You have been presented with Everell Ltd.s income statement for the year ended September 30, 2015. In
Question:
You have been presented with Everell Ltd.’s income statement for the year ended September 30, 2015.
In addition, you have learned the following:
* Cost of sales in 2015 includes a writedown of inventory of $295,000. The amount of the writedown is about three times larger than the usual yearly amount to account for non-saleable inventory or inventory that will have to be sold at a deep discount.
Sales includes $1,250,000 for a one-time sale to a foreign government. The gross margin percentage on this sale was 60 percent, which is significantly higher than what Everell normally experiences.
* Selling and administrative costs includes a $200,000 retirement bonus to the former CEO.
* Everell signed a contract with its employees, effective October 1, 2015. The contract increases union wages and benefits by 5 percent. Wages to union employees represent 70 percent of salary and wage expense in 2015. Wages to other employees are not expected to change during 2016.
During 2015 Everell won a lawsuit against a former employee for divulging confidential information to her new employer. The employee and her new employer are required to pay damages to Everell of $3,000,000.
* Sales (excluding the one-time sale note above) are expected to grow by 8 percent during 2016. Inventory costs are expected to increase by 9 percent, selling and administrative expenses to decrease by 2 percent, interest expense isn’t expected to change, depreciation expense to increase by 2 percent, and other expenses to increase by 4 percent.
Required:
a. Use Everell’s 2015 income statement and the additional information to forecast an income statement for 2016.
b. Explain and interpret Everell’s actual performance in 2015 and the performance you forecast for 2016.
c. Discuss the difficulties with forecasting the future performance of an entity and the problems with using IFRS financial statements for forecasting.
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