Accounting Grade 12: A Complete Guide to Companies and Cash Flow Statements

Companies dominate NSC Grade 12 Accounting. Between the Statement of Comprehensive Income, the Statement of Financial Position, the Statement of Changes in Equity, the Cash Flow Statement and the interpretation questions that follow, roughly 70 of the 300 exam marks live inside company accounting. This guide walks through the layouts, the standard adjustments, and the marks you can pick up with a little discipline.

The Statement of Comprehensive Income

Learn this layout by heart. It runs from Sales at the top to Net profit after tax at the bottom in a fixed order: Sales, Cost of sales, Gross profit, Other income, Gross operating income, Operating expenses, Operating profit, Interest income, Profit before interest expense, Interest expense, Profit before tax, Income tax, Net profit after tax.

Two adjustments catch most learners:

• Depreciation on the diminishing balance method. New assets bought during the year get depreciated proportionally to the months owned. Assets sold during the year get depreciated up to the date of sale. Read the question dates carefully — a purchase on 1 October in a February year-end gets 5/12 of a year's depreciation.
• Bad debts and the provision for bad debts. The bad debts written off go to bad debts expense. The change in the provision goes to bad debts adjustment. If the provision grew, the adjustment is an expense; if it shrunk, it is income.

The Statement of Financial Position

Also called the balance sheet. Assets always equal Equity plus Liabilities. Split assets into non-current and current, and liabilities into non-current and current. Ordinary share capital and retained income together make up shareholders' equity for a company.

Two questions come up every year:

• The tangible/fixed assets note. Show carrying value at the start, additions at cost, disposals at carrying value, depreciation for the year, and carrying value at the end. Marks are awarded per line — write every line even if it is zero.
• The trade and other receivables note. Include net trade debtors (after subtracting the provision for bad debts), other receivables like prepaid expenses or income accrued, and any SARS refund.

The Cash Flow Statement

This is the highest-yield section in the paper. If you know the layout you can score 35+ marks in half an hour. The layout is fixed:

Cash flow from operating activities

• Cash generated from operations (worked out from a mini-reconciliation)
• Interest paid
• Dividends paid
• Tax paid
• Net cash from operating activities

Cash flow from investing activities

• Purchase of tangible assets
• Proceeds from sale of tangible assets
• Investment made / redeemed
• Net cash used in investing activities

Cash flow from financing activities

• Proceeds from issue of shares
• Proceeds from long-term loan / repayment of long-term loan
• Repurchase of shares
• Net cash from financing activities

Then: net change in cash equivalents + opening balance = closing balance.

The three "paid" calculations

Interest paid, dividends paid and tax paid follow the same formula: opening balance owed + expense for the year − closing balance owed = amount paid. Draw a mini T-account if you get confused; the balancing figure is what was paid in cash.

The reconciliation to cash from operations

Start with net profit before tax. Add back non-cash items (depreciation) and add back interest expense (because you list interest paid separately below). Then adjust for changes in working capital: an increase in inventory or debtors is a cash outflow, a decrease is a cash inflow; an increase in creditors is a cash inflow, a decrease is a cash outflow. The result is cash generated from operations.

Interpretation: financial indicators

The last question in every companies paper asks you to comment on the company's performance using ratios. Learn these formulas and, more importantly, what each one tells you:

• Gross profit percentage on sales — pricing and cost of stock.
• Net profit percentage on sales — how well operating expenses are controlled.
• Return on average shareholders' equity — how well the company rewards its owners. Compare to the interest rate available on a fixed deposit; a good return is usually well above that.
• Debt/equity ratio — level of gearing. High gearing means high risk but high potential return.
• Current ratio and acid test ratio — short-term liquidity. Common benchmarks are 2:1 and 1:1 respectively, but a business that turns stock rapidly can operate safely on lower ratios.
• Debtors' collection period and creditors' payment period — how quickly cash comes in and how long the company takes to pay. A company that collects in 30 days but pays in 60 has financed its debtors from its suppliers, which is good — up to a point.
• Earnings per share and dividends per share — shareholder returns. Dividends per share divided by earnings per share is the payout ratio.
• Net asset value per share — the accounting worth of a share. Compare to the issue price of new shares; issuing shares below NAV dilutes existing shareholders.

The examiner wants three things in an interpretation answer: quote the actual number (with units), compare it (to last year, to the industry, or to a benchmark), and state a conclusion (has performance improved or deteriorated, and what should the company do).

Common exam traps

• Forgetting the tax adjustment. When there is a discrepancy between the tax expense and the tax paid, remember that SARS is either owed money by the company (a liability) or owes the company money (an asset).
• Reversing the sign on a change in working capital. An increase in inventory reduces cash flow. Learners often add it back.
• Missing the additional shares issued mid-year in the earnings per share calculation. Use the weighted average number of shares.

A four-week plan

Week 1: Company income statement and balance sheet. Week 2: Company notes — fixed assets, retained income, ordinary share capital. Week 3: Cash flow statement. Week 4: Financial indicators and interpretation.

Do one full company question per week under exam conditions, mark it against the memo, and rewrite the section you scored the least on. By exam day, the layouts will be automatic and your interpretation answers will be sharp.