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

Below is a simplified version of the Cash Flow Statement:

CASH FLOW FROM OPERATING ACTIVITIES
Cash generated from operations: R749,950
Interest paid: R(336,000)

CASH FLOW FROM INVESTING ACTIVITIES
Purchase of fixed assets: R(962,000)
Proceeds from the sale of shares: R210,000

CASH FLOW FROM FINANCING ACTIVITIES
Shares repurchased: R(310,000)

NET CHANGE IN CASH AND CASH EQUIVALENTS: R(179,500)
CASH AND CASH EQUIVALENTS AT BEGINNING: R(345,450)
CASH AND CASH EQUIVALENTS AT END: R179,500

The acid-test ratio is calculated as:

$\text{Acid-test ratio} = \frac{\text{Current Assets} - \text{Inventories}}{\text{Current Liabilities}}$

Using the figures:

Current Assets = R1,186,000 Inventories = R735,000 Current Liabilities = R1,236,000

This gives us:

$\text{Acid-test ratio} = \frac{(1,186,000 - 735,000)}{1,236,000} = \frac{451,000}{1,236,000} \approx 0.365$

The formula to calculate % return on shareholders' equity (ROSH) is:

$\text{ROSH} = \frac{\text{Net Profit After Tax}}{\text{Shareholders' Equity}} \times 100$

Inserting the values:

Net Profit After Tax = R1,378,600 Shareholders' Equity = R7,605,800

Calculating gives us:

$\text{ROSH} = \frac{1,378,600}{7,605,800} \times 100 \approx 18.14\%$

To calculate Earnings per Share (EPS), the formula is:

$\text{EPS} = \frac{\text{Net Profit After Tax}}{\text{Number of Shares Outstanding}}$

Here:

Net Profit After Tax = R1,378,600 Number of Shares = 5,000,000

Thus:

$\text{EPS} = \frac{1,378,600}{5,000,000} = 0.276 ext{ or } 27.6 \text{ cents}$

Joni Ltd is not handling its working capital effectively. The indicators are:

• Current ratio: Grayson Ltd (1.65:1) against Joni Ltd (4.40:1) indicates that Joni has a surplus of current assets.
• Stock-holding period: Grayson Ltd (0.45 days) vs. Joni Ltd (184 days) shows that Joni has excessive stockpiling.

These figures suggest Joni Ltd is ill managing its working capital, leading to tying up cash in inventories.

Grayson Ltd has a lower Debt-to-Equity ratio indicating lower risk with:

• Financial Indicator: Debt-to-Equity 0.1:1

Joni Ltd has higher financial gearing with:

• Financial Indicator: Debt-to-Equity 4:1, indicating a riskier position as it relies more on debt financing. This disparity suggests that Grayson is more conservative in its financial strategy.

Grayson Ltd adopts an aggressive dividend policy with a payout of 98%, leading to higher returns for shareholders, specifically R528,000 out of R540,000.

Conversely, Joni Ltd has a more conservative policy with a payout of 40%, allowing them to retain more earnings (R292,000 out of R730,000), which supports future growth.

Grayson Ltd's share price of R0.67 is higher than its NAV of R1.20, indicating potential overvaluation, which can be a concern for shareholders.

In contrast, Joni Ltd's share price of R1.75 is lower than its NAV of R4.25, suggesting undervaluation and potential for appreciation, which is a positive signal for investors.