FINANCIAL REPORTING AND ANALYSIS
MAY 2020
MEMORANDUM
PREPARED BY: MTHOMBENI
0767297208
, Answer ALL questions in this paper. [100 MARKS]
QUESTION 1 (20 Marks)
1.1 State why each of the following user groups require the accounting information from
the financial statements of a business entity:
1.1.1 Banks
To assess the ability of the business to pay interest on loan and to repay loan/ to decide
whether loans can be granted to the business
(2 marks)
1.1.2 Owners
To assess the risk and return on an investment in the business / to assess success and
profitability
(2 marks)
1.1.3 Managers.
Planning, that is determining future actions to be taken
(2 marks)
1.2 Explain THREE (3) limitations of financial statements.
1. Historical cost – financial reports depend on historical costs. All the transactions
record at historical; The value of the assets by the business and the liabilities it
owes changes time and depends on market factors
2. Inflation Adjustments – the assets and liabilities of the business are not
inflation- adjusted. If the inflation is very high, the items in the reports will be
recorded at lower costs and hence not giving much information to the readers
3. Personal judgements – the financial statements are based on personal
judgements. The value of assets and liabilities depends on the accounting
standards used by the person or group of people preparing them .
(6 marks)
1
MAY 2020
MEMORANDUM
PREPARED BY: MTHOMBENI
0767297208
, Answer ALL questions in this paper. [100 MARKS]
QUESTION 1 (20 Marks)
1.1 State why each of the following user groups require the accounting information from
the financial statements of a business entity:
1.1.1 Banks
To assess the ability of the business to pay interest on loan and to repay loan/ to decide
whether loans can be granted to the business
(2 marks)
1.1.2 Owners
To assess the risk and return on an investment in the business / to assess success and
profitability
(2 marks)
1.1.3 Managers.
Planning, that is determining future actions to be taken
(2 marks)
1.2 Explain THREE (3) limitations of financial statements.
1. Historical cost – financial reports depend on historical costs. All the transactions
record at historical; The value of the assets by the business and the liabilities it
owes changes time and depends on market factors
2. Inflation Adjustments – the assets and liabilities of the business are not
inflation- adjusted. If the inflation is very high, the items in the reports will be
recorded at lower costs and hence not giving much information to the readers
3. Personal judgements – the financial statements are based on personal
judgements. The value of assets and liabilities depends on the accounting
standards used by the person or group of people preparing them .
(6 marks)
1
