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Accounting paper one 2 June common test 2020

QUESTION 1
Choose the correct word from those given in brackets. Write only the word next to the
Question number (1.1.1 – 1.1.4) in the ANSWER BOOK.

1.1.1 E
1.1.2 C
1.1.3 A
1.1.4 B 4

1.2 Statement of Comprehensive Income for the year ended 31 May 2020.
Sales (15 520 000 + 90 000) Operation 15 610 000 
Cost of sales (9 700 000  + 62 500 ) (9 762 500) 
Gross profit Operation 5 847 500 
Other operating income Operation one part correct 204 490 
Rent income (202 500 – 16 500) Two or nothing 186 000 
Bad debts recovered (15 700 + 2 000) Two or nothing 17 700 
Provision for bad debts adjustment (45 000  – 44 210 ) 790 
Gross income 6 051 990
Operating expenses Operation one part correct (1 681 190) 
Salaries and wages (541 000 – 25 000) Two or nothing 516 000 
Employers contributions (21 000 – 2 500 – 250) Two or nothing 18 250 
Directors fees (480 000 + 430 000) Two or nothing 910 000 
Audit fees 38 000
Sundry expenses Balancing figure 14 940 
Packing material (78 000 + 3 000 – 78 500) Two or nothing 2 500 
Bad debts 45 000 
Insurance 55 000
Depreciation 65 000
Loss due to fire (36 000 x 20/80) Two or nothing 9 000 
Trading stock deficit (1 200 000 – 62 500 – 1 130 000) Two or nothing 7 500 

Operating profit Candidate must use 28% on sales 4 370 800 

Interest income 72 000
Operating profit before interest expenses Operation 4 442 800 
Interest expense Operation (42 800) 
Net profit before taxation 4 400 000 
Taxation (1 320 000) 
Net profit after tax 3 080 000  36
Foreign entry -1 max -2

TOTAL MARKS

40

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Accounting paper one 3 June common test 2020

QUESTION 2

2.1 Ordinary share capital note

AUTHORISED SHARES
300 000 Shares
ISSUED SHARES:
100 000  Shares issued on 1 June 2019 1 000 000 
100 000  Shares issued on 1 January 2020 Balancing figure 1 500 000 
(10 000)  Buy-back of shares @ 12.50 (2 375 000/190 000) (125 000) 
190 000  Shares issued at the end 2 375 000  8

2.2 RECONCILIATION BETWEEN NET PROFIT BEFORE TAXATION AND CASH

GENERATED FROM OPERATIONS

Net profit before tax (165 200 x 100/28) 590 000

Adjustment in respect of :
Depreciation 16 645
Interest on loan 120 000 
Operating profit before changes in working capital Operation one part correct 726 645 
Net change in working capital Operation one part correct 37 765 
Decrease in inventory (145 000 – 125 000) Two or nothing 20 000 
Decrease in trade and other receivables (139 000 – 115 000) Two or 24 000 
nothing

Decrease in trade and other payables (56 800 – 50 565) Two or nothing (6 235) 
Cash generated from operations Operation one part correct 764 410  10

2.3 Cash Flow Statement for the year ended 31 May 2020
Cash flow from operating activities Operation one part correct 379 585 
Cash generated from operations See 2.1 764 410 
Interest paid See 2.1 (120 000) 
Dividends paid (14 000 + 100 000) or (14 000 + 360 000 – (114 000) 
260 000)
One mark One mark
Tax paid (165 200 – 10 375 – 4 000) or (4000 + 10 375 – 165 (150 825) 
200)

Cash flow from investing activities operation one part correct (121 285) 

Purchases form Fixed assets (814 800 – 16 645 – 19 430 - 979 440) (200 715) 
(979 440 + 16 645 + 19 430 – 814 800)
Proceeds from sale of fixed assets 19 430 
Changes in financial assets 60 000

Cash flow from financing activities operation one part correct 630 000 
Proceeds from shares issued 1 500 000 
Buy-back of shares (150 000) 
Changes in loan (720 000)

Net change in cash and cash equivalent 888 300

Cash and cash equivalent at the beginning (421 000)
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Accounting paper one 4 June common test 2020

Cash and cash equivalent at the end 467 300 20

2.4 Besides paying back the loan, the directors have taken other major decisions
that have affected the cash balance. State TWO other major decisions
(exceeding R200 000) and quote the figures from the Cash Flow Statement.

In EACH case, state how the decision will affect the future of the company.
DECISION FUTURE EFFECT ON COMPANY
Decision and amount Valid explanation
Purchase of fixed assets Capital growth – investment in fixed assets will lead to
R200 715  expanded business activities 
• Creation of employment
• Cater for more customers to increase profits
Issue of shares R1 500 000 • Financing expansions/ extensions of fixed assets 
 • Expanded shareholder base will affect dividends
• Improve cash flow
4

2.5 Debt/equity ratio

350 000  : 2 499 900 

0,14 :1  or 0,1 : 1 Operation one part correct 3

TOTAL MARKS

45

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Accounting paper one 6 June common test 2020

QUESTION 4

4.1.1 Calculate the amount of dividends Veli would earn for the financial year ended
29 February 2020. Shares repurchased do not qualify for final dividends.

Interim: 23 000 + 2 000 = 25 000 X 0,30 = R 7 500 

Final: 25 000 – 3 000 = 22 000 X 0,50 = R11 000 
R18 500  One part correct 3

4.1.2 Veli is not satisfied with the dividend policy of Wembezi Ltd. Explain why.
Quote and compare relevant financial indicators to support his feelings.

For 2 marks each:

The pay-out policy for 2019 was 75% (120/160)  and for 2020 it decreased to
50%
(85/170) 

For 1 mark each:

EPS increased from 160c to 170c and DPS decreased from 120c to 85c
One mark One mark 4

4.1.3 Veli wants to sell his shares in Wembezi Ltd and invest his funds in an
alternative investment. Quote and explain TWO relevant indicators, other than
dividends and earnings, to support his intention.
Ratio, explanation and figure  
• Return on shareholder’s equity (ROSHE) decreased by 3% from 23% to 20%.
• Market price decreased by 110 cents from 750 cents to 640 cents.
• Net asset value per share decreased by 105 cents from 760 cents to 655 cents.
4

4.1.4 Why would the company spend money on skills development? Explain ONE
point.

ANY RELEVANT ANSWER 

• It develops the workers and improves worker productivity
• Companies are expected to equip workers with the necessary skills and
knowledge (King Code/Legislation). 2

4.1.5 Refer to Information A.

How did the company benefit from this? Name ONE example and quote
figures.

Example  figure 
• Sales increased by R4 800 000 from R13 700 000 to R18 500 000.
• Workplace accident cost decreased by R15 000 from R23 000 to R8 000.
• Loss on production decreased by R5 000 from R7 000 to R2 000.
2

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Accounting paper one 7 June common test 2020

4.2.1 Comment on the liquidity position of the company. Quote THREE financial
indicators (with figures) in your answer.

Current ratio  decreased from 1,7 : 1 to 0,9 : 1 

Acid test ratio  decreased from 0,6 :1 to 0,4 : 1 
Rate of stock turnover  decreased from 5 times to 3 times by 2 times. 
If candidates provide additional irrelevant indicator, search for the correct ones in the answer provided by the candidate and
award marks accordingly.
For those who provide more than three options, penalty of -2 for any irrelevant indicators (max -2). 6

4.2.2 One of the directors feel that the loan should be paid as soon as possible. Do
you agree? Explain. Quote TWO financial indicators with figures to support
your answer.

No 

Financial indicators and figures  

Explanation  

Debt equity ratio is 0,06 : 1 which means the business is in position to borrow more
monies. This indicates low risk.

The return on total capital employed (ROTCE) for 2020 is 24% which is greater than
the interest rate of 16%. This indicates positive gearing. 5

4.2.3 The shareholders should be satisfied with the return on their investment and
the companies’ earnings. Explain TWO financial indicators with figures to
support this opinion.

Explanation with figures.  

Return on shareholders’ equity improved from 10,6% to 18%. 18% is higher than
return on alternative investment of 6% by 12%.

Earnings per share improved from 45 cents to 49 cents per share 4

TOTAL
MARKS

30

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