Learning Goal 5
P4-16 Pro forma income statement The marketing department of Metroline Manufacturing estimates that its sales in 2020 will be 51.5 million. Interest expense is expected to remain unchanged at $35,000, and the firm plans to pay $70,000 in cash dividends during 2020. Metroline Manufacturing’s income statement for the year ended December 31, 2019, and a breakdown of the firm’s cost of goods sold and operating expenses into their fixed and variable components are given below.
- a. Use the percent-of-sales method to prepare a pro forma income statement for the year ended December 31, 2020.
- b. Use fixed and variable cost data to develop a pro forma income statement for the year ended December 31, 2020.
- c. Compare and contrast the statements developed in parts a and b. Which statement probably provides the better estimate of 2020 income? Explain why. Metroline Manufacturing Income Statement for the Year Ended December 31, 2019
Sales revenue | $1,400,000 |
Less: Cost of goods sold | 910,000 |
Gross profits | $ 490,000 |
Less: Operating expenses | 120,000 |
Operating profits | $ 370,000 |
Less: Interest expense | 35,000 |
Net profits before taxes | $ 335,000 |
Less: Taxes (rate = 40%) | 134,000 |
Net profits after taxes | $ 201,000 |
Less: Cash dividends | 66,000 |
To |
$135,000 |
Metroline Manufacturing Breakdown of Costs and Expenses into Fixed and Variable Components for the Year Ended
December 31, 2019
Cost of goods sold | |
Fixed cost | $210,000 |
Variable cost | 700,000 |
Total costs | $910,000 |
Operating expenses | |
Fixed expenses | $36,000 |
Variable expenses | 84,000 |
Total expenses | $120,000 |
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