Help with Financial Management

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

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READ THIS BEFORE YOU DO ANYTHING ELSE!
1.
TUTORIAL

  • INTRODUCTION
  • 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 –

  • INTRODUCTION TO FINANCIAL
  • MANAGEMENT
    Lesson
    1.1
    Financial Management Defined
    4
    Lesson
    1.2
    Basic Financial Concepts
    3

  • CHAPTER 2
  • – 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

  • CHAPTER 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:

      CHAPTER 3 – BASIC BUSINESS CALCULATIONS
      Lesson 3.1
      INTRODUCTION TO FINANCIAL
      MANAGEMENT
      CHAPTER 2
      BASIC FINANCIAL ACCOUNTING AND STATEMENTS
      INTRODUCTION
      CHAPTER 3
      BASIC BUSINESS CALCULATIONS

    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

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