4.1 CONCEPTS Choose the correct term to complete each of the following statements - NSC Accounting - Question 4 - 2017 - Paper 1

1. Cash Flow from Operating Activities:

   • Cash generated from operations: R749,950
   • Interest paid: (R336,000)
   • Net cash from operating activities: R413,950

2. Cash Flow from Investing Activities:

   • Proceeds from the sale of fixed assets: R582,000
   • Cash outflow from investing activities: (R1,200,000)
   • Net cash from investing activities: (R618,000)

3. Cash Flow from Financing Activities:

   • Cash from shares issued: R310,000
   • Cash outflow for loans: (R120,000)
   • Net cash from financing activities: R190,000

4. Net change in cash and cash equivalents: R179,500.

The acid-test ratio is calculated using the formula: $ext{Acid-test ratio} = \frac{\text{Current Assets} - \text{Inventories}}{\text{Current Liabilities}}$ Using the figures: Current Assets = R1,186,000; Current Liabilities = R735,000. Thus, the acid-test ratio is: $\frac{1,186,000 - 451,600}{735,000} = 1.00$. The acid-test ratio indicates that the company can adequately cover its current liabilities using its liquid assets.

Return on shareholders' equity can be calculated with the formula: $ext{ROE} = \left( \frac{\text{Net Profit after Tax}}{\text{Average Shareholders' Equity}} \right) \times 100$ Using the figures: Net Profit after Tax = R1,378,600; Average Shareholders' Equity = R7,605,800. Thus, ROE is: $\text{ROE} = \left( \frac{1,378,600}{7,605,800} \right) \times 100 \approx 18.13\%$.

EPS can be calculated using: $ext{EPS} = \frac{\text{Net Profit after Tax}}{\text{Number of Shares Outstanding}}$ For Brazilia Ltd, with net profit after tax of R1,378,600 and 5,000,000 shares: $\text{EPS} = \frac{1,378,600}{5,000,000} \approx R0.276$.

Joni Ltd is NOT handling its working capital effectively as indicated by its current ratio of 4.40:1 compared to Grayson Ltd's 1.65:1. The high current ratio suggests that Joni Ltd has too much cash tied up in inventories and receivables, impairing operational effectiveness.

Grayson Ltd has a low degree of risk with a debt-equity ratio of 0.4:1, which indicates prudent use of debt. In contrast, Joni Ltd has a higher debt-equity ratio of 0.1:1, indicating a lower reliance on debt, thus minimizing interest expenses. Financial gearing: Grayson Ltd is leveraging 27% of its total capital employed through loans.

Grayson Ltd maintains a high dividend payout policy (98%), paying R528,000 in dividends to encourage shareholders to retain shares. In contrast, Joni Ltd has a lower dividend policy (40%), retaining R292,000 to ensure sufficient income for future operations, which should be beneficial for shareholders.

Grayson Ltd should be satisfied with its share price as it is trading at R1.67, below its NAV of R1.20. Conversely, Joni Ltd might not be satisfied as it’s trading at R0.75, below its NAV of R0.425, indicating potential for re-evaluation and better performance.