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Question 1 : Harry Kane Manufacturing Harry has an electronic computer components business in Isando. His accountant immigrated during the last financial year and he
Question : Harry Kane Manufacturing Harry has an electronic computer components business in Isando. His accountant immigrated during the last financial year and he has not yet been able to find a replacement. As he is not familiar with the financial side of things, he has come to you for help in finalising his accounts and advice on a new venture he is considering. Firstly, the accounts for the year ended February need to be completed to keep SARS happy and give him a starting point for next year's budget. Harry's bookkeeper was able to offer the following information: Sales for the year had been R all of which had been on credit. All sales were of their only product, which had a consistent Cost of Sales of When Harry set up the company ten years ago, he issued himself with shares of R each. There have been no new share issues since then. The prevailing tax rate in South Africa at the time was and Harry always paid out half of the earnings after tax as a dividend to himself. As Harry understood the benefit of taking suppliers up on early settlement discounts, he paid most of his creditors within days. Thus, creditors outstanding at yearend were only R Harry hated debt, so had no LT borrowings at all. Interest paid to finance the overdraft during the year came to R General and Admin costs for the year totaled R and Staff costs amounted to R Harry's powerful corporate customers were extremely slow at paying. The yearend debtors figure of R worried him a great deal. Depreciation for the year came to R and the NBV of fixed assets at the end of the year was calculated to be R Sales and Marketing costs for the year were of turnover. Last year's balance sheet showed retained earnings as at February to equal R Stock holding of raw materials amounted to an average of days of production. Cash in the safe at year end amounted to R and the company's only bank account was overdrawn, but Harry was not sure of the exact amount. After sorting out last year's accounts Harry wanted you to help him budget for the following year and highlight the financial implications of a new deal he wanted to undertake. He had found a computer wholesaler who promised him big orders if he started manufacturing the new generation Supergig and he was excited about the prospect of substantial growth for his business. He would need to acquire some fairly costly new machinery to manufacture the new product and realised that such growth levels could not be funded internally. After lengthy meetings with yourself and his production & marketing teams, he felt sure that the introduction of the new product would bring about the following for the year ended February : Sales would nearly double to That was based on sales of the old product staying exactly the same and the Supergig making up the rest. All sales would still be on credit. In return for guaranteeing such volumes, the wholesaler had fought hard for discounts. While of S on the old product would remain at that of the Supergig was projected to be a much higher The higher volumes being purchased would enable Harry to negotiate better terms with his suppliers. He felt that he could probably keep the settlement discounts and run creditors up to R by yearend. His bulk buying would mean that stock holdings would need to be a lot higher. Harry predicted that they would probably grow to R The tax rate was not due to change and Harry did not want to alter the existing dividend policy. To finance this growth Harry had spoken to Godfrey, who was keen on investing in the business with his old classmate. They had agreed on Harry issuing new shares to Godfrey for the price of R each. This new injection of cash would enable Harry to spend the R required to purchase the new manufacturing equipment. He planned to depreciate this equipment over years this would push the depreciation expense for the year up to R The new product was expected to double General & Admin costs for the forthcoming year. However, staff costs were only expected to go up to R Harry was still adamant that he would not take on any longterm debt. He knew that he would have to rely quite heavily on overdraft funding though and predicted that the overdraft would grow to and attract financing costs of R during the year. Credit terms with the wholesaler would be far tighter than in the past. Harry was determined to bring the average debt
Question :
Harry Kane Manufacturing
Harry has an electronic computer components business in Isando. His accountant immigrated during the
last financial year and he has not yet been able to find a replacement. As he is not familiar with the
financial side of things, he has come to you for help in finalising his accounts and advice on a new
venture he is considering. Firstly, the accounts for the year ended February need to be
completed to keep SARS happy and give him a starting point for next year's budget. Harry's bookkeeper
was able to offer the following information:
Sales for the year had been R all of which had been on credit.
All sales were of their only product, which had a consistent Cost of Sales of
When Harry set up the company ten years ago, he issued himself with shares of R each.
There have been no new share issues since then.
The prevailing tax rate in South Africa at the time was and Harry always paid out half of the
earnings after tax as a dividend to himself.
As Harry understood the benefit of taking suppliers up on early settlement discounts, he paid most
of his creditors within days. Thus, creditors outstanding at yearend were only R
Harry hated debt, so had no LT borrowings at all. Interest paid to finance the overdraft during the
year came to R
General and Admin costs for the year totaled R and Staff costs amounted to R
Harry's powerful corporate customers were extremely slow at paying. The yearend debtors figure
of R worried him a great deal.
Depreciation for the year came to R and the NBV of fixed assets at the end of the year was
calculated to be R
Sales and Marketing costs for the year were of turnover.
Last year's balance sheet showed retained earnings as at February to equal R
Stock holding of raw materials amounted to an average of days of production.
Cash in the safe at year end amounted to R and the company's only bank account was
overdrawn, but Harry was not sure of the exact amount.
After sorting out last year's accounts Harry wanted you to help him budget for the following year and
highlight the financial implications of a new deal he wanted to undertake. He had found a computer
wholesaler who promised him big orders if he started manufacturing the new generation Supergig and
he was excited about the prospect of substantial growth for his business. He would need to acquire some
fairly costly new machinery to manufacture the new product and realised that such growth levels could
not be funded internally. After lengthy meetings with yourself and his production & marketing teams, he
felt sure that the introduction of the new product would bring about the following for the year ended
February :
Sales would nearly double to That was based on sales of the old product staying
exactly the same and the Supergig making up the rest. All sales would still be on credit.
In return for guaranteeing such volumes, the wholesaler had fought hard for discounts. While of
S on the old product would remain at that of the Supergig was projected to be a much higher
The higher volumes being purchased would enable Harry to negotiate better terms with his
suppliers. He felt that he could probably keep the settlement discounts and run creditors up to
R by yearend.
His bulk buying would mean that stock holdings would need to be a lot higher. Harry predicted that
they would probably grow to R
The tax rate was not due to change and Harry did not want to alter the existing dividend policy.
To finance this growth Harry had spoken to Godfrey, who was keen on investing in the business
with his old classmate. They had agreed on Harry issuing new shares to Godfrey for the price
of R each.
This new injection of cash would enable Harry to spend the R required to purchase the
new manufacturing equipment. He planned to depreciate this equipment over years this would
push the depreciation expense for the year up to R
The new product was expected to double General & Admin costs for the forthcoming year.
However, staff costs were only expected to go up to R
Harry was still adamant that he would not take on any longterm debt. He knew that he would have
to rely quite heavily on overdraft funding though and predicted that the overdraft would grow to
and attract financing costs of R during the year.
Credit terms with the wholesaler would be far tighter than in the past. Harry was determined to
bring the average debt
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