QUESTION 1

[10 MARKS]

A former employee is suing your organisation for R10-million, claiming theft of intellectual property. On the advice of the companys legal representatives, a decision is made to provide for the amount of the claim in its financial statements, since it is probable that judgment will be in favour of the plaintiff. The company wishes to present this matter fairly in its financial statements, and approaches you, as a seasoned accounting expert, for guidance.

1.1 Which elements of the financial statements (if any) are involved? (5)

1.2 What are the recognition criteria for liabilities and expenses? (3)

1.3 Does the liability and expense in this instance meet the recognition criteria you (2) have stated in your responses to 1.1 and 1.2, and how should this event be treated

in the financial statements?

QUESTION 2

[10 MARKS]

2.1 Discuss critically the challenges for a small business of calculating fixed asset (5) depreciation.

2.2 What is residual value, and how does it differ from the estimated useful life of an (5) asset?

QUESTION 3

[20 MARKS]

3.1 According to the payback rule, an investment is accepted if its calculated payback (10) period is less than or equal to a prespecified number of years. Consider the investment below if analysed using the NPV rule. The initial cost is R6-million and

the cost of capital is 10% per annum. It has been decided that the project should

be accepted if the payback period is three years or less. Using the payback rule, should this project be undertaken?

Year

Cash Flow Generated

1 2 3 4

R2-million R2.25-million R2.2-million R2.1-million

3.2 Consider the following table. The payback period cutoff is two years. Both projects (10) cost R2.5-million.

Year

Project X

Project Y

1 R1-million

2 R1-million

3 R1-million 0

4 R1-million 0

Which would you pick using the payback rule? Provide three reasons justifying your answer.

R1.75-million R1.75-million

QUESTION 4

The details of KCA Limited are as follows:

Extract from income statement for the year ended 28 February 2018:

Sales

Cost of sales Operating profit Income tax

[30 MARKS]

9 000 000 5 625 000 1 423 200

426 000

Net profit after tax

904 000

Balance sheet as at 28 February 2018:

Assets

Noncurrent assets

4 626 000

Tangible assets Financial assets

Inventories (all trading stock)

Trade and other receivables (all trade debtors) Cash and cash equivalents

Ordinary share capital (R2.00 per share) Retained income

Mortgage loan: UCT bank (15% p.a.)

Trade and other payables (all trade creditors) SARS (income tax)

Current portion of loan

Assuming a year of 360 days, calculate and explain the following ratios for KCA:

4.1 Gross profit on cost of sales, expressed as a percentage

4.2 Net profit on sales, expressed as a percentage

4.3 Operating profit on sales, expressed as a percentage

4.4 Current ratio

4.5 Acid-test ratio

4.6 Debt-equity ratio

QUESTION 5

[30 MARKS]

Discuss the advantages and limitations of the procurement process and its effect on small business development in South Africa.

In your response, focus in particular on these areas of interest:

Procedures;

Tendering in South Africa;

Challenges affecting the procurement process; and

Sustainability and good corporate governance.

4 of 7 ASSIGNMENT QUESTIONS QUESTION 1 [10 MARKS] A former employee is suing your organisation for R10-million, claiming theft of intellectual property. On the advice of the company's legal representatives, a decision is made to provide for the amount of the claim in its financial statements, since it is probable that judgment will be in favour of the plaintiff. The company wishes to present this matter fairly in its financial statements, and approaches you, as a seasoned accounting expert, for guidance. (5) (3) 1.1 Which elements of the financial statements (if any) are involved? 1.2 What are the recognition criteria for liabilities and expenses? 1.3 Does the liability and expense in this instance meet the recognition criteria you have stated in your responses to 1.1 and 1.2, and how should this event be treated in the financial statements? (2) QUESTION 2 [10 MARKS] 2.1 Discuss critically the challenges for a small business of calculating fixed asset depreciation (5) 2.2 What is residual value, and how does it differ from the estimated useful life of an asset? (5) POBM_FMMA_ASG_2020 Regenesys Business School 5 of 7 QUESTION 3 [20 MARKS] 3.1 According to the payback rule, an investment is accepted if its calculated payback (10) period is less than or equal to a prespecified number of years. Consider the investment below if analysed using the NPV rule. The initial cost is R6-million and the cost of capital is 10% per annum. It has been decided that the project should be accepted if the payback period is three years or less. Using the payback rule, should this project be undertaken? Year 1 2 3 4 Cash Flow Generated R2 million R2.25-milion R2 2-million R2.1 million 3.2 (10) Consider the following table. The payback period cutoff is two years. Both projects cost R2.5-million Year 1 Project X R1-milion R1-milion R1-milion R1-milion Project Y R1.75-million R1.75-million 0 2 3 4 0 Which would you pick using the payback rule? Provide three reasons justifying your answer. QUESTION 4 [30 MARKS] The details of KCA Limited are as follows: Extract from income statement for the year ended 28 February 2018: Sales Cost of sales Operating profit Income tax Net profit after tax 9 000 000 5 625 000 1423 200 426 000 904000 POBM_FMMA ASG_2020 Regenesys Business School 5 Balance sheet as at 28 February 2018: Assets Noncurrent assets Tangible assets Financial assets Current assets Inventories (all trading stock) Trade and other receivables (all trade debtors) Cash and cash equivalents Total assets 4 626 000 4 326 000 300 000 1 857 000 1 640 000 110 000 107000 6 483 000 Equity and liabilities Ordinary shareholders' equity Ordinary share capital (R2.00 per share) Retained income Noncurrent liabilities Mortgage loan: UCT bank (15% p.a) Current liabilities Trade and other payables (al trade creditors) SARS (income tax) Current portion of loan Total equity and liabilities 3 698 000 2485 000 1 213 000 1 980 000 1 980 000 805 000 705 000 32 000 68 000 6 483 000 Assuming a year of 360 days, calculate and explain the following ratios for KCA: Gross profit on cost of sales, expressed as a percentage (5) 4.2 Net profit on sales, expressed as a percentage (5) 4.3 Operating profit on sales, expressed as a percentage (5) 4.4 Current ratio (5) 4.5 Acid-test ratio (5) 4.6 Debt-equity ratio (5) POBM_FMMA_ASG_2020 Regenesys Business School 6 QUESTION 5 [30 MARKS] Discuss the advantages and limitations of the procurement process and its effect on small business development in South Africa In your response, focus in particular on these areas of interest: Procedures; Tendering in South Africa Challenges affecting the procurement process; and Sustainability and good corporate governance. Total Marks: 100 PDBM_FMMA ASG_2020 Regenesys Business School 7