Question

Question 1

You have been asked, as a member of a small Accounting firm, to review the December 31 year-end financial statements of a small (R2 million revenues) company in East London. The company has applied for a long-term loan from the bank. You are interested to note as you begin your review of the company’s records that a principal stockholder is your former college roommate. You are preparing your report and wonder about the following items:

 The company decided during the last month of the year to change their method of accounting for depreciation for this year’s financial statements. You do not believe that any adjustments were made to prior years’ reported results because of this change.

 You have been working at the bookkeeper’s desk while she is away on vacation. You pushed the desk blotter aside at one point and noticed underneath it a bill to the company from a local florist for R55. The bill is dated December, but you do not see it recorded anywhere in the company’s books. A number of other unopened envelopes are under the blotter, the contents of which cannot be judged from the outside.

 You read in yesterday’s newspaper that a local manufacturer is seriously contemplating a move to Atlanta. You know from your audit that they are an important customer of the company you are reviewing.

Required:

Should these items be disclosed in your report? Why or why not? If you disclose, how should your disclosure be phrased? Should you disclose any other facts to the company, to your employer, or in your report? Should the audit have been conducted differently? In your answers, try to keep in mind some of the fundamental qualitative principles underlying financial reporting and cite them where relevant.

Question 2

At the beginning of 2017, Rain (Pty) Ltd had total assets of R553,700, total liabilities of R261,800 common stock of R139,000, Retained Earnings of R152,900. During 2017, Rain Pty ltd had net income of R225,200 paid dividends of R74,400, and issued additional common stock for R94,000. Rain ‘s total assets at the end of 2017 were R721,800.

Required:

Calculate the amount of liabilities that Rain (Pty) Ltd must have at the end at the end of 2017 in order for the balance sheet equation to balance.

Question 3

Johnson B (Pty) Limited is considering a project that would require an initial investment of R924, 000 and would have a useful life of eight (8) years. The annual cash receipts would be R600,000 and the annual cash expenses would be R240,000. The salvage value of the assets used in the project would be R138,000. The company uses a discount rate of 15%. Additional Working Capital of R400,000 will be required for the project.

3.1 Compute the net present value of the project (10)

3.2 Compute the Payback period (3)

3.3 Would you recommend the Investment (2)

Question 5

Marks Varney Company makes rolling suitcases. Its sales budget for four months is: Month Sales R March 15,000 April 20,000 May 40,000 June 60,000 Varney's policy is that ending inventory of finished suitcases should equal 30% of the next month's sales. Beginning inventory (March 1) is 5,300 suitcases. Each suitcase required 1.5 meters of ballistic nylon. The ending inventory policy for nylon is that 20% of the following month's production needs must be on hand. On March 1, Varney had 10,450 meters of nylon in inventory.

Required:

5.1 What is the desired ending inventory of suitcases for April? (1)

5.2 What is the budgeted production of suitcases for April? (1)

5.3 What is the desired ending inventory of nylon for March? (1)

5.4 What are the budgeted meters of nylon to be purchased in March? (1)

5.5 Assuming each suitcase required two meters of ballistic nylon, what is the desired ending inventory of nylon for March? (1)

Answer 1

Question 5

5.1 Ending inventory for April = 30% of May budgeted sales = 30%*40,000 = 12,000 suitcases

5.2 Budgeted production of suitcases for April:

Sales budget = 20,000

Add: Ending inventory = 12,000

Less: Beginning inventory = Ending inventory of March = 30%*April sales budget = 30%*20,000 = 6,000

Budgeted production of suitcases for April = 20,000 + 12,000 - 6,000 = 26,000

5.3 Ending inventory of suitcases for March = 6,000

Nylon per unit of suitcases = 1.5 meters

Ending inventory of suitcases for March = 6000*1.5 = 9,000 meters

5.4

Budgeted production of suitcases for March:

Sales budget = 15,000

Add: Ending inventory = 30%*20,000 = 6,000

Less: Beginning inventory = 5,300 (given in question)

Budgeted production of suitcases for March = 15,000 + 6,000 - 5,300 = 15,700

Budgeted meters of nylon to be purchased = 15,700*1.5 = 23,550

5.5

Ending inventory of suitcases = 30%*20,000 = 6,000

Ending inventory for March = 2*6,000 = 12,000 meters