Question

2015 2016

Sales 3,432,000 5,834,400

COGS 2,864,000 4,980,000

Other expenses 340,000 720,000

Analyze the income statement and explain what we can learn about the company from reading the income statement.

Deprec. 18,900 116,960

total op. costs 3,222,900 5,816,960

EBIT 209,100. 17,440

Int. expense 62,500 176,000

pre tax earnings. 146,600. (158,560)

taxes (40%) 58,640 (63,424)

Net Income. 87,960 (95,136)

Answer 1

Following analysis can be drawn from reading Income Statement:

1. In 2015  ratio of COGS to Sale is 83.45% i.e. (2864000 *100/3432000) but this ratio increase to 85.36 % in 2016 (4980000 * 100 /5834400). It implies that inspite of increase in sales by 70% ((5834400-3432000)/3432000) ratio cost of goods sold to sale is increased.

2. Similarly ratio of other expenses to sale is 9.91 % in 2015 (340000 *100/3432000) but it increases to 12.34% in 2016 (720000*100 /5834400).

All this shows that both COGS and Other expenses donot increase in same proportion to sales as it was in 2015, but it increases at high rate. It may be due to the reason that cost of expenses has been increased in 2016 in comparison to 2015 but sale price cannot be increased at same rate.

3. Depriciation has increased manifold from 18900 to 116960. It shows that huge investment in fixed assets has been made. It can also be the reason of increase in sale that, company has increased its production capacity and therefore its sale increases and high ratio of expenses to sale in 2016 in comparison to 2015 may be due to the fact that company has to offer discount to sell increased units and therefore expenses rise more in comparison to sale.

4. Similarly Interest expense is also increased from 62500 to 176000 i.e. by 181.6% ((176000-62500)/62500). It shows that to make investment in fixed assets, resort to borrowing is also made.

All this lead to loss in 2016 of 158560 but as entity is in 40 % tax bracket, net loss is 95136.