NSC Accounting Analysis and interpretation of Financial Statements: 5.1 Choose the correct word(s) f

Question

5.1 Choose the correct word(s) from those given in brackets. Write only the word(s) next to the question numbers (5.1.1 to 5.1.4) in the ANSWER BOOK.

5.1.1 The (internal/external) auditor is appointed by shareholders to express an unbiased opinion of the financial statements of a company.

5.1.2 (Directors/Shareholders) are responsible for the management and running of the business.

5.1.3 The (Income Statement/Balance Sheet) shows the financial position of the business in terms of its assets, equity and liabilities.

5.1.4 The (Income Statement/Cash Flow Statement) is a financial statement that shows the sources of a company’s funds and how they were used.

5.2 BOMBAY LTD
The information relates to Bombay Ltd for the financial year ended 29 February 2020:

REQUIRED:
5.2.1 Fill in the missing amounts on the Cash Flow Statement provided. Show workings. Indicate amounts in brackets.

5.2.2 Calculate the following financial indicators on 29 February 2020:
- % operating profit on sales
- Acid-test ratio
- Net asset value (NAV)
- The current ratio is 1.6 : 1.
- Net asset (NAV) per share.

A. Extract from the Income Statement (Statement of Comprehensive Income) on 29 February 2020:
Sales	R4 824 000
Gross profit	R1 600 000
Depreciation	R312 600
Operating profit	R1 122 500
Net profit before tax	R988 400
Net profit after tax	R864 800

B. Extract from the Balance Sheet (Statement of Financial Position) on 29 February:

2020 (R)	2019 (R)
Fixed assets (carrying value)	4 830 000	3 760 000
Current assets	2 000 000	962 000
Current liabilities	774 000	712 800
Trading stock	619 000	538 000
Bank	250 000	126 000
Petty cash	0	0
Ordinary share capital	5 880 000	5 360 000
Retained income	0	0
Loan: Kan Bank	956 000	1 300 000
SARS: Income tax	0 (Cr)	0 (Dr)
Shareholders for dividends	0	126 000
Bank overdraft	28 800	0

C. Share capital and dividends:
The authorised share capital comprises 1 500 000 shares.
- On 1 March 2019, 60% of the authorised shares were issued for R1 240 000.
- On 30 June 2019, 200 000 additional shares were issued for R1 240 000.
- On 29 February 2020, 120 000 shares were repurchased at R96 000.
- Total dividends paid and declared in the 2020 tax year were R286 000.

D. Fixed assets:
- Additions to buildings were completed during November 2018.
- Old equipment was sold at carrying value, R34 500.

5.3 TWO COMPANIES: LULU LTD AND COCO LTD
Noah Lott won R5.6 m in the national lottery five years ago and then decided to invest R2.8 m in each of the companies below, as follows:

Lulu Ltd	400 000 shares at R7.00 each = R2.8 m
Coco Ltd	100 000 shares at R28.00 each = R2.8 m

He wants your opinion on these companies.

NOTE: When answering the questions below, compare the information given and quote the relevant financial indicators of both companies (percentages, ratios and/or amounts).

INFORMATION:

LULU LTD						COCO LTD
2020	2019	2020	2019
Total number of shares	1 100 000 shares	700 000 shares	
Ordinarily bought by Noah	40 000 shares	...  
Noah’s % shareholding	36%	14%
Current market value per share	R9.00	R17.80
Ordinary share capital	R9 900 000	R9 208 000
Retained income	... 	...
Long-term loan	... 	...
Current ratio	1.55	1.25
Debt-equity ratio	0.8 : 1	0.2 : 1
Net asset value per share	R10.72	R18.76
Earnings per share (EPS)	273 cents	233 cents	171 cents	266 cents
% return on equity	25%	9%	15%	...
% return on capital employed	13%	14%	...	...
Interest rate on loans	6%	6%	6%	6%
Interest rate on fixed deposits	6%	6%	6%	6%

REQUIRED:

5.3.1 Explain which company has the better liquidity. Quote TWO financial indicators to support your opinion.

5.3.2 Comment on the earnings per share and the % return on equity of Lulu Ltd. Give TWO reasons why the shareholders will be satisfied with these indicators.

5.3.3 Comment on the market value of the shares in Coco Ltd. Explain TWO points.

5.3.4 Compare the dividend payout rates of both companies and explain why the directors of EACH company decided on these payout rates.

5.3.5 Noah says that the dividend of 110 cents per share he earned from Lulu Ltd is better than the dividend of 200 cents per share from Coco Ltd. Give ONE point to prove that he is incorrect.

5.3.6 Comment on the risk and gearing of EACH company. Quote TWO financial indicators.

5.3.7 Noah wants to buy shares in Lulu Ltd on the JSE at current market value to become the majority shareholder and CEO. Calculate how much Noah will have to pay for the shares that he needs.

5.1 Choose the correct word(s) from those given in brackets - NSC Accounting - Question 5 - 2020

Worked Solution & Example Answer:5.1 Choose the correct word(s) from those given in brackets - NSC Accounting - Question 5 - 2020

5.2.1 Fill in the missing amounts on the Cash Flow Statement provided. Show workings. Indicate amounts in brackets.

5.2.2 Calculate the following financial indicators on 29 February 2020: % operating profit on sales

5.2.2 Calculate the following financial indicators on 29 February 2020: Acid-test ratio

5.2.2 Calculate the following financial indicators on 29 February 2020: Net asset value (NAV) per share.