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Budgeting Accounting Grade 12 Study Guide and Notes

Budgeting Accounting Grade 12 Study Guide and Notes. Both budgeting and accounting are fiscal systems or processes that involve the planning, allocating, and disbursing of monetary resources. This results in an interrelationship and a need for coordination between these two fiscal disciplines.

Budgeting Accounting Grade 12 Study Guide and Notes

How to use this study guide

The main intention of this study guide is to address the challenges with specific areas of subject content that was poorly answered in the past nsc papers. This is informed by the detailed question-by-question analysis and findings provided in the diagnostic reports. The material presented in this booklet focuses on the progression across the fet phase and the content overlap, as illustrated in the table below.

GRADE 12 GRADE 10/11 (overlap) 
Field 1:
Financial Accounting  
Companies

  • Concepts and bookkeeping
  • Financial Statements
  • Cash Flow, Ratios (analysis and interpretation)

Reconciliations analysis
Bank, Debtors and Creditors
VAT

Bookkeeping (sole trader/ partnership)

  • Adjustments
  • Financial Statements
  • Ratios/ Interpretation

Reconciliations prepare
VAT concepts and calculations

Field 2:
Managerial Accounting
 Manufacturing concerns

  • Production Cost Statement
  • Unit cost calculations and break-even analysis

Budgeting (analysis)

  • Projected Income Statement
  • Cash Budget
Manufacturing

  • Concepts and ledger accounts
  • Break-even analysis

Budgeting (prepare)

  • Concepts and preparation
  • Basic calculations
Field 3:
Managing Resources
Stock valuation

  • FIFO, weighted average andspecific identification

Fixed asset management(analysis)

Auditing, internal controlsand ethics

Stock (clubs)

  • Perpetual and periodic

Fixed assets (prepare)

  • Depreciation, disposal

Auditing, internal controls and ethics

Grade 12 learners (and teachers) must first address prior knowledge (concepts and calculations), before moving to the more challenging aspects of analyzing, interpreting and commenting. The next logical step is to tackle examination-type questions with the understanding that all questions will make provision for the different cognitive levels.

This study guide provides:

  • Explanatory notes comprising simple definitions, examples, formulae and short-cuts (handy hints).
  • Short focus-activities to test specific skills and content.
  • Application activities in the form of examination-type questions.
  • Adapted questions from past examination papers.

Plan of Action:

  • You need to master the basic skills by using this manual, together with all other resources such as textbooks and study guides, to obtain more practice
    examples.
  • Test your knowledge by attempting a variety of examination questions.
  • Make notes of your shortcomings and start the process again until you are able to get the correct answers to the activities

Study and examination tips

Know the paper: General structure and layout.

  • The Accounting paper is one 3-hour paper for 300 marks.
  • It consists of 6 compulsory questions; the marks per question range from 30 to 80 marks. Each question comprises a number of sub-questions that catering for the different cognitive levels.
  • The content covered must conform to the requirements of CAPS, as follows:
Financial Accounting50% – 60%150 – 180 marks
Managerial Accounting20% – 25%60 – 75 marks
Managing Resources20% – 25%60 – 75 marks

The trend in past papers was as follows:

  • Question 1, 2 and 6 are generally shorter questions (30 – 45 marks).
  • Question 3 and 4 are generally the longer questions, comprising Financial Statements, the Cash Flow Statement and Interpretation.
  • The question paper comes with a specially prepared ANSWER BOOK, with appropriate space, formatting and certain details, which means you can answer the questions in any order.

Strategy:
√ Budgeting forms part of the Managerial Accounting field and, together with Manufacturing, it must constitute 20% – 25% of the paper.
√ Past trends show that the topic is normally assessed in Question 5 or 6 and is 30 – 40 marks; ± 20 marks will require calculations and the balance will be on analysis and interpretation.

√ Examiners will switch between the Cash Budget and the Projected Income Statement. There are subtle differences in interpretation, but the calculations are similar. (Detailed explanations are provided in Section 5 of this document).
√ The calculations require good arithmetical ability, which is developed over a period of time, and starting in Grade 7.
√ These skills must include calculating percentages, increases, decreases or specific amounts using equations.
√ Interpretation requires good comprehension ability. Be mindful of the language of the paper, and practice using many past papers.

Overview of the topic: Budgeting

What are some of the words that come to mind?
overview huiha
Discuss the words that are confusing Piet.
Make a list of other relevant words/ terms that came up in your discussion/ brainstorming session.
An EXPLANATION that highlights the purpose of budgeting:
Budgeting is an internal control tool that involves projecting business results, using existing
business information as well as other external factors, making adjustments and taking decisions to achieve the objectives of the business.

Summary of the topic:

summary of budgeting

Start-up Activity: Do I understand the difference between Receipts, Payments, Income and Expenses?
Place the correct amount in the respective column/s. Amounts can apply to more than one column.

NO   INFORMATION   CASH BUDGET PROJECTED INCOME STATEMENT  
 RECEIPT PAYMENT   INCOME EXPENSE 
 aCash sales are expected to be R7 400 per month at a 25% mark-up on cost.
 bAn old computer with a carrying value of R4 400 will be sold for R2 500 cash in the next month.
 cDepreciation on equipment is estimated to be R950 per month.
 dAn annual insurance premium of R5 200 is paid by cheque. R1 200 of the payment is for the next financial year.

What are we expected to cover in Grade 12?

  • Back to basics
    • Concepts and terminology from previous Grades.
    • The difference between the Cash Budget and the Projected Income Statement. o Purpose of preparing a Cash Budget or a Projected Income Statement.
  • Arithmetical ability
    • Calculate missing amounts in the budget.
    • Calculate amount/s for specific items using information from the budget, such as the loan balance or the total cost of a vehicle purchased.
      • The answers are usually:
        specific amounts, percentages, increases, decreases or ratio relationships.
  • Analysis and Interpretation
    • Compare Actual vs Budgeted figures:
      • Provide possible reasons for differences.
      • Provide solutions (internal controls).
    • Consider ethical issues in terms of cash management and adherence to the budget.
    • Problem solving:
      • Control of cash, debtors, creditors, stock
      • Business decisions such as buy/rent fixed assets, sales and profitability.

Unpacking the sections of the budget:

4.1 Sales and collection from debtors
4.1 khgda

EXAMPLE: Cash sales amounts to 30% of total sales.
Calculate the missing amounts.

TOTAL SALES
100%
CASH SALES
30%
CREDIT SALES
70%
March320 00096 000224 000
April350 000245 000
May365 000109 500
June120 000

RECEIPT-TREND FROM DEBTORS: (Must equal 100% of credit sales)

  • Percentage of credit sales, over 2, 3 or 4 months.
  • First portion (part) collected in the month of sale or in the month following the sales month:
    • Is there a discount offered for receipts in the first month?
    • Is provision made for bad debts?

EXAMPLE: The trend in the way debtors settle their accounts is as follows: 20% pay in the month of sale and receive a 5% discount.
35% pay in the month following the month of sale.
40% pay two months after the sales month.
The balance are bad debts.
4.1 receipt trends jyga

 

 

4.2 Purchases and payments to creditors

4.2 ahgda

At times, payment is made early to take advantage of a discount.

TOTAL PURCHASE AMOUNTS: (two possible options)

1. AMOUNTS ARE GIVEN
Purchase amounts are provided in the question.
Cash purchases are 20% of total purchases.
Information:

MarchApril
Sales72 00083 200
Purchases45 00052 000

 

Cash Purchases20%
March
45 000 x 20%
9 000
April
52 000 x 20%
10 400
2. COST OF SALES IS THE TOTAL AMOUNT PURCHASED
The business maintains a base stock and stock is replaced monthly.
Cash purchases are 20% of total purchases.
The business uses a profit mark-up of 50% on cost.
Information:

MarchApril
Sales102 00088 500
Purchases??

 

Cash Purchases20%
March
102 000 x 100/150 x 20%
13 600
April
88 500 x 100/150 x 20%
11 800

DO THE CALCULATIONS:

  • The business maintains a base stock. Stock is replaced monthly.
    • Calculate the cash and credit purchases for the three months.
    • Identify the amount that will be paid in May 2017.
  • Total sales:
    2017

    MarchAprilMay
    R320 000R350 000R365 000
  • Profit mark-up is 60% on cost.
  • 20% of purchases are paid for in cash.
  • Creditors are paid two months after the month of purchase.
TOTAL SALES  COST OF SALES 100%   CASH PURCHASES 20% CREDIT PURCHASES 80% 
MARCH320 000
APRIL350 000
MAY365 000
Amount to be paid in May 2017:

LET’S PRACTICE: (Sales and Purchases)

The following information appeared in the books of Mouse Traders:

REQUIRED:
1.1 Complete the Debtors’ Collection Schedule for June and July 2018.
1.2 Complete the section of the Cash Budget to show cash sales, cash from debtors, cash
purchases and payments to creditors.

INFORMATION:

  1. The business uses a profit mark-up of 75% on cost.
  2. Sales:
    • Cash Sales account for 20% of total sales.
    • Debtors pay according to the following pattern:
      • 30% in the month of sales, subject to a 5% discount.
      • 50% in the month following the sales month.
      • 18% two months after the sales month.
  3. Purchases:
    • The business maintains a base stock. Stock is replaced in the same month that sales take place.
    • Credit purchases makes up 60% of total purchases.
    • Creditors are paid two months after the month of purchase.
  4. Schedule of total sales:
    MARCHAPRILMAY JUNEJULY
     R61 250 R73 500 R64 750 R78 750 R70 000

4.3 UNPACKING THE BUDGET: Examples of different calculations
4.3 akhgdua

ADDITIONAL INFORMATION:

  1. Cash sales is 30% of total sales.
    February total sales is R130 000.
    130 000 x 30%
    39 000
  2. The amount must come from a Debtors Collection Schedule that must be prepared.
  3. Rent income increases by 8% from 9 200 x 108%
    1 February 2017. 9 200 x 8% = 736; 9 200 + 736
    9 936
  4. Cash purchases accounts for 20% of total purchases. Total purchases for February 2017 is R81 000.
    81 000 x 20%
    16 200
  5. Credit purchases are paid in 60 days (two months after purchase).
    18 500 x 80/20
    74 000
  6. Insurance will increase by 5% in March. 2 457 x 100/105
    2 340
  7. The loan was received on 31 January 2017. A fixed instalment and interest are paid on the last day of each month.
    Interest is not capitalized.
    360 000
    (400 000 – 40 000) x 12% x 1/12
    3 600
  8. The business has four sales assistants; each earns the same wage. One sales assistant will receive a special bonus of 60% of her salary in March.
    9 040/4 = 2 260 x 60%
    9 040 + 1 356
    (3 x 2 260) + (2 260 + 1 356)
    10 396
  9. Advertising is estimated at a fixed percentage of monthly cash sales.
    1 080/36 000 x 100 = 3%;
    33 000 x 3%
    990
  10. Sundry expenses increase by 5%  each month.
    2 400 x 105% = 2 520 x 105%
    2 646
  11. Closing balance for the previous month is the opening balance for the next month.
    41 200
  12. Surplus/ Deficit + Opening balance = Closing Balance
    y + 41 200 = 39 500 y = 39 500 – 41 200
    (1 700)

LET’S PRACTICE: (Calculations)
The following information appeared in the records of Abram Traders.

REQUIRED:
2.1 Complete the Debtors Collection Schedule.
2.2 Calculate the missing amounts in the budget for May and June.
2.3 Calculate the amount of the Fixed Deposit invested on 1 June.

INFORMATION:
A. Information for the budget period March – June 2018.

ACTUAL BUDGETED
MARCH APRIL MAY  JUNE
Sales (cash and credit) 148 500 168 000 142 500 ?
 Purchase of stock  99 000 112 000  ? 103 000
 Rent Income 11 200 11 200 ? ?
 Manager’s Salary 15 400 15 400 ? ?
 Wages (Sales Assistants) 19 500 19 500 ? ?
 Advertising  ?  ?  ? 2 438
Commission expense4 4555 0404 275?
Drawings????
Interest on loan3 6003 600??
Interest on fixed deposit000540
Sundry expenses8 000???

B. Additional Information:

  • 25% of total sales are cash sales.
  • Debtors pay according to the following trend:
    60% pay in the month following the transaction month.
    37% pay in the 2nd month after the transaction month.
    03% written off as bad debt.
  • Stock is replaced in the month it was sold. A base stock is maintained.
    • Goods are sold at a mark-up of 50% on cost.
    • All purchases are made on credit. Creditors are paid in the following month and receive a 4% discount.
  • Salaries and wages:
    • The manager will receive a 10% increase on 1 June.
    • The business employs three sales assistants on the same wage. They will receive a 6% inflationary increase on 1 May. One sales assistant will receive a bonus of 50% of her wages in June.
  • Sundry expenses increase by 5% on the previous month.
  • Rent income will increase by 9% on 1 May.
  • Interest on loan is not capitalized. It is paid at the end of each month at 12% p.a. R50 000 of the loan will be paid on 31 May.
  • The owner will draw R5 500 per month. R1 200 will comprise stock.
  • The sales staff receive a commission equal to a fixed percentage of total sales.
  • The advertising budget will increase by 6% on 1 June.
  • A fixed deposit was invested on 1 June. Interest of 9% p.a. is receivable on 30 June.

ACTIVITY 1:

The information provided below relates to Brakpan Stationers.

REQUIRED:
1.1 Explain the importance of comparing budgeted figures with actual figures achieved for the same period. (2)
1.2 Calculate the missing amounts (indicated by a, b and c) in the Debtors’ Collection Schedule for the budgeted period March to May 2015. (4)
1.3 Calculate the following budgeted figures:
1.3.1 Total sales for March 2015. (2)
1.3.2 Payments to creditors during May 2015. (4)
1.3.3 Salaries of the shop assistants for April 2015. (3)
1.3.4 The % increase in the salary of the manager expected in May 2015. (3)
1.3.5 Amount of the additional loan expected to be acquired on 1 April 2015. (3)
1.4 An official of the local municipality has offered to recommend Brakpan Stationers supply the municipality with stationery to the value of R500 000.
However, he will only do this if he receives a cash payment of R20 000 from the owner.
What advice would you offer? State TWO points. (4)
1.5 The owner’s wife is angry that he has not been adhering to the cash budget. The owner says that he deliberately did not keep to the budget because he wanted to improve the overall results of the business.

  • Identify THREE over-payments in April. Provide the figures to support your answer.
    Provide a valid reason for each over-payment to support the owner’s decisions. (6)
  • Explain how the difference of opinion with his wife can be avoided in future. (2)
  • State TWO other strategies that the owner and his wife could consider in future to improve the results of the business. (2)

INFORMATION

  1. Sales and debtors’ collection:
    • TOTAL sales for April 2015 and May 2015 have been estimated as follows:
      April 201570 000
      May 201578 750
    • 80% of all sales are cash sales. The rest of the sales are on credit.
    • Debtors are expected to pay as follows:
      • 60% within the month of sale, subject to a 4% discount.
      • 38% in the month following the month of sale.
      • 2% of debts are written off in the second month following the month of sale.
    • Debtors’ collection schedule:
      CREDIT SALES R MARCH  R APRIL  R MAY R
      February31 50011 970
      March10 500 a3 990
      April14 0008 064b
      Mayc
      18 01812 054
  2. Purchase of merchandise and payments to creditors:
    • A fixed-stock base is kept, i.e. the stock sold is replaced at the end of that month.
    • The business uses a mark-up of 75% on cost.
    • 70% of all merchandise is purchased on credit.
    • Creditors are paid in full in the month following the month of purchase.
  3. Salaries:
    Shop assistants

    • The business has 12 shop assistants who are employed on equal pay in March 2015.
      Nine of the shop assistants are entitled to a bonus equal to 80% of the monthly salary in April 2015.
    • All shop assistants will receive a general increase in May 2015.
  4. Loan:
    An additional loan will be taken from Atlantic Bank on 1 April 2015. The interest rate is 14% p.a.
  5. Extract from the Cash Budget for the three months ending 31 May 2015:
RECEIPTSMARCHAPRIL MAY
BudgetedBudgetedActualBudgeted
 Cash sale of stock 42 000 56 000 59 200 63 000
 Collections from debtors 18 018 12 054 12 800 ?
 Rent income 5 600 6 160  6 160 6 160
 Additional loan acquired 0 ? ? 0
 PAYMENTS
 Cash purchase of stock 9 000 12 000 28 000 13 500
Payment to creditors58 50021 00021 000?
Salaries of shop assistants102 000??110 160
Salary of manager16 00016 00040 00019 200
Interest on loan (14% p.a.)6 3007 1757 1757 175
Delivery expenses to customers9 2009 20009 200
Insurance (paid annually)027 00027 000
Advertising00020 000
Purchase of vehicle00180 0000
Vehicle expenses004 0004 000
Sundry expenses5 3005 3005 3005 800

ACTIVITY 2:

You are provided with a partially completed Projected Income Statement for Dawn Distributors for the period 1 October 2015 to 31 December 2015. It was prepared by the bookkeeper.

REQUIRED:
2.1 List TWO items on the Projected Income Statement,that would not appear on a Cash Budget. (2)
2.2 Fill in the missing amounts denoted by A to E on the Projected Income Statement. (16)
2.3 Take the following additional information into account and calculate the following:
2.3.1 The percentage increase in the wages of cleaners in December 2015. (4)
2.3.2 The monthly salary due to the sales manager in December 2015. (4)
2.3.3 Total credit sales expected in December 2015. (3)
2.3.4 The balance of the loan on 1 November 2015. (3)

INFORMATION:

  1. The business uses a mark-up percentage of 60% on cost.
  2. Credit sales comprise 75% of total sales.
    Sales are expected to increase by 10% per month and by 20% during December.
  3. The business employs a sales manager and an administration manager. The sales manager earns R300 more than the administration manager (per month). The managers are entitled to an increase of 8% p.a. from 1 December 2015.
  4. R20 000 of the loan is repayable on 30 November 2015. Interest on loan at 9% p.a. is payable every quarter. The next payment is due on 1 January 2016.
  5. Advertising expense per month is budgeted at a fixed percentage of total sales.
  6. Income tax is estimated to be 30% of the net profit before tax.

G. INFORMATION FROM THE PROJECTED INCOME STATEMENT FOR OCTOBER TO DECEMBER 2015.

OCTOBERNOVEMBERDECEMBER
BUDGETEDACTUALBUDGETEDBUDGETED
Sales120 00098 400132 000?
Cost of sales75 00058 800B99 000
Gross profitA??
Other income20 70018 20020 70021 200
Rent income10 00010 00010 00010 000
Discount received1 2001 0001 2001 200
Commission income9 5007 2009 50010 000
Gross operating income
Operating expenses48 300??
Salaries (managers)17 10017 10017 100D
Wages (cleaners)3 2003 2003 2003 376
Maintenance4 0001 6504 0004 000
Telephone2 0004 2802 0002 500
Insurance1 8001 8001 8001 800
Advertising2 4001 900C3 168
Depreciation6 2008 0006 2008 000
Trading stock deficit06800500
Stationery3 1503 1003 2003 250
Sundry operating expenses8 4508 4208 5008 550
Operating profit17 400??
Interest income225200200200
Profit before interest expense17 625
Interest expense585585585435
Net profit before income tax???
Income tax???
Net profit after taxE??

4.4 ANALYSING AND INTERPRETING BUDGET INFORMATION

Frequently asked Questions (FAQ)

  • Comparing ACTUAL AMOUNTS to BUDGETED AMOUNTS.
    The difference is referred to as a VARIANCE.

    ACTUAL AMOUNTEXPLANATION
    Well controlledThe actual amount is equal to or very close to the budgeted amount.
    Over-budgetUnder-spending. The amount is significantly lower than the budgeted amount.
    Under-budgetOver-spending. The amount is significantly higher than the budgeted amount.
    • Possible reason for the difference (variance).
    • Possible solutions/ advice/ recommendations (internal controls).
      ACTUAL AMOUNTPOSSIBLE REASONSOLUTION/ADVICE
      Well controlledWell managed and communicated.
      Over-budgetIncorrect budgeting; trying to cut costs; lack of supervision; negligence. unrealistic budgeting.Adjust the budget; do not attempt to cut the cost of essential services; always consult the budget.
      Under-budgetLack of supervision; no company rules; abusing privileges, unrealistic budgeting.Investigate; set rules; supervise; adjust the budget if necessary.
      RELATE THE REASON/ ADVICE TO THE SPECIFIC ITEM BEING ANALYSED.

EXAMPLE:
Kobus is concerned about the following items, which were under/ over budget for February 2016:

ItemBudgetedActualUnder/ over budget
Collections from debtors174 20061 800Under
Payments to creditors39 40015 600Under
Insurance2 2600Under
Drawings18 00052 000Over

Explain why each of the items reflects a problem for the business and advise Kobus regarding each case.

ItemExplanation
Collection from debtorsAny two valid reasons

  • Alternative valid answers acceptable.
    • Collections are much lower than expected.
    • This will cause a cash flow problem.
    • Internal control of debtors is poor.
Payments to creditorsAny two valid reasons

  • Alternative valid answers acceptable.
    • These are a lot lower than they should have been.
    • Suppliers will stop selling to the business.
    • Interest can be charged by the creditors.
    • Poor credit rating for the business.
InsuranceAny two valid reasons

  • Alternative valid answers acceptable.
    • The policy will lapse (risk of being uninsured).
    • It will be difficult to replace assets.
    • There could be an increase in premiums in future.
DrawingsAny two valid reasons

  • Alternative valid answers acceptable.
    • This puts strain on meeting more important business expenses, i.e. strain on cash resources.
    • This puts additional strain on the cash flow problem.
    • It is not ethical for the owner to draw more money while the business is struggling, e.g. increased loans, overdraft.
  • OTHER INTERPRETIVE SCENARIOS:
    • Related Receipts (income) and Payments (expenses)
      • Sales is influenced and affected by Advertising, Delivery Expenses, Commission Expenses and Packing Material.
    • Rent or buy decisions
      • Property or fixed assets such as machinery. Take into consideration the availability of finance, the cost of borrowing, the long-term benefits of the asset etc.
    • Identifying steps taken by the owner to correct/ improve the cash-flow situation:
      • Observe the pattern of the cash balance (positive/ overdraft).
      • Wasteful expenditure.
      • Introduction of additional capital, loans or investments.

ACTIVITY 3:
Below is information relating to DIY Hardware. The business is owned by John Temba. His inexperienced bookkeeper, Mabel, has prepared a Cash Budget.

REQUIRED:
3.1 Identify TWO items that Mabel has incorrectly entered in the Cash Budget. (4)
3.2 Apart from the items mentioned above, name TWO other items in the Payments Section of the Cash Budget that would NOT appear in a Projected Income Statement. (4)
3.3 After correcting all the errors John has identified the following:

JAN 2013FEB 2013
Cash deficit for the month(14 950)(52 400)
Cash at the beginning of the month35 350
Cash at the end of the monthAB

Identify or calculate A and B. Indicate negative figures in brackets. (3)
3.4 Identify or calculate the missing figures C and D in the extract from the Cash Budget. (7)
3.5 Complete the Debtors’ Collection Schedule for February 2013. (10)
3.6 Calculate the percentage increase in salary and wages from 1 February 2013. (2)
3.7 Calculate the interest on the fixed deposit for January 2013. (2)
3.8 John pays Speedy Deliveries to deliver hardware to his customers free of charge. He budgets for this at a rate of 8% of total monthly sales.
3.8.1 Calculate the delivery expense figure budgeted for January 2013. (2)
3.8.2 John is of the opinion that the delivery service is costing him too much.
Which TWO points should John consider before deciding on whether or not to discontinue this service? (4)
3.9 On 31 January 2013 you identified the figures below. Explain what you would say to John about each of the following items at the end of January 2013. Give ONE point of advice in each case. (9)

JANUARY 2013
BUDGETEDACTUAL
Advertising1 6000
Stationery1 0004 400
Staff training2 000700

3.10 John will have a problem with replacing his old computers and cash registers in March 2013. The cost of these items amounts to R150 000 and he expects them to last 5 years. However, he does not have cash available to pay for this. His options are:

  • Raise a new loan at an interest rate of 14% p.a. to be repaid over 36 months.
  • Hire (Lease) the assets from IT Connect Ltd at R5 100 per month.
  • Invite his friend James to become an equal partner in the business and provide capital of R150 000.
    John realizes that all three options have the advantage of not requiring the R150 000 outlay in March 2013.

Consider each of these options and explain ONE other advantage and ONE disadvantage of each option. Provide figures to support your answer. (6)

INFORMATION:

  1. Sales, purchase of stock and cost of sales:
    • Total sales for November 2012 to February 2013 were as follows:
      • November: R150 000
      • December: R200 000
      • January: R160 000
      • February: R140 000
    • 60% of all sales are cash sales; the rest is credit sales.
    • The mark-up is 33.3% on cost of sales at all times.
    • Stock is replaced on a monthly basis.
    • 50% of all purchases are cash, the rest is on credit.
  2. Debtors’ collection:
    Debtors are expected to pay as follows:

    • 30% of debtors pay their accounts in the month of sale (current).
    • 50% pay in the month following the sales transaction month (30 days).
    • 8% pay in the second month (60 days).
    • 2% are written off.
  3. Creditors’ payment:
    Creditors are paid in the month after purchases, so as to receive a 5% discount.
  4. EXTRACT FROM THE CASH BUDGET FOR JANUARY AND FEBRUARY 2013
    JAN 2013FEB 2013
    RECEIPTS
    Cash sales96 00084 000
    Collection from debtors70 000?
    Interest on fixed deposit (7% p.a.)?0
    Fixed deposit: Magic Bank maturing on 1 Feb. 2013042 000
    Commission income??
    Rent income8 5008 800
    PAYMENTS
    Salary and wages15 00016 800
    Stationery1 0001 000
    Telephone??
    Payment to creditors71 250D
    Cash purchase of stockC52 500
    Repayment of existing loan100 000
    Furniture bought on credit30 000
    Delivery expense for delivery of hardware to customers?11 200
    Training of staff2 0002 000
    Advertising1 6001 400
    Depreciation12 50012 500
    Sundry expenses3 5003 600
    Drawings by owner??
    Vehicle expenses0500

ACTIVITY 4: (40 marks; 25 minutes)
4.1 Explain why:
4.1.1 Depreciation and bad debts will not appear in a Cash Budget. (2)
4.1.2 A cash budget is different from a Projected Income Statement. (2)

4.2 KIT KAT DISTRIBUTORS LTD
You are provided with information for the budget period November and December 2018.

REQUIRED:
4.2.1 Complete the Debtors’ Collection Schedule. (12)
4.2.2 Calculate the missing amounts in the Cash Budget denoted by (i) to (iv). (20)
4.2.3 Comment on the internal controls on collection from debtors and payment to creditors. Provide TWO points. (4)

INFORMATION:
A. Cash sales amount to 40% of total sales.
Goods are marked-up by 25% on cost.
B. Debtors are granted credit terms of 30 days. The actual collection trend revealed that:

  • 50% of debtors pay in the month of the sale to receive a 5% discount.
  • 30% is received in the month following the month of sales.
  • 18% is collected in the second month after the sale.
  • 2% of debtors is written off.

C. Stock is replaced in the month it was sold, i.e. a base stock is maintained.
D. 80% of stock is bought on credit. Creditors are paid in full in the month following the month the purchase was made.
E. Salaries and wages are expected to remain the same for the budget period. Staff members on leave in December will receive their pay in November – the total amount is R35 600.
F. A loan will be received from a director, Thabo, on 1 November 2018, at 13% interest p.a. Interest is not capitalised. A fixed monthly instalment and interest will be paid at the end of each month.
G. The company will pay an interim dividend in December. H Rent increased by 8% on 1 November 2018.
I. Incomplete Debtors’ Collection Schedule:

MONTHCREDIT SALESNOVEMBERDECEMBER
September180 00032 400*
October186 00055 800*
November*92 625*
December210 000*
TOTAL**

J. Information from the Projected Income Statement:

NOVEMBER 2018
Sales325 000
Cost of sales260 000
Commission income24 800
Depreciation12 600
Interest expense1 625

K Incomplete Cash Budget for 2018:

RECEIPTSNOVEMBERDECEMBER
Cash sales130 000(i)
Cash from debtors
Commission income24 80026 000
Rent income(ii)19 710
Loan from director Thabo150 0000
TOTAL RECEIPTS
PAYMENTS
Cash purchases of stock52 00056 000
Payments to creditors(iii)208 000
Directors fees20 00020 000
Salaries and wages180 600(iv)
Loan instalment (including interest)13 625(v)
Interim dividends086 500
Sundry expenses15 87516 510
TOTAL PAYMENTS

5. CHECK YOUR ANSWERS

Start-up Activity
Place the correct amount in the respective column/s.
Note that amounts can go in more than one column.

NOINFORMATIONCASH BUDGETPROJECTED INSOMCE STATEMENT
RECEIPTPAYMENTINCOMEEXPENSE
 aCash sales are expected to be R7 400 per month at a 25% mark-up on cost. 7 400 7 400 5 920
 b An old computer with a carrying value of R4 400 will be sold for R2 500 cash in the next month. 2 500 1 900
 cDepreciation on equipment is estimated to be R950 per month.  950
 dAn annual insurance premium of R5 200 is paid by cheque. R1 200 is for the next financial year. 5 200 4 000

EXAMPLE: Cash sales amounts to 30% of total sales.
Calculate the missing amounts.

TOTAL SALES 100%CASH SALES 30%CREDIT SALES 70%
March320 00096 000224 000
April350 000105 000245 000
May365 000109 500255 500
June400 000120 000280 000

Debtors’ Collection Schedule:

Credit Sales R2017
May RJune R
ActualMarch224 00089 600
April245 00085 75098 000
ExpectedMay255 00048 54589 425
June280 00053 200
223 895240 625

DO THE CALCULATIONS: PURCHASES AND PAYMENTS TO CREDITORS

TOTAL SALESCOST OF SALES 100%CASH PURCHASES 20%CREDIT PURCHASES 80%
MARCH320 000320 000 x 100/160
200 000
40 000160 000
APRIL350 000350 000 x 100/160
218 750
43 750175 000
MAY365 000365 000 x 100/160
228 125
45 625182 500
Amount to be paid in May 2017 160 000

1.1 LET’S PRACTICE: (Sales and Purchases)

MONTHCREDIT SALESMAYJUNEJULY
March49 0008 820
April58 80029 40010 584
May51 80014 76325 9009 324
June63 00017 95531 500
July56 00015 960
CASH FROM DEBTORS52 98354 43956 784

1.2 CASH BUDGET (EXTRACT)

CASH RECEIPTSMAYJUNEJULY
Cash sales12 95015 75014 000
Cash from debtors52 98354 43956 784
CASH PAYMENTS
Cash purchases of stock14 80018 00016 000
Payments to creditors21 00025 20022 200

Workings: Calculation of the cost of sales and credit purchases:

MARCHAPRILMAYJUNEJULY
SalesR61 250R73 500R64 750R78 750R70 000
Cost of Salesx 100/17535 00042 00037 00045 00040 000
Credit Purchases COS x 60%21 00025 20022 20027 00024 000

LET’S PRACTICE (Calculations)
2.1 DEBTORS COLLECTION SCHEDULE

MONTHSCREDIT SALESMAYJUNE
March111 37552 725
April126 00075 60046 620
May106 87564 125
June
128 325111 745

2.2 CASH BUDGET FOR THE PERIOD 1 MAY – 30 JUNE

MAYJUNE
Cash sales35 62538 625
Cash from debtors128 325111 745
Rent income12 20812 208
Payments to creditors107 52091 200
Manager’s salary15 40016 940
Wages (shop assistants)20 67024 115
Interest on loan3 6003 100
Commission expense4 2754 635
Sundry expenses8 8209 261
Advertising2 3002 438
Drawings4 3004 300

2.3 Calculate the amount of the Fixed Deposit invested on 1 June.

  • 540 x 12 = 72 000
    9%

ACTIVITY 1: BRAKPAN STATIONERS
1.1 Explain the importance of comparing budgeted figures with actual figures achieved for the same period.
One valid explanation

  • Deviations can be determined and remedial measures can be put in place.
  • Establish whether the budgeting was realistic.
  • To identify trends of mismanagement of cash. (2)

1.2 Calculate the missing amounts (indicated by a, b and c) in the Debtors’ Collection Schedule for the budgeted period March to May 2015 (4)

a6 048
b5 320
c15 750

1.3.1 Calculate budgeted total sales for March 2015. (2)

  • 10 500 x 100/20 = 52 500

1.3.2 Calculate the amount budgeted for payments to creditors during May 2015. (4)

  •        40 000
    70 000 x 100/175 x 70% = 28 000 any one part correct
    or
    12 000/30 x 70 = 28 000

1.3.3 Calculate the budgeted salaries of the shop assistants for April 2015. (3)

  • 102 000/12 = 8 500 8 500 x 3 = 25 500
    15 300 x 9 = 137 700
    25 500 + 137 700 = 163 200 any one part correct
    OR: 102 000 one mark + 61 200 one mark = 163 200
    (102 000 X 80% X 9/12)

1.3.4 Calculate the % increase in the salary of the manager expected in May 2015. (3)

  • 3 200 (1 mark)
    (19 200 – 16 000) /16 000 = 20% any one part correct

1.3.5 Calculate the amount of the additional loan expected to be acquired on 1 April 2015. (3)

  • 875 x (100 x12) /14 = 75 000 any one part correct

1.4 An official of the local municipality has offered to recommend that Brakpan Stationers supply the municipality with stationery to the value of R500 000. However, he will only do this if he is paid R20 000 in cash.
Give advice in this regard. State TWO points.
Any two suggestions (4)

  • This is actually a bribe, which is unethical.
  • If this information is made public, it will have a negative effect on the business.
  • The owner must submit a formal tender to secure a contract through the normal processes.

1.5 Identify THREE over-payments made in April. Provide figures to support your answer. Provide a valid reason for each over-payment to support the decision taken. (6)

Over-payment with figures
Item and figure
Valid reason
1The bonus paid to the manager in February 2015 (R24 000) was not taken into account.He has retained the services of a valuable employee.
2Purchase of vehicle (R180 000).The difference between  motor vehicle expenses and delivery expenses is R5 200 per month.
3Cash purchase of merchandise (R28 000) was significantly higher than the budgeted figure (R12 000).Possibly to take advantage of discounts on bulk purchases.

1.6 Explain how this difference of opinion with his wife can be avoided in future.

  • They should have a specific meeting to determine the budget jointly and the owner should consult his wife before spending on unbudgeted items.

State TWO other strategies that the owner and his wife could consider in future to improve the results of the business.
Any two valid points:

  • Advertise monthly. / Reduce the number of shop assistants.
  • Reinstate deliveries to customers. / Negotiate longer credit terms with suppliers.

ACTIVITY 2 : DAWN DISTRIBUTORS
2.1 Identify TWO items that Mabel has incorrectly entered in the Cash Budget.
Any TWO

  • Cost of sales / Discount received / Depreciation / Trading stock deficit

2.2

AGross profit120 000 – 75 000 = 45 000
BCost of sales132 000 x 100/160 = 82 500
Or
132 000 x 62,5% or 132 000 – (132 000 x 37,5%)
CAdvertising2 400/120 000 = 2%
132 000 x 2% = 2 640
DSalaries17 100 x 108% = 18 468
Or
17 100 + 1 368 = 18 468
ENet Profit after tax17 040
(17 625 – 585) x 30% = 5 112
17 040 – 5 112 = 11 928

2.3.1 The percentage increase in wages that the cleaners will receive in December 2015.

  •          176
    (3 376 – 3 200) x 100 = 5,5% (one part correct)
    3 200

2.3.2 The monthly salary due to the Sales Manager in December 2015.

  • (17 100 – 300) = 8 400 (8 400 + 300) x 108% = 9 396 (one part correct)
    2

2.3.3 Total credit sales expected in December 2015.

  • (99 000 x 160% ) x 75% = 118 800 (one part correct)
    OR
    132 000 X 120% = 158 400 X 75% = 118 800

2.3.4 The balance of the loan on 1 November 2015.

  • 585 x 1200/9 = 78 000 (one part correct)

ACTIVITY 3: DIY HARDWARE
3.1 Identify TWO items that Mabel has incorrectly entered in the Cash Budget.
Two items

  • Depreciation
  • Furniture bought on credit

3.2 Apart from the items above, name TWO other items in the Payments Section of the Cash Budget that would NOT appear in a Projected Income Statement.
Any two items
Expected responses:

  • Payment to creditors / Repayment of loan / Purchase of vehicle / Drawings Cash purchases of stock

3.3 Identify or calculate A and B. Indicate negative figures in brackets.

AR35 350
B(R17 050)

3.4 Identify or calculate the missing figures C and D in the extract from the Cash Budget

C160 000    x 100/133⅓      = 120 000;  120 000 x 50%      = R60 000
D60 000    x 95%      = 57 000    any one part correct

3.5 Complete the Debtors’ Collection Schedule for February 2013.

Credit salesFebruary collections
DecemberR80 00014 400
JanuaryR64 00032 000
FebruaryR56 00016 800
TOTAL operation63 200

3.6 Calculate the % increase in salary and wages with effect from 1 February 2013.

  • 1 800 /15 000 x 100 = 12 %

3.7 Calculate interest on the fixed deposit for January 2013.

  • 42 000 x 7% / 12 = R245

3.8.1 Calculate delivery expenses for January 2013.

  • R160 000 x 8% = R12 800

3.8.2 John is of the opinion that the delivery service is costing him too much. Which TWO points should John consider before deciding whether or not to discontinue this service?
Two factors

  • Whether his competitors are offering the service or not.
  • What the reaction from his customers will be should he withdraw the service.
  • The possibility of charging customers for the delivery service.
  • The possibility of finding a cheaper delivery service.
  • The possibility of using his own vehicle instead of sub-contracting this service.

3.9 Explain what you would say to John about each item at the end of January 2013. Give ONE point of advice in each case.

CommentAdvice
AdvertisingAs he did not spend any money on Advertising, this will probably mean that he will not  achieve budgeted sales.Make sure that he utilises the advertising budget fully each month. (It is there for a purpose.)
StationeryHe spent significantly more than the budgeted figure.Ensure that there is no wastage of stationery. / Keep unused stationery secured. / Find a cheaper supplier.
Staff trainingHe under-spent on the budget, which means that staff might not be interacting well with customers.He must consider that staff training affects the manner in which staff interact with customers. This leads to efficiency and goodwill.

3.10 Consider each of the options below and explain ONE other advantage and ONE disadvantage related to each option.

Other AdvantageDiadvantage
Option 1: Raise a new loan to be repaid over 36 months. The interest rate is 14% p.a..He will own the assets and they could last longer  than five years if he takes good care of them.He has to pay interest of R1 750 per month + R4 167 per month to repay the loan.
Option 2: Hire (lease) the assets from IT Connect Ltd at R5 100 per month.He does not have to raise a loan. / He does not have to pay interest on the loan./ He will not have to pay repair costs.The lease charges are expensive, at R5 100 per month (R306 000 over the expected life span of five years.) / He never owns the assets and so continues to pay.
Option 3: Invite his friend James to become an equal partner in the business and to provide capital of R150 000.He will have the necessary funds to purchase the assets which will then belong to, the business / They will share the workload and their skills.He will have to share half his profits with his new partner.

ACTIVITY 4 :
4.1 Explain why:
4.1.1 Depreciation and bad debts will not appear in a Cash Budget.
Any valid explanation.

  • Non-cash items are not included in a cash budget.
  • A cash budget only includes cash receipts and cash payments.

4.1.2 A cash budget is different from a Projected Income Statement.
Any valid explanation.

  • A cash budget includes receipts and payments and shows plans for cash management. It shows the surplus/ deficit and the bank balance.
  • The PIS shows income and expenses (including non-cash items) and projects the profit or loss per month (for the budget period).

4.2 KIT KAT DISTRIBUTORS LTD
4.2.1

MONTHSCREDIT SALESNOVEMBERDECEMBER
September180 00032 400
October186 00055 80033 480
November195 00092 62558 500
December210 00099 750
Total collection from debtors180 825191 730

4.2.2 Calculate:

  1. Cash sales for December:
    210 000 X 40/60 = 140 000
  2. Rent income amount for November:
    19 710 x 100/108 = 18 250
  3. Payments to creditors for November:
    186 000 x 100/60 = 310 000
    310 000 x 100/125 = 248 000
    248 000 x 80%
    = 198 400
  4. Salaries and wages for December:
    180 600 – 35 600 – 35 600
    = 109 400
  5. Loan instalment (including interest) for December:
    138 000 
    (13 625 – 1 625) + (150 000 – 12 000) x 13% x 1/12
    12 000                                1 495 (three marks)
    = 13 495

4.2.3 Comment on the internal controls for collection from debtors and payments to creditors. Provide TWO points.
Any TWO valid points.

  • Only 50% of the debtors comply with the credit terms.
  • The cash from debtors does not cover the payments to creditors every month.
  • 80% of stock is bought on credit. / Only 20% is cash purchase of stock.
  • As cash sales is a greater percentage of total sales, it may be wise to increase the percentage of cash purchases.
  • Taking advantage of short-term credit is only beneficial if it eases cash-flow problems.

6. Thank you

This Accounting module on the Analysis and Interpretation of financial information was developed by Mr P Govender, Mr A Leeuw, Mr M.P Shabalala, Mr Dorian Olifant and Ms ZJM Mampana (Subject Specialists, PED)
A special mention must be made of Mr Mzikaise Masango, the DBE curriculum specialist who, in addition to his contribution to the development of the guide, also coordinated and finalised the process.
These officials contributed their knowledge, experience and in some instances unpublished which they have gathered over the years to the development of this resource. The Department of Basic Education (DBE) gratefully acknowledges these officials for giving up their valuable time, families and expertise to develop this resource for the children of our country.
Administrative and logistical support was provided by Mr Noko Malope and Ms Vhuhwavho Magelegeda. These officials were instrumental in the smooth and efficient management of the logistical processes involved in this project.

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