Question

Question 1 [30 marks] Income statements for Beach Motors (Pty) Ltd. for the past two years are as follows: (amounts in thousands of Rands) 2018 2017 Sales revenue R 70,000 R 60,000 Cost of goods sold 42,000 30,000 Gross profit R 28,000 R 30,000 Selling and administrative expenses 20,000 14,000 Operating income R 8,000 R16,000 Interest expense 2,000 2,000 Income before tax R6,000 R14,000 Income tax expense 2,000 3,000 Net income R4,000 R11,000 Required: 1. Prepare common-size comparative income statements for the two years for Beach Motors (Pty) Ltd (11) 2. What observations can you make about the common-size statements? List at least four observations. (8) 3. Prepare comparative income statements for Beach motors including columns for the Rands s and for the percentage increase or decrease in each item on the statement. (9) 4. Assume that you are interested in identifying reasons for the changes in selling and administrative expenses and income tax expense. Explain where you would look to find additional information about the change. (2)

Answer 1

2018 100% 60% 40% 29% Answer-1 Period Sales Revenues Cost of Good Sold Gross Profit Selling and Administrative Expense Operating income Interest Expense Income Before Tax Income Tax Expense Net income 2018 2017 70000 60000 42000 30000 28000 30000 20000 14000 8000 16000 2000 2000 6000 14000 2000 3000 4000 11000 2017 100% 50% 50% 23% 27% 11% 3% 3% 9% 3% 6% 23% 5% 18%

Answer -2 Gross Profit is reduced by 10% on comparison from 2017 to 2018 Operating Income is significantly reduced by 16% in 2018 Net income decreased substantially by 12% due to 10% increase in Cost of goods sold and 5% increase in Selling expense Selling and Administrative Expense by 5% which resulted in increase of sales by Rand 10000 Answer -3 Period - Sales Revenues Cost of Good Sold Gross Profit Selling and Administrative Expense Operating income Interest Expense Income Before Tax Income Tax Expense Net income Change in Value from 20 - 20 - 2017 to 2018 Increase/Decrease 70000 60000 10000 Increase 42000 30000 12000 Increase 28000 30000 -2000 Decrease 20000 14000 6000 Increase 8000 16000 -8000 Decrease 2000 2000 o Not changed 6000 14000 -8000 Decrease 2000 3000 -1000 Decrease 4000 11000 -7000 Decrease % Increase / Decrease from 2017 to 2018 17% 40% -7% 43% -50% 0% -57% -33% -64%

Additional information to look for Additional information to look for Changes in Income tax Changes in Selling & admin Expense - Expenses - We need to look in to nature of We need to look into changes in federal tax laws such as change Answer-4 selling expense like promotional in rate of tax, disallwances etc. items, gifts, free distribution etc and how much they are adding to volume of the company