Question

a) The continuity of a business may be influenced by its earnings power and concise forecasting for valuation. Explain the elements that impacts earnings forecasts.

b) The following information has been extracted from the statement of income of ABC Ltd for the year 2016 and 2017.

2017 2018

sh'000 sh'000

sales 190,554   176,781

cost of goods sold 77,741 72,490

______________ _______________

gross profit 112, 813 104,291

selling, general and adminisrative expenses 90,377 81,509

Depreciation, depletion and amortization 6,316 5,907

_____________    ______________

operating profit 16,120 16,875

interest expense 0 148

Non operating income 2,930 2,363

______________   ______________

profit before tax 19,050 19,090

tax 7,811 8,010

______________   ______________

Net income 11,239 11,080

______________ ______________

Required:

i) perform a vertical common size analysis for the two years

ii) Explain how the figures obtained in (i) above may influence your forecasts for the year 2018

Answer 1

	a)	Elements that impact Earning Forecast:
		Sales Growth
		Percentage of Variable costs
		Expected Change in Fixed Costs
		Expected Change in Prices
		Tax Rates
			2016		2017
			A	B=A/190554	C	D=C/176781
		Sales	190,554	100.00%	176,781	100.00%
		Cost of goods sold	77,741	40.80%	72,490	41.01%
		Gross Profit	112,813	59.20%	104,291	58.99%
		Selling ,General and admin expenses	90,377	47.43%	81,509	46.11%
		Depreciation and amortization	6,316	3.31%	5,907	3.34%
		Operating Profit	16,120	8.46%	16,875	9.55%
		Interest expense	0	0.00%	148	0.08%
		Non operating Income	2,930	1.54%	2,363	1.34%
		Profit Before Tax	19,050	10.00%	19,090	10.80%
		Tax	7,811	4.10%	8,010	4.53%
		Net Income	11,239	5.90%	11,080	6.27%
	ii)	Figures above will help forecast of 2018
		Sales has declined
		2018 sales may be lower
		Cost of goods sold will be considered approximately 41% of sales