Refer to Appendix A and lines 74–79. Produce a forecast Income Statement for the year ending 30 September 2019. Assume no other changes.

Mark scheme

Marking points from the official mark scheme (Oct/Nov 2018). The mark or mark type is shown in brackets.

1. [a] OFR applies throughout.
2. [a][1] Revenue: 88 ($m) (Calculation: 80 x 1.1)
3. [a][0] Cost of sales: 10.5 ($m) (Calculation: 10 x 1.05)
4. [a][2] Gross profit: 77.5 ($m) (Calculation: 88 - 10.5)
5. [a][0] Expenses: 55 ($m) (Calculation: 53 + 2)
6. [a][3] Operating profit: 22.5 ($m) (Calculation: 77.5 - 55)
7. [a][0] Financial Expenses: 5 ($m)
8. [a][4] Profit before tax: 17.5 ($m) (Calculation: 22.5 - 5)
9. [a][0] Corporation tax @15%: 2.625 ($m) (Calculation: 17.5 x 0.15). Candidates may round corporation tax to 2.6 or 2.63.
10. [a][5] Profit for the year: 14.875 ($m) (Calculation: 17.5 - 2.625)
11. [a][0] Dividends: 5.95 ($m) (Calculation: 0.4 x 14.875). Allow rounding on dividends to 1 or 2 dp.
12. [a][6] Retained earnings: 8.925 ($m) (Calculation: 14.875 - 5.95)
13. [a] 6 marks requires all figures in table to be correct.
14. [a] Maximum 5 marks if figures not in $m (this is likely to be shown in column heading)
15. [b] GPM = Gross Profit × 100 / Revenue (1 mark if no valid calculation)
16. [b][1] = 77.5/88 × 100 (OFR from 2(a))
17. [b][2] = 88.068% or = 88.1% or = 88%
18. [b] % required for full marks i.e. 88.1 is 1 mark
19. [c][Examiner Note] Usefulness must link to directors / business.
20. [c][Examiner Note] Income statement is not a forecast of cash flow. Discussion solely of cash flow NAQ
21. [c][Knowledge] The income statement forecast is one of the main statements within a business plan. It shows a business's financial performance over an accounting period.
22. [c][Knowledge] Directors can use the forecast income statement forecast to encourage investment in the company
23. [c][Knowledge] Useful when seeking finance
24. [c][Knowledge] Identifies if business is forecast to make profit
25. [c][Knowledge] Monitor performance
26. [c][Knowledge] May be used as stage in setting budgets
27. [c][Knowledge] May be used to guide decisions about future spending / cost issues
28. [c][Application] Shows strongly increasing revenue and profit – this would support application for finance.
29. [c][Application] Finance may have been needed for investments undertaken such as upgrade to facilities and new IT system
30. [c][Application] Recent performance of DLR has been disappointing. The forecast IS can be used to win the continued support of shareholders.
31. [c][Application] Reference to profit margins calculated from the income statement e.g. forecast operating profit margin is 21.25%
32. [c][Analysis] If DLR wishes to raise funds on stock markets directors will need to produce forecast income statement for investors to see. Investors will look at the income before tax to establish their likely return on investment.
33. [c][Analysis] For directors / DLR the important figure is the bottom line net income. Directors can use it to establish % relationships between expenses and revenue, to spot trends in operating profit ratios, and for comparison of actual results against a projection. Thus, it can be used to monitor performance.
34. [c][Analysis] Directors may use forecast income statements to present to financial institutions when seeking finance. For example, interest cover = earnings before interest and tax / interest paid is used to determine whether the profit the business is making is sufficient to cover the interest payments on any loan.
35. [c][Evaluation] Dynamic market; forecasts difficult to make accurately. This limits usefulness.
36. [c][Evaluation] Qualitative information also required to make decisions.
37. [c][Evaluation] Identification of the most useful aspect, to directors/DLR, of a forecast Income Statement that is supported by reasoning e.g. helps set budgets essential in controlling future spending
38. [c][Evaluation] Just one element of the business planning process