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You are provided with information for the financial year ended 28 February 2016, taken from the books of Chuta Ltd, a listed public company - NSC Accounting - Question 5 - 2016 - Paper 1
Question 5
You are provided with information for the financial year ended 28 February 2016, taken from the books of Chuta Ltd, a listed public company. 5.1 Refer to Informatio... show full transcript
Worked Solution & Example Answer:You are provided with information for the financial year ended 28 February 2016, taken from the books of Chuta Ltd, a listed public company - NSC Accounting - Question 5 - 2016 - Paper 1
Step 1
Refer to Information C. Prepare the Asset Disposal Account in respect of equipment sold on 31 August 2015.
Answer
The Asset Disposal Account will include the original cost of the equipment, accumulated depreciation up to the date of sale, and the proceeds received from the sale. The formula to calculate the net book value will be:
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Calculate Total Cost of Equipment:
Equipment sold: 120,000
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Calculate Accumulated Depreciation:
Accumulated Depreciation on Equipment: 46,560
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Determine Net Book Value:
Net Book Value = Cost - Accumulated Depreciation Net Book Value = 120,000 - 46,560 = 73,440
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Account for Cash Received:
Proceeds from Sales: 73,440
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Record in Asset Disposal Account:
Details Amount Equipment sold 120,000 Accumulated Depreciation (46,560) Cash from Sale 73,440
Step 2
Refer to Information C. Calculate the amounts indicated by (a) to (c).
Answer
To calculate the amounts indicated:
(a) Total cost of equipment sold: Total Cost = 3,900,000
(b) Total depreciation: From the provided information, total depreciation amounts to 470,000.
(c) Proceeds from the sale: The selling price is calculated as follows: Selling Price = 80,160 x 62,000 / 61.2 = 15,000.
Step 3
Calculate the following figures which will appear in the Cash Flow Statement for the year ended 28 February 2016: Income tax paid.
Answer
To calculate the income tax paid:
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Identify Revenue and Expenses:
Formula:
Income Tax Paid = Profit Before Tax - Taxable Income
Income Tax Paid = 1,240,000 - 882,800 = 294,100
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Determine Tax Rate: Tax Rate = 17% for 2016
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Calculate Tax on Revenue: Tax Payable = 294,100
Step 4
Calculate the following figures which will appear in the Cash Flow Statement for the year ended 28 February 2016: Net change in cash and cash equivalents.
Answer
The net change in cash and cash equivalents is calculated as:
Net Change = Cash at Beginning + Cash Inflows - Cash Outflows.
Using the figures: Cash at Beginning = 549,580 Cash Inflows = 98,000 Cash Outflows = (18,000) Net Change = 549,580 + 98,000 - 18,000 = 629,580.
Step 5
Prepare the section of the cash effects on financing activities of the Cash Flow Statement for the year ended 28 February 2016.
Answer
The cash effects on financing activities include:
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Proceeds from Shares Issued: 1,350,000
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Buy Back Shares: (172,000)
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Mortgage Loan: 1,550,000
Total Financing Activities: 2,728,000
Step 6
Calculate the following financial indicators for the financial year ended 28 February 2016: Net asset value per share.
Answer
The Net Asset Value (NAV) per share can be calculated using the formula:
a) NAV = Total Assets - Total Liabilities Total Assets = 5,950,800 Total Liabilities = 1,500,000
a) NAV = 5,950,800 - 1,500,000 = 4,450,800
b) NAV per Share = NAV / Number of Shares. Assuming the number of shares = 1,000,000, then NAV per Share = 4,450,800 / 1,000,000 = 396.7 cents.
Step 7
Calculate the following financial indicators for the financial year ended 28 February 2016: Return on average shareholders' equity.
Answer
Return on average shareholders' equity (ROE) is calculated as follows:
ROE = (Net Income / Average Shareholder's Equity) x 100% Assuming Net Income = 892,800 and Shareholder's Equity = 5,147,900,
ROE = (892,800 / 5,147,900) x 100 = 17.3%.
Step 8
Calculate the following financial indicators for the financial year ended 28 February 2016: Debt-equity ratio.
Answer
The Debt-Equity Ratio can be calculated using the formula:
Debt-Equity Ratio = Total Debt / Total Equity
Assuming Total Debt = 1,950,000 and Total Equity = 5,950,800.
Debt-Equity Ratio = 1,950,000 / 5,950,800 = 0.33:1.
Step 9
The directors are not satisfied with the liquidity position. Quote and explain THREE relevant financial indicators (with figures) to support this statement.
Answer
Three relevant financial indicators include:
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Current Ratio: Current Ratio increased from 1.8:1 in 2015 to 3.3:1 in 2016. This indicates improved liquidity.
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Acid Test Ratio: Increased from 1.2:1 in 2015 to 1.6:1 in 2016, suggesting better short-term financial stability.
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Stock Turnover Rate: Decreased from 4 times in 2015 to 3 times in 2016, which could indicate slow-moving inventory.
Step 10
The directors decided to increase the loan during the current financial year. Explain why this was a good decision. Quote and explain TWO financial indicators (with figures) in your answer.
Answer
The decision to increase the loan is supported by the following indicators:
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Return on Total Capital Employed (ROCE): Increased from 21.2% in 2015 to 24.2% in 2016, indicating that more assets are utilized effectively.
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Debt-Equity Ratio: Increased from 0.09:1 to 0.33:1, demonstrating that the company can take on more debt for growth without increasing financial risk excessively.
Step 11
The directors were pleased with the price that the company paid to buy back the 40 000 shares. Give a suitable reason why the directors felt that way. Quote relevant financial indicators (with figures) to support your answer.
Answer
The directors were pleased due to:
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Price per Share: The buyback price was R4.30, which is lower compared to the previous year (505 cents), indicating strong strategic financial planning.
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Average Price: Average price was R3.70, which supports their decision to enhance shareholder value while maintaining liquidity.