Preparing pro forma income statements with different assumptions

Jim Denty, the controller of Grime Corporation, is trying to prepare a sales budget for the coming year. The income statements for the last four quarters follow.

First

Second

Third

Fourth

Quarter

Quarter

Quarter

Quarter

Total

Sales revenue

$170,000

$200,000

$210,000

$260,000

$840,000

Cost of goods sold

102,000

120,000

126,000

156,000

504,000

Gross profit

68,000

80,000

84,000

104,000

336,000

Selling & admin. expense

17,000

20,000

21,000

26,000

84,000

Net income

$ 51,000

$ 60,000

$ 63,000

$ 78,000

$252,000

Historically, cost of goods sold is about 60 percent of sales revenue. Selling and administrative expenses are about 10 percent of sales revenue. Gene Moreno, the chief executive officer, told Mr. Denty that he expected sales next year to be 10 percent above last year’s level. However, Sarah Toole, the vice president of sales, told Mr. Denty that she believed sales growth would be only 5 percent.

Required

a. Prepare a pro forma income statement including quarterly budgets for the coming year using Mr. Moreno’s estimate.

b. Prepare a pro forma income statement including quarterly budgets for the coming year using Ms. Toole’s estimate.

c. Explain why two executive officers in the same company could have different estimates of future growth.