Please help with Financial Management Please find study guide both assignments attached, no prescribed textbook for this module. I need a tutor that is profficient in financial management i passed the formative assignment only the Summative to be done
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MODULE 661
BUSINESS ADMINISTRATION I:
FINANCIAL MANAGEMENT
READ THIS BEFORE YOU DO ANYTHING ELSE!
1.
TUTORIAL
Welcome to studying with Business Management Training College! We trust that you
will find your studies towards this qualification rewarding.
It is very important that you work through the study material in each guide and in the
prescribed text books, as this will prepare you for the assignments at the end of each Module. In
order to complete the Qualification you need to be found competent against all the Assessment
Criteria of the Topics in this Module.
2.
HOW DOES THIS MODULE WORK?
Chapters start with a title followed by the lessons for that chapter. At the beginning of
every chapter is a list of the outcomes for the particular chapter.
YOU ARE NOT REQUIRED TO ANSWER THESE STATEMENTS. We are only
informing you of WHAT you will learn and be assessed on in this module.
The study guide fulfils the purpose of a tutor, and will effortlessly guide you through the
training material. Each lesson teaches you about a specific topic.
Make sure you understand the topic of the lesson before you proceed to the next lesson.
If at any time you require assistance, please contact one of the study advisors at BMT
College who will promptly assist you with any queries.
REMEMBER: IT IS IMPORTANT TO STUDY AND WORK THROUGH
ALL THE LESSONS IN THIS GUIDE BEFORE ATTEMPTING THE
ASSIGNMENT. IF YOU UNDERSTAND THE WORK IN THIS GUIDE,
THE ASSIGNMENT WILL BE EASY.
2
STUDY INSTRUCTIONS
3. ICONS USED IN THIS MANUAL
LESSON 1
Indicates the start of a new lesson
Indicates the start of a Chapter (also top left of STUDY chapters) Usually an explanation
or definition of a specific word or concept
Examples of a specific topic or concept
Important information.
Take a break from your studies!
Making notes while you study is very important. Spaces have
been allocated throughout this manual for this purpose
Indicates self assessment and self assessment answer section
THESE SHOULD NOT BE SUBMITTED FOR ASSESSMENT
Outcomes for this Module (What you will learn)
Steps to be followed in order to complete/execute/do a specific
action or task.
No prescribed textbook for this module
3
READ THIS BEFORE YOU DO ANYTHING ELSE!
HOW TO COMPLETE YOUR ASSIGNMENT
4.
COMPLETING THE QUESTIONS:
Answers to review questions must preferably be typed as this eliminates the possibility
of an assessor marking the answers incorrect due to the illegibility (unclearness) of the
handwriting.
You need to complete ALL the formative questions. Unless the College granted you
RPL exemption from that topic or subject, you need to do all the questions. If you do not
understand a question, phone or e-mail your assessor to get assistance. ALL
questions need to be completed in order to be found competent.
Each question must be marked clearly. The question numbers must not be placed in the
left margin but at the top of the answer.
Question 1.1
An example of a breakfast cereal is Kellogg’s.
Only attempt the summative assignment after you successfully worked through the
module and completed all the formative questions for the particular module/s.
Diploma learners are required to complete a Summative assignment on completion of a
subject (provided in the yellow assignment covers).
Use single sheets, front side only. (Double pages must be cut loose on the sides)
Learners who received exemption from certain topics or subjects through RPL
(recognition of prior learning) must attach the official letter from the College stating the
exempted topics or subjects.
5. SUBMITTING YOUR FORMATIVE AND SUMMATIVE ASSIGNMENTS:
Make sure your name, surname and student number is on every page.
Place the answers to your formative assessment inside the BLUE Formative Assignment
cover provided.
Place the answers to your summative assignment inside the YELLOW
Summative Assignment cover provided.
Use a file binder and bind the cover around your answer sheet.
Always keep a copy of your assignment (should your assignment be lost in the post) as
the BMTC can take no responsibility for assignments lost in the post.
Only summative assignments must be certified under oath (at any police station or post
office) to be the original work of the candidate.
Only the original certified answers will be accepted for assessment.
4
STUDY INSTRUCTIONS
No photocopied, faxed, e-mailed or any other than the original certified answers will be
accepted for assessment.
PLEASE NOTE: You can only submit the Formative Assignment once! That
means, you only have one attempt for the formative assessment. If you fail
the formative you need to make up the marks in the summative. You have
three attempts to pass the summative assignment successfully.
6.
RESULTS OF YOUR FORMATIVE AND SUMMATIVE ASSIGNMENT:
Your formative and summative assignment results will be outlined in a results letter at the
end of each module.
Your formative assessment will count 25% toward your final result for the module and
your summative assessment will count 75% of your final result for the module.
To pass and to be advanced to the next module, you need a final result of 50%.
If you do not obtain a pass mark of 50%, you will be required to re-do sections of the
summative assignment where you did not obtain a successful result.
Even though your progress will be followed by a study advisor, it will not be possible for
the assessor to comment on each answer you submitted. This preventative measure is taken to
eliminate irregularities of sharing memorandum answers with fellow students.
7.
The Assessment Appeals Form need to be submitted to the College.
Assignment (tests) structure for the 1st year of the Diploma qualification Study
Formative
Summative
Next Action from the college?
Process
STUDY COMPONENT 1
Management Principles (a)
College will mark module 1
NO SUMMATIVE DUE
Step 1
Complete and submit
formative assignment and posts
after module 1
Module 1 questions
module 2.
Management Principles (b)
College will mark module 2
NO SUMMATIVE DUE
Step 2
Complete and submit
formative assignment and posts
after module 2
Module 2 questions
module 3.
College will mark module 3
Management Principles (c)
Complete and submit the
formative and summative of
Complete and submit
Step 3
summative assignment on
component 1. Learner receives
Module 3
Module 1, 2 and 3.
results of component 1. The College
formative questions
posts module 4.
STUDY COMPONENT 2
Business Admin (a)
College will mark module 4
NO SUMMATIVE DUE
Step 4
Complete and submit
formative assignment and posts
after module 4
Module 4 questions
module 5.
Business Admin (b)
College will mark module 5
NO SUMMATIVE DUE
Step 5
Complete and submit
formative assignment and posts
after module 5
Module 5 questions
module 6.
College will mark module 6
Business Admin (c)
Complete and submit the
formative and summative of
Complete and submit
Step 6
summative assignment on
component 2. Learner receives
Module 6
Module 4, 5 and 6.
results of component 2. The College
formative questions
posts module 7.
STUDY COMPONENT 3
Entrepreneurship (a)
College will mark module 7
NO SUMMATIVE DUE
Step 7
Complete and submit
formative assignment and post
after module 7
Module 7 questions
module 8.
Entrepreneurship (b)
College will assess module 8
Complete and submit the
Complete and submit
formative and summative of
Step 8
summative assignment on
Module 8
component 3. Learner receives
Module 7 and 8
formative questions
results of component 3.
END OF 1ST YEAR
STUDY PLANNER
Expected
Suggested
time of
Type
REF
Heading/Description
Duration
completion
(in hours)
(learner to
complete)
CHAPTER 1 –
MANAGEMENT
Lesson
1.1
Financial Management Defined
4
Lesson
1.2
Basic Financial Concepts
3
– BASIC FINANCIAL ACCOUNTING AND STATEMENTS
Lesson 2.1
Recording
Transactions
2
The Effect of Transactions on the Financial
Lesson 2.2
3
Position of the Enterprise
Lesson
2.3
Balancing the Accounts of the General Ledger
3
Lesson
2.4
Preparing and Controlling Budgets
2
Lesson
2.5
The Income Statement
3
Lesson
2.6
The Balance Sheet
3
– BASIC BUSINESS CALCULATIONS
Lesson 3.1
Recording
Transactions
4
Lesson 3.2
Calculating
Interest
2
Lesson 3.3
Financial
Ratios
3
Formative
Complete formative answer sheet (Blue Cover)
2
Summative
2
Summative assignment about module 4-6
4
TEAM SUPERVISOR
CHAPTER 1
INTRODUCTION TO FINANCIAL
MANAGEMENT
IN THIS CHAPTER:
LESSON 1.1 : FINANCIAL MANAGEMENT DEFINED
LESSON 1.2 : BASIC FINANCIAL CONCEPTS
AT THE END OF THIS CHAPTER YOU WILL BE ABLE TO:
1. Define and explain financial management as a concept
2. Explain the general objectives of financial management
3. Explain the main tasks of financial management
4. Explain the meaning of a number of important financial management concepts (capital,
profitability, liquidity, solvency, assets, liabilities, income, expenditure and transactions)
LESSON
1.1
LESSON 1.1
FINANCIAL MANAGEMENT DEFINED
In this Lesson:
Financial Management is concerned with acquiring the necessary resources to ensure the
most advantageous financial result to the business over the short and long term. It has to ensure
that the business makes best use of its financial resources.
The primary financial objective of any business is to gain maximum return on the capital
invested in the business. Financial managers want to achieve the highest possible profitability or
net income on the capital available. The secondary objectives of financial management all
contribute in the end to the primary objective of maximising profitability.
CONCEPTS AND VOCABULARY TERMS YOU NEED TO UNDERSTAND:
Financial management: The planning, directing, monitoring, organising, and
controlling of the monetary resources of an organisation.
Liquidity refers to a company’s ability to keep making all necessary payments
regularly and on time.
9
FINANCIAL MANAGEMENT DEFINED
1. FINANCIAL MANAGEMENT DEFINED
1.1
DEFINITION OF FINANCIAL MANAGEMENT
Financial management can be defined as the responsibility to:
Acquire the necessary resources to ensure the most advantageous result to the
business over the short and long term
Make sure that the business makes best use of its financial resources Financial
Management is about the analysis of financial variables to ensure the maximum utilisation of
capital and the maximum attraction of capital to finance the utilisation.
1.2
THE GENERAL OBJECTIVES OF FINANCIAL MANAGEMENT
PRIMARY
OBJECTIVE
The primary financial objective of any business is to gain maximum return on the capital
invested in the business. Financial managers want to achieve the highest possible profitability or
net income on the capital available.
SECONDARY
OBJECTIVES
The secondary objectives all contribute in the end to the primary objective of maximising
profitability. They are:
Use limited resources as well as possible
Available capital must be used as effectively and profitably as possible.
Maintain a healthy position of liquidity
A healthy position of liquidity often means the difference between growth and success on
one hand, or failure on the other hand. If a business is in a situation where it can no longer make
compulsory payments in the short term, the business will fail if the problems cannot be
overcome.
10
LESSON
1.1
An effective working capital cycle tries to free capital that is tied up in working capital
(such as stock and debtors) as quickly as possible to allow this capital to be used for other needs
like paying creditors.
Maintain a positive cash flow
To ensure that the business always has enough money to pay what it needs to pay at any
given time, it needs to:
Collect debt as soon as possible.
Eliminate unnecessary stock and do not overstock.
Eliminate products that are not profitable.
Lease fixed assets such as buildings, delivery vehicles and computer equipment instead
of buying them.
Use discounts offered by suppliers (e.g. bulk discounts).
Keep operating costs as low as possible.
Regularly (at least once a month) draw up a cash budget. It allows you to make suitable
provision for possible shortages of cash and to know when cash will be available.
Negotiate the best loan conditions and interest rates from financial institutions.
Lower interest rates mean lower cost of capital and therefore more profit. A business
must be able to make interest payments on borrowed capital regularly and on time. It must be
able to keep to the terms and conditions of the loan.
Implement an effective budgeting system.
1.3
THE TASKS OF FINANCIAL MANAGEMENT
1.3.1 DRAW UP AND MAINTAIN A FINANCIAL POLICY
Formulate guidelines according to which financial activities must be conducted.
This will also assist in decision-making, e.g. guidelines according to which you will grant
credit, determine product prices, value stock and calculate depreciation.
Keep to the guidelines that have been formulated.
1.3.2 DRAW UP FINANCIAL STATEMENTS
A proper record-keeping system that will provide the accountant / bookkeeper with all
the necessary source documents to draw up financial statements must be maintained.
11
FINANCIAL MANAGEMENT DEFINED
1.3.3 DO FINANCIAL ANALYSES (FOR PLANNING AND CONTROL)
With a financial analysis you investigate the financial position of your business. This
information allows you to apply financial control and to determine to what extent the actual
performance of your business meets the objectives you have set for it. Problem areas can be
identified and corrective action can be taken when necessary. For example businesses normally
loose money for one of two reasons:
A) Poor profits
High expenses; high administrative costs, advertising costs, staff costs and fixed
expenses. Poor gross profit; incorrect purchasing and receiving, incorrect storage and control
and inefficient production. Overcoming the problems of poor profits:
High expenses
High admin costs: Keep good record of costs and eliminate unnecessary costs.
High advertising costs: Only advertise if benefits from advertising will outweigh the
costs.
High staff costs: Cut down unnecessary wages. Regulate staff meals and privileges.
Clean and mend uniforms regularly. Avoid overtime.
High fixed expenses: Avoid purchases on lease terms. Renegotiate terms regularly.
Poor gross profit
Incorrect purchasing and receiving: Check quantity and quality of goods before paying
for them. Choose suppliers carefully to ensure good quality at reasonable price.
Incorrect storage and control procedures: Keep cold-rooms and equipment well
maintained. Do not over-order.
Inefficient production: Keep portion sizes at a reasonable level and monitor complaints
from guests. Correct any problems as soon as possible.
B) Low turnover
This is normally caused by Ineffective management and/or external factors. Overcoming
the problems of low turnover:
Ineffective management: More training for managers. Obtain more feedback from
guests.
External factors: Keep up with changes and events in your micro (internal), macro
(PEESTL) and market environments and adapt as soon and effectively as possible.
1.3.4 MAKE CREDIT EVALUATIONS AND COLLECT DEBTS
Judge the creditworthiness of customers who want to buy on credit.
Decide on what terms credit will be granted.
Credit sales mean additional administration and costs.
Debts must be collected effectively and on time because delays can have a negative effect
on your cash flow and liquidity.
1.3.5 DEAL WITH TAXES AND INSURANCE OF THE BUSINESS
Make provision for paying VAT and Income tax to the SA Revenue services (SARS).
12
LESSON
1.2
LESSON 1.2
BASIC FINANCIAL CONCEPTS
In this Lesson:
As a manager you should be familiar with the basic financial concepts to be able to know
exactly what is referred to when, for instance the financial manager refers to the liquidity of the
business or the income statement or balance sheet. It is important that we understand the key
aspects and terms of finance.
1. BASIC FINANCIAL CONCEPTS
1.1 FINANCE
Finance is the art of raising, managing, and making money. It is a process that involves
three essential steps:
Assessing the financial health of the company
Using the information to plan for future performance
Executing the plan
1.2 CAPITAL
Capital structure
The capital structure represents the long-term financing of the firm, represented by long-
term debt, preferred stock and common equity (consists of capital and retained earnings). Capital
structure is distinguished from financial structure, which includes short-term debt plus all other
accounts.
Capital refers to the money available to the business for the purchase of goods and
services with a view to generating an income for the business.
13
BASIC FINANCIAL CONCEPTS
Fixed capital
The capital used to obtain assets such as land, buildings, machinery and equipment.
Operating or working capital
Money used to acquire current assets such as stock or financing debtors.
Short-, medium- and long- term capital
Short-term capital: Capital that is usually available for a period of between one and
three years; in most cases less than one year
Medium-term capital: Capital usually available for a period between one and five years.
Long-term capital: Capital usually available for a period longer than five years (10, 15
and even 20 years).
Owners’ capital or equity
The capital made available by the owner/s of the business.
Outside (borrowed, loaned or foreign capital)
The part of the capital lent or provided to the business by external institutions (investors,
suppliers, commercial banks and other financial institutions) at a certain price (interest).
1.3 PROFITABILITY
Profitability refers to the relationship between the net income earned over a certain
period, and the capital used in that period to generate income. Profitability is calculated as a
percentage:
Net
income
earned
X
100%
Total
Capital
employed
1.4 LIQUIDITY
A business will incur certain expenditure in the process of making an income.
Payments must be made to suppliers, interest must be paid to financial institutions and
salaries/wages, rental, water and electricity must be paid. Liquidity refers to the company’s
ability to keep making all these payments regularly and on time.
14
LESSON
1.2
1.5 SOLVENCY
The ability of a business to pay off its debt at any given time, even if all its activities
should stop, is known as the solvency of the business. Total assets must cover total liabilities of
the business (liabilities are what the business owes to its creditors and suppliers and suppliers of
capital).
This means in fact that the business’s total assets must at least equal or exceed its total
liabilities. When the business’s total liabilities exceed its total assets, the business is technically
insolvent.
1.6 ASSETS
Assets refer to all the economic resources that an enterprise owns. In an accounting
environment, an asset is something that an entity has acquired or purchased, and that has money
value (its cost, book value, market value, or residual value).
An asset can be:
(1)
something physical, such as cash, machinery, inventory, land and building, (2)
an enforceable claim against others, such as accounts receivable,
(3)
right, such as copyright, patent, trademark, or
(4)
an assumption, such as goodwill.
Assets shown on their owner’s balance sheet are usually classified according to the ease
with which they can be converted into cash. See also intangible assets and tangible assets
FOUR TYPES OF ASSETS TO BE FAMILIAR WITH:
1.6.1 Fixed assets (intangible)
These are assets that confer rights, ex. goodwill, franchise fees, patents, special licences,
brands, copyrights, etc.
1.6.2 Fixed assets (tangible)
These are items that are purchased to facilitate the running of the business. They are not
purchased for resale, ex. land, buildings, plants and machinery, fixtures and fittings, office
machines, furniture, vehicles, etc.
15
BASIC FINANCIAL CONCEPTS
1.6.3 Investments
When a business has spare cash that the owners do not want to put into their trading
operations, they may decide to invest that money into other trading profit earning investments or
ventures; investments in other businesses, long-term deposits, shares in listed companies, etc. If
the investment is of a long-term nature it will be shown separately on the balance sheet under
fixed assets. Short-term investments for quick profits will be shown as a current asset.
1.6.4 Current assets
These are the trading assets of the business. They are part of the working capital.
Typical current assets are: stock of raw materials, stock of finished goods, work in
progress, prepaid expenses and deposits, cash on hand and at bank and outstanding debtors.
1.7 LIABILITIES
Liabilities refer to all money owed by the enterprise to other people or businesses.
A liability legally binds an individual or company to settle a debt. When one is liable for
a debt, they are responsible for paying the debt or settling a wrongful act they may have
committed.
In the case of a company, a liability is recorded on the balance sheet and can include
accounts payable, taxes, wages, accrued expenses, and deferred revenues. Current liabilities are
debts payable within one year, while long-term liabilities are debts payable over a longer period.
THREE TYPES OF LIABILITIES:
1.7.1 Owner’s equity
Amounts invested in the business by owners: share capital and loan accounts.
Accumulated profits. In the case of a Company or CC, these profits may be
distributable (dividends) or non-distributable (reserves).
Equity is a stock or any other security representing an ownership interest. On a
company’s balance sheet, the amount of the funds contributed by the owners (the stockholders)
plus the retained earnings (or losses).
1.7.2 Long term liabilities
Amounts the business borrowed from financial institutions and other businesses or
individuals. The loans are repayable over long periods of time.
16
LESSON
1.2
1.7.3 Current liabilities
The trading liabilities of the company that form part of the working capital; creditors,
bank overdrafts, taxes, etc.
1.8 INCOME
The amount of money or its equivalent received during a period of time in exchange for
labour or services, from the sale of goods or property, or as profit from financial investments.
Income is simply the event that results in money flowing into the business.
EXAMPLES OF INCOME:
Sales
Services rendered (such as an accountant’s services, doctor’s services, a plumber’s
services, etc.)
Interest received
Rent received
Each one of these things above represent some sort of event that occurs (like a sale being
made), which results in money flowing into a business.
Two basic types of income:
From trading or service operations: Sales, commissions, etc.
From other sources: Interest received, dividends, profit on sale of fixed assets, etc.
1.9 EXPENSES
Payment of cash or cash-equivalent for goods or services, or a charge against available
funds in settlement of an obligation as evidenced by an invoice, receipt, voucher, or other such
document.
TWO BASIC TYPES OF EXPENSES:
1.9.1 Fixed overhead expenses.
These are expenses that must be paid whether the business is trading or not. They are not
directly related to sales or manufacturing, ex. rental of administrative offices, receptionist’s and
accountant’s salaries, telephone and electricity expenditure.
17
BASIC FINANCIAL CONCEPTS
1.9.2 Variable expenses
Expenditure directly related to the manufacturing or sales processes of a company, ex.
materials used, labour, depreciation on machines, etc.
1.10 TRANSACTIONS
A transaction is classified as an agreed upon transfer of value from one party to another,
ex. sale or purchasing of goods. In an enterprise, all transactions must be recorded, classified and
summarised to provide information on which owners, managers and investors can base their
decisions and actions.
In
accounting, any event or condition recorded in the book of accounts is a transaction.
This information is normally communicated by means of financial reports such as the balance
sheet (financial position) and the income statement (financial result).
We obtain essential information from accounting records, such as:
Sales
Total sales figures by day, week, month and year should be available and these sales
should also be broken down into departments, products or type of merchandise, if applicable.
These divisions of sales are necessary to determine the profitability of each department or line
and to make decisions about it.
Operating expenses
Information is needed for all types of expenses. Retailers may classify their expenses as
selling expenses and general expenses. Factory’s expenses may be classified as manufacturing,
selling and general expenses.
Accounts receivable
Records of total cash sales and total sales on account must always be available.
Accounts payable
Records of every debt incurred must be available and the total debts outstanding at any
time must be easily accessible.
Inventory
Regular information on the total inventory must be available.
Payroll records
Payrolls include records of weekly wages, monthly cheese to employees, pension fund
contributions, PAYE, etc.
18
LESSON
1.2
NOTES:
19
TEAM SUPERVISOR
CHAPTER 2
BASIC FINANCIAL ACCOUNTING AND STATEMENTS
IN THIS CHAPTER:
LESSON 2.1 : RECORDING TRANSACTIONS
LESSON 2.2 : THE EFFECT OF TRANSACTIONS ON THE
FINANCIAL POSITION OF THE ENTERPRISE
LESSON 2.3 : BALANCING THE ACCOUNTS OF THE GENERAL
LEDGER
LESSON 2.4 : PREPARING AND CONTROLLING BUDGETS
LESSON 2.5 : THE INCOME STATEMENT
LESSON 2.6 : THE BALANCE SHEET
AT THE END OF THIS CHAPTER YOU WILL BE ABLE TO:
1.
Describe how financial transactions are recorded
2.
Explain the double-entry system in accounting
3.
Explain the accounting equation
4.
Explain the effect a transaction will have on the financial position a business 5.
Name and explain the function of all the main documents involved in recording and
summarising transactions (source documents, journals, ledger, financial statements) 6.
Balance a general ledger account
7.
Classify general ledger accounts into asset, liability, income or expenditure accounts 8.
Prepare a pre-adjustment trial balance for a small business/department 9.
Discuss the importance of budgets
10. Explain why budgets are drawn up
11. Describe the stages that have to be completed in sequence to prepare a proper budget
12. Explain terminology associated with budgeting
13. Identify various types of budgets and briefly explain them
14. Prepare a sales budget for a small business/department
15. Prepare a production budget for a small business/department
16. Prepare an income statement for a small business/department
17. Utilise information from an income statement to calculate the breakeven point,
maximum discount, and mark
-up % for a business
18. Prepare a balance sheet for a small business/department
LESSON
2.1
LESSON 2.1
RECORDING TRANSACTIONS
In this Lesson:
Before any transaction can be transferred to the financial statements, it has to be
summarised, organised and recorded. Every transaction has an effect on the financial position of
the enterprise. Transactions must be classified, recorded and summarised to show its effect on
the financial position of the business.
1. RECORDING TRANSACTIONS
1.1 TRANSACTIONS
In general, everything a company does results in a transaction, including things that take
place between the business and:
Customers, who buy products and services sold by the business
Employees, who are paid wages and provided benefits
Vendors, who sell services, equipment, and supplies to the business
Government agencies, who collect taxes from the business
Sources of equity capital (investors or owners who put money in and take it out of the
business)
Sources of debt capital (banks and lending institutions)
Accounting guidelines govern how businesses record transactions. They also dictate the
design of the recordkeeping system that a business uses and how reports are prepared, based on
the information gathered and put into the system.
Before any transaction can be transferred to the financial statements, it has to be
summarised, organised and recorded. Every transaction has an effect on the financial position of
the enterprise.
21
RECORDING TRANSACTIONS
Transactions must be classified, recorded and summarised to show its effect on the
financial position of the business. For example:
When you sell a stock item:
There is a change in stock.
There is a change in cash or debtors.
When you buy stock to resell:
There is a change in stock
There is a change in cash or creditors
This bookkeeping or recording phase provides the information on the financial position
and the financial result of the enterprise that can be used to compile balance sheets and income
statements.
All transactions are recorded in two separate accounts. There is an account for each asset,
liability and equity item. There also is an account for each income and expense item. All these
accounts are classified and grouped together in the general ledger.
Income and expenses affect the equity and are therefore referred to as nominal accounts.
The nominal accounts provide the information for the income statement while the asset, liability
and equity accounts provide information for the balance sheet and statement of changes in
equity.
The accounts in the general ledger are basically in the form of a “T” and are often
referred to as T-accounts. A DEBIT (Dt) and CREDIT (Ct) system is used. The ledger page is
divided in two and debits are entered on the left hand side and credits on the right hand side.
When we enter something on the left side of the account, this is known as debiting the
account. A debit entry is put through or the account is debited.
When we enter something on the right side of the account, it is known as crediting the
account. A credit entry is put through or the account is credited.
A debit amount on one ledger account must have an equal credit on another ledger
account. For every debit entry there always must be a credit entry of a corresponding amount.
This is known as the double-entry system or double entry accounting.
22
LESSON
2.1
DOUBLE ENTRY ACCOUNTING
This is the method used by most businesses and preferred by accountants. With this
method, every valid entry or transaction must involve two (or more) accounts.
(In fact, most accounting software packages will not allow you to post a single entry
transaction!) Both sides – the debit and the credit – of the transaction must balance and this
ensures that all financial statements balance.
For example, let’s say that the business buys a R2, 000 computers on credit. The
company’s assets go up by R2, 000 (the debit) but the liabilities also go up by R2, 000 (the
credit). As this is paid, assets (cash) decrease as payments are made and the liability goes down
by the same amount
Some notes about recordkeeping:
Rand signs are typically not used in journals or ledgers, but should be placed in financial
reports and statements (even if it is on the first line only).
Commas (to show thousands of dollars) are not required in journals or ledgers but should
be placed in financial reports and statements for clarity.
Dashes or blank spaces can be used to indicate zeroes.
1.2
THE ACCOUNTING EQUATION
The financial position of an enterprise can be expressed as follows:
DEBIT
BALANCES
=
CREDIT BALANCES
OR
ASSETS
=
INTERESTS (FINANCING)
OR
ASSETS
=
LIABILITIES + EQUITY
A
debit balance can only be one of two things: an asset or an expense.
A
credit balance can only be one of two things: an income or a liability.
23
RECORDING TRANSACTIONS
The accounting equation can therefore also be written as follows:
How money is applied (Dt) = Where money comes from (Ct)
Assets + Expenses (Dt) = Liabilities + Income (Ct)
Dt
ASSET (e.g. Bank) or EXPENSE Account (e.g. Rent paid) Ct Decrease
(-)
An asset account is increased by an entry on the debit side and decreased by an entry
on the credit side.
The amount of an expense account is also increased by entries on the debit side and
decreased by entries on the debit side.
Dt
LIABILITY (e.g. Creditor) or INCOME (e.g. Sales)
Ct
Decrease (-)
Increase (+)
•
Liabilities and the capital account are increased by entries on the credit side and
decreased by entries on the debit side.
•
The amount of an income account is increased by entries on the credit side and
decreased by entries on the debit side.
1.3 LEDGER
ACCOUNTS
The ledger account is also known as the T-account as it has the form of a T. The title is
being written on the horizontal line and transactions are entered on the left side (debit side) and
right side (credit side) of the vertical line: Cash Account
Debit side
Credit side
24
LESSON
2.1
Balance: The balances of certain accounts increase when debited, while the balances of
other accounts increase when credited. The reason for this is found in the basic accounting
comparison:
Assets= Ownership interest + Liabilities
The balance of an account is the difference between the total money value of the debit
and credit entries on an account.
The balance of an account normally appears on the same side as the side on which the
element appears in the accounting comparison.
The balance of an account increases with the entry of an amount on the same side as the
side on which the element appears in the accounting comparison.
The balance of an account decreases with the entry of an amount on the opposite side as
the one on which the element appears in the accounting comparison.
Asset accounts
Asset accounts are on the left side (debit side) of the comparison. The balance of the asset
account is usually a debit balance and increases with entries on the debit side and decreases with
entries on the credit side.
Liability accounts
Liability accounts are on the right side (credit side) of the comparison. The balance of the
liability account is usually a credit balance and increases with entries on the credit side and
decreases with entries on the debit side.
Ownership interest (Owner’s equity / Capital)
Ownership interest appears on the right side (credit side) of the comparison and therefore
the balance will increase with further entries on the credit side and decrease with further entries
on the debit side.
Income items:
These items will increase ownership interest and therefore income accounts will have
credit balances and will increase with entries on the credit side and decrease with entries on the
debit side.
25
RECORDING TRANSACTIONS
Cost items
These items will decrease ownership interest and therefore cost accounts will usually
have debit balances that will increase with further entries on the debit side and decrease with
further entries on the credit side.
This proposition can schematically be presented as follows:
Assets
=
Ownership interest
+
Liabilities
DT Asset
accounts
CT
DT Capital CT
DT Liability
Accounts
CT
+
–
–
+
–
+
– Increase
– Increase
on
– Increase
on
on
Debit
Credit
side
Credit
side
side
Decrease on
Decrease on
Decrease on
Credit side
Debit side
– Credit
Debit side
– Credit
– Debit
balance
balance
balance
Income accounts
–
+
– Decrease
– Increase
on Debit side
on Credit side
– Credit
balance
Cost Accounts
+
–
– Increase
Decrease on
on
Debit
Credit side
side
(because
it is a
decrease
in
ownership
interest)
– Debit
balance
26
LESSON
2.1
NOTES:
27
RECORDING TRANSACTIONS
NOTES:
28
LESSON
2.2
LESSON 2.2
THE EFFECT OF TRANSACTIONS ON THE FINANCIAL
POSITION OF THE ENTERPRISE
In this Lesson:
Every transaction has an effect on the financial position of the enterprise. A transaction
always affects two accounts. The accounting equation can be used to analyse these effects.
1. THE EFFECT OF TRANSACTIONS ON THE FINANCIAL POSITION OF THE
ENTERPRISE
1.1
ANALYSING THE EFFECTS
Every transaction has an effect on the financial position of the enterprise.
Transactions must be classified, recorded and summarised to show its effect on the
financial position of the business.
A transaction always affects two accounts.
The accounting equation can be used to analyse these effects.
29
RECORDING TRANSACTIONS
The following example will illustrate this principle:
Pamela starts a bakery. During the first month of business:
1.
She opens a bank account for her business in the name of Pamela’s delicatessen and
Deposits R25 000 into it. This is her initial capital investment or equity.
2.
She purchases an oven for R20 000 on credit from Hellfires Pty Ltd.
3.
She purchases consumable inventory for R2000.
4.
She supplies snacks of R2000 on credit to Yuppie Foundation.
5.
The bakery consumes R1000 of consumable inventory.
Assets (R) + Expenses
Liabilities (R) +Equity (R)
Bank
Debtors
Equipment
Consumables =
Creditors
Equity
1
+25
000
=
+25
000
2.
+20 000
=
+20 000
3.
– 2 000
+2 000
=
4.
+2
000
=
+2
000
5.
-1 000
=
– 1 000
+23 000
+2 000
+20 000
+1 000
=
+20 000
+26 000
R46
000 = R46
000
1.
The cash in the bank is an asset for the business, but it owes this amount to the owner.
2.
The oven is an asset for the business, but it owes this amount to Hellfires Pty Ltd.
3.
Because the business paid cash from the bank, the bank asset decreases, but at the same
time the consumable inventory asset increases by the same amount.
When the Inventory is consumed, the cost of the consumption will represent an expense
and the consumable asset as well as equity will decrease with the same amount (see 5.)
4.
This represents an income for the business. Since the business belongs to the owner, the
income also belongs to her. It therefore increases the equity.
30
LESSON
2.2
5.
The consumed inventory represents an expense that decreases equity and the inventory at
hand. If the Yuppie foundation pays their debt, the net profit for this period the difference
between the income (R2000) and the expenditure (R1000).
The profit belongs to the owner.
Examples of how accounts are influenced by transactions:
TRANSACTIONS
ACCOUNT DEBITED
ACCOUNT CREDITED
The owner deposits capital
Bank
Equity/capital
Sell goods for cash
Bank
Goods/stock
Sell goods on credit
Debtors
Goods/stock
Debtor makes payment
Bank
Debtors
Buys goods for cash
Goods/stock
Bank
Purchas goods on credit
Goods/stock
Creditors
Pay creditor
Creditors
Bank
1.2
BASIC ACCOUNTING BOOKS AND STATEMENTS
1.2.1 SOURCE DOCUMENTS
Receipts
Sales invoices
Delivery notes
Invoices from creditors
Delivery notes from creditors
Cash register slips
Petrol and tollgate slips
Stock received notes
Stock requisition notes
Bank statements and vouchers
Other proof of expenditure or income depending on type of business.
31
RECORDING TRANSACTIONS
1.2.2 JOURNALS
Journals are the prime books of entry and are entered from the source documents.
They are diaries of the day-to-day transactions of the business:
Sales journal; records all sales whether cash or credit.
Purchases journal; record of all purchases on credit.
Cash book; accurate record of bank account – payments and receipts.
Petty cash book; minor cash expenditure.
Journal; to make adjustments in the ledger.
1.2.3 LEDGERS
Ledgers are called the secondary books of account and are entered from the journals.
They summarise and categorise the information entered in the journals:
General ledger or private ledger.
Debtor’s ledger; record of all customers who owe you money and buy on credit –
separate account for each debtor.
Creditors ledger; exact information on all the suppliers who supply you on credit basis
and who you owe money to – separate account for every creditor.
Fixed assets register.
The number of accounts needed in the ledger will depend on the nature and size of the
business, but the following accounts must always be opened:
Assets
Liabilities
Owner’s equity
Initial capital invested
Income accounts
Cost accounts
1.3. RECORDING TRANSACTIONS IN THE LEDGER
A separate account must be opened for each asset, liability and ownership interest item.
The collective noun for all these accounts is the ledger. The proportionality of the basic
accounting comparison is being maintained in the ledger and therefore the total of the debit
balances in the ledger equals the total of the credit balances in the ledger.
32
LESSON
2.2
The accounting system is based on the following approaches:
Every transaction influences at least two items in the accounting comparison (or in the
accounts).
The influence of every transaction must be reproduced in terms of money.
The accounting comparison must balance after the reproduction of the influence of each
transaction.
Before a transaction can be put on record, it must be analysed as follows: a)
Determine which asset or interest items are being influenced
b)
Application of the tenets of debit and credit.
Example
The following transactions of CJ Smit, an attorney, are being used to illustrate the
recording of transactions in the ledger accounts:
2011
September
1:
CJ Smit opened a bank account for his legal practice, Smit and Kie by investing R50 000
from his private sources in the practice.
a)
The asset “Cash” increased with R50 000 and to increase an asset the Cash in Bank must
be debited.
Dt
Cash in Bank
Ct
2009
Sept: 1 Capital: CJ Smith R50 000
b)
Ownership interest coming into being (increased) with R5 000; to increase an interest the
interest account must be credited.
Dt
Capital: CJ de Wet
Ct
2009
Sept: 1 Capital: CJ Smith R50 000
33
RECORDING TRANSACTIONS
September
2:
The firm pays R8000 for rent for September for the use of the practice’s offices.
a)
The cost item “Rent Pay” originates (increased) with R8000. This item is a decrease of
the ownership interest. To increase a cost item the Rent Pay must be debited.
Dt
Rent Pay
Ct
2009
Sept: 2 Cash R8 000
b)
The asset “Cash in Bank” decreased with R8000 because of the payment. To decrease the
asset, the Cash in Bank must be credited.
Dt
Cash in Bank Ct
2009
2009
Sept: 1 Capital: CJ Smit R50 000 Sept: 2 Rent R8 000
September
3:
The firm buys office equipment with a value of R16 000 for cash.
a)
The asset “Office Equipment” increased with R16000. To increase the asset, the Office
Equipment must be debited.
Dt
Office Equipment
Ct
2009
Sept 3: Cash R16 000
b)
The asset “Cash in Bank” decreased with R16000. To decrease an asset the Cash in Bank
must be credited.
Dt
Cash in Bank Ct
2009
2009
Sept 1: Capital: CJ Smith R50 000 Sept 2: Rent: R8 000
Sept 3: Equipment R16 000
34
LESSON
2.2
September
6:
Waltons Stationery provides stationery and printing for the value of R2500 on credit.
a)
The cost item “Stationery ad Printing” decrease the Ownership Interest with R2500.
To decrease the Ownership Interest the Stationery and Printing must be debited.
Dt
Stationery and Printing
Ct
2009
Sept: 6 Waltons Stationery R2 500
b)
Creditors increased with R2500. To increase the creditors, Waltons Stationery (a creditor)
must be credited.
Dt
Waltons Stationery Ct 2009
Sept: 6 Stationery & Printing R2 500
September
12:
Smit & Kie receive R5000 for legal services rendered.
a)
The asset “Cash in Bank” increased with R5000. To increase an asset, Cash in Bank must
be debited.
Dt
Cash in Bank
Ct
2009
2009
Sept: 1 Capital CJ Smit R50 000 Sept: 2 Rent R8 000
Sept: 12 Fees R 5 000 Sept: 3 Equipment R16 000
b)
The ownership interest increased with R5000. To increase ownership interest,
“Fees” must be credited.
Dt
Fees
Ct
2009
Sept: 12 Cash R5 000
35
RECORDING TRANSACTIONS
September
18:
Smit & Kie completed legal work for ABC Limited and debited their account with R10
000.
a)
The asset “ABC Limited” (a debtor) increased with R10 000. To increase the asset, ABC
Limited must be debited.
Dt
ABC Limited Ct 2009
Sept: 18 Fees
R10 000
b)
Ownership interest increased with R10 000. To increase Ownership Interest, fees must be
credited.
Dt
Fees Ct 2009
Sept : 12 Cash
R 5000
Sept : 18 ABC Limited R10 000
September 25:
Pay salaries of R10 000 for the month
a)
The cost item “Salary” decreased the ownership interest with R10 000. To decrease the
ownership interest, “Salary” must be debited.
Dt
Salary Ct 2009
Sept: 25 Cash
R10 000
b)
The asset “Cash in Bank” decreased with R10 000. To decrease an asset, “Cash in Bank”
must be credited.
Dt
Cash in Bank Ct 2009
2009
Sept: 1 Capital : CJ Smit
R50 000 Sept : 2 Rent
R 8000
Sept 12 Fees
R 500 Sept : 3 Equipment
R 16000
Sept : 25 Salary
R10 000
36
LESSON
2.2
September
28:
CJ Smit withdrew R5000 from the firm’s bank account for his own use.
Withdrawal by the owner decreased his interest in the enterprise with R5000. To decrease
the ownership interest “Withdrawal: CJ Smit” must be debited.
Dt
Withdrawal : CJ Smit Ct 2009
Sept: 28 Cash
R5000
b)
The asset “Cash in Bank” decreased with R5000. To decrease the asset, cash in bank
must be credited.
Dt
Cash in Bank Ct 2009
2009
Sept 1: Capital : CJ de Wet R 50 000 Sept : 2 Rent
R 8 000
Sept 18 : Fees
R5 000 Sept : 3 Equipment
R16 000
Sept 25 Salary
R10 000
Sept 28 Withdrawal: CJ Smit R 5 000
September
29:
Pay R1500 on account to Waltons Stationery
a)
A liability (creditor) decreased with R1500. To decrease the liability, Walton Stationery
must be debited.
Dt
Waltons Stationery Ct 2009
2009
Sept: 29 Cash
R1 500 Sept: 6
Stationery & Printing
R2 500
An asset “Cash in Bank” decreased with R1500, therefore “Cash in Bank” must be
credited.
Dt
Cash in Bank Ct 2009
2009
Sept 1 : Capital : CJ Smit R50 000 Sept : 2 Rent
R8 000
Sept 18 : Fees
R5 000 Sept : 3 Equipment
R16 000
Sept 25 Salary
R10 000
Sept 28 Withdrawal
: CJ Smit R5 000
Sept 29 Waltons stationery R1 500
Stationery
R 1500
37
RECORDING TRANSACTIONS
September 30: Received payment of R2500 from ABC Limited
a)
An asset “Cash in Bank” increased with R2500. To increase the asset, the account must
be debited.
Dt
Cash in Bank Ct 2009
2009
Sept 1 : Capital : CJ Smit R50 000 Sept : 2 Rent
R8 000
Sept 18 : Fees
R5 000 Sept : 3 Equipment
R 16 000
Sept 30 : ABC Limited
R2 500 Sept 25 Salary
R10 000
Sept 28 Withdrawal
R5 000
Sept 29 Waltons Stationery
R1 500
b)
The asset, debtors decreased with R2500. To decrease the asset, ABC Limited must be
credited.
Dt
ABC Limited Ct 2009
2009
Sept 18 : Fees
R10 000 Sept : 30 Cash
R2 500
38
LESSON
2.2
NOTES:
39
BALANCING THE ACCOUNTS OF THE GENERAL LEDGER
LESSON 2.3
BALANCING THE ACCOUNTS OF THE
GENERAL LEDGER
In this Lesson:
During the recording process both the debit side and the credit side of an account is used.
All amounts on the one side of the account are increases, which must be added. All amounts on
the opposite side are decreases, which must be subtracted.
The different between the total debits and the total credits on an account is known as the
balance on the account. When the total debits on an account exceed the total credits, the balance
is a debit balance and when the credits exceed the debits, it is a credit balance.
1.1
THE BALANCE ON AN ACCOUNT IS CALCULATED AS FOLLOWS:
1)
Add the debit side on an account and write the total in, in pencil.
2)
Add the credit side of an account and write the total in, in pencil.
3)
Subtract the smaller total from the bigger total. The “difference” which is calculated, is
the balance of the specific account. This balance is written on the side of the account with the
smaller total.
4)
The totals of the account are now inserted. After the inserting of the balance as described
in (3), the totals of the debit and credit sides must be in harmony.
5)
The balance, which is written above the totals in (4), must now be transferred to the
opposite side from which it was inserted in step 3 and be written under that side’s total. This
represents the balance at the beginning of the new month’s transactions.
40
LESSON
2.3
The balance of the Cash in Bank account will be calculated as an example:
DT CASH IN BANK CT
2009
2009
Sept 1 Capital : CJ Smit
50 000 Sept 2 Rent
8 000
Sept 15 Fees
5 000 Sept 3 Equipment
16 000
Sept 30 ABC Limited
2 500 Sept 25 Salary
10 000
Sept 28 Withdrawal: CJ Smit
5 000
Sept 29 Waltons Stationery
1 500
(1) total debit side in pencil
57 500 (2) Total credit side in pencil
40 500
DT CASH IN BANK CT
2009
2009
Sept 1 Capital : CJ Smit
50 000 Sept 2 Rent
8 000
Sept 15 Fees
5 000 Sept 3 Equipment
16 000
Sept 30 ABC Limited
2 500 Sept 25 Salary
10 000
Sept 28 Withdrawal: CJ Smit
5 000
Sept 29 Waltons Stationery
1 500
(3) Insert balance
Sept 30 Balance
17 000
as calculated
57 500
57 000
4) Add totals of debit and credit side
2009
Oct 1 Balance
17 000
41
BALANCING THE ACCOUNTS OF THE GENERAL LEDGER
1.2 CLASSIFICATION OF GENERAL LEDGER ACCOUNTS
All accounts must be classified as an asset, liability, income or expense account.
The following are some examples of this classification. The classification will have an
effect on whether the account will be debited or credited. Remember that all Income and
Liability accounts will always have a Credit balance (Use the acronym, CIL to remember: Ct =
Income and Liability accounts) and all Asset and Expense accounts will always have a Debit
balance (Use the acronym DAE to remember : Dt = Assets and Expense accounts).
ACCOUNT NAME
ASSET
LIABILITY
INCOME EXPENSE
Positive bank balance
Telephone expenditure
Land and buildings
Wages
Petty cash
Sales
Advertising expenditure
Stationery (in store room)
Loan from bank
Vehicle
Rental expenditure
Water and electricity
Discounts given
Deposit for municipal account
Postage
Debtors
Creditors
Bank overdraft
42
LESSON
2.3
1.3
THE PRE-ADJUSTMENT TRIAL BALANCE
After the recording of all the transactions in the ledger, the arithmetical accuracy of the
recording must be tested, to determine whether the total debits equal the total credits. This is
being done by determining the balances of each account as already explained.
At the end of a specific period, all accounts in the ledger will either have a debit balance
or a credit balance or a nil balance. A list of these balances is called a trial balance. Because
every debit entry has an equal credit entry, the total of the debit balances has to equal the total of
the credit balances.
If this is the case, the double-entry principle has been applied correctly. It does however
not mean that no mistakes were made during the recording phase. The following errors will not
be revealed by the trial balance:
Items posted to the correct side of the ledger but to the wrong account.
Entries that are completely omitted (not recorded at all).
Errors on one side of ledger that are compensated by errors on the other side if the ledger.
A trial balance can be compiled by taking all the balances from the accounts in the
general ledger and transferring them to the correct columns in a table. This is called the pre-
adjustment trial balance because no changes have been made to it.
Example: Pre-adjustment trial balance of Hamburger Den at 30 April ….
ACCOUNT
DEBIT
CREDIT
Bank R18
000
Consumables (inventory)
R2 000
Equipment R30
000
Capital
R20
000
Sales
R8
000
Creditors
R30
000
Debtors R5
000
Consumables (used)
R2 000
Salaries
R1 000
Total
R58 000
R58 000
43
PREPARING AND CONTROLLING BUDGETS
LESSON 2.4
PREPA
REP RING AND CONTROLLING BUDGETS
In this Lesson:
A budget can be defined as a written document that expresses management’s goals and
forecasts in financial terms for a specific future period. It is a financial plan for a future period.
Budgeting is an important technique for all businesses. Budgets are based on forecasts of
future events. Although forecasts are only guesses as to what may happen in the future, they help
organisations to base their guesses on the most reliable information available at that specific
time. In order for a budget to be drawn up effectively, certain stages have to be completed in
sequence.
1.1 INTRODUCTION
Control is the process that enables management to see to it that the actual activities are in
harmony with planned objectives. This requires concerted effort.
Standards must be set, and performance must be watched. If necessary, corrective steps
must be taken to ensure that the enterprise resources are utilised as effectively as possible.
A budget can be defined as a written document that expresses management’s goals and
forecasts in financial terms for a specific future period. It is a financial plan for a future period.
1.2 REASONS WHY A BUDGET IS DRAWN UP
It creates a formal framework for an enterprise to make forecasts and set goals.
Budgets are instruments for management and staff to evaluate whether goals have been
achieved. They aid financial control by comparing actual results with budgeted results.
Budgets assist in the process of financial planning. In the budgeting process, the capital
requirements of the enterprise are determined. It allows the enterprise to make provision for its
financial needs at an early stage.
44
LESSON
2.4
It creates cost awareness among staff. Budgets are used to control costs in an enterprise
and limit them to a minimum.
It co-ordinates the enterprise’s goals and unifies them to achieve goals. It contributes to
the optimum use of resources at the disposal of the enterprise.
The enterprise has the opportunity to take into account external factors such as
competition and economic cycles that may influence financial planning.
It is a good indication of the enterprise’s performance and is used to assist in the
application of financial control.
Budgeting is an important technique for all businesses. Budgets are based on forecasts of
future events. Although forecasts are only guesses as to what may happen in the future, they help
organisations to base their guesses on the most reliable information available at that specific
time.
In business, forecasts are generally referred to as budgets, though the term projection may
also be used. Forecasts are made of both the income that the business expects to earn and
different types of expenditure that the business is to undertake.
Financial accounting and cost reporting systems are important in assessing how a
business has performed in the past. However, looking at past results alone is not sufficient to
enable managers to run a business efficiently. The success of a business depends on the ability of
the managers to formulate polices and strategies effectively, to plan and control the operations of
the business, to co-ordinate the use of the resources of the business and to make decisions. One
of the most important tools used in this process is the budget.
1.3 BUDGETING PERIODS
Budgets are drawn up a reasonable time before the end of the financial year to be ready
for the following year to which they will apply. It takes place by collecting and processing the
necessary information from various components.
All information in budgets must be based on challenging but realistic goals.
Thorough research must be done on existing situations. A budget will only work if all
interested parties in the enterprise are consulted in the process and their inputs are also
processed. When a budget is reasonable and realistic it will motivate staff to attempt to comply
with it. Unrealistic and unreasonable budgets will have a negative effect on staff.
1.4 INTERNAL AND EXTERNAL FACTORS THAT IMPACT ON A BUDGET
45
PREPARING AND CONTROLLING BUDGETS
In most enterprises, one or more factors exist which limit the activities of the enterprise
as a whole. If this were not the case, all the enterprises in the country would theoretically
experience unlimited growth.
Examples
of
such
limiting factors are:
The supply of the product is limited; therefore purchases are limited (external).
The demand for the product is limited; therefore sales are limited (external).
The funds of the enterprise are limited; therefore neither too much stock can be kept nor
can too much credit be allowed (internal).
There are many competitors in the same industry (external).
1.5 BUDGET STAGES
The budget promotes involvement, co-operation and co-ordination between the often
isolated departments of the organisation. It forces departments to acknowledge their mutual
dependency on one another. In order for a budget to be drawn up effectively, certain stages have
to be completed in sequence: Stage 1
Communicating details of the budget policy
This information may be planned changes in the sales mix, the expansion or contraction
of certain activities, important guidelines that govern the preparation of the budget, ex. price and
wage increases, expected changes in productivity and expected changes in industry demand and
output.
Stage 2
Determining
factors
that restrict output
As discussed above, various limitations exist. Prior to the preparation of the budgets, it is
necessary for top management to determine the factors that restrict performance.
Stage 3
Preparing the sales budget
If sales demand is the factor that restricts output, the sales budget is the most important
plan in the annual budgeting process. Sales budgets are typically based on estimated sales
demand.
Stage 4
Initial
preparation of departmental budgets
Initial budgets should be done by the managers responsible for meeting the budgeted
performance. It should be done using the bottom up process. This means that the lowest level of
management is the source of the budget that is passed up to higher levels for approval.
46
LESSON
2.4
Stage 5
Negotiating
budgets
Once budgets are completed at lower management or departmental level, it is passed up
to higher levels of management, who may adjust certain aspects. This phase merely represents
the adjustment of budgets at higher levels of management.
Stage 6
Co-ordination and review of budgets
This phase represents the acknowledgement of any adjustments made in the previous
phase, and how these adjustments affect the budgeting process.
Stage 7
Final acceptance of the budget
When all budgets are in harmony with each other, they are summarised into a master
budget.
Stage 8
Budget
review
The budget should be analysed at regular interviews. This means that comparisons
between actual results and budgeted results are made. This process will assist in determining the
accuracy of the budgets. Any changes can be made to obtain better results when subsequent
budgets are to be prepared.
1.6 BUDGET TERMINOLOGY
In order to understand the budgetary process, it is important to become familiar with the
terminology associated with budgeting:
1.6.1 COST
It is necessary to examine cost not only by their nature (material, labour, overheads) but
also by their behaviour in relation to changes in the volume of sales. Using these criteria, four
kinds of cost may be identified:
Fixed costs; these costs remain fixed irrespective of the volume of sales, for example
rent, rates, insurance.
Semi-fixed costs these are costs that move in correlation with, but not in direct
proportion to the volume of sales (ex. fuel costs, telephone, laundry). Semi-fixed costs contain a
fixed and variable cost element, ex. the charge for the telephone 47
PREPARING AND CONTROLLING BUDGETS
line and a variable cost depending on the number of calls made.
Variable costs; these are costs that vary in proportion to the volume of sales, ex.
food and beverage costs.
Total costs; this is the sum of the fixed costs, semi-fixed costs and variable costs.
1.6.2 PROFIT
There are two main kinds of profit:
Gross profit = total sales – cost of materials.
Net profit = total sales – total costs (material +labour + overhead costs).
1.6.3 BREAKEVEN POINT
The term break-even point may be defined as that volume of business where the
total costs are equal to the sales and where neither profit nor loss is made.
1.6.4 VARIANCE ANALYSIS
Variance analysis is an activity that allows management to compare the actual
performance during a specific period against its budgeted expectations in the same
period. To use variance analysis effectively, determine why the variance occurred. Identify the
causes of unfavourable variances and suggest remedies to prevent them.
1.7 BUDGET
LIMITATIONS
Although budgets are useful and valuable, one must keep in mind that they do have
certain limitations.
These limitations include:
The given information used to prepare budgets is obtained from estimates.
Budgets are never perfect because they have to adapt continuously to changing
circumstances.
The implementation of a budget and the control over the activities are subject to the
fallibility of man.
48
LESSON
2.4
1.8 BUDGET
CONTROL
In any enterprise it is the responsibility of management to plan the future activities of the
enterprise and to exercise control over these activities so that the planned objectives are met.
The control process can be divided into three phases, namely:
Setting standards or measures.
Measuring reality and judging it against the given measures or standards.
Corrective action when the reality deviates from the plan.
The budget remains one of the best planning and controlling mechanisms the organisation
can make use of, but then it must be established and used in a responsible and scientific manner.
A very good management information system is necessary to do planning and controlling.
1.9 TYPES OF BUDGETS
There are many types of budgets available as financial control tools within the business:
1.9.1 Project budgets are budgets drawn up for specific tasks or projects to be
undertaken (ex. if a company wishes to open up another branch) and will no longer be valid once
the project is completed.
1.9.2 Capital budgets are concerned with general office buildings, extensions of the
factory building, installation of new machinery and equipment as well as new vehicles.
1.9.3 Cash budgets. The enterprise always needs cash and the amount needed will vary
from month to month, depending on the monthly cash income and payments.
1.9.4 Departmental budgets are prepared when individual departments may need to
make separate budgets to add to a master budget, e.g. sales, purchases, human resources,
advertising, etc.
1.9.5 Operating budgets. These are concerned with the day-to-day income and
expenditure of an establishment and include sales, cost of sales, labour, maintenance, etc.
1.9.6 Zero-based budgets. In this approach to budgeting the results of the previous 49
PREPARING AND CONTROLLING BUDGETS
year’s budget are not taken into account. The budgeting process begins afresh every year.
This enables the organisation to look at its activities and prioritise from a fresh angle every year.
The budget figures of the past play no role in the allocation of funds and every manager must
state his case again and give the necessary motivation for his department’s budget request.
1.10 THE MOST IMPORTANT BUDGETS
THE SALES BUDGET
Sales forecasts determine the starting point of the sales budget. It is regarded as the most
important budget because many other budgets are influenced by it. The formula for determining
expected sales is: Expected sales = expected number of units sold x unit price
Example of a sales budget:
ABC
Traders
They sell doormats and estimate that 3000 units will sell in the first quarter.
Sales will increase by 500 units per quarter thereafter.
Their selling price for the door mats is R60 per unit.
SALES BUDGET FOR ABC TRADERS
1 2 3 4
Year
Expected sales
3 000
3 500
4 000
4 500
15 000
Unit price
X R60
X R60
X R60
X R60
X R60
Total: quarter
R180 000
R210 000
R240 000
R270 000
R900 000
PRODUCTION BUDGET
It has now been determined how many units you are expected to sell, thus the units you
must manufacture can now be determined, bearing in mind that you already have some stock on
hand. The calculation should be done as follows: Expected sales figure Minus Opening stock
Plus Final stock = Expected number of units to manufacture.
50
LESSON
2.4
Complete the following production budget
PRODUCTION BUDGET FOR ABC TRADERS
1 2 3 4
Year
Expected sales
3 000
3 500
4 000
4 500
15 000
Less opening stock
(450)
(525)
(600)
(675)
(450)
Total
Plus closing stock
525
600
675
750
750
Number of units to be produced
CASH BUDGET
The cash budget is the main concern in the enterprise; it is an important result obtained
from drawing up other budgets. Expected cash flow is determined to assist management to make
provision for cash shortages and to consider the necessary financing possibilities.
Example:
ABC Traders has collected the following information for you in respect of their cash
budget:
The bank should show a positive balance of R40 000 at the beginning of the year
An investment of R4 000 will be sold for cash in the second period
Purchases of all current costs are spread evenly over the quarters
Direct labour costs are settled in the period incurred
Management wants to purchase a new truck for R133 000 in the second
quarter
The enterprise pays tax monthly in equal instalments
Loans are paid in the first quarter when there is sufficient cash.
51
PREPARING AND CONTROLLING BUDGETS
CASH BUDGET FOR ABC TRADERS
1 2 3 4
Cash balance
40 000
22 550
5 900
13 050
Debtors and cash
173 000
198 000
228 000
258 000
Sales of investment
4 000
Total receipts
213 000
224 550
233 900
271 050
Expenditure
Less: payments
Direct material
15 125
17 625
20 125
22 585
Direct labour
47 105
49 805
52 505
91 500
Rent paid
14 000
14 000
14 000
14 000
Telephone
1 400
1 400
1 400
1 400
Salaries
11 200
11 200
11 200
11 200
Repairs and maintenance
1 120
1 120
1 120
1 120
Marketing
14 000
14 000
14 000
14 000
Purchase of vehicle
133 000
Interest paid
8 750
8 750
8 750
8 750
Current costs
76 500
76 500
76 500
76 500
Tax
1 250
1 250
1 250
1 250
Total payment
190 450
328 650
200 850
242 305
Surplus/deficit
22 550
(104 100)
33 050
28 745
Financing
– loans
110 000
– payments
(20 000)
(10 000)
Closing balance
22 550
5 900
13 050
18 745
52
LESSON
2.4
NOTES:
53
THE INCOME STATEMENT
LESSON 2.5
THE INCOME STATEMENT
In this Lesson:
In any business, income is generated and expenditure is incurred when generating that
income. The record of the income and expenditure is called the Income Statement or a profit and
loss statement or operating statement. This is a summary of the income and expenses of a
business during a certain period: monthly, quarterly, or annually. If the company has more
income than expenses for a certain period it has net income – a profit. If the expenses exceed
income, the company has a net loss.
1.1
INTRODUCTION
An income statement is a record of all income and expenditure that the enterprise
conducted in the year or period under review. The income statement can be used to provide the
comparison between actual results and expected (budgeted) results.
It is essential that any business regularly compile an Income Statement because it gives
management an overview of what is happening in the business. If expenditure exceeds income,
the business makes a loss. If income exceeds expenditure, the business makes a profit. Income
statements should at least be compiled on a monthly basis, annually and when doing projections
for the year ahead.
54
LESSON
2.5
1.2. DRAWING UP AN INCOME STATEMENT
THE PRINCIPLES OF DRAWING UP AN INCOME STATEMENT:
Sales generate income. From this income, the following must be paid:
Materials / Stock
Overheads or operating expenses
Labour
The income statement can therefore be divided into a trading section and a profit and loss
section. The trading section determines how much gross profit was made
– how much profit the business made from buying goods at one price and selling it at a
higher price. The “cost of sales” amount represents the cost of the goods sold before deducting
the fixed overheads, selling and administrative expenses.
The profit and loss section comprises of all other income (other than sales) and all other
expenses. Other income is added to the gross profit and other expenses are subtracted from it.
This leaves the business with its net profit before tax which is the figure by which the
performance of the business will be assessed.
Example of an income statement for a retail business:
Duxbury General Store’s income for December 2010 was R500 000.
Their opening stock was worth R25 000.
They purchased R275 000 worth of stock during the month of December.
On 31 December they found that they had R 20 000 worth of stock left in their store
room.
Their other expenses during December were:
Accounting fees – R5 000;
Advertisements – R 10000;
Bank Charges – R 1500;
Interest on loan – R2 000;
Licenses – R1500;
Postage – R1000;
Rent – R11000;
Salaries – R22000.
55
THE INCOME STATEMENT
DUXBURY’S GENERAL STORE
INCOME STATEMENT FOR THE MONTH ENDED 31 DECEMBER 2010
Sales
R500
000
Less: Cost of sales
R280
000
Opening stock
R25 000
Add: purchases
R275 000
Subtotal:
R300 00
Less: closing stock
R20 000
GROSS PROFIT
R220 000
Less: expenses
R59
000
Accounting fees
R5 000
Advertisements
R10 000
Bank charges
R1 500
Interest on loan
R2 000
Licenses
R1 500
Postage
R1 000
Rent
R11 000
Salaries
R22 000
– Owner
R10 000
– Shop assistant
R8 000
– Cashier
R4 000
Stationery
R1 000
Telephone
R2 000
Water/electricity
R2 000
NET PROFIT BEFORE TAX
R161 000
Less: Provision for tax (assume 28%)
R45
080
NET PROFIT AFTER TAX
R115 920
56
© Business Management Training College (Pty) Ltd
LESSON
2.5
1.3
UTILISING INFORMATION FROM AN INCOME STATEMENT
BREAKEVEN
POINT
Now that you know that your business is making a profit, the next step is to calculate
exactly what turnover or sales is required to cover all expenses. This is called the breakeven
point.
To do this calculation, you need to know your total expenditure as well as the gross profit
%:
Total expenses: Add up all actual or envisioned expenses, e.g. R59 000.
Gross profit %: Sales (R500 000) less cost of sales (R280 000) = Gross profit (R220
000)
Then divide gross profit by sales X 100 = GP%
Gross profit X 100 = R220 000 X 100
= 44%
Sales
1
R500 000
Breakeven point = total expenses divided by GP%
Example: R59 000
0, 44 (for 44%) = R134 090.90 = Breakeven turnover required.
It means that you have to sell or turnover R134 091 to pay for total expenses of R59 000
with a gross profit of 44% for the specified period.
BREAK-EVEN
CHART
The graphic representation of the BEA illustrates the concept as follows: In our
examples, the total costs will look like this: (Total costs = fixed costs +
variable costs)
Total costs
57
THE INCOME STATEMENT
The total costs start at R 100 000. When 0 units are sold, the variable cost is R0
and the fixed cost is R 100 000, bringing the total cost to R 100 000. When 500
units are sold, the variable cost is (500 x R30) = R 15 000 plus fixed cost of R
100 000 bringing the total cost to R 115 000, etc.
Total sales will look like this:
Total sales
The total sales value of 0 units is R0, while the total sales value of R 1 000 units is (R 80
x 1 000) = R 80 000. The total sales value of 500 units is (R80 x 500) = R
40 000, etc.
The Break-even chart:
The break-even point is the point at which the sales line and the total costs line
intersect. Draw a horizontal line from the break-even point (the point where the 2
lines cross) to the vertical axis. The value on the vertical axis at this point is the rand
value of the break-even point (R 16 000 in our example).
Draw a vertical line from the break-even point down to the horizontal axis. The value on
the horizontal axis is the number of units at break-even, which is 2 000
units in our example. The area between the sales and total costs lines, to the right of the
break-even point, is the area where a profit is made. The further we move to the right, the higher
the profit.
58
LESSON
2.5
The area between the sales and total costs lines, to the left of the break-even point, is the
area where a loss is still incurred, as an insufficient number of units are being sold and we are not
reaching break-even.
DETERMINING MAXIMUM DISCOUNT TO CUSTOMERS
Always remember that discount comes from your profit. When you give discount you
actually are giving away profit!
Example:
Sales
R500 000
Less cost of sales
R280 000
Gross profit
R220 000
Less expenses
R59 000
Maximum discount you can
Net profit before tax
R161 000 give in order to break even
Maximum discount expressed as a percentage:
= Net profit before tax
X
100
Sales 1
= R161 000 X 100
R500 000 1
= 32,22% = maximum discount you can give in order to break even.
MARK
UP
%
= Gross profit
X
100
Cost of sales
1
R220 000
X
100
R280 000
1
=
78,
57%
59
THE INCOME STATEMENT
OTHER VALUABLE INFORMATION FROM THE INCOME STATEMENT:
Look for variances between actual results and forecasts. Adjust forecasts to be more
accurate.
Good profits do not necessarily mean good cash flow. When you adjust your income and
expenditure forecast, you must also adjust your cash flow forecast.
Measure advertising and marketing cost against sales to establish the efficiency of your
marketing strategy.
Determine the effects of borrowed money. Interest on loans and leases reduces your
profit. The cost of borrowed money may cost you your competitive edge in terms of selling
prices.
60
LESSON
2.5
NOTES:
61
THE BALANCE SHEET
LESSON 2.6
THE BALANCE SHEET
In this Lesson:
A balance sheet is drawn up to give a snapshot of the business at a specific time. It
includes all the items that contribute to the economic benefit of the business such as assets, loans
and cash. It shows what the business owes (liabilities) and what it owns (assets).
1.1 INTRODUCTION
The balance sheet gives the assets and liabilities of a business on a particular day at the
end of a financial period and follows a fixed format that consists of two sections. The first part
covers the assets of the business and the second section deals with capital, liabilities, equity and
loans.
1.2 TOTAL ASSETS
This section shows where the Capital was applied. The business could have used the
capital to acquire fixed (non-current) assets, current assets or inventory.
Current assets are items like Debtors and the money the business has in its bank account.
1.3 EQUITY AND LIABILITIES
This section shows how much capital the business has and where it was obtained from. It
typically includes items such as capital deposits, accumulated profit/loss, loans/creditors and
short term debts (current liabilities).
62
LESSON
2.6
EXAMPLE OF A BALANCE SHEET
BALANCE SHEET OF ABC STORES AS AT 28 FEBRUARY 20….
R
Non-current assets (fixed
150 200
Current assets:
487 850
Inventory 205
300
Debtors 152
550
Bank balance
130 000
TOTAL ASSETS
638 050
Capital
350
000
Accumulated profit
50 740
Loan (long term)
———-
Current liabilities:
237 310
Creditors 120
110
Arrear expenses
117 200
Bank overdraft
———-
EQUITY AND LIABILITIES
638
050
1.4. ANALYSING A BUSINESS
An annual report typically summarises the company’s fiscal year. The real meat of this
report is the financial statements: balance sheet, income statement, cash flow statement, and
statement of shareholder’s equity.
Each report should have last year’s figures and some comparative numbers for prior years
so that users can see the change. If past history isn’t included, ask for it (or at least an
explanation of why it isn’t there).
63
THE BALANCE SHEET
Here are some other tips for looking at the balance sheet in an annual report:
Look for trends and major changes over the past few years.
Calculate the current ratio if appropriate.
Compare asset values to similar companies.
Watch for an increase in long-term debt. This could signal trouble.
If most of the assets are made up of profits from previous years, then the bottom line
might not be as good as it first appears.
Low-Risk Corporations
Low-risk corporations typically offer low shareholder returns but have lots of equity.
This makes the company more secure and less likely to fail. Its assets exceed its liabilities
by a large margin. Banks, insurance companies, and well-established brand names often fall in
this category.
Financial numbers for a low-risk corporation usually look like this:
70-30 split between current and fixed assets
25% or less of liabilities are current
15% or less of debt is long-term
Shareholder’s equity is around 50-60%
High-Risk Corporations
These are the companies that take bigger risks, or are in riskier business segments, and
(sometimes) can make the big gains under the right circumstances.
These companies can offer investors the allure of high returns but you must remember
that they therefore have higher risk. Their funding typically comes from outside the business and
therefore they have little equity but higher debt. You may see fast growth but you will also likely
see a big fluctuation in earnings.
Financial numbers for a high-risk corporation usually look like this:
30-70 split between current and fixed assets
25% or more of liabilities are current
45% or more of debt is long-term
Shareholder’s equity is around 35%
64
LESSON
2.6
NOTES:
65
THE
T
B
EAM ALANCE
SUPER S
VI HEET
SOR
CHAPTER 3
BASIC BUSINESS CALCULATIONS
IN THIS CHAPTER:
LESSON 3.1 : WORKING WITH PERCENTAGES AND AVERAGES
LESSON 3.2 : CALCULATING INTEREST
LESSON 3.3 : FINANCIAL RATIOS
AT THE END OF THIS CHAPTER YOU WILL BE ABLE TO:
1. Work
with
percentages.
2. Calculate simple interest and find the value of any of the elements of the formula.
3. Calculate compound interest and find the value of any of the elements of the formula.
4. Explain what a financial ratio is and name the four groups of ratios used to analyse
financial statements.
5. Explain and calculate two liquidity ratio figures for a company (current ratio and acid-
test).
6. Explain and calculate two activity ratio figures for a company (inventory turn-over rate
and debtor’s collection period).
7. Explain solvency ratio’s and calculate the debt ratio for a business.
8. Explain profitability ratios and calculate the profitability of a business (return on total
assets) and then also profitability of own capital.
LESSON
3.1
LESSON 3.1
WORKING WITH PERCENTAGES
PERCENT
AND AVERAG
A
ES
IN BUSINESS
In this Lesson:
As a manager one has to be able to analyse results and figures.
Expressing business data and results in terms of percentages can
assist the manager to identify trends and relationships between various variables.
Managers have to be able to express changes (increases /
decreases) in various business factors such as sales, expenses, profit, etc. over time in
terms of percentages.
1.1
WORKING WITH PERCENTAGES
The word per cent means out of every century or out of every 100.
25% therefore means 25 out of every 100 or 25/100.
If somebody spends 20% of their salary to buy food, it means that he/she spends R20 of
every R100 that he/she earns on food.
1.1.1 Converting decimal fractions and / or vulgar fractions into percentages To
convert a decimal or a fraction to a percentage, simply multiply it with 100.
To convert 0,14 to percentage, multiply with 100 = move decimal comma 2 places to the
right = 14%
To
convert 3/5 to percentage,
multiply with 100 = 3/5 x 100 = 300/5 = 60%
To convert a percentage to a fraction,
simply place it on 100 and loose the % sign:
25% converted to a fraction = 25/100 = 1/4
67
GENERAL CALCULATIONS IN BUSINESS
To convert a percentage to a decimal, divide by 100 = move decimal comma 2
places to the left and loose the % sign:
30% converted to a decimal = 0,30
1.1.2 Express one number as a percentage of another
If nine workers were working on a project and two got injured, what percentage got
injured?
The number of injured workers can simply be represented by
2 out of 9 = 2/9.
This fraction can now be converted into a percentage by multiplying it with 100: 2/9 x
100/1 = 200/9 = 22,22%
1.1.3 Applying percentage to a number
There are 40 files in a cabinet. If 20% of these files have to be removed, how many files
must be removed?
We have to remove 20% of 40 files =
20/100 of 40 files
“of” means the same as multiply (x) therefore we can express it as
20/100 x 40/1 = 800/100 = 8 files must be removed.
(To check if we are correct: We have to remove 8 of the 40 files.
8/40 x 100 = 800/40 = 20%)
1.1.4 Measure percentage change
To calculate the percentage increase or decrease, the following formula must always be
used:
Change X 100
Original 1
68
LESSON
3.1
Example:
Let’s consider ABC stores’ sales figures for June 2010 and June 2011:
In June 2010, they sold R150 000 worth of merchandise.
In June 2011, they sold R200 000 worth of merchandise.
Now let’s calculate the percentage increase in sales from 2010 to 2011:
First calculate the amount of change (or difference) in sales from
R150 000 to R200 000
= R50 000
The original always refers to the first (oldest) figure (2010 in this case) =
R150 000
Change X
100 =
Percentage change
Original
1
R50 000 X
100 = R5 000 000 = 500
R150 000 1 R150 000
15
=
33,33% increase in sales
69
GENERAL CALCULATIONS IN BUSINESS
The petrol price was dropped from R11, 50 to R10,95 per litre.
Calculate the percentage decrease in the price of petrol.
First calculate the amount of change (or difference) =
R11,50 – R10,95 = R0,55
Using the formula:
Change
X
100 =
Percentage change
Original
1
R0,55
X 100
R55 = 4,78% decrease in price
R11,50
1 = R11,50
If VAT goes up from 14% to 16%, find the percentage increase.
The change in VAT is: 16 – 14 = 2%. The original VAT figure was 14%
Change
X
100 =
Percentage change
Original
1
2
X 100 =
100 = 14, 28% increase in VAT
14
1
7
1.2
WORKING WITH AVERAGES
When we talk about “average”, we normally mean something or someone that falls
somewhere in the middle of a group. The average of a group of numbers is the number that lies
somewhere in the middle of this group of numbers.
1.2.1 Calculate the arithmetic mean for decimal values and fractions One type of
average is called the “arithmetic mean”. To determine the arithmetic mean, simply add together
all the numbers and divide by the number of numbers that were added together:
The arithmetic mean of 13, 15, 17, 25 and 30 is:
Step 1. Add all numbers:
13+15+17+25+30 = 100
70
LESSON
3.1
Step 2. Now divide by number of numbers (5):
100 ÷ 5 = 20 = arithmetic mean
The arithmetic mean for 1/ 1
2, /8 and 3/4 is:
Step 1. Add the numbers:
½
+
1/8 + ¾ = 4+1+6
=
11
8
8
Step 2. Now divide by number of numbers (3):
11 ÷
3
=
11
X
1
=
11 = arithmetic mean
8
1
8
3
24
Calculate the average age of your workforce:
You have the following statistics regarding the age of your workers: 3 are 56 years old
5 are 33 years old
2 are 29 years old
3 are 24 years old
2 are 20 years old.
Step 1. Add the numbers:
3 x
56
= 168
5
x
33
=
165
2 x
29
= 58
3 x
24
= 72
2 x
20
= 40
15 workers– total age
= 503
Step 2. Divide total age (503) by number of workers (15) = 33, 5 years = Average age of
workers.
71
GENERAL CALCULATIONS IN BUSINESS
1.2.2 Finding the missing percentage
You may sometimes have the average and be asked to calculate one of the amounts
making up the average.
For example:
In total the sales of your store has increased with 60% during the past year.
On further investigation you find the following percentage increases in the sales of
individual items:
Soccer boots: 70%
Soccer shirts: 40%
Soccer shorts: 58%
Soccer balls: 65%
You can however not find any figures for the increase in your sales of soccer socks.
What percentage increase did you experience in the sales of socks?
Boots –
70/100
Shirts –
40/100
Shorts
– 58/100
Balls
– 65/100
Socks
– ??/100
Total number of possible increase for all items: 5 x 100 = 500
Average increase in sales for all items = 60%
You achieved an average increase of 60/100 of 500 for all items = 300
If you add up the increases for the other items:
70 + 40 + 58 + 65 = 233 = increase for items excluding socks
Therefore increase in sales of socks = 300 – 233 = 67%
72
LESSON
3.1
1.2.3 Calculate the average of a group of times in hours and minutes You may be
required to find the average of a group of times, especially when you are planning or budgeting
for your business.
Let’s consider the following example:
Your business delivers fresh products to households on Mondays, Wednesdays and
Fridays. On Mondays it takes your delivery people 3 hours and 15 minutes to complete their
rounds. On Wednesdays they spend 2 hours and 40 minutes and on Fridays it takes them 2,2
hours. What is the average time that your delivery people spend on the road per week?
Step 1. Add up all the times:
Monday: 3 hours = 3 X 60 = 180 + 15 minutes
= 195 minutes
Wednesday:
2 hours = 2 X 60 =
120 + 40 minutes
= 160 minutes
Friday:
2, 2 hours = 2 X 60 = 120 + 12 minutes
= 132 minutes
(120 + 0,2 X 60)
Total Minutes:
= 487 minutes
Step 2. Total number of trips = 3.
Therefore average number of minutes = 487 ÷ 3 = 162,33
60 minutes (1hour) goes into 162 minutes 2 times (120 minutes) and 42 minutes remain.
Average time is 2 Hours and 42 minutes
73
GENERAL CALCULATIONS IN BUSINESS
NOTES:
74
LESSON
3.2
LESSON 3.2
CALCULAT
ALCULA ING INTEREST
In this Lesson:
Interest is the cost of borrowing money. An interest rate is the cost stated as a percentage
of the amount borrowed per period of time, usually one year.
WHAT IS INTEREST?
The prevailing market rate is composed of:
The Real Rate of Interest that compensates lenders for postponing their own spending
during the term of the loan.
An Inflation Premium to offset the possibility that inflation may erode the value of the
money during the term of the loan. A unit of money (rand, dollar, peso, etc.) will purchase
progressively fewer goods and services during a period of inflation, so the lender must increase
the interest rate to compensate for that loss.
Various Risk Premiums to compensate the lender for risky loans such as those that are
unsecured, made to borrowers with questionable credit ratings, or illiquid loans that the lender
may not be able to readily resell.
1.1
SIMPLE INTEREST
Simple interest is calculated on the original principal amount only. Accumulated interest
from prior periods is not used in calculations for the following periods.
Simple interest is normally used for a single period of less than a year, such as 30
or 60 days.
75
CALCULATING INTEREST
Simple Interest = p * i * n
where:
p = principal amount (original amount borrowed or loaned)
i = interest rate for one period
n = number of periods
Example 1:
You borrow R10,000 for 3 years at 5% simple annual interest.
interest = p * i * n = 10,000 * .05 * 3 = 1,500
Example 2:
You borrow R10,000 for 60 days at 5% simple interest per year (assume a 365
day year).
interest = p * i * n = 10,000 * .05 * (60/365) = 82.1917
1.2
COMPOUND INTEREST
Compound is, simply put, single interest plus interest on interest. It is interest which is
calculated not only on the capital or principal amount but also the accumulated interest on the
amount over the period. Compound interest differs from simple interest in that simple interest is
calculated solely as a percentage of the principal sum.
The equation for compound interest is: P = C(1+ r/n)nt
Where:
P = future value
C = initial deposit
r = interest rate (as a fraction: e.g. 0.06 for 6%)
n = number of times per year interest is compounded
t = number of years invested
Although the interest may be stated as a yearly rate, the compounding periods can be
yearly, semi-annually, quarterly, or even continuously.
76
LESSON
3.2
You can think of compound interest as a series of back-to-back simple interest contracts.
The interest earned in each period is added to the principal of the previous period to become the
principal for the next period.
Example:
You borrow R10,000 for three years at 5% annual interest compounded
annually:
interest year 1 = p * i * n = 10,000 * .05 * 1 = 500
interest year 2 = (p2 = p1 + i1) * i * n = (10,000 + 500) * .05 * 1 = 525
interest year 3 = (p3 = p2 + i2) * i * n = (10,500 + 525) *.05 * 1 = 551.25
Total interest earned over the three years = 500 + 525 + 551.25 = 1,576.25.
Compare this to R1,500 earned over the same number of years using simple interest.
The power of compounding can have an astonishing effect on the accumulation of
wealth.
The table shows the results of making a one-time investment of R10,000 for 30
years using 12% simple interest, and 12% interest compounded yearly and quarterly.
TYPE OF INTEREST
PRINCIPAL PLUS INTEREST EARNED
Simple R46,000.00
Compounded yearly
R299,599.22
Compounded quarterly
R347,109.87
77
CALCULATING INTEREST
NOTES:
78
LESSON
3.3
LESSON 3.3
FINANCIAL RAT
A IOS:
ANALYSING
NAL
FINANCIAL STATEMENTS
In this Lesson:
A financial ration is a comparison of the relation between two sets of values from a
financial statement, for example, the relation between current assets and current liability (current
ratio). It is important not to look at any ratio in isolation – it must be compared with a norm and
assessed together with other ratios. A ratio on its own is not an indication of the success or
failure of a business.
Financial statements should be analysed with the aid of various financial ratios.
Some of the most useful ratios are:
Liquidity ratios – they analyse the business’s ability to meet its commitments regularly
and on time
Activity ratios – they investigate the effectiveness of employment of assets to realise
sales
Solvency ratios – they determine the ability of a business to pay all its debts at any time
Profitability ratios – they assess the profitability of a business and calculate the return of
capital employed
79
FINANCIAL RATIOS
1.1
LIQUIDITY RATIO FIGURES (CURRENT RATIO AND ACID-TEST)
There are two ratios that are generally used to assess the liquidity position of a business –
the current ratio and acid-test ratio.
1.1.1 The current ratio
The current ratio indicates to what extent the current liabilities (short-term debt) of the
business are covered by the current assets. It tells the business whether it has the means to meet
its obligations in the short term (liquidity). It shows if the business is able to pay what it owes its
creditors.
Current ratio =
current assets
current
liabilities
The generally accepted norm for the current ratio is 2:1. A lower ratio can mean that the
business will have difficulty meeting its short-term obligations. A weak current ratio can be the
result of factors like having too many creditors, cash flow problems or a large bank overdraft.
1.1.2 The acid-test ratio
The current ratio is based on the assumption that all current assets could be turned into
cash equally quickly. Businessmen will however know that this is often not the case and that it
can take longer to turn inventory into cash than it does for an investment in the bank or debtors.
The main reason for this longer conversion period is that often the inventory is sold on credit and
the debt must first be collected before the cash can be used for payments. For this reason, the
acid-test ratio is employed. This ratio excludes inventory and gives a better indication if the
business will be able to meet its short-term obligations regularly and on time.
Acid-test ratio =
current assets – inventory
current liabilities
The generally accepted norm for the acid-test ratio is 1:1. This means that for every R1 of
short-term liability, the business must have R1 of liquid assets that can be converted to cash
quickly.
A low acid-test ratio can be the result of too much inventory, a lack of sufficient cash
resources at a specific moment or many debtors who have already settled their accounts.
80
© Business Management Training College (Pty) Ltd
LESSON
3.3
Low current and /or acid test ratios indicate that the business has potential/
possible cash-flow problems. It may experience problems to pay current liabilities such
as creditors or maintain an acceptable bank balance. This makes credit providers hesitant about
granting additional funding/credit.
1.2
ACTIVITY RATIO FIGURES (INVENTORY TURN-OVER RATE AND DEBTOR’S
COLLECTION PERIOD)
This type of ratio gives an indication of how effectively the assets of the business are
being used to realise sales. There are a number of activity ratios but for purposes of this course,
only two will be discussed: The inventory turn-over rate and the debtors collection period.
1.2.1 The inventory turn-over rate
This ratio gives an indication of how many times the average inventory (stock) is realised
in sales during a year. A business’s inventory has to turn around a certain number of times to
realise its projected sales for the year.
Inventory turnover rate =
Cost of sales
Average inventory
The inventory turn-over rate differs from industry to industry and no single norm can
therefore be established.
The following are examples of industry-specific norms:
Cafés: 8 times
General dealers: 4-5 times
Grocery stores: 6-8 times
Clothing stores: 2-3 times
The higher the inventory rate, the less capital the business will need to carry inventory
and the capital can be used more frequently during a period to finance new inventory. It can
however also be risky to have a too high rate as this can create the danger of inventory shortages
when sales suddenly increase.
If the rate is too low, it may mean that:
Wrong type of inventory is carried
Out of date inventory is carried
Too much damaged inventory is carried
Too much inventory in general is carried
81
FINANCIAL RATIOS
The sales figures of the business is too low
1.2.2 The debtors collection period
Debtors collection period =
average debtors x 360
credit sales
This rate gives an indication of the average number of days it takes for the business to
collect its debts. It enables the business to compare the real collection period with the granted
credit period. If big differences occur, the business has to review its credit policies and collection
practises.
A long debtor’s collection period is an indication of slow and late payments by debtors
and has a direct influence on the cash flow of the business and can result in liquidity problems.
1.3
SOLVENCY RATIO
The solvency of an enterprise refers to the ability of the business to pay all its debts at
any time, even if all its activities are stopped. The business should at all times be able to repay all
its debts and therefore its total liabilities must be covered by its total assets.
The most useful solvency ratio is the debt ratio. It reflects the extent to which the total
liabilities of the business are covered by its total assets.
Debt ratio = Total assets
Total liabilities
The higher the debt ratio, the greater the financial risk of a business. A debt ratio of 2:1
means the business has R2, 00 in assets for each R1, 00 of debt. A debt ratio of 1:1 means that
the business is technically insolvent and run a strong risk of liquidation by any of its external
capital suppliers.
1.4
PROFITABILITY RATIOS
These ratios give us an indication of how profitably the business has employed the
available capital in its activities. Businesses try to obtain at least a satisfactory return on their
available capital but normally would push to increase the profitability as much as possible.
82
LESSON
3.3
1.4.1 Return on total assets (Profitability)
Profitability = Net income before interest and tax x 100
Total assets
The profitability of a business should at least exceed the inflation rate and be
considerably higher than interest rates
1.4.2 Profitability of own capital
This ratio is an indication of the return that the owners of the business have earned on
their capital annually.
Profitability of own capital = Net income after interest and before tax X 100
Own capital (owner’s interest)
1.5
OTHER IMPORTANT RATIOS
There are many other ratios that managers use, for example:
Return on equity: Profit margin on sales, leverage ratio, times interest earned and cash
flow ratios. Compares the net after-tax profit with the owner’s equity and shows how much the
owner of the organisation earned on each rand invested in the business.
Profit margin on sales: Relates the sale of the business’s products to the direct cost of
the products.
Leverage ratio: This is the ratio of total sales to equity and it measures the percentage of
total funds provided by the owners.
Times interest earned: Measures the extent to which the business is able to pay its
interest obligations and the level by which earning can decline without causing financial losses
for the financier.
Cash flow ratios: In order to manage a business’s assets, management needs to
comprehend the use and application of cash flow performance indicators. The cash flow
statement allows managers to analyse various sources and applications of cash.
83
FINANCIAL RATIOS
The
cash flow adequacy ratio measures the ability of the business to generate sufficient cash
to pay its interest bearing debts, reinvest funds in its operations and distribute dividends to
shareholders.
The
cash position ratio indicates to what extent cash from total activities can finance
investment in fixed and financial assets. It assesses the business’s ability to generate cash flow in
excess of capital expenditure from operations and other activities.
In ratio analysis, it is important to remember ratios must always be compared to
benchmarks. Benchmark figures are compiled by taking the average of the best quarter.
Benchmarking ensures that trends can be identified and compared with long term goals and
standards. Any ratio must be evaluated in the context of all the other associated ratios of the
organisation. The usefulness of ratios depends on the skilful application and interpretation.
When assessing ratios, it is important that the results are compared with
other companies in the same industry or with historic ratios and not to be
taken in isolation. What may seem like a poor ratio at first glance may well
be normal for that industry and, of course, the reverse applies, in that what
may seem a good ratio on its own, could be below average for that industry.
1.6
SOME PRACTICAL RATIO CALCULATIONS
For the purpose of our calculations, we will use the balance sheet and income statement
of the Swiftgro Company (source: Business Management – A Value Chain Approach)
84
© Business Management Training College (Pty) Ltd
LESSON
3.3
Balance sheet as at 31 December 2002
2002
2001
ASSETS
Non-Current Assets
389 000
110 000
Property, plant and equipment
379 000
100 000
Intangible assets
10 000
10 000
Investments
20 000
20 000
Current Assets
463 200
185 100
Inventory
252 000
110 000
Trade and other receivables
201 200
70 100
Cash and cash equivalents
10 000
5 000
TOTAL ASSETS
872 200
315 100
EQUITY AND LIABILITIES
Capital and reserves
387 300
157 300
Issued share capital
200 000
152 000
Reserves
187 300
5 300
Non-current liabilities
Long term loan
180 000
0
Current Liabilities
304 900
157 800
Trade and other payables
278 200
157 800
Bank overdraft 20
000
0
Tax payable 6
700
0
TOTAL EQUITY AND LIABILITIES
872 200
315 100
SWIFTGRO LIMITED
Liquidity Ratio (Current ratio)
We have already looked at the current ratio (liquidity ratio) earlier on. The liquidity ratio
measures the ability of the business to meet its short term financial obligations if current assets
are converted into cash in the short term.
A good ratio is seen as one where the current assets are twice the value of current
liabilities, although it depends on the nature and scope of a business’s activities.
85
FINANCIAL RATIOS
Liquidity ratio =
Current Assets
Current Liabilities
=
463
200
304 900
= 1.52 for 2002 and
185
100
157
800
= 1.17 for 2001
This means that for every R1 of current liabilities the company had R 1.52 of current
assets to cover current liabilities in 2002. Om 2001 the ratio was R1.17 of current assets for each
R1 of current liabilities. This implies that in 2002 the company was in a more favourable
position to cover its short-term obligations that it was in 2001.
Acid Test
The acid test is calculated as:
Current assets – stock
Current liabilities
This ratio measures the ability of the organisation to meet its current liabilities without
the most non-liquid item of current assets. In our example, the acid test is: 211
200
304
900
=
0.69 in 2002 and
75 100
157
800
=
0.48 in 2001
86
LESSON
3.3
This means that for every R1 of current liabilities, the business and only 69c of current
assets less stock to cover current liabilities.
In 2001 the ratio was worse, with only 48c of current assets less stock available to cover
current liabilities.
Activity ratio
This is also known as the asset management ratio. This ratio measures how effectively
management uses the business assets, that is the amount of sales generated for every R1 of the
assets.
The activity ratio is calculated as:
Sales
Total
assets
In our example the activity ratio is:
1 200 000
872
200
= 1.38 for 2002 and
620
000
315
000
= 1.97 for 2001.
This means that in 2002, for every R1 of fixed assets, R 1.38 of sales was generated. In
2001 the company generated R1.97 of sales for every R1 of assets employed.
Debtor’s collection period
The average debtor’s collection period is the average length of time that elapses between
concluding a sale and receiving the cash.
This is calculated as:
Debtors x
365
Sales
1
By referring to our previous example:
87
FINANCIAL RATIOS
201 200 x 365
1 200 000
=
61 for 2002 and
70 100 x 365
620 000
=
41 for 2001
This means that the debtor’s turnover in 2002 was nearly six times a year, (365/61) while
in 2001 it was nearly nine times (365/41). This indicates that the collection of debtors was
substantially better in 2001 than in 2002.
The same is true for debtors’ days outstanding, which is a different calculation of the
same collection period. In 2001 debtors were outstanding for 41 days, while in 2002 they were
outstanding for 61 days.
Return on total assets
The return on total assets measures the profitability of the business as a whole in relation
to the total assets. The figure used in this ratio must be profit before interest and tax, to measure
the true effectiveness of the operational management.
The reason for excluding interest and tax is that these expenses are not controlled by
operational management, but are a result of borrowing and tax legislation.
Each asset in a business should earn income. The amount of money earned on an asset
should be more than cost of financing that asset. If not, then the assets will cost the business
more than the assets produced and the business loses money.
88
LESSON
3.3
Return on total assets is calculated as:
=
Profit before interest and tax
x
100
Total assets
1
By referring to our previous example:
= 280
000
872
200
=
32% in 2002 and
= 74
600
315 100=
24% in 2001.
This means that for every R1 in assets, the company earned 37c in profit before interest
and tax in 2002. In 2001 the company earned only 24c for every R1
invested in fixed assets. A sharp increase in profit has occurred from 2001 to 2002.
Profitability ratio
This ratio measures the profitability of the business. It indicates what percentage of sales
remains as profit for every rand generated from sales. This ratio does not measure how much the
business sells, but rather, for each rand earned, what amount remains as profit.
This ratio is calculated as:
Profit before interest and tax
x
100
Sales
1
In our example:
= 280
000
1 200 000
=
23% in 2001 and
= 74
600
620
000
=
12% in 2001.
89
FINANCIAL RATIOS
This means that for every R1 generated from sales, 23c net profit before interest and tax
was earned in 2002. In 2001 only 12c net profit before interest and tax for every R1 of sales was
earned. The largest part of the increase in return on assets was due to the profitability ratio.
Insolvency Ratio
Shareholders’ funds
loss
Compares a company’s losses to its shareholders funds, indicating (in years) the time it
will take for the company to become insolvent due to lack of profit, rather than due to cash flow
liability. It assumes that the company will continue to make the same losses.
Current assets – stock
Current liabilities
This ratio indicates the ability of a company to pay its debts as they fall due. It is
generally considered to be a more accurate assessment of a company’s financial health than the
current ratio as it excludes stock, thus reducing the risk of relying on a ratio that may include
slow moving or redundant stock.
Figures of this ratio are lower than the current ratio. Supermarkets can, for example,
easily survive on ratios as low as 0.4 with cash being received for goods sold, before the goods
are actually paid for. Plant hire contractors would also expect ratios as low as 0.6 to 0.8.
Clothing retailers also operate at very low levels, with average figures being between 0.2
and 0.6 and retail as a whole between 0.3 and 0.7. In manufacturing figures between 0.7 and 1.1
are seen as acceptable and for wholesalers 0.7 to 1.0.
Construction should operate at between 0.6 and 1.0.
90
LESSON
3.3
NOTES:
BIBLIOGRAPHY
Business Management – A Value Chain Approach second edition. Gideon Nieman, Alf
Bennet.
Basic Financial Management for Entrepreneurs – Conradie, WM & CMW Fourie
Basic Business Calculations – Prof D Zidel
STUDY GUIDE REVIEW AND COMMENTS
We are committed to provide the best quality study material to our
students. Your contribution and constructive feedback to this
regard will be highly appreciated.
Student Name:
Student Number:
Name of Study guide:
Student Number:
–
Formative Assessment
Module 6
Introduction to Financial
Management
Assignment No. MAN61FMod6-1
Initial:
Student Number: –
Question 1: Answer the following short questions regarding financial management
1.1 The primary financial objective of any business is to:
___________________________
___________________________________________________________________(1)
1.2 Name 5 secondary objectives of financial management.
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
__________________________________________________________________(5)
1.3. Explain 5 steps that can be taken to ensure that a business maintains a positive cash flow.
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
___________________________________________________________________(5)
1.4 Name 4 reasons why budgets are drawn up.
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
__________________________________________________________________ (4)
Total question1: /15
Initial:
Student Number: –
Question 2: Basic financial concepts:
Match the following terms (a-j) to the most accurate description (2.1 – 2.10)
a) Solvency
b) Fixed assets
c) Liquidity
d) Working capital
e) Assets
f) Profitability
g) Fixed overhead expenses
h) Capital
i) Variable expenses
j) Current assets
2.1
Stock of raw materials, stock of finished goods, work in progress, prepaid expenses
and deposits, cash on hand and at bank and outstanding debtors.
2.2
Items that are purchased to facilitate the running of the business (they are not pur-
chased for resale)
2.3
The ability of a business to pay off its debt at any given time, even if all its activities
should stop.
2.4
The relationship between the net income earned over a certain period, and the capital
used in that period to generate income.
2.5
The money available to the business for the purchase of goods and services with a
view to generating an income for the business.
2.6 The economic resources that an enterprise owns
2.7 Expenses that must be paid whether the business is trading or not.
2.8 The company’s ability to keep making all its required payments regularly and on time.
2.9 Money used to acquire current assets such as stock or financing debtors.
2.10 Expenditure directly related to the manufacturing or sales processes of a company
Total question 2 /10
Question 3:
Carefully read each of the following statements and state whether they are true (T) or false (F):
No Statement
3.1 The amount of an expense account is decreased by entries on the debit side.
3.2 The amount of an income account is increased by entries on the debit side.
3.3 An enforceable claim against others, such as account receivable is classified as an asset.
3.4 The acid test measures the ability of an organisation to meet its current liabilities without the
most non-liquid item of current assets.
3.5 Solvency ratios investigate the effectiveness of employment of assets to realise sales
Total question 3 /5
Initial:
Student Number: –
Question 4: Classify (√) the following accounts as asset, liability, income or expense
accounts:
ACCOUNT ASSET LIABILITY INCOME EXPENSE
Sales
Loan from bank
Telephone
Rental paid
Discounts given
Stationary in store
Postage
Equipment
Total question 4 /4
Question 5: Choose the concept (a-f) that match the statements (5.1-5.6):
a. Fixed asset register
b. Journals
c. Income statements
d. Cash flow statements
e. Ledgers
f. Balance sheets
5.1 Diaries of the day-to-day transactions of the business.
5.2 Summarise and categorise the information entered into journals.
5.3 Reflect the profit/loss made by company for a specific period.
5.4 Examples of ledgers.
5.5 Project the flow of money in a business for specified future period.
5.6 Snapshots of businesses at close of business on a specified day.
Total question 5 /6
Initial:
Student Number: –
Question 6: Compile a pre-adjustment trail balance for Catherine’s Cake Emporium.
The following balances appear in her general ledger on 31 July:
Bank (favourable) R13 000
Capital R20 000
Salaries R 8 000
Vehicles R35 000
Creditors R32 000
Debtors R 3 000
Sales R 7 000
Account Debit Credit
Total question 6: /10
Total Formative 6: /50
Initial:
Student Number:
–
SECTION A
/70
SECTION B
/80
SECTION C
/50
SECTION D
/50
TOTAL
/250
1
Student Number:
–
SECTION A: SHORT QUESTIONS
Nr: Question
Mark:
1
1.1 Name three external role-players that need information from an organisation.
1.2 Also name the type of information needed by each.
6
2
Why is a workload chart very useful when developing new systems?
4
3
Name three different types of information systems and the organisational level that it is
used at.
6
4
How is the flow of information influenced by structure and culture in an organisation?
5
5
Name three factors that must be taken into account when organising a meeting by way of
video conferencing.
3
6
Give examples of how legal requirements, regulations or the organisation’s constitution
can have an effect on organising events such as a conference, banquet congress, or seminar.
5
7
Why is determining your audience an important step in the communication process?
5
8
Name three devices that make use of wireless transmission.
3
9
9.1 Explain the difference between a star network and a ring network.
9.2 Point out the advantages and disadvantages of each type of network.
8
10
Why is it important to compile an agenda for a meeting?
5
/50
Multiple Choice – Only write the MOST CORRECT corresponding answer in the
space provided for “Your Answers”. (i.e. either a, b, c, or d )
Nr:
Statement or question:
Mark Your
Answer
11.1 When can a chairperson adjourn a meeting without a majority decision?
2
a
When the rules and regulations of the organisation are not observed by the members.
b
When some members talk too much and do not allow quieter members to have their say.
c
When disorderliness makes it impossible to continue.
d
When someone attending the meeting does not obey him.
11.2 When does a motion become a decision?
2
a
When it is submitted in writing.
b
When it is seconded.
c
After it has been discussed and adopted by the meeting.
d
In the next meeting after it was adopted.
11.3 A ‘bring forward’ planning system is also known as …
2
a To-do-list
b Tickler
file
c
Time-log
d Gantt
chart
2
Student Number:
–
Multiple Choice – Only write the ACCURATE corresponding answer in the space
provided for
“Your Answers”. (i.e. either a, b, c, or d )
Nr:
Statement or question:
Mark
Your
answer
11.4 What is the ‘scalar principle’ more commonly known as?
2
a Delegation.
b Accountability
c
Span of control.
d
Chain of command
11.5 The rights inherent to a managerial position
2
a Delegation.
b
Span of control.
c
Authority
d
Responsibility
11.6 Identify the disadvantage of centralisation
2
a
Work processes are not always the best.
b
Offices do not always have the specialised workers and equipment to implement savings
c
The co-operation of administrative activities can eventually become cumbersome.
d
Owing to a variety of work of smaller scope, the work is done more slowly.
11.7 In a functional organisational structure, the administrative manager …
2
a
Has the authority to give instructions to people in staff positions.
b
Has authority to give enforceable instructions regarding the administrative function to all
other functions.
c
Has authority to give instructions to line functionaries and their subordinates.
d
Has only line authority.
11.8 When you take action to prevent an anticipated problem, you are practising …
2
a Concurrent
control
b Feedback
control
c
Feed-forward control
d
Quality control
3
Student Number:
–
Multiple Choice – Only write the MOST CORRECT corresponding answer in the
space provided for “Your Answers”. (i.e. either a, b, c, or d )
Nr:
Statement or question:
Mark
Your
Answer
11.9
A deviation from the quality standard can be caused by … 2
a
Sick or unhappy employees and labour unrest.
b
Out-dated and inadequate machinery.
c
Poor working conditions and lack of support from management
d
All the above
11.10 When using the Delphi technique as a problem-solving aid, the business will … 2
a
Involve a group of people to generate as many as possible ideas and solutions.
b
Ask each individual in the group taking part to write his/her ideas about the problem
down in silence.
c
Do their best to create an environment for creative thinking.
d
Collect anonymous opinions from a group of experts.
Total question 11: /20
TOTAL SECTION A: 70
4
Student Number:
–
SECTION B: CASE STUDIES
Mark
Planet Bike is a manufacturer of bicycles. It has retail outlets in Kwa-Zulu Natal,
Gauteng, Limpopo, the Free State and Cape Town. All functions are centralised in their Head
Office in Gauteng, apart from sales representatives and consultants who introduce and market
new products to various outlets. Steve Taylor is the administrative manager. He is a very
competent manager who understands that the primary purpose of his section is to process and
communicate information.
12.1 List four key objectives that you think Steve will be responsible for as
administrative manager. (4)
12.2 The functional managers at Planet Bike need information to enable them to assist
top management in the planning, development and implementation of policies and to manage
their individual functions effectively.
What type of internal information would the managers of the following areas require
from Steve and his team?
(12)
12
Purchasing
25
Operations
Human Resources
Public Relations
12.3 Give an example of an external role player, and the type of information this role
player would need from Steve’s department. (4)
12.4 Discuss the following statement:
‘An administrative manager should have special people skills’ (5) Cඉඛඍ ඛගඝඌඡ 2
You are leading the payments and accounts team in a small retail business. The function
of the team is to process payments and administer accounts. This office takes 10 days to process
a payment. One person works on a document, and then files it away in a cabinet. It is taken out
later again for further work by another person. After each stage the documents are carefully filed
away in a cabinet.
Bongani is an expert in office layout and design. You have asked Bongani for advice with
the current office layout (figure A). She inspected the current office layout , (figure A) and
changed it to figure B.
Figure A: Figure B: 13.1 Do you think the change in office lay-out was an
improvement? Motivate your answer by referring to the possible effect on quality delivery, cost
and time. (5) 13.2 Bongani has advised you that you need new office furniture in some of your
other sections.
13 Write a letter to an office furniture supplier requesting a catalogue and a price list to
assist you in making your decision on what to buy. (Use the Business letter—standard block
form). (10) 25
13.3 The photocopier is not suitable for your team any more. Investigate various
photocopier options and write an informal (short) report to senior management where you
request the photocopier most suitable for your office needs. (10)
5
Student Number:
–
SECTION B: CASE STUDIES
Nr:
Question:
Mark:
Top-cover is a short-term insurance company. The claims department consists of 30
claims adjustors, examiners and investigators that analyse and investigate claims before the
insurance company makes a payment to the customer.
Their functions include:
Applying insurance rating systems.
Calculating amount of claim.
Contacting insured or other involved persons to obtain missing information.
Organising and working with detailed office or warehouse records, using computers
to enter, access, search and retrieve data.
Paying small claims.
Posting or attaching information to claim file.
Preparing and reviewing insurance-claim forms and related documents for
completeness.
Providing customer service, such as giving limited instructions on how to proceed
with claims or providing referrals to auto repair facilities or local contractors.
Reviewing insurance policy to determine coverage.
Transmitting claims for payment or further investigation.
They have experienced a sharp increase in workload over the past couple of months
without any new appointments being made. They find it difficult to deal with the increased
workload and feel unmotivated. Lots of time is wasted on unnecessary things like duplicate
queries on outstanding claims, paperwork, unnecessary phone calls, junk e-mail, clients now
knowing the right procedure to claim, etc.
To make things worse, they are constantly running out of stock and have to waste
valuable time waiting for paper and other stationary. The department uses an average of 800
pages of A4 paper each day, and new stock takes 3 days to deliver.
The manager of the department, Vusi, decided to have a meeting with his team to discuss
problems and possible solutions.
14.1 Use a planning aid to demonstrate how Vusi can help his sub-ordinates use their
time more effectively.(10)
14.2 Discuss the importance of stock control in an organisation. (5) 14
14.3 Decide on the level of A4 stock that must always be available for the claims
department 30
in the case study. Calculate the re-order level of A4 paper for the department. What does
the figure that you calculated mean? (5)
14.5 Write a memorandum to the claims department employees in which you give them
information on the forthcoming meeting. (10)
TOTAL SECTION B:
80
6
Student Number:
–
SECTION C: ESSAY QUESTIONS
Nr: Question:
Mark:
As a result of the technological revolution, electronic communication today is one of the
most frequently used modes of communication. Communications media technology is vitally
important in a network.
15
15.1 Which factors should be considered to determine the most appropriate
communications 15
medium? (10)
15.2 What is groupware and why is it so important in an organisation? (5) The
relationships within an organisation cannot be restricted to those enforced by management, and
are therefore not always formal.
16
10
Explain why it is important for the administrative manager to know about the informal
organisational structure.
Problem-solving is a skill that is required of an administrative manager. Discuss the
following statement critically:
17
10
‘All problems that occur in the workplace have something to do with people at some
stage.’
You have been asked to develop a forms management policy for ABC Stores, a closed
corporation business that belongs to two brothers.
18.1 Motivate the necessity of a forms management system. (5) 18
15
18.2 What should be addressed in a forms management policy? (5) 18.3 Describe how
you would go about establishing a forms management policy. (5) TOTAL SECTION C
50
7
Student Number:
–
SECTION D: FINANCIAL MANAGEMENT QUESTIONS
Nr: Question:
Mark:
19
Explain at least 5 steps that a company can take to ensure that it will maintain a positive
cash flow.
10
20
Discuss the two main reasons why businesses normally loose money.
10
21
21.1 Briefly explain the 8 stages in a typical budgeting process (8)
21.2 Explain how Zero-based budgeting is done (2)
10
Compile a pre-adjustment trail balance for Daniela’s Sweets.
The following balances appear in her general ledger of 31 October:
Bank (positive) R15 000
Capital
R27 000
22
Salaries
R 8 000
Vehicles R35
000
10
Creditors R34
000
Debtors
R10 000
Equipment R12
000
Sales
R21 000
Rental
R 2 000
Compile an income statement for Fruity Tooty Juice for October.
The following information is available:
During the month they received R55 000 for the sale of fruit juice.
23
At the beginning of the month they had R5 000 worth of fruit juice.
During the month they bought another R18 000 of fruit juice.
10
At the end of the month they have R6 000 stock left.
Rental for the shop amounts to R4 000 per month.
They pay the sales person R3 000 per month.
The cost of paper cups used during the month is R2 500.
TOTAL SECTION D
50
Total of section A : 70
Total of section B : 80
Total of section C : 50
Total of section D : 50
Total of summative assessment: 250
8
StudentNumber: 2 0 1 3 0 1 5
–
0 5 1 4 1
Formative Assessment
Module 5
Risk Management
Assignment No. MAN61FMod5-1
Copyright © Business Management Training College (Pty) Ltd
FD Roodt
1 3 0 1 5- 0 5 1 4
55 5 55
RISK MANAGEMENT
Learner Full Names:
Surname:
Only fill in your answers in the provided columns on the right hand side of the page.
Question 1: Multiple Choice – Only write the BEST CORRECT corresponding answer in the
space provided for “Your Answers”. (i.e. either a, b, c, or d )
Nr: Statement or question: Mark
Your
Answers
1.1 In risk management, uncertainties may include: 2 d
a Events which may or may not happen
b Uncertainties caused by a lack of information
c Uncertainties caused by ambiguity
d All of the above
1.2 The unexpected variability or volatility of returns is known as: 2 b
a Information security risk
b Financial risk
c Human relationship risks
d Marketing risk
1.3 The characteristics of a Level 3 uncertainty (total uncertainty) are: 2 d
a Outcomes are not fully identified and probabilities are unknown
b Outcomes can be predicted with precision
c Outcomes are identified and probabilities are known
d Outcomes are identified but probabilities are unknown
1.4 Having appropriate risk management processes in place is a function of: 2 a
a The Board
b Employees
c Management
d Directors
Copyright © Business Management Training College (Pty) Ltd
Initial:
FD Roodt
Student Number: 2 0 1 3 0 1
–
5 0 5 1 4 3
Question 1: Multiple Choice – Only write the BEST CORRECT corresponding answer in the
space provided for “Your Answers”. (i.e. either a, b, c, or d) CONTINUED:
Nr: Statement or question: Mark Your Answers
1.5 An example of a risk management plan is: 2 a
a House insurance
b SWOT analysis
c Project failures
d None of the above
1.6 A benefit of risk management is: 2 d
a Effective use of resources
b Ability to quickly grasp new opportunities
c Contingency planning
d All of the above
1.7 One of the key activities in the Risk Management Process is: 2 a
a Resource controls
b Staff meetings
c Cost allocation
d Budgeting
1.8 The practice of taking measures to minimize loss is called: 2 c
a Risk avoidance
b Risk assumption
c Risk prevention
d Risk transfer
1.9 The capture of information about the organization and its operations, 2 b including the company’s aims and objectives, involves:
a Compliance risk
b Strategic risk
c Operational risk
d Security risk
1.10 A Risk Assessment form is used to: 2 d
a Show the severity of a risk
b Indicate risk probabilities
c Estimate the frequency of occurrence of a risk
d Show the organisation’s vulnerabilities and the estimated cost of recovery in the event of damage.
Total question 1 /20
Initial:
FD Roodt
Student Number: 2 0 1 3 0 1 – 5 0 5 1 4 4
Question 2: Choose the CORRECT answer by selecting a or b.
Nr: Statement or question: Nr: Your Answers
A Work Breakdown Structure breaks larger tasks down into …
2.1 a. smaller tasks (activities) or 2.1 a
b. milestones
Each item in the WBS is generally assigned a unique identifier; these identifiers
2.2
can provide a structure for a hierarchical summation of costs and …
2.2
b
a. time
b. resources
The following are examples of possible Threats and Opportunities in a business: b
2.3 a. Quality; Staff; Management; Price
b. Technology; Public expectations; Competitors and competitive actions
The following are examples of possible Strengths and Weaknesses in a business: b
2.4 a. Economic conditions; Expectations of stakeholders or 2.4
b. Resources ( financial, intellectual, location); Customer service; Efficiency
FMEA is a method for analysing potential …. early in the development cycle.
2.5 a. reliability problems or 2.5 a
b. risk problems
Risk can be defined in terms of frequency and severity:
2.6
… is how serious it will be if something happens.
2.6
b
a. Frequency or
b. Severity
A Hazard and Operability study that systematically analyses each part of a
2.7
system or activity is called …
2.7
a
a. HAZOP or
b. HAZOS
Failure Modes and Effects Analysis is a method used
2.8 a. early in the development cycle or 2.8 a
b. at the end of the development cycle
The following aspects should be covered in the risk review process:
2.9 a. Opinions of key external and internal stakeholders; Risk disclosure 2.9 a
exercise; or
b. Resource controls; Planned reaction; Report and monitor performance
Which of the following are risks associated with workplace skills:
2.10
a. Financial risk; Compliance; Reputation
2.10
b. Changing labour market conditions; changes in existing strategic a
partnerships
Total question 2 /10
FD Roodt
Initial:
Student Number: 2 0 1
3 0 1 – 5 0
5 1 4 5
Question 3:
Carefully read each of the following statements and state whether they are true (T) or false (F):
No Statement T/F
3.1 Two of the factors that make up risk are levels of risk and uncertainty.
T
3.2 Risk management is defined as a set of principles and processes that help minimise the negative impacts of
risks and maximise the positive impacts.
3.3 One of the risks faced when developing new products is problems with employee acceptance.
3.4 A reactive project manager tries to resolve issues when they occur.
3.5 Risk spreading is when money is put aside to cover losses that might occur.
3.6 One method to reduce inter-group conflict is through arbitration.
3.7 Reputation is a risk associated with workplace skills.
3.8 In financial risk management, market risk is the investor’s risk of loss arising from a borrower who does not
make payments as promised.
3.9 Injury or harm to customers due to negligence of the company may result in a public liability claim against the com-
pany.
3.10 Compliance risk is the risk of direct or indirect losses arising from failed internal processes or systems.
3.11 An event that result in development of new infrastructure and demand management systems that cannot be
man-aged after the event, is called environmental risk.
3.12 According to the 3×3 risk matrix, the severity of a risk with a high probability and medium impact is medium.
3.13 One of the problems that could be experienced with a risk matrix is that higher qualitative ratings can be
assigned to quantitatively smaller risks by mistake.
3.14 One of the elements of the external environment that the SWOT analysis examines, is the human resource skills.
3.15 The HAZOP process is a means of solving problems rather than an identifying technique.
3.16 In PEST analysis, PEST is an acronym for Political, Economic, Sociological and Training factors.
3.17 To run an effective risk management program, one needs to be able to predict failure risk levels throughout the
life of the asset.
3.18 Four ways to respond to risk include tolerate, treat, transfer and terminate.
3.19 One of the controls that can be put in place to mitigate risk, is additional information.
3.20 In an insurance context, pure risk refers to the uncertainty as to whether a voluntary undertaken activity will result
in a gain or loss.
Total question 3 /20
TOTAL: FORMATIVE 5 /50
Initial:
T
F
T
F
T
T
F
T
F
F
F
T
F
F
T
T
T
T
F
FD Roodt
Formative Assessment
Module 5
Risk Management
Assignment No. MAN61FMod5-1
Student Number: – 1
RISK MANAGEMENT
Learner Full Names:
Surname:
Only fill in your answers in the provided columns on the right hand side of the page.
Question 1: Multiple Choice – Only write the BEST CORRECT corresponding answer in
the space provided for “Your Answers”. (i.e. either a, b, c, or d )
Nr: Statement or question:
Ma
rk
Your
Answers
1.1 In risk management, uncertainties may include: 2 D
a Events which may or may not happen
b Uncertainties caused by a lack of information
c Uncertainties caused by ambiguity
d All of the above
1.2 The unexpected variability or volatility of returns is known as: 2 B
a Information security risk
b Financial risk
c Human relationship risks
d Marketing risk
1.3 The characteristics of a Level 3 uncertainty (total uncertainty) are: 2 D
a Outcomes are not fully identified and probabilities are unknown
b Outcomes can be predicted with precision
c Outcomes are identified and probabilities are known
d Outcomes are identified but probabilities are unknown
1.4
Having appropriate risk management processes in place is a
function of: 2 A
a The Board
b Employees
c Management
d Directors
Question 1: Multiple Choice – Only write the BEST CORRECT corresponding answer in the
space provided for “Your Answers”. (i.e. either a, b, c, or d) CONTINUED:
Nr: Statement or question: Mark Your Answers
1.5 An example of a risk management plan is: 2 A
a House insurance
b SWOT analysis
c Project failures
d None of the above
1.6 A benefit of risk management is: 2 D
a Effective use of resources
b Ability to quickly grasp new opportunities
c Contingency planning
d All of the above
1.7 One of the key activities in the Risk Management Process is: 2 A
a Resource controls
b Staff meetings
c Cost allocation
d Budgeting
1.8 The practice of taking measures to minimize loss is called: 2 C
a Risk avoidance
b Risk assumption
c Risk prevention
d Risk transfer
1.9
The capture of information about the organization and its operations,
2
including the company’s aims and objectives, involves: B
a Compliance risk
b Strategic risk
c Operational risk
d Security risk
1.10 A Risk Assessment form is used to: 2 D
a Show the severity of a risk
b Indicate risk probabilities
c Estimate the frequency of occurrence of a risk
d Show the organisation’s vulnerabilities and the estimated cost of recovery in the event of damage.
Question 2: Choose the CORRECT answer by selecting a or b.
Nr: Statement or question: Nr: Your Answers
A Work Breakdown Structure breaks larger tasks down into …
2.1 a. smaller tasks (activities) or 2.1 A
b. milestones
Each item in the WBS is generally assigned a unique identifier; these identifiers
2.2
can provide a structure for a hierarchical summation of costs and …
2.2
a. time B
b. resources
The following are examples of possible Threats and Opportunities in a business: B
2.3 a. Quality; Staff; Management; Price
b. Technology; Public expectations; Competitors and competitive actions
The following are examples of possible Strengths and Weaknesses in a business: B
2.4 a. Economic conditions; Expectations of stakeholders or 2.4
b.
Resources ( financial, intellectual, location); Customer service;
Efficiency
FMEA is a method for analysing potential …. early in the development cycle.
2.5 a. reliability problems or 2.5 A
b. risk problems
Risk can be defined in terms of frequency and severity:
2.6
… is how serious it will be if something happens.
2.6
a. Frequency or B
b. Severity
A Hazard and Operability study that systematically analyses each part of a
2.7 system or activity is called … 2.7 A a. HAZOP or
b. HAZOS
Failure Modes and Effects Analysis is a method used
2.8 a. early in the development cycle or 2.8 A
b. at the end of the development cycle
The following aspects should be covered in the risk review process:
2.9 a. Opinions of key external and internal stakeholders; Risk disclosure 2.9 A
exercise; or
b. Resource controls; Planned reaction; Report and monitor performance
Which of the following are risks associated with workplace skills:
2.10 a. Financial risk; Compliance; Reputation 2.10 A b. Changing labour market conditions; changes in existing strategic
partnerships
Total question 2 /10
Question 3:
Carefully read each of the following statements and state whether they are true (T) or false (F):
No Statement T/F
3.1 Two of the factors that make up risk are levels of risk and uncertainty. -True
3.2 Risk management is defined as a set of principles and processes that help minimise the negative impacts of
risks and maximise the positive impacts. – True
3.3 One of the risks faced when developing new products is problems with employee acceptance. – False
3.4 A reactive project manager tries to resolve issues when they occur. _ True
3.5 Risk spreading is when money is put aside to cover losses that might occur. – False
3.6 One method to reduce inter-group conflict is through arbitration. – True
3.7 Reputation is a risk associated with workplace skills. – True
3.8 In financial risk management, market risk is the investor’s risk of loss arising from a borrower who does not
make payments as promised. – False
3.9 Injury or harm to customers due to negligence of the company may result in a public liability claim against the com-
pany. – True
3.10 Compliance risk is the risk of direct or indirect losses arising from failed internal processes or systems. – False
3.11 An event that result in development of new infrastructure and demand management systems that cannot be
man-aged after the event, is called environmental risk. – False
3.12 According to the 3×3 risk matrix, the severity of a risk with a high probability and medium impact is medium. – False
3.13 One of the problems that could be experienced with a risk matrix is that higher qualitative ratings can be
assigned to quantitatively smaller risks by mistake. – True
3.14 One of the elements of the external environment that the SWOT analysis examines, is the human resource skills. – False
3.15 The HAZOP process is a means of solving problems rather than an identifying technique. – False
3.16 In PEST analysis, PEST is an acronym for Political, Economic, Sociological and Training factors. – True
3.17 To run an effective risk management program, one needs to be able to predict failure risk levels throughout the
life of the asset. – True
3.18 Four ways to respond to risk include tolerate, treat, transfer and terminate. – True
3.19 One of the controls that can be put in place to mitigate risk, is additional information. – True
3.20 In an insurance context, pure risk refers to the uncertainty as to whether a voluntary undertaken activity will result
in a gain or loss. – False
