Course: Basic Finance

tudy: III, 2018-2019

Lecturer, PhD Meral KAGITCI

Seminar nr. 7 – Income Statement Analysis

INCOME STATEMENT- Financial statement that shows the revenues,expenses, and net income of a
firm over a period of time

1. During 2018 LOVELY Co. had the following performance:

Operating Revenues 920,000 RON

Cost of Goods Sold (710,000) RON
Selling, General and Administrative Expenses (98,000) RON
Depreciation (9,000) RON

Operating Income 103,000 RON

Other Income 0 RON
Other Expenses (except Interest) 0 RON

Earnings before Interest and Taxes (EBIT) 103,000 RON

Interests (43,000) RON

Earnings Before Taxes (EBT) 60,000 RON

Corporate Income Tax (50%) (30,000) RON

Net Income 30,000 RON

Course: Basic Finance
tudy: III, 2018-2019
Lecturer, PhD Meral KAGITCI

Requirements:
a) Analyze the types of revenues and costs.
b) What is the connection between the IS and the BS of Lovely Co. (Depreciation,
Accumulated retained earnings).
c) Build the Statement of Changes in Equity

2. The financial data of the ALFA Co’s Income Statement for 2018 look as follows:
a. sales revenues: € 32,000
b. salaries: : € 3,000
c. interest expenses: : € 500
d. raw materials expenses: € 8,000
e. depreciation and amortization: : € 1,000
f. other expenses with services and materials: : € 8,000
g. taxes on land and buildings: : € 100
h. corporate income tax: : € 100

Requirements:
a) build the IS (Anglo-Saxon and Romanian approach);
b) determine the Value Added and its allocation
c) if the allocation of value added in 2017 was: 10% to employees, 30% to creditors,
15% to the state, 5% to the company and 40% to the shareholders, comment the
evolution of value added allocation and identify possible future problems.

3. Berry Corporation produces tea pots which are sold with $15/piece. For any
production of less than 400,000 pieces the value of fixed costs is $700,000. The
variable cost is $10/piece.

a) What is the profit or the loss if the volume of sales is 125,000 pieces? What if is it
is 175,000 pieces?
b) What is the level of the breakeven point? Draw it!
c) What is the operating leverage? If the average level of operating leverage in the
field of tea pot production is 2.5, comment on Berry Corporation’s risk of operating
activities compared to that of its competitors.

HOMEWORK:

1. Assume that the financial statements for Lillian's Bakery reveal that the bakery's fixed
costs are $49,000 and its variable costs per unit of production (loaf of raisin coffee cake) are
$.30. Further assume that its sales revenues are $1.00 per loaf.
Determine the quantity that has to be produced so that Lilian’s Bakery reaches the
breakeven point. What is the value of sales revenues at breakeven?

2. We know the following about BETA Co:

a. sales revenues: $10,000, obtained from selling 1,000 pairs of shoes;
b. variable operating costs: $5,000;
c. depreciation: $2,000;
Course: Basic Finance
tudy: III, 2018-2019
Lecturer, PhD Meral KAGITCI

d. interests expenses: $1,000;

a) determine the operating breakeven point in quantity and sales revenues.
b) If sales increase by 20% what is the value of operating leverage?
c) If sales increase with an additional 10%, what will be the increase in EBIT?

Ex.16/pg 139 (Fundamental of Corporate Finance)

Income Statement. A firm’s income statement included the following data. The
firm’s average tax rate was 20 percent.
Cost of goods sold $8,000
Income taxes paid 2,000
Administrative expenses 3,000
Interest expense 1,000
Depreciation 1,000
a. What was the firm’s net income?
b. What must have been the firm’s revenues?
c. What was EBIT?