Question

You learn below from the annual report of HS ONE Limited:

“The Company sells consumer products. Trading volume is fluctuating due to the unstable market demand. Yet, the overall business development is promising thanks to the diligent management efforts made. An annual growth rate of 3% in net income is targeted in order to provide a value-for-money investment return for the shareholders. Other operating expenses mainly represented items such as staff costs and monthly rent. Repairs and maintenance expense was incurred and paid at the same time when repairing activities took place.”

HS One Limited
Statement of Profit or Loss
For the years ended 31 December 2017, 2018, and 2019

Year 2019 Year 2018 Year 2017

$$$

Sales revenue 112,860 104,500 110,000

Less: Sales discount (2,257) - -

Net sales 110,603 104,500 110,000

Less: Cost of goods sold (85,386) (82,555) (86,350)

Gross profit 25,217 21,945 23,650

Other operating expenses (11,060) (10,450) (11,000)

Repairs and maintenance expense (6,570) (4,130) (5,500)

Net income 7,587 7,365 7,150

Required:

1. (a) Compute the index-number trend percents for below accounts for each of the three years, using year 2017 as the base year.

   1. (i) Net sales; and

   2. (ii) Net income.

2. (b) Express the statement of profit or loss above in common-size percents for 2017 to 2019.

3. (c) For item (i) in Part (a) above, analyze the trend, the observed results, and the likely reason(s) behind

   respectively.

4. (d) Identify the most likely earnings management technique used regarding “repairs and maintenance

   expense”. Support your answer with explanation.

Answer 1