Pro forma income statement The marketing department of Metro line Manufacturing estimates that its sales in 2004 will be $1.5 million. Interest expense is expected to remain unchanged at $35,000, and the firm plans to pay $70,000 in cash dividends during 2004. Metro line Manufacturing’s income statement for the year ended December 31, 2003, is given below, along with a breakdown of the firm’s cost of goods sold and operating expenses into their fixed and variable components.
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Metroline Manufacturing Income Statement for the Year Ended December 31, 2003 |
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Sales revenue |
$1,400,000 |
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Less: Cost of goods sold |
910,000 |
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Gross profits |
$490,000 |
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Less: Operating expenses |
120,000 |
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Operating profits |
$370,000 |
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Less: Interest expense |
35,000 |
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Net profits before taxes |
$335,000 |
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Less: Taxes (rate _ 40%) |
134,000 |
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Net profits after taxes |
$201,000 |
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Less: Cash dividends |
66,000 |
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To retained earnings |
$135,000 |
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Metroline Manufacturing |
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Cost of goods sold |
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Fixed cost |
$210,000 |
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Variable cost |
700,000 |
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Total cost |
$910,000 |
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Operating expenses |
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Fixed expenses |
$36,000 |
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Variable expenses |
84,000 |
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Total expenses |
$120,000 |
a. Use the percent of sales method to prepare a pro forma income statement for the year ended December 31, 2004.
b. Use fixed and variable cost data to develop a pro forma income statement for the year ended December 31, 2004.
c. Compare and contrast the statements developed in parts a and b. Which statement probably provides the better estimate of 2004 income? Explain why.