Question 1

1.1 ABC presented the statement of comprehensive income below for the latest 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 ABC would love to earn large pross profit by selling its products at a much higher price than its cost. Describe two factors that may prevent if from doing so. (2)

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

1.1.4 Explain why cost of sales, operating expenses and 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 comrehensive income presented above is inadequate to provide a proper interpretation of the financial results of ABC for the financial year. (2)

1.2 The statement of comprehensive income for 2019 and 2018 given below were extracted from the accounting records of Tshabalala Ltd.

Statement of comrehensive income

Statement of comrehensive income

2019 2018

Net sales 1,003,600 901,300

Cost of sales (905,600) (744,300)

Gross profit 98,000 157,000

Selling, general and administrative expenses (92,000) (65,000)

Income from operations 6,000 92,000

Other income/expenses

Non-operating income 124,500 18,000

Interest expense (90,500) (57,000)

Profit before tax 40,000 53,000

Income tax (12,000) (15,900)

Net profit 28,000 37,100

Required: Refer to the statement of comrehensive income of Tsabalala Ltd for 2019 and 2018 and comment on the performance of the company including the operating profit earned. Take into account that the profit margin (percentage profit after tax to sales) for the industry was 4.51% in 2018 and 2.60% in 2019. (4)

1.3 Name three transactions that improves cash flow but does not increase profit.