Pro forma income statement Euro Designs, Inc., expects sales during 2004 to rise from the 2003 level of $3.5 million to $3.9 million. Because of a scheduled large loan payment, the interest expense in 2004 is expected to drop to $325,000. The firm plans to increase its cash dividend payments during 2004 to $320,000. The company’s year end 2003 income statement follows.
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Euro Designs, Inc. Income Statement for the Year Ended December 31, 2003 |
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Sales revenue |
$3,500,000 |
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Less: Cost of goods sold |
1,925,000 |
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Gross profits |
$1,575,000 |
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Less: Operating expenses |
420,000 |
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Operating profits |
$1,155,000 |
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Less: Interest expense |
400,000 |
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Net profits before taxes |
$755,000 |
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Less: Taxes (rate 40%) |
302,000 |
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Net profits after taxes |
$453,000 |
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Less: Cash dividends |
250,000 |
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To retained earnings |
$3,500,000 |
a. Use the percent of sales method to prepare a 2004 pro forma income statement for Euro Designs, Inc.
b. Explain why the statement may underestimate the company’s actual 2004 pro forma income.