Grade 12 Accounting Questions and Answers for Term 3

Grade 12 Accounting Questions and Answers for Term 3 September for 2023, 2022, and 2021

Welcome to our comprehensive guide on Grade 12 Accounting Questions and Answers for Term 3 September for 2023, 2022, and 2021, designed to aid in your revision and understanding of key accounting concepts. This guide covers essential topics including financial statements, liquidity, gearing, profitability, and solvency. Whether you’re preparing for exams or looking to deepen your understanding of accounting principles, this resource offers detailed explanations and scenario-based questions that reflect real-world applications. Download the accompanying PDF to access additional exercises and solutions, perfect for thorough revision and practice. Let’s dive into the world of accounting and enhance your knowledge for academic success!

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Grade 12 Accounting Questions and Answers Term 3 2022

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Grade 12 Accounting Questions and Answers Term 3 Revision

Are Shareholders Responsible for the Running of the Company?

Answer: False

Explanation: Shareholders are the owners of a company, but they are not directly responsible for its day-to-day operations. The running of the company is typically managed by the board of directors and the executive team, who are appointed by the shareholders. The directors and executives make decisions on the company’s operations, strategies, and policies.

Does the Statement of Financial Position Show the Financial Position of a Company at a Specific Date?

Answer: True

Explanation: The Statement of Financial Position, also known as the balance sheet, provides a snapshot of a company’s financial condition at a specific point in time. It lists the company’s assets, liabilities, and shareholders’ equity, showing what the company owns and owes at that particular date.

Does the Statement of Comprehensive Income Show the Profit or Loss for the Financial Year?

Answer: True

Explanation: The Statement of Comprehensive Income, also known as the income statement, details a company’s financial performance over a specific period, usually a financial year. It includes revenues, expenses, and other comprehensive income items, culminating in the net profit or loss for that period. This statement is crucial for understanding a company’s profitability.

What is the Use of Borrowed Capital (Loans) to Finance the Business?

Answer: Gearing

Explanation: Gearing refers to the use of borrowed funds, or debt, to finance a company’s operations and investments. It measures the proportion of a company’s capital that comes from debt, as opposed to equity. High gearing indicates a higher reliance on debt, which can increase the financial risk if the company struggles to meet its debt obligations.

What is the Ability of the Business to Pay Short-Term Debts?

Answer: Liquidity

Explanation: Liquidity is the measure of how easily a business can pay off its short-term liabilities with its short-term assets. High liquidity means the company can quickly convert its assets into cash to meet immediate financial obligations, ensuring smooth operations and financial stability.

What is the Ability to Settle All Debts Using the Assets of the Business?

Answer: Solvency

Explanation: Solvency is the ability of a company to meet its long-term obligations and financial commitments. It indicates whether a company’s assets are sufficient to cover all its liabilities. A solvent company can continue operating in the long term without the risk of bankruptcy or financial distress.

Can Liquidity Impact a Company’s Short-Term Financial Stability?

Answer: True

Explanation: Liquidity directly impacts a company’s short-term financial stability because it reflects the company’s ability to meet its short-term obligations. A company with high liquidity has sufficient cash or easily convertible assets to pay its immediate debts and expenses, thus maintaining operational stability and preventing financial crises.

What Does Profitability Indicate About a Business?

Answer: Profitability

Explanation: Profitability measures a company’s ability to generate earnings relative to its revenue, expenses, and other costs incurred during a specific period. It indicates how efficiently a company is using its resources to produce profit. High profitability is a sign of a healthy business, capable of generating significant returns for its shareholders.

Does Gearing Influence Financial Risk?

Answer: True

Explanation: Gearing influences financial risk because it measures the proportion of a company’s funding that comes from debt versus equity. High gearing means the company has a large amount of debt relative to its equity, which can increase financial risk. If the company fails to generate enough income to cover its debt payments, it may face insolvency or bankruptcy.

Can a Company Be Solvent But Not Liquid?

Answer: True

Explanation: A company can be solvent but not liquid. Solvency means the company’s assets exceed its liabilities, allowing it to cover all its debts. However, liquidity refers to the company’s ability to pay short-term obligations with its short-term assets. A company might have valuable long-term assets (indicating solvency) but insufficient cash or liquid assets to meet immediate liabilities (indicating poor liquidity).

Why is Understanding the Statement of Comprehensive Income Important for Investors?

Answer: It shows the profit or loss for the financial year.

Explanation: The Statement of Comprehensive Income is crucial for investors because it details a company’s financial performance over a specific period. By showing the total revenues, expenses, and resulting profit or loss, this statement provides investors with insights into the company’s profitability, operational efficiency, and overall financial health. It helps investors make informed decisions about buying, holding, or selling shares based on the company’s performance trends.

Scenario Question: Assessing a Company’s Financial Health

Scenario: You are an investor considering investing in Company X. The company’s financial statements for the last year show the following key figures:

• Current Assets: $1,000,000
• Current Liabilities: $800,000
• Total Assets: $5,000,000
• Total Liabilities: $3,500,000
• Net Income: $500,000
• Total Equity: $1,500,000
• Total Revenue: $2,000,000

Using these figures, answer the following questions:

How Would You Assess the Company’s Liquidity?

Answer: To assess the company’s liquidity, we calculate the Current Ratio, which is the ratio of current assets to current liabilities:

Current Ratio = Current Assets / Current Liabilities = $1,000,000 / $800,000 = 1.25

Explanation: A Current Ratio of 1.25 indicates that the company has $1.25 in current assets for every $1.00 of current liabilities. This ratio suggests that the company has adequate liquidity to meet its short-term obligations, though it could benefit from improving this ratio to further strengthen its financial position.

What Does the Company’s Gearing Ratio Indicate?

Answer: To determine the company’s gearing, we look at the ratio of total liabilities to total equity:

Gearing Ratio = Total Liabilities / Total Equity = $3,500,000 / $1,500,000 = 2.33

Explanation: A Gearing Ratio of 2.33 means that Company X has $2.33 of debt for every $1.00 of equity. This indicates a high level of financial leverage, suggesting that the company relies heavily on debt financing. While this can amplify returns during good times, it also increases financial risk, especially if the company faces challenges in generating sufficient income to cover its debt obligations.

Is Company X Solvent Based on the Given Information?

Answer: To determine solvency, we compare total assets with total liabilities:

Solvency Assessment: Total Assets = $5,000,000; Total Liabilities = $3,500,000

Explanation: Company X has more assets than liabilities, indicating it is solvent. The company’s total assets exceed its total liabilities by $1,500,000, meaning it can cover all its debts. This positive equity suggests the company has a solid financial base and is not at immediate risk of insolvency.

How Would You Evaluate the Company’s Profitability?

Answer: Profitability can be assessed using the Net Profit Margin:

Net Profit Margin = (Net Income / Total Revenue) x 100 = ($500,000 / $2,000,000) x 100 = 25%

Explanation: A Net Profit Margin of 25% indicates that Company X is generating a profit of $0.25 for every dollar of revenue. This is a strong profitability ratio, suggesting efficient management and healthy operations. A higher net profit margin generally reflects well on the company’s ability to control costs and effectively convert revenue into profit.

Should You Be Concerned About Company X’s Financial Health?

Answer: While Company X shows good liquidity and profitability, its high gearing ratio might be a concern for potential investors.

Explanation: The high level of debt relative to equity (2.33 gearing ratio) suggests that the company is heavily leveraged. This increases financial risk, particularly in economic downturns or if the company faces revenue shortfalls. Potential investors should consider the stability of the company’s income streams and its ability to service its debt. The positive solvency and strong profitability are reassuring, but the reliance on debt financing could pose risks if not managed carefully.