Accounting English Paper 1 2015 Questions and Answers Part 3

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Question 4

What is the main purpose of a Cash Flow Statement?

• Good answer = 2; Average = 1; Incorrect = 0 ΠΠ
• It provides users of financial statements with information on the inflow and outflow of the cash resources of the company to see how monies were generated or spent and what the cash flow position is. To account for the difference in opening and closing bank balances.

Calculate the missing amounts (indicated by a, b, c and d) in the Fixed/Tangible Asset Note for the year ended 31 October 2014.

 Workings Amount a 3 000 000 – 2 500 000 500 000 ΠΠ b 660 000 x 20 % 132 000 ΠΠ c 660 000 – (b) – 446 000 Or 150 000 – 68 000 82 000 ΠΠ Ρone part correct d 157 500 + 48 000 - 55 000 Or 258 000 – 108 000 150 000 ΠΠ

Classic LTD Cash Flow Statement for the Year Ended 31 October 2014

Note: Ticks in final column are for operation AND correct use of brackets/no brackets.

 Cash Flow from Operating Activities one part correct 625 000 Ρ Cash generated from operations 1 985 500 Interest paid (175 500) Taxation paid (27 500Π + 375 000Π + 22 500Π) one part correct (425 000) Ρ Dividends paid (385 000Π + 825 000Π – 450 000Π) one part correct (760 000) Ρ Cash Flow from Investing Activities one part correct 534 000 Ρ Fixed assets purchased (48 000) Π Proceeds from sale of fixed assets (500 000Π + 82 000 Ρ) one part correct 582 000 Ρ Cash Flow from Financing Activities one part correct 925 000 Ρ Proceeds from the sale of shares 300 000 ΠΠ Change in loan (2 000 000 Π - 1 375 000 Π) 625 000 Ρ Net Change in Cash and Cash Equivalents check operation 2 084 000 ΡΠ Cash and Cash Equivalents at Beginning 207 500 Π Cash and Cash Equivalents at End 2 291 500 Π
 Decisions by directors Reason to support John՚s opinion Reason to support directors՚ decision (other than improving cash flow) Issued more shares Dilutes the returns to existing shareholders ΠΠ Cheaper option of raising funds as loans carry interest ΠΠ Sold fixed assets Prevents the company from benefiting through capital gainsΠΠ Unproductive or unused assets will incur maintenance expenses. ΠΠ

Calculate the acid-test ratio.

(1 075 000Π + 2 291 500 Π) : 1 450 000 Π

3 366 500 = 2,3: 1 Ρ or 2,32: 1 one part correct

Calculate the earnings per share.

Π x100c

= 130 cents Ρone part correct

Calculate the return on average shareholders՚ equity.

4 225 000 = 23,1 % Ρ or 23,08 % or 23,07 % or 23 % one part correct

Calculate the debt-equity ratio.

2 000 000 Π: 4 450 000Π

= 0,4: 1Ρ (or 0,5: 1) one part correct

The directors proposed to expand the business operations in the new financial year. One of the directors suggested that they finance the expansions by taking a loan of R1 000 000, instead of issuing new shares to the public. Quote and explain two financial indicators to support his opinion.

Financial indicator Π Π

Trend Π Π

Explanation Π Π

Debt/Equity Ratio

• It has increased from 0,34: 1 to 0,45: 1.
• Company still has a low financial risk.

Return on Average Capital Employed

• It has increased from 18 % to 26 %
• Company is positively geared as it exceeds the rate of borrowing which currently is 12 % .

Calculate the amount of dividends Bongani would earn for the financial year ending 31 October 2014.

32 000 Π x 110 cents Π = R35 200 Ρ one part correct

(R1,10)

Should Bongani be satisfied with the dividend policy of Classic Limited? Quote and explain relevant financial indicators to support your answer.

Yes/No Π

Indicator Π

Figures Π

Explanation Π

Explanation for yes:

• EPS was 130 cents and DPS was 110 cents.
• (110/130 x 100) 85 % of earnings given to shareholders, compared to (75/94 x 100) 80 % given in the previous financial year.
• The dividends have increased from 75 cents to 110 cents.

Explanation for no:

• EPS was 130 cents and DPS was 110 cents.
• (110/130 x 100) 85 % of earnings given to shareholders, compared to (75/94 x 100) 80 % given in the previous financial year.
• More is being paid out on dividends and less is being retained for future expansion.

Bongani wants to sell his shares in Classic Ltd and invest his funds in an alternative investment. You disagree with him. Quote and explain ONE relevant financial indicator, other than dividends, to discourage him from selling his shares. Your answer must include the actual figure/ratio/percentage.

• ROSHE is 23,1 % Ρ see 4.1. 5
• Greater than the return on fixed deposits, 5,5 % . Π
• Strong performance of the company may continue in the future to offer greater returns to Bongani. ΠΠ Or
• The value of his share has increased from R4,75 (475 cents) to R9,50 (950 cents) . (two marks)
• This is a capital growth of 100 % in just three years. His investment in the company has increased from R152 000 (32 000 x R4,75) to R304 000. Such high returns will not be earned on outside investments. (two marks)