5.1 Choose a term from the list below that answers the specific following questions - NSC Accounting - Question 5 - 2019 - Paper 1

The appropriate term is liquidity.

The suitable term for this question is profitability.

The term that addresses this question is gearing.

The Retained Income Note is prepared as follows:

Balance on 1 March 2018: R141,500
Net profit after tax: R683,900
Less: Funds used for repurchase of shares: R456,800

Balance on 28 February 2019: R368,600

This indicates the balance of retained income at the end of the financial year.

For cash effects of investing activities, the calculation is:

Fixed assets purchased: R345,000
Sale of fixed assets: R111,800
Total cash effects: R518,600

For net change in cash and cash equivalents, the calculation is:

Cash and cash equivalents at the beginning: R374,500
Cash and cash equivalents at the end: R260,180
Net change: R114,320

These figures reflect the company's investing activities and cash position.

1. Acid-test ratio:

   $\text{Acid-test ratio} = \frac{\text{Current assets - Inventory}}{\text{Current liabilities}} = \frac{R288,300 - R0}{R553,600} = 1.0 : 1.0$

2. Debt-equity ratio:

   $\text{Debt-equity ratio} = \frac{\text{Total debt}}{\text{Total equity}} = \frac{R1,400,000}{R7,557,600} = 0.18 : 1$

3. % Return on average shareholders’ equity (ROSH):

   $\text{ROSH} = \frac{\text{Net income}}{\text{Shareholders' equity}} \times 100 = \frac{R293,100}{R7,705,600} \times 100 = 3.80\%$

1. Current ratio: Increased from 0.7 to 1.8.

2. Acid-test ratio: Improved from 0.4 to 1.0.

3. Debtors' collection period: Decreased from 39 days to 28 days.

These indicators show a positive trend in liquidity.

Increasing the share capital and loan has implications for gearing.

1. Debt-equity ratio: This moved from 0.99 to 0.18, indicating reduced reliance on debt.

2. Return on total capital employed (ROTCE): Decreased from 14.4% to 12.9%, showing a higher level of risk attributed to leverage.

The calculations are as follows:

1. Previous pay-out rate:

   $\frac{R610,000}{R293,100} \times 100 = 208.68\%$

2. New pay-out rate:

   $\frac{R497,110}{R293,100} \times 100 = 169.70\%$

This reflects a significant reduction in the pay-out ratio.

Martha benefited as her shareholding increased relative to the total shares.

1. Number of shares post-repurchase: Martha's shares remain 475,000 out of 900,000 originally, but with repurchase the total outstanding shares decrease.

2. This increases her ownership percentage which enhances her voting power and dividends collected per share.