4.1 CONCEPTS: MATCHING Choose an accounting concept from COLUMN B that best matches the questions in COLUMN A - NSC Accounting - Question 4 - 2017 - Paper 1

The appropriate matching concept is Solvency. Solvency reflects a company's ability to meet its long-term debts and financial obligations. It assesses whether the total assets exceed total liabilities.

This question relates to Liquidity. Liquidity measures how easily a firm can meet its short-term obligations using its current assets.

The Share Capital note will be presented as follows:

Authorised share capital: 1,200,000 ordinary shares

Issued share capital:

• 800,000 shares on 1 July 2016
• 200,000 shares issued at R9.80 per share
• 120,000 shares repurchased at R10.00 per share
• Closing balance: 880,000 ordinary shares

Total ordinary share capital on 30 June 2017: R8,412,800.

1. Dividends paid:

   • Final dividends: R514,000
   • Less dividends: R320,000

   Total dividends paid: R194,000

2. Income tax paid: R314,400

3. Change in investment:

   • Ending investment: R950,000, Initial investment: R1,250,000
   • Change: R300,000 increase

4. Change in loans:

   • Loan on 30 June 2017: R1,250,000; Loan on 30 June 2016: R950,000.
   • Change: R300,000 increase.

Cost of additional equipment:

1. Total fixed assets on 30 June 2017: R9,806,000
2. Less: Fixed assets on 30 June 2016: R8,410,000

Cost of additional equipment purchased is calculated as follows:

R9,806,000 - R8,410,000 = R1,396,000.

The net change in cash and cash equivalents is:

Cash balance at the beginning of the period: R98,500 Cash balance at the end of the period: R2,500,000

Net change = R2,500,000 - R98,500 = R2,401,500.

1. Gross profit percentage:

   Gross Profit = R4,290,000 Sales = R11,440,000

   Gross ext{ }Profit ext{ }Percentage = rac{4,290,000}{11,440,000} imes 100 = 37.5 ext{ %}

   2. Net asset value per share (NAV):

   NAV = rac{Shareholders ext{ } equity}{Number ext{ } of ext{ } shares} = rac{8,801,400}{880,000} = 1,000 ext{ cents}

   3. Return on average shareholders' equity:

   Return on SH Equity = ((Retained Income + Average Shareholders' Equity) / Average Shareholders' Equity) * 100

   Average Shareholders' Equity = (R7,821,800 + R8,801,400) / 2

   Return calculated as = 6.8%.

YES. The directors were justified in increasing the loan based on the following indicators:

1. Debt/Equity Ratio: 0.1:1 indicates that the company is conservatively leveraged.
2. Return on Capital Employed (ROCE): Increased from 11.3% to 12.5% suggests improved efficiency in using funds.

These figures demonstrate that increased leverage is advantageous for the company's growth.

Shareholders may be concerned because:

1. Dividend Pay-Out Policy: Dropped from 61.1% in 2016 to 55.8% in 2017, indicating lower returns.
2. Return on Shareholder Equity: Increased from 7.9% to 8.8% shows a potential for higher returns but also reveals a decreasing trend in pay-outs.

This disparity suggests the company retains more earnings, which may not align with shareholder expectations for cash returns.

The price paid to repurchase shares at R10.00 was fair based on the following indicators:

1. NAV per share at R9.78: Indicating the company’s valuation.
2. Market price at the time of repurchase was R11.00: Reflects an upward trend.

Therefore, the repurchase was strategically beneficial, showing fiscal prudence while aligning shareholders' interests.