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ASSIGNMENT 1ST SEMESTER : FINANCIAL ACCOUNTING (FA)

STUDY UNITS COVERED : STUDY UNITS 1-4

: CHAPTERS 1-6

DUE DATE : 3:00 p.m. 19 MARCH 2013

TOTAL MARKS : 100

INSTRUCTIONS TO CANDIDATES FOR COMPLETING AND SUBMITTING ASSIGNMENTS

The complete ‘Instructions to Students for Completing and Submitting Assignments’ must be collected
from any IMM GSM office, the relevant Student Support Centre or can be downloaded from the IMM GSM
website. It is essential that the complete instructions be studied prior to commencing your assignment.
The following points highlight only a few important notes.

1. You are required to submit ONE assignment per subject.

2. The assignment will contribute 20% towards the final examination mark, and the other 80% will be
made up from the examination, however the examination papers will count out of 100%.
3. Although your assignment will contribute towards your final examination mark, you do not have to
earn credits for admission to the examinations; you are automatically accepted on registering for the
exam.
4. Number all the pages of your assignment (page 1 of 4) and write your name and surname, student
number and subject at the top of each page.
5. The IMM GSM requires assignments to be presented on plain A4 paper. You must show all working
calculations, including and where appropriate multiple choice working calculations.
6. A separate assignment cover, which is provided by the IMM GSM, must be attached to the front cover
of each assignment.
7. Retain a copy of each assignment before submitting, in case the original does not reach the IMM
GSM.
8. The assignment due date refers to the day up to which assignments will be accepted for marking
purposes. The deadline is 3:00 p.m. on 19 March 2013. Late assignments will be accepted, but 25
marks will be deducted from the maximum mark, if received after 3:00 p.m. on 19 March 2013 and
up to 5:00 p.m. the following day after which no assignments will be accepted.
9. If you fail to follow these instructions carefully, the IMM Graduate School of Marketing cannot accept
responsibility for the return of the assignment. It may even result in your assignment not being
marked.
10. Results will be available on the IMM GSM website: www.immgsm.ac.za, on Friday, 3 May 2013.

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QUESTION 1 – Theoretical concepts [20]

Brave Brands Marketing is a well-renowned marketing organisation with a strong

workforce of dedicated employees. However, the CEO has recently identified that
many of his staff members have a poor understanding of financial statements and
difficulty in interpreting financial data as their tertiary education has not exposed them
to such information. As an IMM GSM graduate and flourishing marketing manager,
you have been asked to do research which will enable you to answer the following
questions in preparation for the training course that you will perform internally for the
company.

1.1 In a brief but comprehensive response, define the role of accounting. (You
are required, amongst others, to address accounting information, users of
financial information, the accounting process and the role of financial
accounting vs. management accounting.) (½ x 12)(6)

1.2 You have identified, as a marketer, that whilst you are not directly responsible
for preparing financial statements you are certainly required to perform
financial analysis. Discuss the purpose of and need for financial analysis.
(½ x 8)(4)

1.3 In general, explain what the statement of comprehensive income (income

statement) and statement of financial position (balance sheet) portray about a
business entity and briefly discuss what is contained in each statement. (4)

1.4 The statement of comprehensive income is said to be prepared (as per IAS 1
of the International Financial Reporting Standards) using the accrual basis
whereas the statement of cash flows is prepared using the cash basis.
Briefly discuss the difference between the cash basis and accrual basis of
accounting using the example of rent of R24 000 being paid in advance by
Company A for 12 months from 1 September 2012. Company A has a
December year end. (4)

1.5 The CEO has described an item in the financial statements of Brave Brands
Marketing as “…a present obligation, arising from a past event, the
settlement of which is expected to result in an outflow from the enterprise of
resources embodying economic benefits.” State what element of the
accounting equation the CEO is referring to and give any example of the said
element. (2)

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QUESTION 2 – Current and non-current assets [15]

Sunshine Sail Cruises (SSC) is a company which owns a fleet of cruise ships and
offices and specialises in providing exotic cruises across various locations.

PART A

SSC has realised that the value of its tangible assets (property, plant and equipment)
is a material item in its financial statements and thus takes great care in faithfully
representing the figures. The CEO knows that accounting for the consumption of
economic benefits inherent in the items or use thereof through depreciation is very
important. He has learnt that the definition of depreciation is “the systematic
allocation of an asset’s depreciable amount over its economic useful life.” He is
struggling to account for a new cruise ship that was purchased for R196 000 000 on
12th May 2012. R122 000 000 was spent on finalising the cabins, painting the ship in
the company colours and getting professional fitters to get the ship in a condition as
was intended for its use. After approximately 17 days the ship was ready to be used
for its first cruise from the 1st June 2012. On the 16th June 2012 the ship’s hull was
damaged by a passing tug boat and R52 000 was spent on repairing the damage.
The ship was expected to be used (from the 1st June 2012) for 16 years after which it
could be sold for R118 000 000. The accountant has suggested that a diminishing
balance rate of 6% per annum could also be applied. SSC has a February year end.

2.1 TWO methods of depreciation are available to SSC. Identify these two
methods and briefly explain the differences between the two methods. (2)

2.2 Identify which ONE of the methods identified above would be most
applicable for the SSC cruise ship and briefly explain why you have chosen
that method. (2)

2.3 Using the information provided, calculate the initial/capitalised cost of the
asset that would be recognised and depreciated from the 1st June 2012. (2)

2.4 Using the information provided, calculate the depreciation for the year ended
28th February 2013 if the straight line method is selected for depreciation. (2)

2.5 Show the effect of the amount, calculated in 2.4, on the elements of the
accounting equation. (You are required to show the amount and a + OR – to
indicate an increase or decrease.) Use the following headings as a guide: (1)

ASSETS OWNERS’ EQUITY LIABILITIES

2.6 Using the information provided, calculate the depreciation for the year ended
28th February 2013 if the reducing balance method is selected for
depreciation. (2)

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PART B

One of the ‘duty-free’ fragrance stores ‘Smell-IT’ on board one of the cruise ships is
having some issues relating to the control of its stock. Declining sales of one of the
brands ‘Higo Loss’ has been as a result of customers seeing it as outdated and too
common as a result of poor marketing efforts. There are 20 bottles of Higo Loss on
the shelves currently selling for R360 each (cost price of R 150 each). It is estimated
that each bottle could be sold for one third of its original selling price. The owner of
Smell-IT is unsure of how to measure her inventory and has asked for your
assistance.

2.7 Calculate the net realisable value of the 20 bottles of Higo Loss. (2)

2.8 Calculate the total cost price of the 20 bottles of Higo Loss and indicate what
amount the Higo Loss stock should be held at, explaining your reasons for
stating the amount calculated. (2)

QUESTION 3 – Accounting statements and adjustments [40]

Linda Mphosi, being a driven entrepreneur, opened her own Laundromat at the
beginning of March 2012, trading as ‘Linda’s Laundry’. Her specialty lies in
repairing and servicing broken coats and shoes along with the mandatory cleaning of
laundry. She also stocks some cleaning and other useful products, mostly from one
supplier ‘Laund-Right’. As Linda is quite inexperienced in bookkeeping and with the
accounting requirements as per the International Financial Reporting Standards, she
has asked for your assistance in accounting for all the transactions.

The following is a list of transactions which have occurred during her first year of
trading, ended 28th February 2013.

1. On the 3 March 2012 Linda contributed R150 000 cash to the business as
her capital contribution. In addition to the cash she also transferred her old
Renault Scenic into the business’s name to be used as a delivery car. The fair
value of the car at that date was R96 000.
2. During April Linda repaired 5 pairs of shoes and charged the customer R25
per pair. The customer settled the amount owing up front in cash.
3. Linda purchased, on credit, more Laund-Right products for resale from her
supplier. The goods cost R2 250 and related to 30 items.
4. Linda started to find running the business and being the sole employee to be
very stressful. As a result, at the end of April she hired a friend to help her
serve customers. She agreed to pay her friend R82 200 per year. Linda
correctly accounted for the salary to her friend each month. However, on the
28 February she got caught up in month-end processes and forgot to process
the payroll accounts and payments. As a result she will only be able to pay
her friend in March 2013.

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5. In May Linda wanted to buy new cleaning equipment in order to make her
operations more efficient. In order to do so she applied for a loan from Grant
Bank and was granted a facility of R250 000. The money was deposited into
the business’s current account on the 3rd of May. The loan will be repaid in full
in 2016 and earns simple interest of 15% per annum. The interest had been
accounted for correctly and was paid on a monthly basis at month end.
6. Linda bought the cleaning equipment on the 5th May and paid R250 000 cash
for it.
7. Linda took out business insurance in the company’s name on the 28 th May
that will cover the business from 1st June 2012. The monthly premiums (at
R1 200 per month), that are deducted via a debit order, were all correctly
accounted for except for that of February 2013. It was discovered that a bank
error caused the debit order to lapse. Linda will pay the premium manually to
the insurance company on the 12th March 2013.
8. In order to gain exposure, Linda approached a marketing organisation. She
was motivated by their ideas and on the 5 th June 2012 she paid them R12 000
cash for an advertising campaign that would run for 12 months from that
date.
9. During July Linda’s Laundry sold 12 Laund-Right products to customers. All
items were sold for cash at R160 per item. (Cost price R75 per item.)
10. In August, Linda took two Laund-Right products to give to her sister to sample.
11. On the 1st of September 2012 Linda’s Laundry received commission income
in cash from Laund-Right suppliers because she stocks its product
exclusively. This is a once off payment of R150 000 by them to cover a
contract period for a year from the 1st of September where Linda is required to
continue selling its product.
12. Other operating expenses incurred by Linda’s Laundry for the period ended
28th February 2013 included:
Telephone R 1 300
Rent R12 500
Machine repairs R 3 200
13. Various services performed on credit for customers over the period amounted
to R88 000. And miscellaneous cash and credit sales of products amounted
to R6 500 over the period. (Cost of sales R3 200.)
14. Depreciation on the equipment was correctly calculated at R20 800 for the
period.
15. Further cash purchases of Laund-Right products amounted to R5 400.
16. Mrs Jones, a credit customer, was declared insolvent during the period and
as a result her account of R800 should be written off as irrecoverable.
17. Ignore VAT. Assume that Linda’s Laundry uses a perpetual inventory system.

P.T.O for Required

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Required:

3.1 Using a table such as the one below, show the effect (either + / -) as well as
the accounts affected by transactions 1, 3 and 6 only. (A random example
is given below for your reference as to how to lay out your answers.) (4)

ASSETS OWNERS’ EQUITY LIABILITIES

E.G.: + 2 000 + 2 000 0
Bank Rent income

3.2 Refer to transaction 8:

a) Process the journal entry that would have been processed on the 5th
June 2012. (Assume that Linda accounts for the whole amount as an
expense when paid.) (2)
b) Process the internal/adjusting journal entry that would be required on
the 28th February 2013 relating to the prepayment in the transaction.
(2)
3.3 Refer to transaction 5:
a) Process the journal entry to account for the cash proceeds received
from the loan. (2)

b) Process the journal entry that would have taken place each month to
account for the interest incurred and paid for. (Show all workings.) (3)
3.4 Prepare a complete and correctly accounted for statement of
comprehensive income (income statement) for the period ended 28
February 2013. (19)
3.5 Show an extract of the statement of financial position (balance sheet) as at
28th February 2013, showing the equity and liabilities section only. (8)

NOTE: IT IS RECOMMENDED THAT YOU USE THE SUGGESTED FORMATS

PROVIDED FOR THIS QUESTION IN ANNEXURE A AT THE END OF THE
QUESTION PAPER.

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QUESTION 4 – Financial analysis [25]

This question consists of TWO unrelated parts.

PART A

The following information relating to XXY Ltd is to be used in answering questions

4.1 - 4.3.

R
ASSETS
Property and plant 592 000
Inventory ?
Trade receivables ?
Bank 50 000
TOTAL ASSETS 864 000

EQUITY AND LIABILITIES

Share capital 600 000
Reserves ?
Non-current liabilities 120 000
Current liabilities ?

XXY Ltd has a current ratio of 4:1 and an inventory turnover ratio of 10.5 times.
Assume the average inventory equals the ending inventory and the cost of sales
expense for the year amounts to R1 470 000.

Required:

4.1 Calculate XXY’s closing inventory balance, represented by a ‘?’ in the

information provided. (2)

4.2 Calculate XXY’s current liabilities, represented by a ‘?’ in the information

provided. (2)

4.3 Calculate the quick ratio for XXY Ltd from the information
provided/calculated. (Round your answer to 2 decimal places.) (2)

4.4 When analysing financial information, state one relevant benchmark against
which you could compare the above results. (1)

NOTE: FOR THE PURPOSES OF THIS QUESTION, ASSUME THE FOLLOWING:

Inventory turnover = Cost of sales

Average inventory

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PART B

The following are extracts from the statement of comprehensive income and the
statement of financial position of Hits and Hammers Limited in respect of the June
2012 and 2013 financial years. You are required to use the information to answer
the questions on the next page.

Hits and Hammers Limited

Extract from the statement of comprehensive income
R’000 R’000
2013 2012
Sales 1 290 000 980 000
Cost of sales 853 500 588 000
Finance cost 20 000 25 000
Profit after tax 204 750 135 100

Hits and Hammers Limited

Extract from the statement of financial position
R’000 R’000
2013 2012
Share capital 292 000 150 000
Retained income / Accumulated profit (opening balance) 425 000 275 000
Long-term loan (10% p.a.) 200 000 250 000
Inventory 200 000 160 000
Trade receivables (debtors) 193 800 167 200
Bank 44 000 38 000
Trade payables 214 750 120 000
Non-current assets (at carrying value) 1 131 750 795 000

Industry averages for the year ended June 2013

Current ratio 1.75:1
Quick ratio 1.25:1
Debt to equity ratio 52%
Average days inventory on hand 65 days
Average debtors collection period 80 days
Gross margin 32%

Additional information 2013 2012

Market price of shares R15.75 R12.80
Dividends per share 38 cents 40 cents
Number of ordinary shares in issue 146 000 shares 140 000 shares
Assume 75% of total sales relate to credit sales. All purchases are on credit.

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Required: (You are NOT required to use averages. You are required to round your
answers to 2 decimal places and to the nearest whole day where applicable.)

4.5 Calculate the percentage change in sales between 2012 and 2013. (1)

4.6 4.6.1 Calculate the gross profit percentage on sales for 2012 and 2013. (2)
4.6.2 Provide ONE possible reason for the change calculated between the
two years in 4.6.1. (1)

4.7 Calculate the following for the 2013 year:

4.7.1 Average days inventory on hand. (1)

4.7.2 Average debtors collection period. (1)
4.7.3 Briefly comment on the ratios calculated above. You are required to
briefly describe what you understand about the ratios as well as
compare them to any relevant figures provided. (4 x ½)(2)

4.8 Calculate the total asset turnover ratio for 2013 and briefly explain what this
ratio represents. (3)

4.9 4.9.1 Calculate the earnings per share for 2013. (1)
4.9.2 Calculate the price earnings ratio for 2013. (1)
4.9.3 Briefly explain what the PE ratio indicates about the perception the
market has of the business. (1)

4.10 The following ratios have been correctly calculated for Hits and Hammers:

2013 2012
Current ratio 2.04 : 1 3.04 : 1
Quick ratio 1.11 : 1 1.71 : 1
Debt to equity 28% 59%
Times interest earned/interest cover 15.63 times 8.72 times

4.10.1 Taking the above into account, as well as any additional information,
comment briefly on the short-term liquidity of Hits and Hammers. (2)
4.10.2 Comment on the gearing and long-term solvency in terms of Hits and
Hammers. (2)

ASSIGNMENT TOTAL: 100

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ANNEXURE A – Suggested format for answers to Question 3

3.1

Trans. ASSETS OWNERS’ EQUITY LIABILITIES

3.2 and 3.3

(a) Details/Account Debit Credit

(b)

3.4 Statement of comprehensive income for the year ended 28 February 2013
R
Sales
Cost of sales
Gross profit
Laundry service income
Other income

Operating expenses

Finance cost

Profit/loss for the period

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th
3.5 Extract from the statement of financial position as at 28 February 2013
R

EQUITY AND LIABILITIES

Equity

Liabilities
Non-current liabilities

Current liabilities

Total equity and liabilities

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Assignment 1st Semester 2013 FA