Question: You have been presented with Kelliher Ltd s income statement for

You have been presented with Kelliher Ltd.'s income statement for the year ended September 30, 2017.

Kelliher Ltd.
Income Statement
For the Year Ended September 30, 2017
Sales ............. $5,100,000
Cost of sales.......... 2,295,000
Gross margin.......... 2,805,000
Salaries and wages....... 1,101,600
Depreciation.......... 394,800
Selling and administrative.... 580,000
Interest.......... 200,000
Other............. 130,000
Unusual items—lawsuit revenue... 400,000
Income before income taxes..... 798,600
Income tax expense....... 239,580
Net income.......... $ 559,020
In addition, you have learned the following:
• Cost of sales in 2017 includes a write-down of inventory of $118,000. The amount of the write-down is about three times larger than the amount usually written down each year to account for non-salable inventory or inventory that will have to be sold at a deep discount.
• Sales include $500,000 for a one-time-only sale to the government of a foreign country. The gross margin percentage on this sale was 60 percent, which is significantly higher than what Kelliher normally experiences.
• Selling and administrative costs includes a $80,000 retirement bonus paid to the former CEO.
• Kelliher signed a contract with its employees that goes into effect on October 1, 2017. The contract increases union employees' wages and benefits by 4 percent.
Wages to employees covered by the contract represent 70 percent of salaries and wages expense in 2017. Wages to other employees are not expected to change during 2018.
• During 2017, Kelliher 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 Kelliher of $400,000.
• Sales (excluding the one-time sale note above) are expected to grow by 7 percent during 2018. Inventory costs are expected to increase by 8 percent, selling and administrative expenses are expected to decrease by 2 percent, interest expense isn't expected to change, depreciation expense is expected to increase by 3 percent, and other expenses are expected to increase by 5 percent.

a. Use Kelliher's 2017 income statement and the additional information to forecast an income statement for 2018.
b. Explain and interpret Kelliher's actual performance in 2017 and the performance that you forecast for 2018.
c. Discuss the difficulties that can occur with forecasting the future performance of an entity and the problems with using IFRS or ASPE financial statements for forecasting.

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