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)

   2017    2018

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	R 6,000	R14,000
Income tax expense	2,000	3,000
Net income	R 4,000	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.  

Answer 1

a)
	2017	%	2018	%
Sales revenue	70000	100.00%	60,000	100.00%
Cost of goods sold	42,000	60.00%	30,000	50.00%
Gross profit	28000	40.00%	30000	50.00%
Selling and administrative expenses	20,000	28.57%	14,000	23.33%
Operating income	8000	11.43%	16000	26.67%
Interest expense	2,000	2.86%	2,000	3.33%
Income before tax	6000	8.57%	14000	23.33%
Income tax expense	2,000	2.86%	3,000	5.00%
Net income	4000	5.71%	11000	18.33%
b)
1) Net Income has increased from Year 2017 to 2018 not just in dollar terms, but also as a percentage of sales.
2) Expenses has reduced not just in dollar terms, but also as a percentage of sales
3) Income before tax has increased not just in dollar terms, but also as a percentage of sales.
4) Sales revenue has decrease in dollar terms
c)	2017	2018	Increase/ decrease	%
Sales revenue	70000	60,000	-10,000	-14%
Cost of goods sold	42,000	30,000	-12,000	-29%
Gross profit	28000	30000	2,000	7%
Selling and administrative expenses	20,000	14,000	-6,000	-30%
Operating income	8000	16000	8,000	100%
Interest expense	2,000	2,000	0	0%
Income before tax	6000	14000	8,000	133%
Income tax expense	2,000	3,000	1,000	50%
Net income	4000	11000	7,000	175%
d)
Selling and administrative expenses has reduced by 30% as we can see the sales revenue also reduced by 14%.Income tax expenses has increased 50% as the company cut done its expenses that has helped the company to increase the net income.High net profit margin is also an indicator that management exercises good control of its costs and expenses. we should study the income statement  thoroughly.