SECTION A (40 MARKS) – PARAGRAPH QUESTIONS
Answer the following questions. Question 1 (10 marks)
- With all the digital developments and opportunities that have arisen post-Covid to create one’s dream business, you are asked to sit back and dream of creating your own business.
Describe the business, providing a summary of the services or goods the business would provide, the number of people that would be required, the types of customers to whom you would offer the services or goods, and the suppliers that would be required.
Lastly, consider the funding required to get the business going. (5)
- The ideal structure for the business now needs to be considered. Identify and discuss the merits (or lack of suitability) of each of the three different structures in specific relation to your dream business. (5)
Question 2 (10 marks)
You are the manager of the sales division of a large pot plant and steppingstone business, Stairs to Heaven (Pty) Ltd. With the expanded focus on gardens and the outdoor living spaces after the Covid-19 pandemic, a new range of do-it- yourself (DIY) mosaic posts and water features has been created. Some of these products even include small solar lights that allow the features to glow in the evening.
You are preparing for a pricing meeting with the Chief Financial Officer (CFO). The purpose of the meeting is twofold: to discuss a sustainable pricing for these new products, as well as to develop some specials to attract customers. Answer the following questions accordingly:
- One of the new products is a sparkled mosaic three-tiered water feature. It would cost R5 000 to manufacture the water feature. The mosaics cost R2 500, and the cost of labour would be R1 500. The intention is to sell the water feature for a special “new product” price of R13 500.
Calculate the markup on cost and show all your workings. (3)
- After the special, the intention is to sell the sparkled mosaic three-tiered water feature for a markup of 80% on cost. Calculate the sales price accordingly, as well as the margin on the sales price. (3)
- The rest of the collection will sell as follows. Complete the missing information in the table and round off your answers to two decimal places:
| Item | Cost | Markup (R) | Selling price (R) |
| Twinkle toes steppingstones | 150 | 75% markup on cost | ? |
| Three-sized pot collection | ? | 30% margin on selling price | 1 200 |
| Mini-glazed water feature | 500 | ? margin on selling price | 750 |
| Mosaic paving stones | ? | 60% markup on cost | 68 |
(4)
Question 3 (10 marks)
Read the following scenario and answer the questions that follow:
| Funky Coffee (Pty) Ltd is a chain of coffee shops focusing on sustainably sourced coffee beans. It serves ready-made coffee, as well as the beans. The company is loved by the local communities, as it provides flavoured coffees (for example, cinnamon, vanilla, chocolate and so on). Funky Coffee has five retail outlets around South Africa. To fund the opening of two further shops, the company received a five-year term loan from its |
bank. This is in addition to its existing debt. The bank has therefore put some debt covenants in place to secure the company’s debt.
Below is Funky Coffee’s forecast Statement of Profit or Loss and Other Comprehensive Income for the year ended 31 March 2024:
| 2024 | Rands | |
| Profit before interest and tax | 950 000 | |
| Interest expense | 200 000 | |
| Profit before tax | 750 000 | |
| Taxation | 210 000 | |
| Profit after tax | 540 000 |
Additional information:
- Existing borrowings are R1 million and forecast to be in place all year.
- New borrowings of R2 million is forecast to be raised from 1 October 2023.
- The interest rate charged on all the loans was forecast to be 10% per annum.
- The tax rate is 28%.
- Ordinary shares in issue all year were 1 200 000.
Required:
- Identify and briefly explain two possible loan covenants in the context of Funky Coffee. Also provide an example of how each covenant could be applied to Funky Coffee. (4)
- Interest rates are expected to rise to 12% per annum on all the company’s bank loans. Recalculate Funky Coffee (Pty) Ltd’s forecast Statement of Profit or Loss and Other Comprehensive Income for the year ending 31 March 2024, assuming the new interest rates are in effect all year. (4)
- Calculate the earnings per share forecast for Funky Coffee for the year
| ending | 31 | March | 2024, | based | on | the | revised | forecast of |
| Question | 3.2. | (2) |
Question 4 (10 marks)
See the following extract from the trial balance of a company, and answer the questions that follow:
Trade payables Trade receivables Tax payable Overdraft Inventory
Non-current assets Mortgage loan Retained income
Debit (rands)
520 000
450 000
1 800 000
Credit (rands)
410 000
55 000
12 000
1 000 000
893 000
Required:
- Determine the value of the “owners’ equity” of the company, by using the accounting equation. (4)
- Demonstrate how the following two transactions would be recorded in terms of the accounting equation. Use debits and credits to reflect the impact on the accounting equation:
- Goods were sold for R12 000 on credit. (1)
- Salaries of R20 000 were paid via an electronic funds transfer.
(1)
- When working with the accounting equation, how does one determine whether a debit entry is an asset or an expense (within equity)? Explain the difference, and provide an example of an asset and an example of an expense within your explanation. (4)
SECTION B (30 MARKS) – CASE STUDY
Answer the following question.
Question 1 (30 marks)
Read the following case study and answer the questions that follow:
Optimal Balance (Pty) Ltd is a holistic health store that operates in the Western Cape. It started trading 20 years ago and has seen steady growth ever since. During the post-Covid recovery period specifically, communities have been more concerned about their health and well-being.
The company operates on the philosophy of optimal human balance – i.e. be aware of and optimise your health on an ongoing basis. The company therefore offers a variety of complementary health services, as well as supplements and consultative services.
Initially, there was only one store in the Cape. However, the company has now expanded to 15 stores, with the most recent two opening in the past year.
It is the company’s policy to rent premises, as opposed to buying premises. Although these right-of-use assets are on the statement of financial position, the company does own vehicles, computers and office furniture.
Products are locally sourced as far as possible. Product purchases are all on credit, whereas costs for services from consultants are settled when the service is provided.
Customers are mostly cash-paying, as they shop and pay for the goods and services on receipt. However, since Optimal Balance is now partnering with certain corporates as their health partner (guiding them on employee wellness), the corporates are allowed to settle their invoices in the following month.
The company is continuously seeking ways to expand and create innovative products and services. It is currently considering offering advisory services on edible gardens, where it plans to have experienced gardeners at hand who would be able to visit clients to assist and even set up such gardens. The funding for this expansion still needs to be sourced.
The financial information for the 2021 and 2022 financial years for Optimal Balance (Pty) Ltd is provided as follows:
| Optimal Balance (Pty) Ltd Statement of Financial Position as at 30 September 2022: | |||
| 2022 | 2021 | 2020 | |
| R’m | R’m | R’m | |
| ASSETS | |||
| Non-current assets | 5 800 | 3 700 | 2 900 |
| Property plant and equipment | 2 800 | 1 800 | 1 500 |
| Right-of-use assets | 3 000 | 1 900 | 1 400 |
| Current assets | 4 250 | 3 390 | 2 730 |
| Inventory | 3 300 | 2 800 | 2 500 |
| Accounts receivable | 700 | 300 | 120 |
| Cash and cash equivalents | 250 | 290 | 110 |
| Total assets | 10 050 | 7 090 | 5 630 |
| EQUITY AND LIABILITIES | |||
| Shareholders’ equity | 3 950 | 3 190 | 3 130 |
| Share capital | 1 100 | 850 | 600 |
| Retained income | 2 850 | 2 340 | 2 530 |
| Non-current liabilities | 2 650 | 1 400 | 700 |
| Long-term loan | 700 | 300 | – |
| Lease liability | 1 950 | 1 100 | 700 |
| Current liabilities | 3 450 | 2 500 | 1 800 |
| Accounts payable | 2 700 | 2 000 | 1 400 |
| Current portion of lease liability | 750 | 500 | 400 |
| Total equity and liabilities | 10 050 | 7 090 | 5 630 |
| Optimal Balance (Pty) Ltd Statement of Profit or Loss and Other Comprehensive Income for the year ending 30 September 2022: |
| 2022 | 2021 | ||
| R’m | R’m | ||
| Revenue | 28 000 | 22 500 | |
| Cost of merchandise sold | 16 900 | 14 700 | |
| Cost of services | 3 400 | 2 500 | |
| Gross profit | 7 700 | 5 300 | |
| Commission income | 3 000 | 2 300 | |
| Expenses | 7 480 | 5 000 | |
| Employee costs | 2 700 | 1 900 | |
| Operations | 3 180 | 1 950 | |
| Merchandising and administration | 1 600 | 1 150 | |
| Profit before interest and tax (EBIT) | 3 220 | 2 600 | |
| Less: Interest expense | 340 | 190 | |
| Profit before taxation | 2 880 | 2 410 | |
| Less: Taxation | (806) | (651) | |
| Net profit | 2 074 | 1 759 | |
| Additional information: Twenty percent (20%) of the sales is on credit in 2022, whereas 7.5% of the sales was on credit in 2021.All purchases are on credit.Purchases in R million for 2022: R17 400, and 2021: R15 000.The ratios for 2021 are provided below. | |||
| 2021 | |||
| a. Gross margin | 23.56% | ||
| b. Net margin | 7.82% | ||
| c. Return on operating assets | 36.67% | ||
| d. Debtors collection period | 45.42 days | ||
| e. Stock days on hand | 65.80 days | ||
| f. Creditors payment period | 41.37 days | ||
| g. Total debt ratio | 55.01% | ||
| h. Interest cover | 13.68 times |
Required:
- You manage Optimal Balance (Pty) Ltd’s relationships with investors. You have been asked to prepare a report on the company’s performance and financial position for the year. You need to calculate the ratios (a) to (h) for 2022 in the previous table.
Analyse the ratios by providing possible:
- causes for and effects of the improvement or deterioration thereof from 2021 to 2022; and
- ways to improve the financial ratios. (26)
- Suggest two ways in which Optimal Balance could fund the expansion into “edible gardens”. Be sure to apply your suggestions to the case study, and explain why such funding would be suitable. (4)
TOTAL MARKS: 70
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