which was paid for the erection of a storeroom.
7. An account for R720 in respect of the annual dance must still be paid. No entry has as yet been made
for this.
8. The refreshments stock was sold to the members for R180 and still had to be paid for by them. No
entry has been made in this regard.
10. Provision must be made for depreciation at 10% p.a. on the diminished balance of the equipment.
Equipment for R3 360 was bought on 1 April 20.5.
11. Interest at 16% p.a. on the balance of the loan was prepaid for 6 months. A loan repayment of R3
000 will be made on 30 June 20.6.
12. The investment of R3 600 was made on 31 December 20.5 at 15% p.a. at the AB Bank. Interest is
payable half-yearly. R2 000 of this investment matures on 30 September 20.6.
Notes to the financial statements for the year ended 31 December 20.5
1. INTEREST INCOME
from savings 81
81
2. INTEREST EXPENSE
on loan [576 – 576 + 2 592 – 864] 1 728
1 728
4. INVENTORIES
Club blazers [4 800 – 4 800 + 1 920] 1 920
1 920
5. RECEIVABLES
Prepaid expenses [24 – 24 + 864] 864
Income receivable [1 080 – 1 080 + 720 + 180] 900
1 764
The main purpose of a non-profit sports club is to provide facilities for its members, while the main
purpose of a business, whether a trading or a service business, is to make a profit. A sports club does
not intend to make a profit. However, the income received should cover the expenses incurred.
8.23.2 Write down the largest amount found in the PARTNERSHIP. Explain in detail from
where the partnership received this money.
R436 520
• Stock was purchased from wholesalers at cost price and the owners (partners) instructed their sales
manager to mark up these costs by 240% so as to make a gross profit of R308 320
• These goods were most likely purchased every month and sales to the public took place every working
day of the year.
• The main purpose of this huge gross profit is to offset the operating expenses and leave a sufficient
amount as net profit for the owners to share at the end of the year.
8.23.3 Write down two items (together with their amounts) found in the Income and Expendi-
ture Statement of the club that are unlikely to be found in an Income Statement of a
partnership. Explain why these two items would not appear in a partnership Income
Statement.
• Membership fees of R60 840 – this is the voluntary amounts agreed by the members at a meeting to
give to the club so that the club can meet its regular expenses.
• Grant from local town board R3 000 – this amount is generally allowed to non-profit organisations who
render some service to members of that town.
• Honorarium of R1 000 – is generally a small gift given as a token of appreciation for free services
rendered throughout the year by a member of the club.
8.23.4 Write down two items (together with their amounts) found in the Income Statement
of the partnership that are unlikely to be found in an Income and Expenditure State-
ment of the club. Explain why these two items would not appear in the club Income
and Expenditure Statement.
• Sales of R436 520 – a club’s main objective is to maintain its status as a non-profit organisation to render
service to its members. If it does sell some item, then that is a side issue, generally to raise funds to
pay for expenses.
• Medical aid contributions of R790 – almost all persons associated with the club do not get paid. Payment
is sometimes made to a part-time worker – and it is most unlikely to have medical aid contribution for
this part-time worker.
8.23.5 Explain what will happen to the net surplus of R58 916 of the club.
This amount will be transferred to the accumulated funds account. Funds from this account are generally
used to purchase assets such as furniture and equipment.
8.23.6 Explain what will happen to the net profit of R219 556 of the partnership.
This amount will be transferred to the Appropriation account. This account is used to distribute the profit
to the two (or more) partners according to the terms of the partnership agreement. The partners may
agree to distribute the monies for the interest on partners’ investment (capital); partners’ salaries and
share the remainder as per agreed ratio.
8.24.1 Examine Note 5 (Receivables) of the CLUB and compare this to Note 5 (Trade and other
receivables) of the PARTNERSHIP and explain why one is just called “Receivables” and
the other “Trade and other Receivables”.
• A partnership is generally a trading business, i.e. it buys goods at low price and sells these same goods
at higher price. Hence they are in the business of “trading”. Customers who buy goods on credit and
pay later are termed “Trade debtors” – therefore the heading Trade and other receivables for a partner-
ship.
• In a club the “profit motive” is absent because the club is a “non-profit organisation”
8.24.2 Examine the amount for “Creditors” in Note 8 of the CLUB and compare the amount
for “Trade Creditors” in Note 9 of the PARTNERSHIP. Explain why the details and
amount appear to be reasonable.
• Creditors are similar to the case of debtors. The creditors of a partnership business sell their goods on
credit and the partnership understands that the price of the goods was the selling price of the creditors
– hence larger amount.
• The partnership business must have sufficient stocks for their own customers who buy from them. Since
these goods are for trading purposes, the amount owing for these goods are termed “Trade Creditors”.
8.24.3 Note 7 (CAPITAL) and Note 8 (CURRENT ACCOUNTS) have substantial amounts as final
balances in the Partnership. Explain why Capital and Current account notes would
never appear in the Balance Sheet of a club.
• The note for Capital and Current accounts comes under the heading “Equity and Liabilities” on the face
of the Balance Sheet. This equity is really the “Owners equity” and the Owners equity represents how
much of the business is “owned” by the partners.
• In the case of a Club no one individual can lay claim to “ownership” of the club. The club does not
belong to any person. In the event of a club closing down, or stops functioning, the constitution may
provide for selling the assets and donating the proceeds to another non-profit organisation such as local
senior citizens club or a religious organisation.
8.24.4 Explain why you would expect to see that the “Non-Current Liabilities” amount for a
Partnership would generally be much larger than that of a Club.
• The partnership business may take a loan to expand its future business activities. The size of the loan
will depend on the size of the guarantees given to the bank. Since the partnership is in the business of
making a profit it may take a large loan and pay off the loan from expected profits.
• In the case of a club, income in the form of membership fees and fund-raising activities is not guaran-
teed. Therefore the management of the club cannot take large loans unless it has sufficient guarantees
for repayment.
8.25.2
Outline the factors responsible for the increase in the surplus of 20.3 compared to 20.2
Refreshment sales have increased; increase in membership fees; increase in fund-raising activities, e.g.
concert.
8.25.4
Do you consider it necessary to raise the membership fee per member? Give 3 reasons
for your answer.
Yes – expenses have increased, therefore, more income is needed; the club can accumulate funds for
expansion or improving facilities for members; very few members would be unable to afford R60 per
annum.
No – surplus has improved; low fees result in increased membership; collection policy is unsatisfactory –
this situation could worsen if fees are increased.
8.25.5
The secretary suggested that R1 000 should be invested at the current fixed deposit
rate of 12% p.a. Would you support him or would you rather recommend that this
amount be used to reduce the loan? Why?
The interest on the loan is 10% while the return on fixed deposit is 12% - positive gearing.
The secretary’s suggestion is therefore supported.
8.25.6
The employees of the club received an increase on 1 January 20.3. What was the
percentage increase? Show workings.
R3 766 – 3 424 = R342
342 x 100 = 10%
3 424 1
With reference to ethics and internal control – encourage or draw out responses such as need for one to one
discussion with relevant member as well as for voluntary disclosure of problem by individual at a formal meet-
ing of members.
Members of a club need to know about incorrect procedures and or violation of good ethical behaviour. In
most cases executive committee members (such as chairman, treasurer, etc.) need to be aware of conscious
and unconscious actions on their part.
Internal
No. Problem control What should be done
OR Ethics
8.28.1
8.28.2
8.28.3
8.28.4
8.28.5
8.28.6
8.28.7
8.28.8
8.28.9
8.28.10
Requires
Yes – profi-
Skills more atten- Complete
cient
tion
Explain Accounting concepts unique to a non-profit or-
ganisation.
Distinguish between a sports club and a business con-
cern.
Identify how the bookkeeping entries need to be
adapted to make the necessary recordings for a club.
Complete a membership fees / subscriptions account in
the General Ledger.
Post accounts to ledger and draw up a Trial Balance.
Distinguish between receipts and income.
Distinguish between payments and expenditure.
Prepare the Analysis Cash Book of clubs.
Prepare the Financial Statements of clubs.
Differentiate between Financial Statements of partner-
ships and clubs.
Introduce and discuss control measures to be used in a
sporting club.
Analyse and interpret ledger accounts and financial
statements.
If learners are experiencing difficulties with costing concepts, it would be advisable to go over the basics again
(even if it is for only one lesson or one work period). An understanding of simple, basic fixed and variable
costs is essential.
9.1.1 Write down the details of the above costs (from Column A only) into the appropriate
sections as set out in the table below:
Electricity R2 000
Rent 3 000
Consumable stores 150
Cleaning aids 100
Factory manager’s salary 7 000
Factory cleaner’s salary 1 800
TOTAL R14 050
9.1.8 Classify the factory overhead costs into fixed and variable costs.
Examples:
Fixed costs: Rent, Factory manager’s salary, Factory cleaner’s salary.
Variable costs: Factory worker wages, raw materials.
9.1.11 If they make 30% profit, how much will they sell each table for?
R443.59 + 30% = R576.67
9.1.12 In your opinion do you think this is a realistic selling price? Explain.
Use discretion with learners’ answers - learners must give reasons for their answer.
SELF-ASSESSMENT FORM
Learners are to complete the self-assessment form, after marking their work, by ticking off the appropriate
column, to determine their prior knowledge:
Knowledge and skills YES NO
Can identify direct material costs
Can identify direct labour costs
Can calculate the prime cost
Can identify factory overhead costs
Can define fixed and variable costs
Can divide overhead costs into fixed and variable costs
Can calculate the total cost of production
Can work out the unit cost
Can work out the selling price
Suggestion: Let the class make a large poster with each group finding pictures (use newspaper
or magazines) to depict the specific cost per group.
9.3.1 Refer to Task 9.1 and calculate Woza Manufacturer’s break-even point.
14 050
576.67 – 382.50
14 050 = 72.4 tables / 73 tables
194.17
9.3.2 Does this mean that Woza Manufacturer’s makes a profit? Explain your answer?
Yes.
They are selling 230 tables, which is more than the break-even. They will, therefore, make a profit.
9.3.3 State whether the effect would be an INCREASE or DECREASE or NO CHANGE on the
break-even point when each of the following situations listed below occur.
EFFECT ON
SITUATIONS
BREAK-EVEN POINT
Labour cost per hour increased. Increase
Raw material cost decreased. Decrease
Rent increased. Increase
Selling price decreased. Increase
Loan was taken out interest free. No change
Loan was taken out at 12% p.a. interest. Increase (Extra cost)
Equipment was bought on credit. No change
Depreciation was written off. Increase (Extra cost)
Extra labourers were hired but quantity produced was the same. Increase
Electricity cost per kilowatt increased. Increase
Note:
*10% trade discount on the wood.
**The total cost of the wood would decrease.
As there are two different selling prices for the articles you cannot work out a combined selling price per unit
or break-even – the separate figures have to be used in the comments.
9.5.2 What measures could the business introduce in order to improve the productivity
level of the workers?
• Improve working conditions
• Incentive bonuses.
• Training.
• Profit sharing schemes.
• Time off.
• Forum in which to voice their grievances.
• Etc.
NOTE TO TEACHER:
1. Explain difference aspects of manufacturing business and retail business as per diagram and flow chart
in learner book.
2. Highlight the flow of the goods from the storeroom to the factory to the finished and then to be sold to
the customer.
Suggestion: Photostat the following illustrations, enlarging them to A3 size and pin them up on
your classroom wall.
Allow learners time to study the flowchart and to see the links. Giving them time to explain also
helps to consolidate their thinking.
1. The costs incurred – raw materials bought, labour used and factory overheads incurred.
2. The manufacturing costs are transferred to the Work-in-progress account so that the total cost of pro-
duction can be calculated.
RETAIL BUSINESS
Purchase / buy Sales of stock
stock
Bank Cost (price) of (goods) sold
Trading Stock
Cost price
Sales
Cost of sales
MANUFACTURING BUSINESS
Suggestion:
Allow the learners time to work through the example. Draw their attention to the fact that the prin-
ciples are exactly the same as they are used to:
1. Work-in-progress is the new account and is used to calculate the cost of production. It also shows the
value of goods that are still on the production line.
2. Finished goods stock account has the same function as the Trading stock account.
3. Raw materials stock account is the same as Direct materials cost account and works on the same concepts
as the Trading stock.
4. All factory expenses are debited to the respective expense accounts. These expense accounts are then
closed off to the Factory overhead cost account.
WORK-IN-PROGRESS STOCK B
20.5 20.6
Mar 1 Balance b/d 20 000 Feb 28 Finished goods stock GJ 390 000
20.6 Balance c/d 22 000
Feb 28 Raw materials cost GJ 165 000
Direct labour cost GJ 50 000
Factory overhead GJ 177 000
412 000 412 000
Mar 1 Balance b/d 22 000
WORK-IN-PROGRESS STOCK B
20.7 20.8
Mar 1 Balance b/d 12 000 Feb 28 Finished goods stock GJ 434 000
20.8 Balance c/d 6 000
Feb 28 Raw materials cost GJ 178 000
Direct labour cost GJ 90 000
Factory overhead cost GJ 160 000
440 000 440 000
Mar 1 Balance b/d 6 000
Note:
Calculate the Cost of sales (mark-up of 25% on sales of R517 500). As the closing balance in the Finished
goods account is given, the Work-in-progress can be calculated and substituted into the Work-in-progress
account and the closing balance calculated.
WORK-IN-PROGRESS STOCK B
20.5 20.6
Mar 1 Balance b/d 120 000 Feb 28 Finished goods stock GJ 1 205 000
20.6 Balance c/d 14 880
Feb 28 Direct materials cost GJ 651 000
Direct labour cost GJ 90 900
Factory overhead cost GJ 357 980
1 219 880 1 219 880
Mar 1 Balance b/d 14 880
[1]
90 000 + 900 [2]
7 000 + 22 000 – 3 000 [3]
50 000 + 500
[4]
500 000 – 120 000 x 12% x 80% [5]
250 000 x 60% [6]
160 000 x 3/6
[7]
30 000 x 3/6
[1]
250 000 x 20% [2]
160 000 x 2/6 [3]
30 000 x 2/6
ADMINISTRATION COST C
20.6 20.6
Feb 28 Salaries[1] GJ 40 400 Feb 28 Profit and Loss a/c GJ 131 187
Depreciation[2] GJ 9 120
Rent expense[3] GJ 50 000
Electricity[4] GJ 26 667
Sundry expenses[5] GJ 5 000
131 187 131 187
[1]
40 000 + 400 [2]
500 000 – 120 000 x 12% x 20% [3]
250 000 x 20%
[4]
160 000 x 1/6 [5]
30 000 x 1/6
Note:
Using the sales figure the cost of sales can be calculated (50% mark up) and thus the Work-in-progress figures
in the Finished goods account, as you have the closing balance. This figure can then be substituted into the
Work-in-progress stock account and the closing balance calculated.
WORK-IN-PROGRESS STOCK B
20.6 20.7
July 1 Balance b/d 60 000 June 30 Finished goods stock GJ 1 170 000
20.7 Balance c/d 66 000
June 30 Direct materials cost GJ 495 000
Direct labour cost GJ 150 000
Factory o/head cost GJ 531 000
1 236 000 1 236 000
July 1 Balance b/d 66 000
9.10.3 What is the difference between direct and indirect labour cost?
Direct labour: The people who are making the bicycles – they are directly involved in the manufacturing
process.
Indirect labour: Those people who work in the factory but are not directly involved in the manufacturing
process, e.g. cleaners, maintenance, etc.
9.10.4 Name 5 items that could be included in the Factory overhead cost account.
Electricity, rent, indirect labour, consumables stores, depreciation, petrol, etc.
9.10.5 What GAAP principle governs that Factory overhead cost should be shown as one fig-
ure?
Concept of materiality – not important to know the individual details in the Work-in-progress account – they
are reflected in the ledger accounts.
Matching concept – all overhead costs are transferred to the Factory overhead cost so that the total can be
shown.
9.10.6 If the business made 450 bicycles, calculate the cost price of each bicycle.
R360 000 450 = R800.
9.10.7 If the business wishes to make a profit of 50% on cost when each bicycle is sold, what
would the selling price be?
R800 + 50% (R400) = R1 200.
9.10.8 What is the difference between Finished goods and Trading stock accounts?
Finished goods are produced by the business while Trading stock is bought for resale.
9.10.9 Why is the folio reference GJ (General Journal) used in the ledger account?
These are transfer entries.
Answer Explanation
A R27 500 5 500 x R5
B R3 500 Balancing figure
C Raw materials cost Only cost item missing
D GJ Transfer entries
9.11.2 Explain why the stock figure from the beginning of the year to the end of the year has
decreased.
There are fewer goods on the production line at the end of the year than there was at the beginning of the
year.
9.11.3 At present it is taking 2.45 days for the sweets to emerge from the factory. Bongi
believes that this time should be 2.1 days. Give her 3 suggestions as to how she could
speed up the process without reducing the quality of the sweets.
Offer incentive bonuses to the staff.
Training for the staff.
Streamline activities – prevent duplications and waiting.
Invest in better (quicker) equipment.
Etc.
9.11.4 On an average, 8% of the sweets are ‘ruined’ in the production process and are, there-
fore, sold below cost at the factory shop. This results in a loss of profits. Give Bongi
3 suggestions as to how to improve this ‘spoilt’ rate.
Incentive bonuses.
Introduce checkpoints.
Making people personally responsible above an acceptable level.
Streamline activities.
9.13.13 Management is not fully satisfied with the CONTROL over the five cost accounts dur-
ing the year. Compare the costs to the previous year and give reasons (quoting com-
parative figures) for the changes to the following five cost accounts. Suggest ways
to improve efficiency, where applicable.
• Direct materials cost.
Decreased from R36.80 to R32.
Less wastage.
Economical use of raw materials.
Cheaper supplier found to supply specified quality materials.
Raw materials purchased in bulk – lower cost.
Training of employees to use materials efficiently, etc.
• Administration cost.
Increased from R9.70 to R10.50 (8% increase).
Increase in office expenses – electricity, salaries, petrol, etc.
Could be abuse of stationery, telephone usage, vehicle used for personal use, etc.
Total costs increased from R100 to R102.50.
WORK-IN-PROGRESS STOCK B
20.4 20.5
Apr 1 Balance b/d 32 000 Mar 31 Finished goods GJ 431 800
stock
20.5 Balance c/d 41 000
Mar 31 Raw materials cost GJ 91 000
Direct labour cost GJ 56 000
Factory o/head cost GJ 293 800
472 800 472 800
Apr 1 Balance b/d 41 000
9.14.3 Suggest two ways that the expense mentioned above could be reduced or elimi-
nated.
• Approach the landlord and ask for reduction in annual rent.
• Try to obtain new premises where rent payment is cheaper.
• Take a loan and purchase own building – use present rental for repayment on loan.
9.14.4 There appears to be a big difference between the previous year’s closing balance and
the current year’s closing balance in the finished goods stock. Give one possible rea-
son for this. Fully explain your answer.
There appears to be a big difference between the previous years’ closing balance and the current years’
closing balance in the finished goods stock. Give one possible reason for this. Fully explain your answer.
• It is possible that industrial action negatively impacted on production process.
• It is possible that no planning was done last year for major national events, such as World Cup tourna-
ment or elections, which may result in many employees taking more leave than normal – thereby targets
could not be met.
9.14.5 Explain two ways in which the amount for the gross profit (to be transferred to profit
and loss) could be increased in future.
• The first way would be to increase mark–up from 60% to 70% provided cognizance is taken of compe-
tition and other market factors.
• An attempt should be made to reduce direct materials cost or factory overhead cost thereby reducing
cost of finished goods. Maintaining the selling price will result in increased profit.
9.15.3 Do you think that the gross profit percentage is satisfactory? Give reasons for your
answer.
Yes – it is a large order, and the business placing the order would expect to receive a reduced rate for bulk
order such as this one.
9.15.4 Identify TWO possible problems that the present 40 permanent workers would have
with the current plans of management? Suggest a solution to the two problems that
you have identified.
Two possible problems:
• There would be unhappiness over obvious extra payment for the additional 25 staff.
• It appears that only managers are to receive a bonus and not ordinary employees on the factory floor.
Solution:
• At the very worst pay new staff at the same rate as the existing staff. In fact new staff ought to be paid
slightly lower rate, during training for about two weeks and then pay the same rate as the existing staff.
Allow detailed answers (together with class discussion) on this scenario and similar case studies as per media
reports.
The following aspects must be mentioned in learners’ responses:
1. The legality and morality of “sewing” the tag “Made in South Africa” when the T–shirt was not made in
South Africa.
2. Why is it necessary to avoid paying import/custom duty? Is there fraud and bribery of officials involved?
3. The advance payment of R2 000 000 maybe part of a scam. What is the credibility of the businessman
concerned? How is it possible for him to give guarantees?
4. Is it possible for one government to give guarantees to a business organisation? Should not the South
African government be involved in guarantees from a foreign government?
5. If this order is sub–contracted to a foreign country, then money would be going out of the country at the
expense of local citizens, such as those in Port Elizabeth. It is better to have more local people employed
so as to strengthen the local economy.
9.18.2 Explain why this could also lead to a reduction in employment. What effect will this
have on the country?
The cost of all products will become more expensive. Consumers will ‘tighten their belts’ and reduce spending.
Fewer products will be sold and therefore fewer products will be manufactured, which mean manufacturing
businesses will cut the number of jobs they can offer.
9.18.3 Refer to the last quotation in the report above. In your opinion, will a lower fuel price
towards the end of the year solve the problem? Explain.
Teachers should allow debate on this, e.g. some learners might think that manufactures might be dishonest
and not reduce the prices when the petrol price decreases.
There might also be opinions on what manufacturers can do to minimise the impact on the consumer, e.g. find
cost-savings in other areas.
CHECKLIST
PAYMENTS
Rent expense 1 650 - - 1 650
Car instalment 1 900 1 900 1 900 5 700
Municipal charges 600 750 750 2 100
Mobile phone charges 457 466 600 1 523
Insurance 750 750 750 2 250
Motor expenses 984 1 014 1 044 3 042
Other expenses 1 501 1 546 1 592 4 639
Bond repayment 2 400 2 400 4 800
Transfer fees 6 500 6 500
Total payments [B] 7 842 15 326 9 036 32 204
10.1.2 Teacher:
If your school (and your learners) do not have access to computers, allow them to draw pie graphs
manually. Interact with the Mathematics department for assistance in this regard if necessary.
The above chart could also be shown with percentages rather than monetary values:
5%
20% Rent expense
18% Car instalment
Municipal charges
Mobile phone charges
Insurance
7%
15% Motor expenses
5% Other expenses
Bond repayment
7% Transfer fees
14%
9%
10.2.2 List two items that could be included under ‘Other expenses’.
Clothing, medication, cleaning services, etc.
10.2.4 In September Alfred’s payments exceeded his receipts. What caused this?
The cost of purchasing the property, i.e. the transfer fees and other charges (R6 500).
PAYMENTS
Transport costs 10000
Accommodation: 40 x 150 x 3 18000
Lunch and dinner: 40 x 100 x 3 12000
Entrance fees and other expenses: 40 x 120 4800
Gratuity 500
Total payments 45 300
10.3.2 Calculate the total amount that would have to be paid by each learner.
40 300 40 = R1 007.50
10.3.3 One of the learners, Joe Smart, has an aunt who lives in Richards Bay. She will provide
free lunch and dinner to Joe and two of his friends for two of the three days.
(a)
(a) Calculate the total amount saved by Joe and his two friends in respect of meals.
3 x 100 x 2 = R600.00
(b)
(b) Calculate Joe’s net cost of the tour.
1 007.50 – 200 = R807.50
10.3.4 Assume that Joe Smart and his friends opt not to take the R100 for meals and instead
request that the money be put back in the pool.
(a) Calculate the total cost of the tour.
Total payments will decrease by R600, i.e. R45 300 – 600 = R44 700
Total cost of the tour: 44 700 – 5 000 = R39 700
(b)
(a) How much less would each learner pay?
Cost per learner: 39 700 40 =R992.50
Difference per learner: R1 007.50 – R992.50 = R15
Remember that various answers (responses) are possible depending on the learner’s experience and exposure
at school and in the community.
10.4.1 The letter of motivation should include a detailed break-down of start-up expenses.
10.4.2 A detailed list of expected receipts and payments is to be shown. The loan must also be paid back.
The target should be a net taking higher than that of the previous year (R40 000).
PAYMENTS
Cash purchases of trading stock [2] 180000 198 000 207 900 585 900
Salaries [3] 56000 64 400 64 400 184 800
Drawings [4] 4000 4 000 4 800 12 800
Sundry other expenses [5] 21000 22 050 23 153 66 203
Bond repayment [6] 14800 16 300 16 300 47 400
New equipment - - 15 000 15 000
Total payments [B] 275 800 304 750 331 553 912 103
WORKINGS:
[1] March 270 000; April 270 000 x 110% = 297 000; May 297 000 x 105% = 311 850
[2] March sales x 150/100 = 180 000
April sales x 150/100 = 198 000
May sales x 150/100 = 207 900
[3] Salaries 15% increase, i.e. 56 000 x 115% = 64 400
[4] Drawings increase by 20%, i.e. 4000 x 120% = 4 800
[5] 20 000 x 105% = 21 000
21 000 x 105% = 22 050
22 050 x 105% = 23 153
[6] 14 800 + 1 500 = 16 300
PAYMENTS
Cash purchases of trading stock [2] 144 000 151 200 158 760 453 960
Salaries [4] 34 720 34 720 34 720 104 160
Deposit on vehicle 15 000 15 000
Instalment on vehicle 5 000 5 000
Drawings [6] 5 000 5 000 5 000 15 000
Sundry other expenses [7] 5 768 5 941 6 119 17 828
Total payments [B] 189 488 211 861 209 599 610 948
(b) Should the increase be granted calculate the new bank balance on 31 March 20.9.
Salary expense would increase to R37 200 (31 000 + 20%).
He would be paying R2 480 per month (37 200 – 34 720) extra.
Over the three months the extra amount will be R7 440 (2 480 x 3).
The bank balance would decrease to R82 822 (90 262 – 7 440).
(c) What effect would the payment of the additional 8% have on the net profit?
Net profit would decrease by R7 440.
(d) Amod decides to terminate the services of four of his employees with effect from
1 April 20.9. In their place he would employ his wife, his two sons and a nephew.
His wife will receive no pay; his sons and nephew will be paid R3 000 each.
• Calculate the new amount paid in respect of salaries in April 20.9.
34 720 ÷ 2 = 17 360 OR 34 720 ÷ 8 x 4 = 17 360
Salaries = 17 360 + (3 x 3 000)
= 17 360 + 9 000
= R26 360
• What is your view on Amod’s decision? Consider the legal and ethical issues
and also trade union reaction.
Various answers possible.
Legal issues – dismissal of workers may be against the law – Employment Equity Act.
Ethical issues – unfair dismissal; employing his wife for no pay; etc.
Trade unions – employees may have grounds to object to their dismissal; the trade union can take action
against Amod.
10.8.4 Study the sales trend for the budget period. What are your observations?
Fairly consistent except in July when sales amount to R200 000 – it is possible that business improves during
the school vacation.
Alternative answers are possible.
Debtors’ collections
February [13%] 5 590
March [55%; 13%] 28 050 6 630
April [30%; 55%; 13%] 16 200 29 700 7 020
May [30%; 55%] 22 500 41 250
June [30%] 27 000
Cash receipts from debtors 49 840 58 830 75 270
10.11.2 Calculate the total bad debts amount written off up to 31 March 20.8.
[2% x 98 000] + [2% x 156 000] = 1 960 + 3 120 = R5 080
10.11.3 Calculate the total discount allowed for the period 1 January 20.8 to 31 March 20.8.
[5% x 56 000] + [5% x 42 000] + [5% x 35 000] = 2 800 + 2 100 + 1 750 = R6 650
10.11.4 How does Bazuko Traders benefit from offering their customers a 5% discount for
early settlement?
Their cash flow is improved; the discount promotes customer loyalty – customers will probably buy more,
thus increasing turnover.
Debtors’ collections
February 15 120
March 21 000 12 600
April 17 550 30 000 10 800
May 15 210 26 000
June 18 720
Cash receipts from debtors 53 670 57 810 55 520
Calculations:
16 150 x 100/95 = R17 000
17 000
/85 000 x 100% = 20% (payable in the month of the sale less 5% discount)
80% - 2% (bad debts) = 78% is payable in the month after the sale.
[1]
85 000 x 78% = R66 300
[2]
80 000 x 78% = R62 400
[3]
82 000 x 20% - 5% = R15 580
[4]
82 000 x 78% = R63 960
10.13.4 Ideally debtors should pay the trader before he (the trader) pays his creditors. Do
you agree with this statement? Explain why.
Yes – working capital is eased up as payment is received for the stock sold before the trader has paid the
supplier.
[1]
40 000 is cost of sales which is equal to total purchases: 40 000 – 30 000 = 10 000
[2]
Mark-up % = 20 000/40 000 x 100% = 50%
70 500 x 100/150 = 47 000
[3]
Percentage cash purchases = 10 000/40 000 x 100% = 25%
47 000 x 25% = R11 750
[4]
47 000 – 11 750 = R35 250 OR 47 000 x 75% = R35 250
[5]
Discount = 30 000 – 29 250 = R750
Percentage discount = 750/30 000 x 100% = 2.5%
35 250 – 2.5% = R34 369
Remedial measures:
Offer incentives to debtors to settle their accounts before 60 days; negotiate with suppliers for extended
credit, i.e. more than 30 days; reduce the credit terms offered to debtors, i.e. less than 60 days; etc.
Debtors’ collections
October 20.7 [15%] 810
November 20.7 [30%; 15%] 1 944 972
December 20.8 [50% less 5%; 30%] 5 700 3 600
January 20.8 [50% less 5%] 1 425
Cash receipts from debtors 8 454 5 997
10.15.2
MAGGIES
CASH BUDGET FOR THE PERIOD 1 JANUARY 20.8 – 28 FEBRUARY 20.8
RECEIPTS January February
Cash sales 7 000 8 400
Cash receipts from debtors 8 454 5 997
Loan 20 000
Total receipts [A] 15 454 34 397
PAYMENTS
Cash payments to creditors 21 000 8 500
Salary 6 600 6 600
Rent expense[1] - 2 875
General expenses[2] 3 290 2 770
Total payments [B] 30 890 20 745
Cash surplus (shortfall) [A – B] (15 436) 13 652
Bank: opening balance 13 900 (1 536)
Bank: closing balance (1 536) 12 116
[1]
During December the rent for December (R2 500); the rent for January (R2 875) was also paid in December
(prepaid). Therefore the budgeted rent for January is nil.
[2]
In December general expenses (R1 300) was still owed; this is added to the January figure as it will be
paid during this month.
PAYMENTS
Cash purchases of trading stock 104 500[2] 87 500[3]
Cash payments to creditors 135 375[1] 148 913[2]
Lease payment 4 200
Loan instalment 26 000 26 000
Cash operating expenses 41 500[4] 45 650[5]
Drawings 15 000 15 000
Total payments [B] 322 375 327 263
[1]
Mark-up: 1 125 000
/1 875 000 x 100/1 = 60%
December purchases: 380 000 x 100/160 = 237 500
Cash purchases: 40% x 237 500 = 95 000
Credit purchases: 60% x 237 500 = 142 500
Payment to creditors: 142 500 – 5% = 135 375
[2]
January purchases: 418 000 x 100/160 = 261 250
Cash purchases: 40% x 261 250 = 104 500
Credit purchases: 60% x 261 250 = 156 750
Payment to creditors: 156 750 – 5% = 148 913
[3]
February purchases: 350 000 x 100/160 = 218 750
Cash purchases: 40% x 218 750 = 87 500
[4]
498 000 ÷ 12 = 41 500
[5]
41 500 + 10% = 45 650
DEBTORS COLLECTION SCHEDULE FOR THE PERIOD 1 JANUARY 20.8 – 28 FEBRUARY 20.8
20.7 20.7 20.8 20.8
November December January February
Total sales (credit) 320 000 380 000 418 000 350 000
Debtors’ collections
November 20.7 [7%] 22 400
December 20.7 [80%; 7%] 304 000 26 600
January 20.8 [10% less 3%; 80%] 40 546 334 400
February 20.8 [10% less 3%] 33 950
Cash receipts from debtors 366 946 394 950
(b) Does this business own or lease property? Provide a reason for your answer.
Own – they have a mortgage bond towards which monthly payments of R26 000 are made.
Debtors’ collections
August [20%] 7 200
September [35%; 20%] 11 200 6 400
October [40% less 2½%; 35%; 20%] 14 625 13 125 7 500
November [40% less 2½%; 35%] 21 450 19 250
December [40% less 2½%] 40 950
Cash receipts from debtors 33 025 40 975 67 700
Payments to creditors
August [90% less 5%; 10%] 34 628 4 050
September [90% less 5%; 10%] 30 780 3 600
October [90% less 5%; 10%] 28 856 3 375
November [90% less 5%] 42 323
Cash payments to creditors 34 830 32 456 45 698
Cash surplus (shortfall) [A – B] (54 055) (41 781) (43 498) (139 334)
Bank: opening balance 90 000 35 945 (5 836) 90 000
Bank: closing balance 35 945 (5 836) (49 334) (49 334)
[1]
3% x 75 000 + 5 000(September) [2]
3% x 110 000
[3]
4% x 150 000 [4]
6 000 – 1 000
10.17.3 Make a careful study of the budget. Prepare a report for submission to the owner
identifying the main problem areas; indicate if the business has a future and explain
how the situation can be improved.
Different answers are possible. Some observations are stated below:
- The favourable bank balance of R90 000 becomes unfavourable after three months.
- The overdraft will most probably increase further in the future as total receipts are less than total
payments for all three months.
- The owner does not seem to have considered interest on overdraft.
Remedial measures:
- Review the mark-up percentage – presently it is 331/3% (Gross profit = 90 000 – 67 500 = R22 500).
Mark-up is 22 500/67 500 x 100% = 331/3%). Profitability of this business needs to improve.
- Get the debtors to pay sooner.
- Obtain better credit facilities from suppliers.
- Review the amounts paid in respect of salaries and cash operating expenses.
- Review the monthly cash drawings made by the owner.
- Etc.
Suggested rubric for this activity:
Criteria Level 1 Level 2 Level 3 Level 4
Identification of
problem areas that
Identifies most of Identifies problem
Identification of Fails to identify are comprehen-
the main problem areas beyond the
problem areas. problem areas. sively discussed
areas. obvious.
showing great in-
sight.
Can identify be- Excellent discus-
Very little attempt Can identify future
Future prospects yond the obvious sion of the future
to identify future prospects of the
identified. with some discus- prospects of the
prospects. business.
sion evident. business.
Can make sugges-
Cannot make sug- Make obvious sug- Excellent sugges-
Suggestions for tions beyond the
gestions for im- gestions for im- tions showing
improvement. obvious with some
provement. provement. great insight.
discussion evident.
10.18.3 No loan instalment was paid in January and February. Provide a possible reason for
this.
The loan agreement probably stipulates that loan repayments be made quarterly – every three months.
(b) A profit of R2 700 was made on the disposal. Calculate the carrying value of the
vehicle.
50 000 – 2 700 = R47 300
(c) Does the profit of R2 700 have an effect on the closing March balance? Explain.
No, the profit is included in the selling price of R50 000. The carrying value is R47 300; it was sold for
R2 700 more than its carrying value: 47 300 + 2 700 = R50 000.
10.18.7 Explain the meaning of the following statement: ‘A fixed base stock level is
maintained’.
The stock sold in a month is replaced by the same amount, i.e. cost price of goods sold is equal to the total
purchases of stock for that month.
10.18.8 The owner of Allcats Traders maintains that her business is doing well. Explain why
you disagree with her. State your observations and suggestions.
Observations
The loan of R40 000 was used to finance expenses in January.
The disposal of the vehicle reduced the shortfall in March.
Total payments are higher than total receipts for the entire budget period.
The overdraft would probably increase further in the subsequent months.
Suggestions:
Turnover needs a boost – sales promotions; mark-downs; sales; other incentives.
Extended credit terms with suppliers should be applied for.
The business may want to consider selling on credit – this would increase turnover and subsequently cash
receipts.
There is a need for more effective control over expenses – e.g. rent – obtain cheaper or smaller premises.
Alternate answers/interpretations are possible.
CASH BUDGET OF DR DOUGAL FOR THE PERIOD 1 FEBRUARY 20.9 – 30 APRIL 20.9
February March April Total
CASH RECEIPTS
Interest income 1 400 1 400 1 400 4 200
Lump sum benefit 350 000 350 000
Fee income 20 000 30 000 40 000 90 000
Total receipts [A] 21 400 381 400 41 400 444 200
CASH PAYMENTS
Household expenses 10 400 10 400 10 400 31 200
School fees 500 500 500 1 500
Lease payment for car 3 450 3 450 3 450 10 350
Medical aid 1 300 1 300 2 800 5 400
Pension fund 2 000 2 000 - 4 000
Insurance 3 300 3 300 3 300 9 900
Bond repayment 300 000 300 000
Rent expense 6 000 6 000 6 000 18 000
Equipment 30 000 30 000
Payment to creditor 2 000 2 000
Salary 2 500 2 500 2 500 7 500
Medical supplies 5 000 5 000 5 000 15 000
Sundry other expenses 4 000 4 000 4 000 12 000
Total payments [B] 38 450 368 450 39 950 446 850
Pie-charts may be used to show monthly expenses, e.g. the monthly expenses for February is shown below.
Household expenses
School fees
Lease payment for car
Medical aid
Pension fund
Insurance
Bond repayment
Rent expense
Equipment
Salary
Medical supplies
Sundry other expenses
Household expenses
R 4 000 10% School fees
R 10 400 26% Lease payment for car
R 5 000 13%
Medical aid
Insurance
R 2 500 6% R 500 1% Rent expense
R 2 000 5% R 3 450 9% Payment to creditor
R 2 800 7% Salary
R 6 000 15% Medical supplies
R 3 300 8%
Sundry other expenses
Budget Displays little skill Adequately skilled Highly skilful in Shows outstanding
in compiling a in compiling a compiling a skills in compiling a
budget. budget that is budget, well-pre- budget - well-pre-
fairly accurate. sented and accu- sented, accurate
rate. and contains all
the relevant detail.
Report Shows little under- Shows a reasona- Highly professional Shows a high de-
standing of a ble understanding with effective sug- gree of profession-
budget. of budgeting but gestions / com- alism with relevant
needs some im- ments supplied. and effective com-
provement. ments / sugges-
tions.
[1]
250 000 + 60% = 400 000
[2]
400 000 – 20% = 320 000
[3]
Mark-up = 125 000 x 100
125 000 1
= 100%
400 000 x 100 = 200 000
200
OR 400 000 2 = 200 000
[4]
320 000 2 = 160 000
[5]
324 000 x 100 = 180 000
180
[6]
400 000 x 40% x 3% = 4 800
[7]
320 000 x 40% x 3% = 3 840
[8]
324 000 x 40% x 3% = 3 888
[9]
96 000 + [4 x 1 500] = 102 000
[10]
96 000 + 8% = 103 680
[11]
2 500 + 15% = 2 875
[12]
3 000 + [4 000 x 15% x 1/12] = 3 000 + 50 = 3 050
10.20.2 Refer to the Income Statement for November 20.8. State your observations on the
gross operating income and net profit. What can be done to improve the situation?
Huge difference between the gross and the net profit: operating expenses are high and needs to be con-
trolled – mainly salaries.
Viola needs to check how effective advertising is on turnover as the amount spent on advertising is quite
high.
An increase in mark-up will result in a higher gross profit – this could also improve the situation.
10.21.4 Many of Osman’s competitors sell their DVDs for between R30 and R35 each.
Reliable sources informed him that competitors sell ‘fake’ or ‘pirate’ DVDs and are
making huge profits. Osman is also tempted to deal in illegal copies of DVDs because
of the substantial profit potential. What is your view on this? Consider the legal and
ethical issues involved.
Trading in illegal copies of DVDs is illegal – criminal action can be instituted against Osman and his com-
petitors as this constitutes an infringement of the copyright laws.
As a rule dealing with illegal products is unethical and immoral as one enriches oneself at the expense of
another.
In this case it would be the artists/singers or the producers of the film who are being cheated of their
rightful earnings.
Alternate answers are possible.
10.22.2 List two expenses that would appear in the Projected Income Statement but not in
the Cash Budget.
Depreciation; Bad debts; Provision for bad debts adjustment; Stock deficits.
10.22.3 List two items that would appear in the Cash Budget but not in the Projected Income
Statement.
Receipts from debtors; Payments to creditors; Purchase/sale of asset.
[1]
March: 66 000 x 5% =3 300
April: 90 000 x 5% =4 500
May: 72 000 x 5% =3 600
June: 54 000 x 5% =2 700
July: 60 000 x 5% =3 000
August: 66 000 x 5% =3 300
Debtors collection 65 700 53 400 57 900 61 740 62 865 77 592 379 197
Rent income 4 000 4 000 4 000 4 000 4 400 4 400 24 800
Total receipts [A] 109 700 101 400 103 700 117 990 132 577 140 773 706 140
PAYMENTS
Payments to creditors[1] 60 000 66 667 73 333 69 667 87 083 108 854 465 604
Salaries and wages 20 000 20 000 20 000 20 000 20 000 20 000 120 000
Advertising 15 000 15 000 30 000
Other operating expenses 7 026[2] 8 289 8 455 8 624 8 796 8 972 50 162
Loan instalment[3] 2 500 2 500 2 500 2 500 2 500 2 500 15 000
Total payments [B] 104 526 97 456 104 288 115 791 118 379 140 326 680 766
Cash shortfall [A - B] 5 174 3 944 (588) 2 199 14 198 447 25 374
Opening bank balance 23 400 28 574 32 518 31 930 34 129 48 327 23 400
CLOSING BANK BALANCE 28 574 32 518 31 930 34 129 48 327 48 774 48 774
[1]
Mark-up = 500 000/1 000 000 x 100/1 = 50% [2]
8 126 + 1 200 – 2 300 = 7 026
March = 90 000 x 100/150 = 60 000 [3]
Interest on the loan is included in the loan instalment.
Use the following grid to summarise your concerns and suggested solution:
10.25.1 Expense 1: Telephone Negative Variance:
January : - 2000 ( 2000 – 4000)
February: -3000 ( 2000 – 5000)
CHECKLIST
Requires
Yes –
Skills more Complete
proficient
attention
Can explain a budget and its use.
Draw up a personal budget for more than one
month.
Prepare a business Cash Budget.
Explain how credit terms affect a budget.
Draw up a Cash Budget where goods are bought and
sold on credit.
Prepare and analyse a Debtor’s Collection Schedule.
Describe a debtor collection policy.
Analyse sales trends using budget information.
Prepare a Monthly Income Forecast.
Draw up a Projected Income Statement.
Ability to use budgets for effective control over
expenses.
COST OF SALES N
20.6 20.6
Jan 12 Trading stock CRJ 375 Jan 25 Cost of sales DAJ 39
21 Trading stock DJ 900 31 Trading account GJ 1 236
1 275 1 275
11.5.2 The target mark-up of this business is 60%. Calculate the mark-up achieved.
30 400 x 100 = 54%
56 200 1
11.5.3 Should the owner be satisfied with the mark-up achieved? Explain why.
No, he is achieving 6% (60% - 54%) below target.
Probable causes: too many discounts, mark-downs, stock losses due to theft, damage, etc., inaccurate
calculations.
[1]
220 500 + 132 000 – 13 000 – 2 000
[2]
168 500 – 25 000 – 1 500 - 750
11.6.3 The owner intends increasing his mark-up percentage by 10%. List three factors that
he should consider before he implements this policy.
Effect on turnover as his price will now be higher.
Prices of competitors.
Effect on net profit.
Etc.
11.8.4 Comment on your answer in 11.8.3 above. Should the owner be satisfied with the
mark-up percentage?
No, he is achieving 28% (100% - 72%) below the target.
11.8.5 Calculate how long (in days) Bro’s Confectioners can expect their stock to last.
[15 000 + 20 000] 2 x 365
104 500 1
17 500 x 365 = 61 days
104 500 1
SALES N
20.4 20.4
June 30 Debtors allowances[3] DAJ 3 300 June 30 Bank[1] CRJ 67 500
Trading account GJ 122 700 Debtors control[2] DJ 58 500
126 000 126 000
[1]
45 000 x 150/100 = R67 500 [2]
39 000 x 150
/100 = R58 500
[3]
2 200 x 150/100 = R3 300
Periodic system
No. Account debit Account credit A= OE + L
1. Purchases Creditors control 0 -24 334 +24 334
2. Bank Sales 0 +14 400 -14 400
3. Carriage on purchases Bank 0 -2 333 +2 333
4. Donation Purchases 0 ±720 0
5. Creditors control Purchases 0 +930 -930
6. Bank Rent income 0 +900 -900
7. Debtors allowances Debtors control -684* -684 0
*513 x 1331/3
100
Date Transaction
1 Owner deposited capital into the banking account.
3 Stock purchases paid for by cheque.
9 Stock purchases on credit.
12 Stock returned to suppliers/creditors.
15 Cash sales.
19 Stock withdrawals by the owner.
21 Carriage on purchases paid for by cheque.
28 Credit sales.
30 Stock returned by debtors.
31 Value of stock on hand (unsold) at month-end.
11.12.5 Indicate why the net change in owner’s equity is not the same as the gross profit.
Refer to the transaction on the 19th.
This transaction has no effect on owner’s equity – it increases and decreases by R900, however, the trans-
action decreases purchases by R900.
An expense is being credited which implies an increase in profit.
The net effect on owner’s equity is R900 while the gross profit is R1 800.
11.12.6 Show how the closing stock figure of R5 600 was arrived at.
2 000 + 8 000 – 200 – 2 000[1] – 900 + 300 – 1 667[2] + 67[3] = R5 600
[1]
3 000 x 100/150
[2]
2 500 x 100/150
[3]
100 x 100/150
Required:
Analyse the transactions below according to the headings supplied. The periodic system is in use, the bank
balance is favourable for all the transactions.
Transactions:
1. The owner took merchandise for his own use R430.
2. Made a donation by cheque to the local school R200.
3. Donated merchandise of R600 to the local school.
4. The owner returned some of the merchandise which he had previously taken for
his own use R80.
5. Sold stock on credit R2 000.
6. Purchased merchandise and paid for it by cheque R4 900.
7. A credit customer returned damaged goods of R110. A credit note was issued.
8. A cheque for R1 500 previously received from a debtor was returned by the bank due to insufficient funds.
A discount of R60 had been allowed to him.
9. Paid customs duty by cheque for R320 on stock imported from overseas.
10. Stock bought and paid for by cheque R2 220 was incorrectly posted to the Equipment account. The error
must be corrected.
11. Bought trading stock on credit R5 400.
12. Returned damaged merchandise to the supplier R320.
13. Stock sold for cash R800.
14. The bank charges as per the bank statement amounted to R340.
15. The stock on hand as per physical stock-take at year-end amounted to R24 000.
DRAWINGS B2
20.9 20.9
Jan 1 Balance b/d 20 000 Jan 31 Balance c/d 21 500
21 Purchases GJ1 1 500
21 500 21 500
Feb 1 Balance b/d 21 500
VEHICLES B4
20.9
Jan 1 Balance b/d 120 000
DEBTORS CONTROL B6
20.9 20.9
Jan 1 Balance b/d 23 122 Jan 31 Bank CRJ3 20 485
20 Bank (r/d) CPJ3 14 345 Discount allowed CRJ3 1 028
31 Sales DJ3 13 149 Debtors allowances DAJ3 499
Sundry accounts GJ3 887 Balance c/d 29 491
51 503 51 503
Feb 1 Balance b/d 29 491
BANK B7
20.9 20.9
Jan 1 Balance b/d 76 231 Jan 31 Sundry accounts CPJ3 88 490
31 Sundry accounts CRJ3 131 278 Balance c/d 119 019
207 509 207 509
Feb 1 Balance b/d 119 019
CASH FLOAT B8
20.9
Jan 1 Balance b/d 2 500
CREDITORS CONTROL B9
20.9 20.9
Jan 31 Bank CPJ3 23 088 Jan 1 Balance b/d 23 592
Discount received CPJ3 659 31 Sundry accounts CJ3 38 596
Sundry accounts CAJ3 1 877
Balance c/d 36 564
62 188 62 188
Feb 1 Balance b/d 36 564
UIF B11
20.9 20.9
Jan 25 Bank CPJ3 648 Jan 31 Salaries SJ3 324
UIF (Contribution) SJ3 324
648 648
DEBTORS ALLOWANCES N2
20.9
Jan 1 Total b/f 12 444
31 Debtors control DAJ3 499
12 943
PURCHASES N3
20.9 20.9
Jan 1 Total b/f 58 923 Jan 21 Drawings GJ3 1 500
31 Bank CPJ3 11 322 31 Creditors control CAJ3 1 759
Creditors control CJ3 34 628
104 873 3 259
CARRIAGE ON PURCHASES N4
20.9
Jan 1 Total b/f 4 567
8 Bank CPJ3 1 987
6 554
SALARIES N5
20.9
Jan 1 Total b/f 64 980
31 Sundry accounts SJ3 32 490
97 470
TELEPHONE N7
20.9
Jan 1 Total b/f 1 297
27 Bank CPJ3 2 345
3 642
BANK CHARGES N8
20.9
Jan 1 Total b/f 907
28 Bank CPJ3 348
1 255
DISCOUNT ALLOWED N9
20.9 20.9
Jan 1 Total b/f 670 Jan 20 Debtors control GJ3 757
31 Debtors control CRJ3 1 028
1 698 757
STATIONERY N17
20.9
Jan 23 Bank CPJ3 679
31 Creditors control CJ3 454
1 133
DEBTORS LEDGER
R. Rocky DL1
Date Details Fol Debit Credit Balance
20.9
Jan 1 Balance b/d 15 102
Interest income GJ3 130 15 232
7 Inv 234 DJ3 5 678 20 910
8 C/N 110 DAJ3 89 20 821
15 Rec 14 CRJ3 14 345 6 476
Discount allowed CRJ3 757 5 719
20 R/d cheque CPJ3 14 345 20 064
Discount allowed GJ3 757 20 821
24 Inv 237 DJ3 2 349 23 170
G. Grassy DL3
Date Details Fol Debit Credit Balance
20.9
Jan 1 Balance b/d 2 609
10 Rec 13 CRJ3 1 000 1 609
19 Inv 236 DJ3 1 998 3 607
22 C/N 113 DAJ3 64 3 543
CREDITORS LEDGER
WEN CC CL1
Date Details Fol Debit Credit Balance
20.9
Jan 1 Balance b/d 2 697
12 Cheq 15 CPJ3 2 697 0
19 Inv 766 CJ3 4 337 4 337
D/N 032 CAJ3 189 4 148
HUBERS STORES
CREDITORS JOURNAL – JUNE 20.9 CJ1
Inv Creditors Equip- Consum- Sundry accounts
D Creditor Fol Purchases
no control ment ables Amount Fol Details
V21 2 DD Suppliers CL2 10 510 7 890 2 170 450 N4 Carriage
S8 9 Vermaak Handelaars CL3 6 660 4 560 1 120 980
M2 18 DD Suppliers CL2 9 140 8 900 240 N10 Sundry expenses
99 20 Guzz Wholesalers CL1 6 040 5 550 490
Y3 24 Guzz Wholesalers CL1 3 420 3 420
35 770 30 320 3 290 1 470 690
B7 N3 B5 N6
HUBERS STORES
CREDITORS ALLOWANCES JOURNAL – JUNE 20.9 CAJ1
Inv Creditors Equip- Consum- Sundry accounts
D Creditor Fol Purchases
no control ment ables Amount Fol Details
24 10 Vermaak Handelaars CL3 100 60 40
25 20 Guzz Wholesalers CL1 170 140 30
26 DD Suppliers CL2 230 190 40 N10 Sundry expenses
500 390 70 40
B7 N3 N6
DRAWINGS B2
20.9 20.9
June 1 Balance b/d 80 000 June 30 Balance c/d 82 070
10 Bank CPJ1 1 330
14 Purchases GJ1 560
Consumables GJ1 180
82 070 82 070
July 1 Balance b/d 82 070
VEHICLES B4
20.9 20.9
June 1 Balance b/d 180 000 June 30 Balance c/d 181 100
28 Bank CPJ1 1 100
181 100 181 100
July 1 Balance b/d 181 100
DEBTORS CONTROL B6
20.9 20.9
June 1 Balance b/d 24 500 June 30 Bank CRJ1 26 945
16 Bank (r/d) CPJ1 1 440 Discount allowed CRJ1 895
30 Sales DJ1 18 220 Debtors allowances DAJ1 770
Sundry accounts GJ1 820 Balance c/d 16 370
44 980 44 980
July 1 Balance b/d 16 370
CREDITORS CONTROL B7
20.9 20.9
June 30 Bank CPJ1 71 137 June 1 Balance b/d 65 420
Discount received CPJ1 2 383 30 Sundry accounts CJ 35 770
Sundry accounts CAJ1 500
Balance c/d 27 170
101 190 101 190
July 1 Balance b/d 27 170
BANK B8
20.9 20.9
June 1 Balance b/d 65 770 June 30 Sundry accounts CPJ1 168 147
30 Sundry accounts CRJ1 151 675 Balance c/d 49 298
217 445 217 445
July 1 Balance b/d 49 298
FIXED DEPOSIT B9
20.9
June 14 Bank CPJ1 20 000
UIF B13
20.9 20.9
June 30 Bank CPJ1 900 June 25 Salaries SJ1 450
UIF Contribution SJ1 450
900 900
DEBTORS ALLOWANCES N2
20.9
June 1 Total b/f 2 340
30 Debtors control DAJ1 770
3 110
PURCHASES N3
20.9 20.9
June 1 Total b/f 89 760 June 30 Creditors control CAJ1 390
30 Bank CPJ1 7 100 Drawings GJ1 560
Creditors control CJ1 30 320 Sundry expenses GJ1 500
127 180 1 450
CARRIAGE ON PURCHASES N4
20.9
June 1 Total b/f 18 560
2 Creditors control CJ1 450
10 Bank CPJ1 180
19 190
CONSUMABLES N6
20.9 20.9
June 1 Total b/f 5 220 June 30 Creditors control CAJ1 70
30 Bank CPJ1 1 210 Drawings GJ1 180
Creditors control CJ1 1 470
7 900 250
RENT INCOME N7
20.9
June 1 Total b/f 18 000
25 Bank CRJ1 9 000
27 000
DISCOUNT ALLOWED N8
20.9 20.9
June 1 Total b/f 2 340 June 16 Debtors control GJ1 100
30 Debtors control CRJ1 895
3 235 100
DISCOUNT RECEIVED N9
20.9
June 1 Total b/f 5 620
30 Creditors control CPJ1 2 383
8 003
DEBTORS LEDGER
DJ Cool DL1
Date Details Fol Debit Credit Balance
20.9
June 1 Balance b/d 14 400
5 Interest income GJ1 720 15 120
Rec R20 CRJ1 14 000 1 120
Discount allowed CRJ1 400 720
9 Inv 14 DJ1 7 640 8 360
10 C/N 5 DAJ1 640 7 720
12 Inv 15 DJ1 2 140 9 860
27 Rec R23 CRJ1 4 000 5 860
LT Powers DL2
Date Details Fol Debit Credit Balance
20.9
June 1 Balance b/d 8 560
21 Inv 16 DJ1 6 530 15 090
25 Inv 18 DJ1 800 15 890
C/N 7 DAJ1 90 15 800
28 Rec 24 CRJ1 7 505 8 295
Discount allowed CRJ1 395 7 900
DB Swerve DL3
Date Details Fol Debit Credit Balance
20.9
June 1 Balance b/d 1 540
12 Rec 21 CRJ1 1 440 100
Discount allowed CRJ1 100 0
16 R/d cheque CPJ1 1 440 1 440
Discount allowed GJ1 100 1 540
24 Inv 17 DJ1 1 110 2 650
25 C/N 5 DAJ1 40 2 610
CREDITORS LEDGER
Guzz Wholesalers CL1
Date Details Fol Debit Credit Balance
20.9
June 1 Balance b/d 32 120
3 Cheq 008 CPJ1 31 317 803
Discount received CPJ1 803 0
20 Inv 99 CJ1 6 040 6 040
D/N 25 CAJ1 170 5 870
24 Inv Y3 CJ1 3 420 9 290
DD Suppliers CL2
Date Details Fol Debit Credit Balance
20.9
June 1 Balance b/d 15 430
2 Inv V21 CJ1 10 510 25 940
18 Inv M2 CJ1 9 140 35 080
20 D/N 25 CAJ1 230 34 850
26 Cheq 017 CPJ1 25 000 9 850
Discount received CPJ1 1 200 8 650
VEHICLES B4
20.8
Dec 31 Balance b/d 180 000
EQUIPMENT B6
20.8
Dec 31 Balance b/d 40 000
BANK B10
20.8
Dec 31 Balance b/d 14 770
PURCHASES N2
20.8 20.8
Dec 31 Total b/f 120 000 Dec 31 Trading account GJ 120 000
CARRIAGE ON PURCHASES N3
20.8 20.8
Dec 31 Total b/f 21 000 Dec 31 Trading account GJ 21 210
Accrued expenses GJ 210
21 210 21 210
SALES N4
20.8 20.8
Dec 31 Debtors allowances GJ 28 000 Dec 31 Total b/f 450 110
Trading account GJ 422 110
450 110 450 110
DEBTORS ALLOWANCES N5
20.8 20.8
Dec 31 Total b/f 28 000 Dec 31 Sales GJ 28 000
BANK CHARGES N8
20.8 20.8
Dec 31 Total b/f 3 600 Dec 31 Profit and loss a/c GJ 3 600
BAD DEBTS N9
20.8 20.8
Dec 31 Total b/f 1 440 Dec 31 Profit and loss a/c GJ 1 700
Debtors control GJ 260
1 700 1 700
DEPRECIATION N17
20.8 20.8
Dec 31 Acc dep on vehicles GJ 28 000 Dec 31 Profit and loss a/c GJ 33 500
Acc dep on equipment GJ 5 500
33 500 33 500
CARRIAGE ON PURCHASES N3
20.8 20.8
Feb 28 Total b/f 9 995 Feb 28 Trading account GJ1 9 995
CLOSING STOCK N4
20.8 20.8
Feb 28 Trading account GJ1 46 345 Feb 28 Trading stock GJ1 46 345
SALES N5
20.8 20.8
Feb 28 Trading account GJ1 143 213 Feb 28 Total b/f 143 213
CLOSING ENTRIES
Trading account F1 143 104
Opening stock N1 34 566
Purchases N2 98 543
Carriage on purchases N3 9 995
Closing entries
Closing stock N4 46 345
Sales N5 143 213
Trading account F1 189 558
Closing entries
Trading account F1 46 454
Profit and Loss a/c F2 46 454
Gross profit transferred to
profit and loss account
(b) Ms Beazle intends installing scanning and bar coding equipment in her superette.
Will it still be necessary for her to continue using the periodic system? Explain
how the change will affect her business in the future. Also mention the
advantages/disadvantages of the two types of stock systems.
Answers may differ on account of subjectivity.
The one approach is to advise her to change to the perpetual system as stock control will be improved via
barcodes and scanning.
Stock figures are updated at the point of sale – she is able to do stock analyses more effectively, e.g. she
would be in a better position to identify slow moving stock; when to place her orders; theft /leakages are
easily detected; etc.
The investment in the additional equipment may pay dividends in the future as almost all products are
barcoded by manufacturers thus facilitating internal stock control.
The other approach is to advise her to remain with the periodic system.
This system seems to be working well as her mark-up achieved is almost equal to the target mark-up.
The additional investment in sophisticated equipment may, therefore, not be warranted.
Refer to the Learner’s Book for information on the main features/advantages/disadvantages of the two
systems.
(c) Freshever Florists feel that they are paying too much for carriage on purchases.
They are deciding whether to use their own vehicle to pick up stocks from their
various suppliers. In this way, they would no longer have to pay for carriage.
What is your view on this? Write a report on this.
Alternate answers are possible.
Some suggestions are provided:
The elimination of carriage would result in a better gross profit but net profit may be negatively affected as
vehicle expenses (fuel, depreciation, repairs) may possibly increase.
The driver (if he has one) of the vehicle may demand a higher wage as he may have to work longer hours
and subsequently do more driving.
Suppliers of flowers may be located in remote areas – this is a factor which needs to be considered, arrival
of fresh stocks may be delayed.
Etc.
CHECKLIST
Requires more
Skills Yes – proficient Completed
attention
Calculate cost of sales and mark-up using
the perpetual stock system.
Make the necessary entries in the journals
and ledger accounts using the perpetual
stock system.
Show the effect on the Accounting
equation according to both systems.
Explain perpetual inventory systems.
Explain periodic inventory systems.
Discuss the difference between the two
systems.
Make the necessary entries in the journals
and ledger accounts using the periodic
stock system.
Calculate the cost of sales according to the
periodic inventory system.
Calculate opening and closing stock
according to the periodic inventory system.
Draw up the Trading account according to
the periodic inventory system.
Therefore, the first Task is a baseline assessment and this will give you the required information as to whether
you can continue with the Grade 11 work or go back to the Grade 10 book to cover missing skills and
knowledge.
Take note that learners are not required to complete VAT entries in the journals, and the ledger accounts are
only covered in Grade 12. Grade 10 was an introduction and this year, the emphasis is on the calculations
using the invoice basis.
Note to Teacher:
Learners should use their own assessment form to fill in the missing details in their knowledge and / or skills–
they can be referred back to the Grade 10 book or you might have to re-teach all or some aspects, depending
on the class’s responses to the assessment Task.
Suggestion: Photostat the following examples of financial statements, enlarging them to A3 size
and pin them up on your classroom wall.
VAT CALCULATIONS:
Learners have always experienced difficulties with calculations, particularly those that involve working back-
wards. It is vital that they can calculate the amount of VAT whether the prices are quoted as exclusive or
inclusive. Extracting VAT from an inclusive amount is the same calculation that is used when calculating cost
of sales when given the sales figure.
It is important that you spend some time on these calculations and ensure that the learners are happy with
the procedure so that in Grade 12 they can focus on the ledger accounts and the VAT return.
Suggestion: You may wish to get one or all of the groups to design their own chart – using any
product (maize – flour – bread) or (cotton – mill – dye – T-shirt) to show how the VAT is determined
at each stage. You could link with the Life Orientation department to do a shared project on this
subject.
12.5.3 Which Ministry of the Government has the authority to adjust the rate of VAT?
Ministry of Finance – it is normally adjusted by the Minister of Finance during his budget speech in parliament
during February of each year.
• Zero-rated items
These goods and services attract VAT at a rate of 0%.
These goods and services are zero-rated so that they are affordable to the poorer members of the population.
(The Minister of Finance may change zero-rated products to standard rated or vice versa).
• Output VAT
This refers to VAT that is collected from the customers of the business for goods and/or services rendered.
12.5.7 Complete the following table. Assume that all goods and services are subject to VAT at
14%.
VALUE IN-
Value exclu-
TRANSACTION VAT amount CLUSIVE OF
sive of VAT
VAT
Credit sales 16 200 2 268 18 468
Cash sales 32 400 4 536 36 936
Cash purchases of trading stock 22 700 3 178 25 878
Credit purchases of trading stock 18 100 2 534 20 634
Goods taken by the owner for personal use 2 000 280 2 280
Goods returned to suppliers 1 800 252 2 052
Goods returned by customers 600 84 684
Account of a debtor written off 400 56 456
Discount allowed on credit sales 300 42 342
12.5.8 12.5.8.1 Is Mona’s Supermarket a VAT registered vendor? Give a reason for your an-
swer.
Yes. The supermarket has a VAT registration number.
• B
(8.55 + 9.69 + 31.92 + 13.68) = 63.84 x 14
/114 = R7.84
12.5.8.3 Calculate the selling price of the washing powder exclusive of VAT.
R31.92 x 100
/114 = R28.00
12.5.8.4 Calculate the change that the cashier would have handed to you.
R120.00 – R108.32 = R11.68
NOTE:
It is customary for businesses to process entries into the VAT Input and VAT Output accounts and then to
transfer the respective amounts to the VAT control account at the end of the two month period. However, it
is also possible to process all entries directly into the VAT control account
12.6.2 The adjusted amount of VAT that Durban Traders is liable to pay SARS in respect of this
sales invoice no DB 143.
Amount of original sale was R13 680 (inclusive of VAT)
VAT payable on sale = R13 680 x 14/114 = R1 680
Amount to be written off equals R4560 (inclusive of VAT)
VAT on amount to be written off = R4 560 x 14/114 = R560
VAT liability to SARS on inv. no. DB 143 = R1 680 less R560 = R1 120
12.8.3 Calculate the third and final amount that Tulani Retailers will pay Eshowe Wholesalers
on 18 December 20.1 if they had made two payments on the following dates:
• A first payment of R15 000 on 29 July 20.1.
• A second payment of R8 000 on 31 August 20.1.
The following amounts will be reflected on the invoice issued on 18 July 20.1:
• Value of goods R40 000
• LESS: Trade discount R12 000
• Net amount payable R28 000
Tulani Retailers is allowed a trade discount of 30% because of being a trader who buys in bulk in order to
resell at profit.
However, Tulani Retailers failed to settle their total debt within the 90 day period.
An amount of R23 000 (R15 000 + R8 000) was settled at 90 days, i.e.18 October 20.1
An amount of R5 000 (R28 000 less R23 000) was owing for two additional months.
Interest payable for 2 months amounts to R200 (R5 000 x 24% for 2/12).
Total payable on 18 December is R5 200 (R5 000 + R200).
DEBTORS ALLOWANCES N
20.1
Jan 1 Total b/f 2 100
8 Debtors control 1 500
VAT OUTPUT B
20.1 20.1
Jan 8 Debtors control 210 Jan 1 Balance b/d 4 000
Workings:
VAT = R1 710 x 14/114 = R210
Sales returns = R1 710 - R210 = R1 500
TRADING STOCK N
20.1 20.1
Aug 1 Balance b/d 18 800 Aug 2 Creditors control 2 200
VAT INPUT B
20.1 20.1
Aug 1 Balance b/d 9 000 Aug 2 Creditors control 308
Workings:
VAT = R2 508 x 14/114 = R308
Purchases returns = R2 508 - R308 = R2 200
Try to use examples that many people will say that they would not be unethical but when faced with situations
often react differently. For example, how many people do not try to cheat SARS by manipulating information,
take their families out to supper and claim it as a business expense, take stationery home that becomes a tax-
deductible expense to the business?
Allow learners time to discuss the ethical issues. If possible, use case studies or information that is relevant
in your community or at this present time.
•Discuss the following slogan as portrayed by SARS “Your tax quenches the nation’s thirst”
and the effect of fraud on the country.
Tax money is used for the country, e.g. education, police force, defence, hospitals, roads, emergency situa-
tions, etc.
If SARS is defrauded, it means they do not collect all the money and this will impact on the government’s
delivery of services.
12.15.5 How much does SARS pay out monthly for VAT claims?
R20 to R30 billion per month
12.15.6 Explain briefly what you understand by the term “biometric verification”.
This is “fingerprint scanning”. A VAT vendor (the owner or manager) must have his fingerprints recorded at
SARS and they can verify the real person by physically checking the finger prints.
12.15.7 According to Gugu Smit what is South Africa’s tax system based on? State at least
THREE elements.
“South Africa's tax system is based on self-declaration and depends to a large extent on the integrity of tax
payers to make full, accurate and honest disclosure and pay all the tax that is due.''
12.15.9 How did SARS detect fraud in the case of Dr. Tulani Colin Khan?
The VAT audit conducted by SARS revealed the fraud.
This included checking the bank statements.
12.15.10 Do you agree with the punishment given? Give ONE reason for your answer.
Yes.
He committed fraud which is illegal but he is paying back R1.5 million to SARS and doing 1 000 hours of
community service at a hospital in Durban dealing with HIV.
OR
No
If you commit the crime then you should at least serve part of the sentence of 10 years – should not be wholly
suspended.
12.15.11 Do you think that newspapers should be allowed to publish details of court cases of
fraud and corruption committed by private individuals, business people and govern-
ment officials?
B Business people Yes Business is there to make a profit. The customer is paying
for a service and customer must get TRUE value for his
money.
C Government officials Yes Government officials really work for the people – paid by
taxpayers’ money. The taxpayer expects these officials to
be honest. Therefore, if there is corruption then the tax-
payer must know about it.
[1]
1 545 + 340 + 515 + 2 101 + 258 – 469 – 2 450
[1]
3 675 + 7 070 – 2 500 – 4 860 – 8 620 – 5 577
The following Tasks do not appear in the Learner’s textbook but can be used for extra Tasks or tests.
EXTRA TASK 1
Information:
During February 20.9, a trader had issued and recorded the following cheques in her books. The bank balance
was overdrawn by R5 400 (before any adjustments) on 28 February 20.9. The following have not yet been
considered:
2. Calculate the new bank balance after taking into account the adjustments. Indicate whether the bank
balance is favourable or unfavourable.
1.
Name of account in General
No. Ledger No
A= OE + L Reason
Account debit Account entry
credit
Trading stock is an asset which
increases on the Dr side; Bank
(a) Trading stock Bank +500 +500
is a liability which increases on
the Cr side.
Land & buildings is an asset
which increases on the Dr side;
(b) Land & buildings Bank +830 +830
Bank is a liability which
increases on the Cr side.
Loan is a liability which
decreases on the Dr side; Bank
(c) Loan: GB Finance Bank ±460
is a liability which increases on
the Cr side.
Creditors control is a liability
which decreases on the Dr
(d) Creditors control Bank ±555
side; Bank is a liability which
increases on the Cr side.
Creditors control is a liability
which decreases on the Dr
Discount
Creditors control +25 -25 side; Discount received is an
received
income which increases on the
Cr side (OE+).
Post-dated cheques are only
(e) X
recorded on the due date.
Bank is a liability which
decreases on the Dr side; Rent
(f) Bank Rent income +1 500 -1 500 income is an income which
increases on the Cr side
(OE+).
Bank charges is an expense
which increases on the Dr side
(g) Bank charges Bank -314 +314
(OE-); Bank is a liability which
increases on the Cr side.
Interest on o/d is an expense
which increases on the Dr side
(h) Interest on o/d Bank -982 +982
(OE-); Bank is a liability which
increases on the Cr side.
EXTRA TASK 2
Required:
1. Complete the Cash Journals of Sipilo Stores.
2. Post to the Bank account only.
3. Prepare the Bank Reconciliation Statement on 30 April 20.9.
Note:
Sipilo Stores has a current account with Sharper Bank.
Information:
Bank Reconciliation Statement on 31 March 20.9
Favourable balance as per bank statement R315
Outstanding deposit 12 600
Outstanding cheques:
No. 0155 2 444
No. 0178 6 498
No. 0189 992
No. 0198 500
No. 0204 530
Balance as per bank account ?
Additional information:
1. Provisional totals in the Cash Journals:
Cash Receipts Journal R18 760
Cash Payments Journal R13 647
2. The bank statement showed a direct deposit of R3 560 received from Fulham Stores for commission
earned. This did not appear in the Cash Journal.
1. SIPILO STORES
CASH RECEIPTS JOURNAL FOR APRIL 20.9 CRJ
Doc. Sundry accounts
D Details Fol Bank
no. Amount Fol Details
30 Totals b/f 18 760 18 760
0155 Morteck Suppliers (mislaid cheq.) 2 444 2 444 Creditors control
0178 DK Dealers (cheque cancelled) 6 498 6 498 Trading stock
0189 Omar’s Shop (overstated) 63 63 Consumable stores
B/S Fulham Stores 3 560 3 560 Commission income
B/S Sharper Bank 45 45 Interest income
B/S P. Noble 250 250 Bad debts recovered
31 620 31 620
B
[1]
315 + 12 600 – 2 444 – 6 498 – 992 – 500 - 530
EXTRA TASK 3
The information below relates to the books of Silvano Dealers.
Required:
Use the relevant information to prepare the following:
1. The Bank account in the General Ledger, properly balanced on 30 June 20.8.
2. The Bank Reconciliation Statement as at 30 June 20.8.
EXTRA TASK 4
The inexperienced bookkeeper of Money Penny Stores closed off the cash journals for March 20.8 before
comparing the bank statement.
Required:
Enter all the necessary transactions to update the records directly into the Bank account and prepare a Bank
Reconciliation Statement on 31 March 20.8.
Note:
The contra accounts (contra references) for the individual entries must be clearly indicated when preparing
the Bank account.
Information:
1. The Bank account is given below:
2. The following items appeared on the bank statement for March 20.8 and were not ticked off:
• Service fees R245; cash deposit fee R68; interest on debit balance R255.
• Unpaid cheque:
- A cheque received from G. Buntie for R540 in settlement of his account was dishonoured due to
insufficient funds.
• Deposits:
- An electronic payment made by the tenant R3 000.
- An electronic payment made by a debtor, U. Opius, R350. His account had been previously written
off.
• Cheque no. 0961 for R2 690 for merchandise. This had been entered into the Cash Payments Journal
as R1 690. The bank statement is correct.
• Debit orders:
- In favour of BeeQue Brokers for insurance R1 245.
- In favour of the local municipality to pay the monthly utility bill in respect of lights, water and rates
R1 988.
- In favour of TMN to pay the monthly cellphone charges of the business R1 774.
- In favour of TMN to pay the monthly cellphone charges of the owner’s daughter R1 991.
3. The following items appeared in the cash journals but not on the bank statement:
- Outstanding deposit R1 445.
- Cheques:
No. 0061: R1 200 (15 September 20.7)
No. 0081: 245 (6 January 20.8)
No. 0861: 2 555 (8 February 20.8)
No. 1141: 987 (15 March 20.8)
No. 1175: 432 (15 April 20.8)
Note:
▪ Cheque no. 0061 was issued to Tavco Wholesalers for goods which had been delivered in
September. The cheque is stale.
▪ Cheque no. 0081 had been lost in transit. It was issued to Dino’s for repairs. The cheque will be
replaced during April 20.8.
Explanation:
The bookkeeper (Rihanna) overstated the discount by R900. It is, therefore, necessary to add back R900 to
the creditor’s balance.
Alternate format:
Balance as per Statement of account 30 314
Correction of error on 20th – Inv. 5780 (9 880)
Invoice 6011 not reflected on statement 6 771
Payment not reflected on statement (9 500)
Discount not reflected on statement (475)
Balance as per Creditors Ledger 17 230
Explanation:
• The Statement of account balance is entered on the debit side. From the point of view of Coprox Whole-
salers this amount (R30 314) is owing to them. It should be noted, that you can start with the balance in
the Creditors Ledger and then end with the Statement of account balance.
• Error on the 20th: this is shown as a credit as Celeb Stores were erroneously debited with a purchase
made by another business.
• Invoice 6011: this purchase has not been recorded by Coprox Wholesalers as this transaction took place
after the 25th. The Statement of account reflects transactions up to and including 25 June 20.8.
• Payment and the discount: these do not appear on the Statement as the transaction took place after the
25th.
13.6.3 The owner of this business needs to know how soon suppliers (creditors) are being
paid. Use the relevant information below to calculate the creditors’ payment period
in days.
Average creditors x 365
Credit purchases
½(50 000 + 64 000) x 365
416 100
57 000 x 365 = 50 days
416 100
13.6.4 The debtors collection period on 28 February 20.8 is 90 days. State your observations
on the debtors collection and creditors payment periods. Suggest ways in which the
situation can be improved.
Creditors are been paid in 50 days which is 40 days before the debtors are paying their accounts (90 days).
Besides this the business has to also sell the stock and only then collect the money from the debtors some
90 days later.
The business thus has to pay out money before it has been collected. This will mean the business needs
more working capital.
The ideal situation is to sell the stock, collect the money from the debtors and only then pay the creditors.
13.7.2 Apart from showing the amount owing to the supplier what are the other purposes of
a statement of account?
Shows purchases for the month, payments made, discounts that may have been received, returns, etc.
13.7.3 Provide a reason for the stock returns not appearing on the statement.
• The business has not received the stock yet.
• The business has not accepted the returns.
13.7.5 Refer to the 2nd item in the Creditors Reconciliation Statement. Why has this amount
been subtracted?
The supplier may have overstated an invoice by R240.
Other possible answers, e.g. incorrect addition, a return may have been understated by R240, creditor may
have charged for goods that this business did not purchase, etc.
The incorrect plus will have to be cancelled by subtracting the amount.
Calculations:
[1]
Vehicles 510 000 – 60 000 – 258 160 x 25% = R47 960
60 000 x 25% x 5 months (5/12) = R6 250
R47 960 + 6 250 = R54 210
[2
Equipment 171 500 x 20% = R34 300
40 500 x 20% x 4/12 months = R2 700
R34 300 + R2 700 = R37 000
[3]
Computers R85 000 x 30% = R25 500
1 500 x 30% x 8/12 months = R300
R25 500 + 300 = R25 800
EQUIPMENT B6
20.6 20.7
July 1 Balance b/d 171 500 June 30 Balance c/d 212 000
20.7
Feb 28 Bank/Creditors control 40 500
212 000 212 000
20.7
July 1 Balance b/d 212 000
[1]
[510 000 – 60 000 – 258 610 x 25% = 47 960] + [60 000 x 25% x 5/12 = 6 250] = 54 210
[2]
[171 500 – 40 500 x 20% = 34 300] + [40 500 x 20% x 4/12 = 2 700] = 37 000
[3]
[85 000 x 30% = 25 500] + [1 500 x 30% x 8/12 = 300] = 25 800
[1]
R5 400 x 20% x 6/12 = R540
[2]
1 March 20.1 – 31 Aug 20.4 = 42 months / 3½ years
5 400 x 20% x 42/12 = R3 780
[3]
128 800 – 5 400 x 20% = R24 680
RECORD OF DEPRECIATION
Accum.
Cost Book
Date Details Amount depre- Remarks
price value
ciation
20.8
March 1 Balance b/d 5 400 3 240 2 160
Aug 31 Depreciation at
20%p.a. for 6 540 3 780 1 620
months
Sold to K. Alex 1 800 R180 profit on sale
13.11.3 Discuss 4 measures that the owner could introduce to ensure that the new equipment
brings in a profit when it is sold in the future.
• Ensure that the equipment is serviced whenever necessary to maximise the life span.
• Buy equipment of good quality so that it lasts and has a higher re-sale value.
• Should consider selling the equipment earlier before it loses too much value.
• Control personal use of the equipment.
CALCULATION OF DEPRECIATION:
On vehicles:
Sold: 90 000 x 20% x 8/12 = R12 000
Remaining: 360 000 – 90 000 x 20% = R54 000
204 000 x 20% x 4/12 = R13 600
Total: 12 000 + 54 000 + 13 600 = R79 600
On equipment:
150 000 x 20% = R30 000
120 000 x 20% x 6/12 = R12 000
Total: 30 000 + 12 000 = R42 000
FIXED ASSETS
Land &
Vehicles Equipment Computers
buildings
Carrying value at beginning 450 000 540 000 240 000 9 000
Cost 450 000 800 000 510 000 88 000
Accumulated depreciation (260 000) (270 000) (79 000)
Movements 0 84 500 37 000 (4 750)
Additions at cost 44 000 210 000 140 000 18 000
Disposals at carrying value 44 000 0 (22 000) 0
Depreciation 0 (129 000) (81 000) (9 749)
Carrying value at end 494 000 621 000 277 000 17 251
Cost 494 000 1 010 000 570 000 106 000
Accumulated depreciation 0 (389 000) (293 000) (88 749)
EQUIPMENT
Sold: 80 000 x 15% x 6/12 = 6 000
Remaining: 510 000 – 80 000 x 15% = 64 500
New: 140 000 x 15% x 6/12 = 10 500
Total: 6 000 + 64 500 + 10 500 = R81 000
COMPUTERS
88 000 x 25% = 8 999 (the book value is only R9 000)
18 000 x 25% x 2/12 = 750
Total: 8 999 + 750 = R9 749
PARTNERSHIPS
[1]
Calculation of Salary:
Thando: (10 000 x 10) + (11 000 x 2) = 100 000 + 22 000 = 122 000
Yenzo: (8 000 x 10) + (8 800 x 2) = 80 000 + 17 600 = 97 600
[2]
Calculation of Interest on capital:
Thando: (160 000 x 15% x 6/12) + (180 000 x 15% x 6/12) = 12 000 + 13 500 = 25 500
Yenzo: (180 000 x 15% x 10/12) + (160 000 x 15% x 2/12) = 22 500 + 4 000 = 26 500
(b) Refer to the notes prepared above. Should the partners be happy with their business?
Supply two reasons.
Returns on average equity are as follows:
Business: 300 000/362 360 x 100 = 82.8%
Thando: 171 700/193 350 x 100 = 88.8%
Yenzo: 178 300
/169 010 x 100 = 75.9%
Yes, the partners should be very happy.
The business as a whole and the partners individually are earning exceptional returns (see above).
The profit earned in one year is almost equal to the capital they have invested.
They are withdrawing approximately 85% of the profit earned (254 280/300 000 x 100) so they are not reinvest-
ing very much of the profits they earned, which is a negative point.
(i) False
(ii) True
(iii) True
(iv) True
(v) False
(vi) True
(vii) False
(viii) False
(ix) True
(x) False
WORKING:
Rent:
(6 600 x 11) = 72 600; Repairs = 76 800 – 72 600 = 4 200; Feb rent to pay = R6 600 – 4 200 = R2 400
Interest on loan:
(280 000 x 13% x 6/12) + (250 000 x 13% x 6/12) = 18 200 + 16 250 = R34 450
APPROPRIATION F3
20.2 20.2
Feb 28 Salary: Andile 216 000 Feb 28 Profit & loss account 360 201
Salary: Bryan 144 000 Current a/c: Andile 29 775
Bonus: Bryan 20 000 Current a/c: Bryan 29 774
Interest on capital 39 750
419 750 419 750
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 28 FEBRUARY 20.2
1. INTEREST INCOME
On fixed deposit [3 540 + 960] 4 500
On savings account 1 980
On overdue debtors’ account 156
6 636
2. INTEREST EXPENSE
on loan [24 900 + 9 550] 34 450
34 450
4. INVENTORIES
Trading stock [481 000 – 2 310 – 8 640] 470 050
Consumable stores on hand [3 900 + 1 950] 5 850
475 900
[1]
Calculation of Sarah’s salary: 115 200 x 100/120
[2]
Calculation of interest on capital:
Mary: (5% x 1 300 000 x 6/12) + (5% x 1 500 000 x 6/12) = 32 500 + 37 500 = R70 000
Sarah: (5% x 900 000 x 6/12) + (5% x 750 000 x 6/12) = 22 500 + 18 750 = R41 250
(b) Calculate the percentage Gross profit on cost of sales for each year.
20.6 20.5
112 000 x 100 = 38.9% 96 000 x 100 = 27.9%
288 000 1 344 000 1
(c) Calculate the Operating expenses as a percentage of sales (turnover) for each year.
20.6 20.5
84 000 x 100 = 21% 76 000 x 100 = 17.3%
400 000 1 440 000 1
(d) Calculate the Operating profit as a percentage of sales (turnover) for each year.
20.6 20.5
Operating profit: Operating profit:
400 000 – 288 000 + 20 000 – 84 000 = 48 000 440 000 – 344 000 + 20 000 – 76 000 = 40 000
48 000 x 100 = 12% 40 000 x 100 = 9.1%
400 000 1 440 000 1
(e) Calculate the Net profit as a percentage of sales (turnover) for each year.
20.6 20.5
Net profit = 48 000 + 10 000 – 11 000 = 47 000 Net profit = 40 000 + 9 000 – 8 000 = 41 000
47 000 x 100 = 11.8% 41 000 x 100 = 9.3%
400 000 1 440 000 1
13.17.2 OP Stores:
Calculate(a)
Net profit as a percentage of Average owners’ equity for each year.
20.6 20.5
168 000 x 100 = 26.9% 232 000 x 100 = 43%
624 000 1 540 000 1
13.17.3 QR Stores:
Calculate(a)
Net assets for each year.
20.6 20.5
Total assets – Total liabilities
(560 000 + 40 000 + 180 000) – (100 000 + 320 (568 000 + 40 000 + 152 000) – (80 000 + 520
000) 000)
780 000 – 420 000 = R360 000 760 000 – 600 000 = R160 000
Calculate(b)the Solvency ratio (i.e. total assets: total liabilities) for each year.
20.6 20.5
Total assets : total liabilities
780 000 : 420 000 = 1.9 : 1 760 000 : 600 000 = 1.3 : 1
13.17.4 ST Stores:
Calculate
(a) net Current assets for each year.
20.6 20.5
Current assets – Current liabilities
240 000 – 52 000 = R188 000 160 000 – 28 000 = R132 000
Calculate
(b) the Current ratio (i.e. Current assets : Current liabilities) for each year.
20.6 20.5
Current assets : Current liabilities
240 000 : 52 000 = 4.6 : 1 160 000 : 28 000 = 5.7 : 1
Calculate
(c) Liquid assets (i.e. Current assets without Inventories) for each year.
20.6 20.5
Current assets – Inventories
240 000 – 140 000 = R100 000 160 000 – 80 000 = R80 000
Calculate
(d) the Acid-test ratio (i.e. Liquid assets : Current liabilities) for each year.
20.6 20.5
Liquid assets : Current liabilities
100 000 : 52 000 = 1.9 : 1 80 000 : 28 000 = 2.9 : 1
13.17.5 UV Stores:
(a) Calculate the average stock for each year.
20.6 20.5
(165 000 + 195 000) ÷ 2 = R180 000 (135 000 + 165 000) ÷ 2 = R150 000
(b) Estimate how long it will take the business to sell its closing stock at the end of each year.
20.6 20.5
Average daily cost of sales:
900 000 ÷ 365 = R2 466 600 000 ÷ 365 = R1 644
Stock period:
195 000 ÷ 2 466 = 79 days 165 000 ÷ 1 644 = 100 days
(c) Calculate how many times the business had to re-order stock during each year, i.e. the turn-
over rate of stock (use average stock in your calculation).
20.6 20.5
900 000 ÷ 180 000 = 5 times 600 000 ÷ 150 000 = 4 times
(d) You are told that this business sells clothing. In your opinion, are the financial indicators
calculated above satisfactory? Explain.
Yes, the indications are satisfactory.
The business is now replacing its stock at a faster rate (5 times instead of 4 times) which could indicate greater
volume of customers, which would lead to bigger profits.
In the clothing business fashion changes frequently (±3 months), so 79 days should be appropriate.
This has improved from the 100 days of stock in 20.5.
(e) If this business sells groceries, would your answer in (d) be different? Explain.
Yes.
A grocery store stocks perishable items.
A grocery store should aim to have a very high stock turnover rate and a lower closing stock.
13.17.6 WX Stores:
(a) Calculate the debtors average collection period for 20.6 and 20.5.
20.6 20.5
Average debtors: Average debtors:
(60 000 + 100 000) ÷ 2 = 80 000 (100 000 + 80 000) ÷ 2 = 90 000
80 000 x 365 = 38.9 days 90 000 x 365 = 29.2 days
750 000 1 1 126 000 1
(b) Calculate the creditors average payment period for 20.6 and 20.5.
20.6 20.5
Average creditors: Average creditors:
(200 000 + 140 000) ÷ 2 = 170 000 (140 000 + 160 000) ÷ 2 = 150 000
160 000 x 365 = 74.9 days 150 000 x 365 = 49.8 days
780 000 1 1 100 000 1
13.19.4 How would you know that the partners were expecting to make a bigger profit than
the one they earned this year?
The primary distribution according to the partnership agreement is greater the net profit earned.
They would have expected a remaining profit.
13.19.5 What percentage of the current year’s profits was retained in the business? What
reason would the partners have had in making this decision?
75 000 x 100 = 38.5%
195 000 1
The partners wish to retain a portion of the profits so that the business can grow and earn bigger profits in
the future.
13.19.10 If the debt : equity ratio is 0.25 : 1, calculate the amount of the non-current loans.
Non-current loans : 0.25 x 996 000 = R249 000
13.19.11 Comment on the returns and the debt : equity ratio for 20.8. The comparative figures
for the previous year were:
- Return earned by the business: 21%
The percentage return earned by the business increased from 21% to 24.1%.
13.19.12 Aboobaker is not happy with his returns. In your opinion, does he have a valid con-
cern? What advice would you offer him?
Yes – Consider the following:
• Aboobaker has more capital than Marx.
• The return earned by Aboobaker is less than that of the business and Marx.
• He should renegotiate the partnership agreement.
13.20.2 Has the business appeared to control its operating expenses well in 20.5? Quote two
financial indicators (actual figures or percentages) for both years to support your an-
swer.
Yes.
Operating expenses as a percentage of sales have improved from 42.5% in 20.4 to 35.1% in 20.5.
Consequently Operating profit as a percentage of sales increased from 16.6% to 20.2%.
This is partly due to the good control of operating expenses, and also to the successful strategy relating to the
mark-up percentage.
13.20.3 Comment on the solvency of the business. Should the partners be satisfied? Explain.
Quote a financial indicator (actual figures or percentages) for both years to support
your answer.
Yes.
In both years the solvency ratio is more than 3 : 1 .
The total assets exceed the total liabilities by more than three times, so the business should not have any
problem in paying off all its debts.
13.20.4 Zilda says she does not agree with the low value of land & buildings in the Balance
Sheet as it is valued at the cost price from 10 years ago. She says the solvency ratio
will be even better if the land & buildings are valued at current values. Do you agree
with her? Explain.
Yes and No.
She is correct that the solvency ratio will be higher as total assets will be much higher based on the current
value of land and buildings.
However, it is generally accepted practice to value land and buildings at historical cost (GAAP).
This also complies with the rule of prudence (i.e. being conservative) as they cannot be certain of the current
value until the land and buildings are sold.
13.20.5 Comment on the control over stock, debtors and creditors. Quote financial indicators
(actual figures) for both years to support your answer.
Stock:
The business is keeping too much stock.
Fashions change almost every 3 months/90 days), but they are keeping 150 days of stock (worsened from 120
days).
Debtors:
The control over debtors has improved.
They are now paying much quicker, in 27 days rather than the 45 days of the previous year.
13.20.6 Comment on the current ratio and the acid-test ratio. Quote the financial indicators
(actual figures or percentages) for both years to support your answer.
Current ratio: Has increased from 2.4 : 1 to 3.3 : 1
Acid-test ratio: Has increased from 1.3 : 1 to 1.5 : 1.
Although the business will have no problem in settling its current debts, both these ratios are too high and
represent too much invested in working capital.
Even without relying on the sale of stock, the business will not have a problem paying off its current debts.
Current asset items do not earn a return and it would be advisable to convert some of these assets into
investments.
13.20.7 Comment on the debt / equity ratio. Quote a financial indicator (actual figures or
percentages) for both years to support your answer.
The debt/equity ratio has been maintained at 0.2 : 1 for both years which indicates that the business relies
significantly more on capital provided by the owners rather than on borrowed capital.
Partner’ capital is 5 times higher than the loans.
This means that the business is in a low-risk situation.
If profits drop in future, the business will not have to pay high interest on loans and loan repayments will be
relatively low.
13.20.8 Comment on the percentage return earned by the business, by Piet and by Zilda.
Quote financial indicators (actual figures or percentages) for both years to support
your answer.
Percentage return of the business:
This has improved from 22.2% to 26.3% which greatly exceeds the return on alternative forms of investment.
The partners should be very satisfied.
But this return could be even higher if they sort out the over-investment in current assets (see 13.20.5 and
13.20.6 above).
Percentage return of Piet:
His return is good and it has increased from 18% to 21.6%.
Percentage return of Zilda:
His return is very satisfactory; it has increased from 24.9% to 30.0%.
However, Piet should be concerned that his percentage return is consistently lower than that of Zilda, and that
of the business.
He might have contributed considerable capital and he might not be earning what he feels he might be entitled
to earn.
He should inspect the partnership agreement to see that he is happy with the provisions.
13.20.9 Comment on the Drawings taken by the partners. Is this good business practice? Ex-
plain, quoting a financial indicator (ratio or percentage) for both years to support your
answer.
In both years the partners are drawing 50% of the profit earned by the business.
This is good business practice as it means the partners are personally benefiting from the business each year
by taking a good percentage of the profit in the form of drawings, while they are also retaining 50% of the
profit in the business which will enable it to grow and earn even bigger profits in the future.
Also the business will be worth more, which will enable the partners to sell the business at a higher value
should they choose to retire at some stage.
4. INVENTORIES
Refreshments [939 – 939 + 325] 325
325
5. RECEIVABLES
Prepaid expenses [30 – 30 + 1 470] 1 470
Income receivable/Accrued income
[1 000 – 90 – 750 –160 + 135] 135
Deposit for hall 150
1 755
6. CASH AND CASH EQUIVALENTS
Fixed deposit 6 250
Savings account 456
Bank [75 + 21 344 – 19 321] 2 098
8 804
7. ACCUMULATED FUND
Balance at beginning of financial year 149 250
Net surplus for the year 2 521
Entrance fees capitalized [4 575 x 1/3] 1 525
Balance at the end of the financial year 153 296
8. PAYABLES
Creditors [925 – 875] 50
Expenses payable [100 – 100 + 1 250] 1 250
Deferred income [225 – 225 + 450] 450
Short term loan 3 750
5 500
[1]
6 x 300 = 1 800
[2]
4 x 300 = 1 200
[3]
2 x 300 = 600 OR 1 800 – 1 200 = 600
[4]
8 x 300 = 2 400
[5]
100 + 6 – 1 x 300 = 31 500
[6]
Balancing figure OR
100 – 1 (membership terminated) – 1 (paid in 2002 for 2003) – 8 (arrears in 2003) + 6 (new members)
= 96 x 300 = R28 800
[1]
[28 000 x 5%] + [2 400 x 8% x 3/12] = 1 400 + 48 = R1 448
[2]
[120 000 x 9% x 8/12] + [120 000 – 12 000 x 9% x 4/12]
= 7 200 + 3 240 = R10 440
[3]
62 000 + 5 000 – [4 x 500] = 65 000 for 13 months
Old rent amount = 65 000 13
= R5 000 per month
Prepaid amount = 5 000 + 500
= R5 500
[4]
8 400 x 15% x 11/12 = 1 155
[5]
[260 000 – 12 000] – [124 000 – 3 600]
= 248 000 – 120 400 = 127 600
127 600 x 15% = R19 140
[6]
18 200 x 15% x 4/12 = R910
13.23.4 Notes to the financial statements for the year ended 31 December 20.3
*110 – 2 [2 400 ÷ 1 200] – 9 [10 800 ÷ 1 200] + 14 [2 800 ÷ 200] x 1 200 = 113 x 1 200 = R135 600
13.24.2 Do you think the committee should be happy with the collection of fees? Why?
Give TWO reasons for your answer.
No.
13 members (15 600 ÷ 1 200) did not pay their previous year’s fees.
This amounts to 12% (13/110 x 100).
17 members (20 400 ÷ 1 200) did not pay their current year’s fees.
This amounts to 15% (17/113 x 100). Arrear fees have increased by 3%.
The fees of 9 members had to be written off – 8% (9/110 x 100) of the total membership.
Alternate answers are possible.
COST ACCOUNTING
13.25.2 Calculate the unit cost if 1 500 satellite dishes were manufactured.
R1 432 200 ÷ 1 500 units = R954.80
13.27.2 Calculate the unit cost of production of a cap if 109 000 caps were manufactured
during the year.
436 000 ÷ 109 000 = R4
(c) Do you recommend that the sanitary ware be imported from China? Discuss two rea-
sons for your answer.
No.
Quality of products.
Distance between countries – lead to problems regarding queries, returns, placing of orders.
Time taken between placing of orders and delivery of goods.
Risk with shipping – damages.
Yes.
Profits increase.
Remove risks associated with manufacturing, e.g. strike action by workers, etc.
[1]
5 200 + 15 540 - 6 800 [2]
22 400 x 4/5
[3]
36 000 x 800/1 200 [4]
9 800 x 4/5
[5]
72 000 + 5 400 + 12 000
13.28.2
(a) Calculate the following:
• Direct material cost per unit
390 600 ÷ 28 000 = R13.95
13.29.2 In your opinion what did Kamino do to improve credit terms? Give two examples.
No deposit; lower deposit; no credit checks, etc.
13.29.3 Calculate the expected cash and credit sales for the period 01 April 20.8 – 30 June
20.8. (Round off answers to the Rand when necessary).
PAYMENTS
Cash purchases of stock[2] 25 800 24 000 25 500 75 300
Payments to creditors[3] 16 000 24 000 18 000 58 000
Operating expenses 30 600 31 212 31 836 93 648
Drawings 10 000 10 000 10 000 30 000
Deposit on vehicle 20 000 - 20 000
Instalment on vehicle 1 200 1 200
Total payments [B] 82 400 109 212 86 536 278 148
CASH PAYMENTS
Stock purchases[1] 12 000 10 800 12 420 35 220
Payments to creditors[2] 151 200 108 000 97 200 356 400
Loan instalment 2 550 2 550 2 550 7 650
Salaries 60 000 60 000 60 000 180 000
Drawings 5 000 5 000 5 000 15 000
Sundry operating expenses 49 850 50 000 50 150 150 000
Total payments [B] 280 600 236 350 227 320 744 270
(b) The carrying value of the vehicle sold in February is R18 000. Calculate the
profit or loss on the vehicle sold.
Selling price (R21 000) is higher than the carrying value (R18 000). A profit of R3 000 was made.
(c)Calculate the expected amount for “other operating expenses” for April 20.8
Explain how you arrived at this figure
R50 300 - There is a monthly increase of R150 from January to March.
(d) Study the Cash Budget and state six observations that you have made about
this budget.
• In January the large deficit arose mainly from the large amount paid to creditors in respect of December
purchases.
• The sale of the vehicle brought in more cash but there is still a deficit.
• The additional loan in March and the rent income resulted in a positive balance.
• A healthy balance of R186 450 has decreased to R61 480 over a 3-month period.
• The proprietor should be concerned about this decrease in cash.
• Sales revenue need to be boosted – consider a change in mark-up, advertising campaigns, etc.
• Better control over expenses is necessary.
INVENTORY SYSTEMS
[1]
Purchases: 520 000 + 3 400 – 5 800 – 1 200 [2]
Carriage on purchases: 14 600 + 2 500
[3]
Sales: 882 000 – 22 000 – 1 920
13.32.4 Jack Nkosi is considering changing to the perpetual inventory system next year. What
main point should he consider before doing this?
Cost of implementation in comparison to the benefit.
Any other valid explanation.
13.33.6 At month-end the amount that will be transferred to the Trial Balance is R92 376. Cal-
culate the missing amount on the debit side marked ‘*’.
92 376 + 1 232 + 1 987 + 1 209 – 24 320 – 31 250 = R41 234
PURCHASES N
20.7 20.7
Dec 31 Total b/f 356 710 Dec 31 Drawings GJ 1 860
Trading account GJ 354 850
356 710 356 710
[1]
Rent amount before the R500 increase = 33 000 – [4 x 500]
= 33 000 - 2 000 = R31 000
01 Jan 20.7 – 30 April 20.7: 4 x 100% = 400%
01 May 20.7 – 28 Feb 20.8: 10 x 115% = 1 150%
Total = 1 550%
[2]
80 000 – 56 000 x 25% x 11/12 = R5 500
[3]
[320 000 – 80 000] – [200 740 – 56 000] x 25%
= 240 000 – 144 740 x 25% = R23 815
[4]
148 000 - 32 000 x 15% = 17 400
[5]
32 000 x 15% x 4/12 = 1 600
Cost of sales:
Opening stock 96 660
Purchases 354 850
Carriage on purchases 40 510
Customs duty 13 790
505 810
LESS Closing stock 92 000
Cost of sales R413 810
2. INVENTORIES
Trading stock 92 000
Consumable stores on hand 500
92 500
3. TRADE AND OTHER RECEIVABLES
Net trade debtors 48 960
Trade debtors 54 400
Provision for bad debts [5 440]
Prepaid expenses 5 500
54 460
4. CASH AND CASH EQUIVALENTS
Bank 44 110
Petty cash 2 000
Cash float 4 500
50 610
5. OWNER’S EQUITY
Balance on 01.01.20.7 600 000
Net profit for the year 166 865
Additional capital introduced 50 000
Drawings [124 360]
Balance on 31.12.20.7 692 505
6. TRADE AND OTHER PAYABLES
Trade creditors 90 530
Pension fund (2 500 – 90 + 1 080) 3 490
UIF (210 – 1 080 + 90)* (780)
Income received in advance/Deferred income 5 600
Accrued expenses/Expenses payable 670
99 510
*Can be shown under Trade and other receivables.
13.35.2 BANK B
20.8 20.8
June 1 Balance b/d 12 569 June 30 Sundry accounts CPJ 89 256
30 Sundry accounts CRJ 115 655 Balance c/d 38 968
128 224 128 224
July 1 Balance b/d 38 968
13.35.5 PURCHASES N
20.8 20.8
June 1 Total b/f 99 550 June 30 Creditors control CAJ 2 167
30 Bank CPJ 36 298
Creditors control CJ 16 367
Petty cash PCJ 449
152 664 2 167
Periodic method:
No. Account debit Account credit Amount
(a) Purchases Creditors control R3 942
(b) Bank Sales R3 400
(c) Carriage on purchases Bank R475
(d) Donation Purchases R720
(e) Creditors control Purchases R930
(f) Bank Rent income R2 900
(g) Debtors allowances Debtors control R513
13.36.2 Briefly explain 2 advantages of the perpetual inventory system over the periodic in-
ventory system.
Stock movements are recorded immediately.
Stock shortages are easily detected.
More sophisticated – bar coding, inventory control computer software.
Any other valid answer.
13.36.3 Briefly explain 2 advantages of the periodic inventory system over the perpetual in-
ventory system.
Cheaper – no need for expensive outlay in computer/scanners, etc.
Ideal for smaller businesses where cost price cannot be easily determined.
Any other valid answer.
VAT
MAJMEY CLOTHING
Balance Sheet on 28 February 20.9
20.9 20.8
Non-current assets 6 320 800 5 266 500
Fixed / tangible assets 5 864 500 4 942 500
Investment (Fixed deposit at A1 Bank) 456 300 324 000
Note 1: CAPITAL
MAJOLA MEYER TOTAL
Balance on 1 March 20.8 3 000 000 1 200 000 4 200 000
Capital contributed on 31 August 20.8 0 600 000 600 000
Balance on 28 February 20.9 3 000 000 1 800 000 4 800 000
Promotion of the gym to gain Per client, this gym makes the Repairs to equipment appear
clients is good. Spent highest profit (R167). The po- to be well controlled
Good
R50 000 on advertising which tential exists to make the (R54 000, which is on aver-
points
is double that of the Polo- highest profit of the three age R12 per client). This
relating
kwane gym, but the Knysna gyms if they can double the could be seen as a negative if
to each
gym has 1 500 more mem- membership. clients are dissatisfied with
gym
bers. the condition of the equip-
ment.
2. Better control is needed over the collection of fees. A new system needs to be put in place, especially
for the Polokwane gym. Encourage clients to pay by debit order even though bank charges could in-
crease. This would also reduce the security risk of carrying cash on the premises.
3. The promotion of the gyms should probably be done as a concerted effort from Steve’s head office. It
is clear that the managers of the different gyms are using different policies which are not always suc-
cessful.
4. The role of instructors needs to be determined. These people are obviously good for each gym. Maybe
it is necessary to employ more of them and pay them more or employ them for more hours (such as
occurs with the Knysna gym) as the clients might feel they are getting better service.
5. Certain costs in certain gyms need to be investigated to assess whether controls are good or not, e.g.
telephone costs in the Knysna and Benoni gyms; administration salaries in the Polokwane gym; other
operating costs in the Knysna gym.
6. The condition of the equipment in all three gyms must be inspected. Although the Knysna and Polkwane
gyms are relatively not spending much, they must not allow the condition of the equipment to deteriorate
as this will lead to loss of clients. On the other hand, maybe the relatively higher expenditure on repairs
by the Benoni gym is due to clients or employees abusing the equipment, so better physical control
might be necessary.
Alternate format:
Bank Reconciliation Statement on 30 September 20.9
Debit Credit
Balance as per the bank statement 7 922 ✓
Outstanding deposit✓ 5 200 ✓
Correction of overpayment of stop order 2 400 ✓✓
Outstanding cheques:✓ No. 201 850 ✓✓
No. 195 920 ✓
No. 198 740 ✓
Balance as per bank account 2 832
10 432 10 432
Negative marking: -1 for R1 200; -1 for R1 250
1.4 The owner has asked for your assistance on how to prevent situations like 2.5 (6)
above occurring again in the future. Briefly discuss 3 measures that he can intro-
duce.
• 2 signatures on each cheque.✓✓
• Authorisation must be obtained before a cheque is written out.✓✓
• Division of duties. ✓✓
Any other feasible reason.
CALCULATION OF DEPRECIATION
VEHICLE SOLD: 260 000 x 15% x 10/12 = R32 500
Balance of vehicles:
560 000 – 260 000 = 300 000 x 15% = R45 000✓✓
320 000 x 15% x 2/12 = R8 000✓✓
EQUIPMENT:
80 000 x 20% = 16 000✓✓
132 000 x 20% x 4/12 = 8 800✓✓
2.3.2 Briefly discuss 3 measures that the business could introduce to try to avoid such (6)
losses in the future.
• Control private mileage.✓✓
• Keep up the services and maintenance.✓✓
• Trade in earlier before losses are incurred.✓✓
• Any other feasible reason.
(11)
3.2.3 CAPITAL ACCOUNTS Stuart Mark Total
Balance at the beginning of the year 480 000 600 000 1 080 000
Contribution of capital during the year 80 000
Withdrawal of capital during the year
Balance at the end of the year 560 000 600 000 1 160 000
(14)
3.3.2 Stuart and Mark are not happy with this return as they budgeted to make a return
of 50% this year. Explain to them why in view of the economic climate they
should be happy with this return. (5)
Recession and poor economic conditions may have resulted in the decrease. Also it should be noted that the
sporting industry is not an essential item. ✓✓✓
The return of 40% is a lot higher than they would receive on an alternative investment. ✓✓
4.2 The acid test ratio for 20.9 is 1.4 : 1. Calculate the missing cash and cash equivalent and in-
ventory figures. (6)
65 000 x 1.4 = R91 000✓✓
CASH AND CASH EQUIVALENTS: 91 000 – 72 000✓ = R19 000
INVENTORY: 169 000 – 91 000 = R78 000✓
4.3 Calculate the average stock holding period for 20.9. (4)
(78 000 + 110 000) ÷ 2 x 12
423 000
94 000 ✓ x 12
423 000✓
2.7 months / 81 days✓
4.4 Calculate the average debtors’ collection period for 20.9. (4)
(72 000 + 60 000) ÷ 2 x 12
761 400 x 70%
66 000✓ x 12
532 980✓✓
1.5 months / 45 days
4.5 Calculate the average creditors’ payment period for 20.9. (4)
(65 000 + 52 000) x 12
423 000 x 90%
58 500✓ x 12
380 700✓✓
1.8 months / 56 days
4.6 The owner is very happy as he believes the liquidity position of the business has
improved as the current ratio has decreased from last year. You do not totally agree
with him. Explain why you feel this way, by quoting at least 2 figures to support your
answer. (6)
The stock holding period has increased from 1.9 months to 2.7 months.✓✓
The creditors are been paid quicker than last year (1.8 months as against 2.1 months).✓✓
The debtors are taking longer to pay, i.e. 1.5 months as against 1.2 months.✓✓
Therefore, creditors are been paid before the stock has been sold and the debtors have all paid.
4.10 Explain to the owner whether the taking out of the loan was the best option or not.
Quote figures to explain your answer. (8)
The risk has increased from 0.2 : 1 to 0.5 : 1 although there is still low risk.✓✓
The return on total capital employed has decreased from 19% to 17%. ✓✓
While there is still positive gearing, the reason for the decrease needs to be assessed – is it going to increase
in the future?✓✓
Overall opinion – partner or loan ✓✓
(12)
(5)
(7)
5.2 Point out at least 3 reasons why it would be better to buy the raw materials from
Limpopo. (6)
• Buying locally means more employment for locals which could lead to an improvement in the living condi-
tions of our own people.
• Due to fluctuating exchange rates the imported products are not stable.
• Goods brought from China are subject to import duties and higher carriage.
• Ethical reasons around child labour in China.
Any other feasible reason.
CASH BUDGET OF JOYCE STORES FOR THE 3 MONTHS ENDED 31 DECEMBER 20.9
• Three points you would mention to Miss Nevva Wright concerning the comments (6)
she has made (see above).
Any three valid points
• Creditors’ reconciliations are an important part of internal control.
• They are not a waste of time but are essential to ensure that creditors are paid the correct amounts.
• This process is part of her job description as a bookkeeper. Her existing salary covers this.
• Statements received from creditors are documents received from other organisations.
2.2 Make a list of the changes to BB Wholesalers’ account in the Creditors Ledger which (12)
Miss Nevva Wright should process to correct her errors or omissions. Show the
changes to the balance of BB Wholesalers in the Amount column.
Workings:
New balance on BB Wholesalers’ account: 57 000 – 21 776 = 35 224
VUZAN TRADERS
BALANCE SHEET / STATEMENT OF FINANCIAL POSITION ON 28 FEBRUARY 20.8 (33 marks)
ASSETS Note R
Non-current assets 3 205 200
Fixed assets 1 2 985 200
Investment: Fixed deposits [300 000 – 80 000] 220 000
Current assets 793 000
Inventories [565 200 – 12 000 – 7 000 + 8 000] 554 200
Trade & other receivables
93 800
[103 000 – 13 000 – 7 200 + 11 000]
Cash & cash equivalents [60 000 + 5 000 + 80 000] 145 000
TOTAL ASSETS 3 998 200
EQUITY & LIABILITIES
Partners’ equity 3 309 000
Capital [1 500 000 + 900 000] 2 400 000
Current accounts 2 909 000
Non-current liabilities 310 500
Loan from Prime Lenders [344 000 + 62 500 – 96 000] 310 500
Current liabilities 378 700
Trade & other payables 3 356 900
Bank overdraft [35 000 + 800 – 14 000] 21 800
TOTAL EQUITY & LIABILITIES 3 998 200
4.1 Comment on the solvency of the business. Should the partners be satisfied? Ex- (4)
plain. Quote a financial indicator (actual figures or percentages) for both years to
support your answer.
Opinion: Yes
Comment:
The business should have no problem in settling all its debts.
Total assets are 4 times higher than total liabilities (increased from 3 times in the previous year).
4.2 Should the partners be satisfied with the stock turnover rate? Explain, quoting (4)
the financial indicator (actual figures) for both years to support your answer.
Opinion: Yes
Comment:
The business is selling its stock more quickly in 20.8.
The stock turnover rate has improved from 5 times to 7 times in 20.8.
4.3 Comment on the liquidity of the business. Quote two financial indicators (actual (6)
figures or percentages, other than those used above) for both years to support
your answer.
Both the current ratio and the acid-test ratio have remained constant at 1.8 : 1 and 0.8 : 1 respec-
tively.
Liquid assets are approximately equal to current liabilities, so the business should be able to settle its current
debts, especially as these ratios have existed for the past two years without any apparent problems.
The ratios are not too high indicating that the working capital is being used efficiently.
4.4 In your opinion, has the business appeared to control its operating expenses well (3)
in 20.8? Quote two financial indicators (actual figures or percentages) for both
years to support your answer.
Opinion: No
Comment:
Operating expenses on sales increased from 33.5% to 40.1%
4.6 The percentage return earned by the business on average equity is 23.0%. Pro- (5)
vide a calculation to prove that this calculation is in fact correct.
885 000 x 100 = 23.0%
3 845 000 1
4.7 The percentage return earned by Ted on his average equity is 19.0%. Provide a (5)
calculation to prove that this calculation is in fact correct.
345 000 x 100 = 19.0%
1 815 000 1
4.8 Comment on the percentage return earned by the business. Quote a financial in- (4)
dicator (actual figures or percentages) for both years to support your answer.
The partners should be satisfied as the return of 23.0% in 20.8 exceeds that which can be earned on
alternative investments.
However, this has decreased from 27.3% in 20.7 so the partners should develop strategies or implement
controls to get the return back to previous levels.
4.9 Comment on the percentage return earned by Ted. Quote a financial indicator (4)
(actual figures or percentages) for both years to support your answer.
Ted should not be completely satisfied as his return (19.0%) has decreased (from 24.9%) and is lower
than that of the business (23.0%)and Bess (27.6%).
He should look at possibly renegotiating with Bess for a fairer distribution of profit.
4.10 Comment on the debt / equity ratio. Quote a financial indicator (actual figures or (4)
percentages) for both years to support your answer.
The debt/equity ratio has increased from 0.5 : 1 to 0.6 : 1
This indicates that the business is making relatively more use of loans and is in a more risky situation should
profits drop in future.
4.11 What percentage of the net income are the partners withdrawing from the busi- (4)
ness? Is this good business practice? Explain, quoting figures to support your
opinion.
Percentage withdrawn:
295 000 x 100 = 33.3%
885 000 1
Comment:
This is good business practice as the partners are now retaining a lot more in the business thereby enabling
it to grow and earn bigger profits in the future.
4.12 You are told that R200 000 has been spent in the past year for the controlled de- (5)
stroying stock of detergents, cleaning materials and chemicals that have reached
their sell-by date. Partner Bess thinks this has been a waste of money, while Ted
disagrees. Which opinion do you share? Explain.
Share Ted’s opinion.
This is a responsible business practice.
The business must display respect for the environment.
Disposing of these materials in unsafe ways will lead to consequences for the environment and the local
community.
Others will have to bear a cost of rectifying the problem which is unfair.
The business must display good corporate governance in this regard as their products are dangerous and
due care should be taken.
5.4 Jackie is concerned about the increase in the cost of producing the jackets as this is (8)
negatively affecting the net profit he is earning. He is considering an alternative
fabric costing R110 per metre which looks the same as the fabric currently used, but
is not as long-lasting. Explain four points that you would mention to Jackie, quoting
evidence or figures from the question to support your answer.
Any four valid points.
Award part-marks for less complete answers.
• It would be foolish to focus on the fabric as the cause of the problem as the price has remained constant
at R130 per metre for the past two years.
• The unit cost of production increased from R1 500 to R1 790 per jacket due to the other costs of production,
i.e. labour or overheads. Rather focus on those for cost savings, e.g. reduce the amount of overtime, or
do a study of the efficiency of the workers.
• The increase in unit cost is significantly affected by the number of units produced. The number of units
produced dropped from 4 000 to 3 090. Fixed costs remain constant (i.e. administration cost and factory
overheads), which means that fixed costs per unit have increased. Rather try to increase production over
4 000 units again, and market the jackets and price the jackets correctly.
• Ethically, it would be wrong to mislead the customers about the quality of the fabric. They will notice this
sooner or later and this will affect the sales that they make, as well as the goodwill that they have built up
with their client base.
• Explain how Simon budgets for advertising (calculate the actual percentage
used in his method). (2)
10 800 x 100 = 3%
360 000
OR 6 000
/200 000 x 100 OR 3600
/120 000 x 100
• Do you agree with Simon’s budgeting for both these items? Explain. (4)
- It is good that he is investing a significant amount (R40 000 and R46 000) in training as this will benefit
the business in terms of its professional dealing with customers.
- His sales appear to be very seasonal, e.g. lower sales in January (R200 000) and even lower sales in
February (R120 000). Applying a small percentage such as 3% might not be advisable. In the months
with low sales he should consider advertising a lot more to try to keep his sales constant in order to
cover monthly overheads.
6.2 Calculate the missing figures in the Cash Budget designated by A to F. (16)
Calculation of A (Cash sales for February 20.9):
25% x R120 000 = R30 000
6.3 The shop assistants are not satisfied with their increase. Explain what advice you (6)
would give to Simon. Provide two points. Quote evidence or figures from the
question to support your answer.
Any two valid points, quoting evidence from the question.
• The manager got an increase of 9% which is above the inflation rate.
• The shop assistants got an increase of 5% which is much lower and is calculated off a lower base. The
shop assistants will not see this as fair.
• One of the shop assistants has not been replaced. This means that the other assistants will be doing
more work. However, sales are decreasing by R60 000 in January and a further R80 000 in February,
so maybe keeping four assistants is not viable. So maybe keeping four assistants is not viable.
7.1.1 Calculate the value of closing stock on hand on 28 February 20.8 (refer to Infor- (6)
mation 2 (c) below).
Taps: R4 000 + R10 500 + (30 x R100): R17 500
Other stock: R102 000
TOTAL R119 500
QUESTION 7.2
COMMENT, IDENTIFY PROBLEM &
PROVIDE ADVICE
QUOTE FIGURE/S
Mark allocation on each shop:
3 marks x 3 shops Mark allocation on each shop:
Comment on problem Figure/s
= 9 marks total Advice
Credit sales are Nil / Creditors being
NORTHVILLE SHOP Offer sales on credit to increase sales /
paid after 15 days – affects liquidity as
Manager: Nora Use credit terms to the maximum.
the stock takes 60 days to sell.
No discounts offered (75% mark up
Offer trade discounts to liquidate slow-
WESTVILLE SHOP achieved at all times) / Debtors taking
moving stock / Chase up slow-paying
Manager: Wally too long to pay (40 days) which affects
debtors.
liquidity.
The shop is doing well.
Offering discounts appears to be in-
Sales are high (R2.24m) / Gross profit
SOUTHVILLE SHOP creasing sales – maintain this policy /
is high (R640 000)
Manager: Sam Increase stock levels to ensure demand
Stock holding period too low (15
can be satisfied.
days).
4.1 Solvency 4 2 2
4.2 Stock turnover 4 2 2
4.3 Liquidity 6 2 4
4.4 Operating ex-
penses 3 3
4.5 Interest 2 2
4.6 Calculate busi-
ness 5 3 2
4.7 Calculate partner 5 3 2
4.8 Comment busi-
ness 4 4
4.9 Comment partner 4 4
4.10 Debt equity 4 2 2
4.11 Withdrawals 4 2 2
4.12 Corp governance 5 2 3 5