Survey Of Accounting
Survey Of Accounting
4th Edition
ISBN: 9780077862374
Author: Edmonds, Thomas P.
Publisher: Mcgraw-hill Education,
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Chapter 14, Problem 21P

a)

To determine

Determine the percentage increase in sales and prepare the pro forma income statement.

a)

Expert Solution
Check Mark

Explanation of Solution

Income statement: The financial statement which reports revenues and expenses from business operations and the result of those operations as net income or net loss for a particular time period is referred to as income statement.

Compute the percentage of increase in sales:

Percentage increase in sales=Projected salesCurrent salesCurrent sales×100=$3,635,000 (1)$3,200,000$3,200,000×100=13.59%

Hence, the percentage of increase in sales is 13.59%.

Prepare the pro forma income statement:

Company P
Income Statement
For the year ended
ParticularsAmount
Sales revenue (1)$3,635,000
Cost of goods sold$2,544,500
Gross profit$1,090,500
Selling & administrative expenses (2)$423,500
Net income$ 667,000

Table (1)

Working note 1: Calculate the sales value:

The company expects net income to increase by 15%, so the increased net income is $667,000($580,000+($580,000×15%)) . The cost of goods sold is 70% or 0.70 and the selling and administrative expense is 10% or 0.10.

Consider sales as X:

Net income=SalesCOGSS&A expenses$667,000=X0.70X($60,000+0.10X)$667,000+$60,000=X0.70X+0.10X$727,000=0.2X

X=$727,0000.2X=$3,635,000

Hence, sales are $3,635,000.

Working note 2: Compute selling and administration expenses:

Selling and administration expenses=10% of sales revenue+Fixed cost=($3,635,000×0.10)+$60,000=$363,500+$60,000=$423,500

Hence, the selling and administration expenses are $423,500.

b)

To determine

Prepare the pro forma income statement and the other ideas to reach the Company P’s goal.

b)

Expert Solution
Check Mark

Explanation of Solution

Income statement: The financial statement which reports revenues and expenses from business operations and the result of those operations as net income or net loss for a particular time period is referred to as income statement.

The cost of goods sold could be reduced by 2% if production procedure is improved. So, the revised cost of goods sold is $2,195,200($2,240,000×98%).

The budgeted level of selling and administrative expenses is $337,800($1,004,800 $667,000).

Prepare the pro forma income statement:

Company P
Income Statement
For the year ended
Particulars        Amount
Sales revenue$3,200,000
Less: Cost of goods sold$2,195,200
Gross profit$1,004,800
Less: Selling & administrative expenses$337,800
Net income$667,000

Table (2)

The management has to reduce the selling and administrative expenses by $42,200 ($380,000$337,800) in order to reach the president’s goal.

c)

To determine

Explain whether the company can reach the goal of Company P.

c)

Expert Solution
Check Mark

Explanation of Solution

Income statement: The financial statement which reports revenues and expenses from business operations and the result of those operations as net income or net loss for a particular time period is referred to as income statement.

Compute projected sales:

Projected sales=Current sales×115%=$3,200,000×(100+15)100=$3,680,000

Hence, the projected sales are $3,680,000.

Compute the projected cost of goods sold:

Projected cost of goods sold=Projected sales×70% =$3,680,000×70% =$2,576,000

Hence, the projected cost of goods sold is $2,756,000.

Prepare a pro forma income statement:

Company P
Income Statement
For the year ended
Sales revenue$3,680,000
Less: Cost of goods sold$2,576,000
Gross profit$1,104,000
Less: Selling & administrative expenses$460,000
Net income$644,000

Table (3)

Hence, the net income is $644,000.

The projected net income under this situation is $644,000 which is less than the actual income of $667,000. So, the company would not be able to reach its goal.

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