Choose ONE word/term for each of the following descriptions from the list below - NSC Accounting - Question 5 - 2017 - Paper 1
Question 5
Choose ONE word/term for each of the following descriptions from the list below. Write only the word/term next to the question number (5.1.1-5.1.4) in the ANSWER BOO... show full transcript
Worked Solution & Example Answer:Choose ONE word/term for each of the following descriptions from the list below - NSC Accounting - Question 5 - 2017 - Paper 1
Step 1
5.1.1 The ability of the business to pay off its short term debts in the next financial year
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Answer
Liquidity
Step 2
5.1.2 The extent to which the company is financed by borrowed capital (loans)
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Answer
Gearing
Step 3
5.1.3 The difference between current assets and current liabilities
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Answer
Net working capital
Step 4
5.1.4 Shareholders will not be required to use their personal possessions to settle the debts of the company
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Answer
Limited liability
Step 5
5.2.1 Prepare the following notes on 31 December 2016:
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Answer
Ordinary share capital:
Issued shares: R4 752 000
Retained income:
Balance on 1 January 2016: R276 000
Net profit after tax: R1 150 000
Dividends paid: (R510 000)
Retained income on 31 December 2016: R916 000
Step 6
5.2.2 Complete the CASH EFFECTS OF OPERATING ACTIVITIES section of the Cash Flow Statement. Show workings.
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Cash generated from operations = R1 237 400
Interest paid: (R100 000)
Income tax paid: (R292 600)
Total cash generated = R1 237 400
Step 7
5.2.3 Calculate the following amounts that will appear in the Cash Flow Statement. State whether these are inflows or outflows.
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Change in fixed deposit: R300 000 (Inflows)
Proceeds on disposal of equipment: R212 400 (Inflows)
Step 8
5.2.4 Calculate the following financial indicators on 31 December 2016:
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Mark-up percentage on cost: 45%
Debt-equity ratio: 0.2:1
Net asset value (NAV): 817 cents
Step 9
5.2.5 The financial director was questioned about the decision to increase the loan. Explain what he should say to justify this decision. Quote TWO financial indicators (with figures).
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Answer
The debt-equity ratio increased to 0.2:1 which indicates a low risk as the company is not heavily reliant on borrowed funds. Additionally, the Return on Average Capital Employed (ROCE) improved to 21.8%, showing effective use of the borrowed funds.
Step 10
5.2.6 Ashraf is unhappy with the dividend pay-out policy for 2016. Provide a calculation to support his opinion.
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Dividend pay-out ratio = (Dividends paid / Net profit after tax) = (R510 000 / R1 150 000) = 44.35%
He expected at least 80% as paid in 2015.
Step 11
5.2.6 Explain TWO points to support the company’s decision regarding dividends for 2016.
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The company retained more of its earnings to support future growth, which could lead to higher profits.
Retained earnings will fund extensions to buildings and improve long-term capital structure.
Step 12
5.2.7 Comment on the re-purchase price paid for the 40 000 shares on 30 December 2016. Provide TWO financial indicators (with figures) in your comment.
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The re-purchase price of R7.20 was above the NAV of R817 cents, indicating a premium paying for the shares. Additionally, the market price was R848 cents, suggesting shareholder benefits as they received above the market value.
