Question $1$:

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 ${28}^{th}$ February $2022$ 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$1,570,000$ all of which had been on credit.

All sales were of their only product, which had a consistent Cost of Sales of $46\%.$

When Harry set up the company ten years ago, he issued himself with $6,000$ shares of R$1$ each.

There have been no new share issues since then.

The prevailing tax rate in South Africa at the time was $40\%$ 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 $7$ days. Thus, creditors outstanding at year$-$end were only R$12,300.$

Harry hated debt, so had no L$-$T borrowings at all. Interest paid to finance the overdraft during the

year came to R$2,500.$

General and Admin costs for the year totaled R$109,000$ and Staff costs amounted to R$178,800.$

Harry's powerful corporate customers were extremely slow at paying. The year$-$end debtors figure

of R$285,600$ worried him a great deal.

Depreciation for the year came to R$45,900$ and the NBV of fixed assets at the end of the year was

calculated to be R$324,000$

Sales and Marketing costs for the year were $8\%$ of turnover.

Last year's balance sheet showed retained earnings as at ${28}^{th}$ February $2021$ to equal R$553,900.$

Stock holding of raw materials amounted to an average of $32$ days of production.

Cash in the safe at year end amounted to R$72,300$ 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 $5^{th}$ 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 ${28}^{th}$

February $2023$: $-$

Sales would nearly double to $R3,000,000.$ 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 $C$ of

S on the old product would remain at $46\%,$ that of the Supergig was projected to be a much higher

$70\%$

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$100,900$ by year$-$end.

His bulk buying would mean that stock holdings would need to be a lot higher. Harry predicted that

they would probably grow to R$139,900.$

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 $4,000$ new shares to Godfrey for the price

of R$180$ each.

This new injection of cash would enable Harry to spend the R$1,200,000$ required to purchase the

new manufacturing equipment. He planned to depreciate this equipment over $10$ years $-$ this would

push the depreciation expense for the year up to R$165,900.$

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$199,000.$

Harry was still adamant that he would not take on any long$-$term debt. He knew that he would have

to rely quite heavily on overdraft funding though and predicted that the overdraft would grow to

$R128,700$ and attract financing costs of R$17,570$ during the year.

Credit terms with the wholesaler would be far tighter than in the past. Harry was determined to

bring the average debt