4.1 Choose a term to complete each of the following statements - English General - NSC Accounting - Question 4 - 2017 - Paper 1

The term that fits this statement is internal auditor. An internal auditor is responsible for evaluating and improving the effectiveness of risk management, control, and governance processes within an organization.

The term to complete this is shareholder. Shareholders are individuals or entities that own shares in a company, thereby holding a stake in the company’s financial performance.

The correct term is external auditors. External auditors are independent parties that review the company's financial statements to ensure accuracy and compliance with accounting standards.

The notes to the Balance Sheet as of 31 August 2017 would include:

• Ordinary Share Capital:

  • Authorized share capital: 1 200 000 ordinary shares.
  • Issued share capital: 980 000 shares as of 31 August 2017.

• Retained Income:

  • Starting balance: R147 370.
  • Net profit after income tax: R438 130.
  • Total retained income: R585 500.

The Cash Flow Statement will include:

• Cash flows from operating activities:
  • Cash generated from operations: R945 000.
  • Interest paid: R86 100.
• Cash flows from investing activities:
  • Purchase of fixed assets: R1 846 000.
• Cash flows from financing activities:
  • Proceeds from issue of share capital: R945 000.
  • Repurchase of shares: R437 500.

The percentage operating profit on sales can be calculated as follows:

ext{Percentage Operating Profit} = rac{ ext{Operating Profit}}{ ext{Sales}} imes 100

Substituting the provided figures:

ext{Percentage Operating Profit} = rac{697 000}{8 652 000} imes 100 = 8.1\%

To calculate the dividends per share (DPS), use the formula:

DPS = rac{ ext{Total Dividends}}{ ext{Number of Shares}}

From the information provided, the total dividends paid is based on the retained income, thus:

1.2 million shares = 1 200 000 shares.

Total dividends: R(DPS calculated based on retained earnings). Therefore: DPS = R(108 000) / 1 200 000 = R0.09.

The price of R9,10 charged by Castro Ltd for the new shares can be seen as fair as it is close to their average market price of R10, which reflects a level of demand for the shares. Investors may view this as reasonable, given that shares are issued to existing shareholders, thus maintaining their proportional ownership.

The issuance of new shares has decreased the financial gearing of Castro Ltd, as can be indicated by a lower debt-equity ratio. Financial gearing is now less risky, reflecting a shift towards equity funding. For example:

1. Debt-to-equity ratio has improved from 0.8 to 0.5.
2. Return on Capital Employed (ROCE) has increased due to efficiency gains from the new branch, showing stronger profitability ratios.

To retain a 60% shareholding in Castro Ltd after the issue of new shares:

1. Current shareholding: 300 000 shares.
2. After issuing 200 000 new shares, total shares = 300 000 + 200 000 = 500 000.
3. Shares needed for 60% ownership = 60% of 500 000 = 300 000.
4. Therefore, Henry needs to buy 120 000 new shares at R9,10 each, equating to R1 092 000.

Ronki Ltd’s liquidity position can be gauged from the current ratio and quick ratio. The current ratio may be below 2, suggesting a tighter liquidity stance, indicating:

1. Current Ratio (e.g., 1.7)
2. Quick Ratio (e.g., 1.1 or lower), both implying that the company may struggle to meet its short-term obligations.

Ronki Ltd's share buy-back at prices over the average market reflects a premium which may signal to investors a commitment to increasing shareholder value. The company aims for enhancing earnings per share (EPS) through reduced share count. This method effectively manages surplus cash.

Henry benefits from the share repurchase in the following ways:

1. Increased share value: As shares are removed from circulation, the overall value of his remaining shares may increase due to reduced supply.
2. Enhanced per-share metrics: Metrics like EPS and ROE are likely to improve, enhancing Henry's investment value.
3. Greater shareholding control: The reduction in total outstanding shares gives Henry a more amplified voice in shareholder meetings, thus enhancing his control.