QUESTION ONE                                                                                                                  [50]

Light It Up (Pty) Ltd engages in the manufacture and retail of luxurious, scented candles. The company started its operations 5 years ago when Anne Bing saw a need in the market for personal care items, specifically these candles. The company hit a slump during the COVID pandemic but quickly began to grow as the hospitality industry started to operate once more. Light It Up (Pty) Ltd supplies boutique hotels and restaurants with their signature candles. Anne Bing has approached you, her friend for some advice regarding her company and its financial records. You have recently qualified as a chartered accountant and have explained to Anne Bing that ‘financial statements are prepared and presented at least annually and are directed toward the common information needs of a wide range of users.’

During the 2022 financial year, Light It Up (Pty) Ltd, purchased machinery for R90 000 on 01/01/2021. The transport costs for bringing the machinery to location was R5 000. Installation fees were R15 000. Initial operating losses were R10 000. The depreciation on the machinery is 20% p.a. using the cost method; the machinery has a nil residual value. The entity uses the revaluation method to measure property, plant and equipment.

The company revalues its machinery on an annual basis and records the fair value adjustments. The following fair values were given:

Fair value 31/12/2022                        R90 000

Fair value 31/12/2023                        R54 000

Fair value 31/12/2024                        R44 000

Required:

1.1       List the users of financial statements identified by The Accounting Framework and briefly discuss their needs for information.                                                        (6)

1.2       Briefly discuss the relationship between the information needs of investors and of other users.                                                                                                           (6)

1.3       Calculate the cost of the machinery.                                                                         (13)

1.4       Prepare the journal entries to record the transaction above for the years ended 2021, 2022 and 2023 and 2024

Answers to Above Questions on Financial Management

Answer 1: When it comes to the uses of financial statements as identified in the accounting framework, there are different users of financial statements having different purposes. Some of the important users include the investors, debtors, creditors, management, employees, government, tax authorities, potential investors and many more.