Answer ALL questions in this paper. [100 MARKS] QUESTION 1 (20 MARKS) REQUIRED Answer the following questions based on the information provided below: 1.1 Calculate the distribution expenses for the year ended 31 December 2022. (2 marks) 1.2 What changes in financing activities and investing activities possibly took place during 2022? Explain. (4 marks) 1.3 Why are dividends to shareholders not disclosed in the Statement of Comprehensive Income? (2 marks) 1.4 Calculate the retained earnings for the year ended 31 December 2022. (2 marks) 1.5 Critically assess the performance of the company from the information provided with particular attention to sales, gross margin ratio, distribution expenses, administration expenses and profit after tax. (10 marks) INFORMATION The Statement of Comprehensive Income and extract of the Statement of Changes in Equity of Chippa Ltd are provided below: CHIPPA LTD STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 DECEMBER: 2022 (R) 2021 (R) Sales 18 800 000 16 800 000 Cost of sales (7 800 000) (6 800 000) Gross profit 11 000 000 10 000 000 Other operating income 600 000 560 000 Distribution expenses ? ? Administrative expenses (2 400 000) (2 400 000) Operating profit 2 960 000 2 660 000 Interest income 20 600 10 800 Interest expense (17 400) (35 200) Profit before tax 2 963 200 2 635 600 Company tax (880 000) (780 000) Profit after tax 2 083 200 1 855 600 STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 DECEMBER 2022 R Balance at 31 December 2021 5 884 000 Profit for the year 2 083 200 Dividends (763 200) Balance at 31 December 2022 7 204 000 QUESTION 2 (20 MARKS) 2.1 REQUIRED Calculate the ratios for 2022 only that reflect the following. Express the answers to two decimal places. 2.1.1 The amount of the net income generated as a percentage of the revenue. (2 marks) 2.1.2 A measure the company's ability to pay its short-term obligations using all the assets that can be converted into cash within a year. (2 marks) 2.1.3 The amount of time taken by the company to collect the trade debts. (2 marks) 2.1.4 The time during which trade payables remain outstanding. (2 marks) 2.1.5 A measure of the efficiency of the company's net assets in generating revenue. (2 marks) INFORMATION Extracts of the financial statements of Supreme Limited are provided below: SUPREME LIMITED STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 DECEMBER 2022 R Cost of sales 2 400 000 Gross profit 1 440 000 Operating profit 684 000 Profit before tax 600 000 Profit after tax 420 000 STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER: 2022 (R) 2021 (R) Non-current assets 825 000 950 000 Inventories 1 145 000 630 000 Trade and other receivables (Accounts receivable only) 380 000 330 000 Cash and cash equivalents 55 000 70 000 Shareholders equity 1 650 000 1 150 000 Non-current liabilities 500 000 700 000 Current liabilities (Accounts payable only) 255 000 130 000 Note: Eighty percent (80%) of the sales is on credit. Fifty percent (50%) of the purchases of inventory is on credit. 2.2 REQUIRED Answer the following questions based on the ratios provided by Creole Limited below: 2.2.1 Comment on the following ratios: Debt to assets Interest coverage Gross margin (Gross profit margin) Earnings per share (8 marks) 2.2.2 What recommendations would you make in respect of the liquidity of Creole Limited? (2 marks) INFORMATION The following are the ratios of Creole Limited for 2022 and 2021: 2022 2021 Current ratio 4.22:1 2.50:1 Acid-test ratio 0.88:1 1.84:1 Debtor collection period 45 days 29 days Inventory turnover 12 times 18 times Debt to assets 32% 43% Interest coverage 9 times 10 times Gross margin (Gross profit margin) 43% 49% Earnings per share 170 cents 195 cents QUESTION 3 (20 MARKS) 3.1 REQUIRED Study the information provided below and answer the following questions independently: 3.1.1 Calculate the margin of safety (in units). (4 marks) 3.1.2 Use the contribution margin ratio to determine the level of sales in Rands to obtain an operating profit of R896 000. (4 marks) 3.1.3 Calculate the expected total Contribution Margin and Operating Profit/Loss, if the selling price increases to R260 per unit. (4 marks) 3.1.4 Villa Limited wants to eliminate the variable selling costs by employing a salaried sales force. If the company sells 10 000 units, how much could it pay in salaries for the sales staff and still have an operating profit of R896 000? (4 marks) INFORMATION Villa Limited manufactures and sells its own brand of air filters. Each air filter sells for R250 and the expected annual sales are 5 000 units. The accountant has provided the following projected data: The variable manufacturing costs and variable selling costs are estimated at R50 unit and 10% of sales respectively. Fixed manufacturing costs and fixed selling expenses are expected to be R450 000 and R188 750 per year respectively. 3.2 REQUIRED The information provided below refers. Suppose Ascot Limited wants to earn an operating profit of R2 700 000 from the battery sales. How much can it afford to spend on the variable manufacturing costs per unit, if the production and sales equal 40 000 units? (4 marks) INFORMATION Ascot Limited is confident that it can make and sell a new battery with a prolonged life for cellular phones. The management anticipates the market demand for the new battery to be 40 000 units per year if the battery is priced at R450 per unit. Variable administration and marketing costs are expected to amount to R120 per unit. The companys accountants and engineers estimate that fixed costs to be R1 350 000. QUESTION 4 20 MARKS REQUIRED Prepare the Pro Forma Statement of Financial Position as at 31 December 2023 from the information given below. INFORMATION The financial position of Remo Limited as at 31 December 2022 is reflected in the following statement: REMO LIMITED STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 2022 R ASSETS Non-current assets 1 500 000 Property, plant and equipment 1 350 000 Other non-current assets 150 000 Current assets 11 500 000 Inventories 7 000 000 Accounts receivable 2 700 000 Cash and cash equivalents 1 800 000 Total assets 13 000 000 EQUITY AND LIABILITIES Equity 4 100 000 Ordinary share capital (1 200 000 shares) 2 350 000 Retained earnings 1 750 000 Non-current liabilities 900 000 Mortgage bond 900 000 Current liabilities 8 000 000 Accounts payable 2 250 000 Other current liabilities 5 750 000 Total equity and liabilities 13 000 000 Additional information: Operations for 2023 were projected using the following working assumptions: All sales are on credit and are expected to amount to R10 000 000. The profit margin (net profit margin) is expected to be 10%. Old equipment with a cost price of R200 000 and accumulated depreciation of R150 000 is expected to be sold for R60 000. New equipment with a cost price of R500 000 will be purchased to replace it. Depreciation is expected to be R300 000 for the year. Other non-current assets remain unchanged. Inventories are expected to be 10% higher than in 2022. Accounts receivable would be based on a collection period of 73 days. A cash balance of R1 750 000 is desired. The ordinary share capital balance is expected to remain unchanged. Dividends of 50 cents per share are expected to be paid during 2023. Mortgage bond payments amounting to R190 000 including interest of R90 000 are expected to be made. Accounts payable are forecasted to be 20% of sales. Other current liabilities will be allowed to fluctuate with seasonal needs (balancing figure). QUESTION 5 (20 MARKS) Note: Where applicable, use the present value tables provided in APPENDICES 1 and 2 that appear after QUESTION 5. 5.1 REQUIRED Use the information provided below to calculate the following: 5.1.1 Payback Period of Option A (expressed in years, months and days). (2 marks) 5.1.2 Accounting Rate of Return (on initial investment) of Option B (expressed to two decimal places). (4 marks) 5.1.3 Net Present Value (NPV) of the two investment alternatives (expressed to the nearest Rand.). (8 marks) INFORMATION Toni Limited is planning a new business venture. With R1 000 000 available funds to invest, it is investigating two options: Option A is to acquire an exclusive contract to provide and operate parking meters in a small town for four years. The contract requires the firm to pay the municipality R700 000 cash at the beginning of the contract. R200 000 is also required to install the parking meters. The firm expects cash revenues from the operations to be R1 125 000 per year and cash expenses to be R625 000 per year. Option B is to operate a copy shop in a shopping mall. This option would require the company to spend R900 000 on equipment that has a useful life of four years, with a salvage value of R100 000. The cash revenues are expected to be R1 075 000 per year and cash expenses are expected to be R600 000 per year. The company requires a 12% rate of return on its investment projects. The firm uses the straight-line method of depreciation. 5.2 REQUIRED Use the information provided below to calculate the cost (as a percentage expressed to two decimal places) of ordinary share financing, preference share financing and the loan. (6 marks) INFORMATION Gypsey Limited intends investing in a project and is considering using the following three sources of finance: Ordinary shares The market price of an ordinary share of Gypsey Limited is R200 and the total ordinary share capital is R2 000 000. The shares were initially sold for R160 each. The dividend per share at the end of the previous year was R30. The expected growth rate in dividends is 10%. The dividend growth model is used to estimate the cost of the ordinary shares. Preference shares Gypsey Limited intends issuing 8 000 15% preference shares at R210 per share. The cost of issuing the shares is estimated at R10 each. Long-term loan Gypsey Limited intends obtaining a long-term loan. The loan of R1 160 000 is expected to be obtained at an interest rate of 12%. The marginal tax rate of Gypsey Limited is 28%. END OF PAPER