Question

QUESTION 1 (20)   
1.1 XML Limited presented the Statement of Comprehensive Income below for its most recent financial year.   

Sales 743 000
Cost of sales 402 000
Gross profit 341 000
Operating expenses 145 000
Income from operations 196 000
Other income 1 100
Other expenses 26 000
Profit before tax 171 100
Income tax 60 000
Net profit 111 100
  
1.1.1 Explain the difference between “sales” and “other income”. (4)

1.1.2 XML Limited would like to earn a large gross profit by selling its products at a much higher price than its cost. Describe two factors that may prevent it from doing so. (2)

1.1.3 Explain how cost of sales, operating expenses and other expenses are different from one another. (3)

1.1.4 Explain why cost of sales, operating expenses, other expenses and income tax are listed separately in the Statement of Comprehensive Income rather than being lumped together as one item. (2)

1.1.5 Explain why the Statement of Comprehensive Income presented above is inadequate to provide a proper interpretation of the financial result of XML Limited for the financial year. (2)

Answer 1

solution:-

(1) In this particular queston ,

we have to describe the meaning of sales and other income

we can earn revenues by the help of two operations one is from the ordinary activities ( also known as core business activity )  and another is from Non - ordinary activities.

If we talk about ordinary revenues then it is related to the main course of business which generates incomes for the organisation like sales of goods or services is termed basically as sales.

If we generate revenues from other than the ordinary activities than basically it is termed as other income like interest received from bank deposits, sales of fixed assets and other kind of revenues which is indirectly born to the conmpany is termed as other income.

(2) Sometimes company charged much higher price to earn larger gross profits for their products but there will be some factors which will prevent it from doing so,

(a) competition - it will cause organisation to not enhance the price of products in the perfect market as the demand of products will fall

(b) Goodwill ; - This is the second prevention as we know that for any organisation goodwill matters and sudden increase in price of products will totally unsatisfy consumers and they can start unfollow.

(3) Cost of sales:- It is the cost which is related to produce the product which has been sold.

operating expenses :- It is those expenses which incurred in the normal course of business

Other expenses : - It is related to those expenses which is specifically borne to earn other income

(4) For presentation we use statement of comprehensive income and show all calculations step by step to know the exact value for profits which will be used in ratio analysis, also to find the value of contribution, EBIT, EBT, EAT and leverage analysis.

(5) In the given question we can see here that a proper presentation for comprehensive income is not done , we must follow these below steps for proper presentation of Income .

Sales

Less :- Variable cost

Contribution

Less:- Fixed Cost

Profit Before Interest and tax

Less:- Interest

Profit before tax

Less:- Tax

Profit after tax