Topic 2

Question 1

Set of financial statements

Answer 1

1. Statement of financial position
2. Statement of comprehensive income
3. Statement of changes in equity
4. Statement of cash flows
5. Notes

Question 2

Triple bottom line

Answer 2

The annual reports should contain financial statements ( that report on profit), but also reports on the company’s role in terms of people and the planet

Question 3

Statement of financial position

Answer 3

Consists of assets (what the company owns), liabilities (what the company owes), and Owner’s equity (the owners’ interest the company in the form of shares, retained earnings and accumulated reserves)

Assets = liabilities + owner’s equity

Question 4

Assets

Answer 4

All the items that the company owns and that can be utilised in its operations to generate an income.

It shows how a business applies its financial resources; namely, the capital that the owners contributed and the debt that the company acquired

Non-current assets (long-term tangible or intangible assets) and current assets (short-term)

Question 5

Equity

Answer 5

Equity in a Statement of Financial Position is the total amount that the owners invested in the business and the amount of profit that was retained in the business.

Any profit that is not paid out to its owners increases the value of their ownership.

Net worth [equity] = assets - liabilities

Question 6

Liabilities

Answer 6

The sum of all the amounts that the business owes and has to repay at some point in the future.

In many respects, liabilities are the opposite of assets and detract from the value of the business

Non-current liabilities and current liabilities

Question 7

Statement of comprehensive income

Answer 7

purpose of the Statement of Comprehensive Income is to show the operational income and expenses of the business over a particular period of time and to indicate whether a profit or a loss was made

Information based on the accrual principle

Question 8

Income

Answer 8

The revenue (excluding VAT) that accrues to the business over the period of the statement.

It can be separated into revenue received from business operations and revenue received from assets owned by the business.

Examples of income include commission earned, interest earned, sales, rent received, and discount received

Question 9

Expenses

Answer 9

The costs that the business incurs during operations over the period of the statement

Incurred in the normal operation of the business

Examples include purchases, salaries, wages, rent, general expenses, repairs, insurance, fuel, commission paid, interest paid, discount allowed, depreciation, etc.

Question 10

Sales/revenue/turnover/total sales

Answer 10

The income from the business operations of the business

Question 11

Cost of sales

Answer 11

The total direct costs of business operations of business.
It comprises regular and ongoing expenses linked to sales

Financial planners and lawyers do not really have cost of sales expenses

The cost of manufacturing products, purchasing goods for sale, and raw materials

Question 12

Gross profit

Answer 12

refers to all sales accrued in the period less the cost of sales

Question 13

Other income

Answer 13

The revenue that a business receives from an asset

Rental from extra office space that is rented out or dividends from company-owned investments

Question 14

Operating expenses

Answer 14

The costs of doing business that are operational in nature and cannot be defined as cost of sales.

An easy rule of thumb for these expenses is ‘the costs that a business would incur whether sales
are made or not’

E.g. Salaries, rentals, water and electricity, Internet, maintenance, fees (for accountants and lawyer)

Question 15

Depreciation

Answer 15

non-cash expense and is the value by which assets have decreased over a period of time.

The reduction in the value of a non-current asset over its useful life

Question 16

Net profit

Answer 16

The profit made by the business after the cost of sales and business expenses have been deducted from sales

Question 17

Tax

Answer 17

Calculated on the net profit of the business

Question 18

Net profit after tax

Answer 18

The profit that is left after all expenses and taxes are paid

Distributed to the owners as a dividend and/or retained by the business to be used at some point in the future

Question 19

Statement of Changes in Equity

Answer 19

Provides a link between the Statement Of Financial Position and the Statement of Comprehensive Income.
It is the statement that shows the change in the equity value of the Statement of Financial Position through the outcome of the Statement of Comprehensive Income

Question 20

Movements in the shareholders’ equity

Answer 20

1. Net profit or loss (attributable to shareholders) during the accounting period
2. The increase or decrease in capital reserves
3. Dividend payments to shareholders
4. Gains and losses recognized directly in equity
5. The effect of changes in accounting policies
6. The effect of correcting a prior period error

Question 21

The Statement of Cash Flows

Answer 21

Differs from the Statement of Comprehensive Income, in that it only reports on cash moving in and out of the business, and ignores the accrual principle in the process.

Question 22

Statement of cash flow sections

Answer 22

1. cash flow from INVESTING activities: includes transactions involving acquisition or disposal of fixed assets and investments
2. Cash flow from FINANCING activities: includes the cash effects of ransactions involving the owners and long-term creditors.
3. Cash flow from OPERATING activities: includes all transactions that are not financing or investment activities

Question 23

Business valuation methods

Answer 23

Intrinsic value method

Earnings yield method

business can then be valued by comparing it to a similar business
value on the in the same industry.

Question 24

Intrinsic value method

Answer 24

Most appropriate if the main value of the business is contained in its assets

It calculates the total net value of the business

Question 25

Intrinsic value method steps

Answer 25

1. Determine the market value of the total assets 2. Determine the market value of the total liabilities 3. Deduct the total liabilities from the total assets

Question 26

Earnings yield method

Answer 26

Suitable where the asset base of the business is not directly related to the earning potential of the business, and the value business of the business is mainly contained in the potential future earnings of the business For service-based businesses like accounting firms Ignores the capital that the owners may have invested in the business

Question 27

Earnings yield method steps

Answer 27

1. Obtain the current net profit after tax 2. Determine the yearly growth of the business 3. Calculate the expected future net profit after tax 4. Determine the fair rate of return 5. Capitalize the expected future net profit after tax at the fair rate of return

Question 28

Income tax implications on sole proprietor

Answer 28

All income from the business will be taxed in the hands of the business owner as an individual, as it accrues to them personally. It will be added to any other income that may accrue to the individual Rebates available to the individual will also apply Sole proprietor is a provisional taxpayer and can qualify for a simplified turnover tax regime

Question 29

Capital gains tax implications for sole proprietor

Answer 29

Taxed in the hands of the owner. Also qualifies for the annual exclusion available to individuals. The deceased estate of a sole proprietor may be liable for CGT, but a special exemption applies if certain conditions are met.

Question 30

Estate duty implications for sole proprietor

Answer 30

All the business assets (net of liabilities) will form part of the estate of the sole proprietor in the event of their death. Depending on the size of the business, this may cause a substantial estate duty liability in the sole proprietor's personal estate

Question 31

Income tax implications for partnership

Answer 31

Not a separate legal entity, so it doesn't pay tax in its own name Each partner's profits will be added to their other taxable income and will pay tax on the taxable amount as an individual Partners must register as provisional taxpayer and pay tax accordingly

Question 32

Capital gains tax implications for partnership

Answer 32

Treated the same way as for sole proprietor It will be taxed in the hands of the individual Partners

Question 33

Estate duty implications for partnership

Answer 33

When a partner dies, the value of their share in the business will be included in their estate for estate duty purposes

Question 34

Income tax implications for close corporations

Answer 34

It is a tax paying entity in its own right. Pays income tax on their taxable income at the flat rate for companies. Provisional taxpayers and can qualify for two special tax compensations

Question 35

Capital gains tax implications for close corporations

Answer 35

Subject to CGT at the inclusion rate as applicable to companies and CCs. This rate is higher than the CGT rate that applies to individuals, and CCs do not qualify for an annual exclusion If member sells their interest or passes away, this gain will be subject to individual CGT

Question 36

Estate duty implications for close corporations

Answer 36

The membership interest of the deceased will form part of their estate for estate duty purposes

Question 37

Income tax implications for companies

Answer 37

Pays on taxable income at the flat rate for companies Companies are provisional taxpayers Qualifying small businesses and qualifying microbusinesses have special tax tables that apply

Question 38

Capital gains tax implications for companies

Answer 38

Subject to CGT at the inclusion rate as applicable to companies and CCs Higher than the rate that applies to individuals

Question 39

Estate duty implications for companies

Answer 39

The shares of the deceased will form part of their estate for estate duty purposes

Question 40

Dividend withholding tax implications for companies

Answer 40

All South African residents who are natural persons and all foreign investors will be subject to dividend withholding tax When declared, they have to deduct the dividend withholding tax before paying out the remainder to the shareholders Foreign dividends are also taxed at the dividend tax rate; however, since foreign authorities will not necessarily apply withholding tax at the same rate, as special formula is applied to calculate the exempt portion

Question 41

Special tax regimes

Answer 41

1. Microbusinesses turnover tax regime 2. Tax for small business corporations

Question 42

Microbusinesses turnover tax regime

Answer 42

Natural persons, private companies, cooperatives, partnerships, and CCs, with a qualifying turnover of no more than R1 000 000 for the year of assessment, can qualify as a microbusiness For partnerships, the collective turnover of the whole Partnership is taken into account Pays turnover tax and is exempt from CGT and dividend withholding tax (max: R200 000 per year)

Question 43

How is taxable turnover of a microbusiness determined

Answer 43

TOTAL amount received (not accruals) PLUS all investment income (only applies to CCs and companies) BUT excluding: all capital receipts from conducting business and any amount exempt from income tax

Question 44

Persons and entities that do not qualify as microbusinesses

Answer 44

1. Trust 2. Professional service business 3. Natural persons (if person holds any interest in company, is a labour broker without an exemption certificate, is a personal service provider, etc.) 4. Company or CC (if year of assessment doesn't end on end of February, is a tax-exempt recreational club, is a tax-exempt public benefit organization, etc.)

Question 45

Tax for small business corporations

Answer 45

If a business qualifies, it benefits from a progressive scale of taxation and favorable concessions on the write-off of assets Close corporations, cooperatives, private companies and personal liability companies qualify to be registered as a small business corporation (SBC)

Question 46

Conditions for application as a SBC

Answer 46

1. All the shares in the company or member interest of the CC are held by individuals 2. None of the shareholders hold interest in any other company or any other CC or cooperatives (those that are inactive have assets less than R5 000 and have taken steps to liquidate, wind-up, or deregister) 3. The gross income does not exceed R20 million for the year of assessment 4. Not more than 20% of the gross income of the company/corporation comprises investment income or from rendering a personal service