Question

Pro forma income statement The marketing department of Metroline Manufacturing estimates that its sales in 2016 will be $1.50 million. Interest expense is expected to remain unchanged at $35,000, and the firm plans to pay $70,000 in cash dividends during 2016. Metroline Manufacturing's income statement for the year ended December 31, 2015, is given 2, along with a breakdown of the firm's cost of goods sold and operating expenses into their fixed and variable components. a. Use the percent-of-sales method to prepare a pro forma income statement for the year ended December 31, 2016. b. Use fixed and variable cost data to develop a pro forma income statement for the year ended December 31, 2016. c. Compare and contrast the statements developed in parts a. and b. Which statement probably provides the better estimate of 2016 income? Explain why. a. Use the percent-of-sales method to prepare a pro forma income statement for the year ended December 31, 2016. Complete the pro forma income statement for the year ended December 31, 2016 below: (Round the percentage of sales to four decimal places and the pro forma income statement amounts to the nearest dollar.) i Data Table Pro Forma Income Statement Metroline Manufacturing, Inc. for the Year Ended December 31, 2016 (percent-of-sales method) (Click on the icon located on the top-right corner of the data tables below in order to copy its contents into a spreadsheet.) Sales Less: Cost of goods sold Gross profits Less: Operating expenses Operating profits Less: Interest expense Net profits before taxes Less: Taxes Net profits after taxes Less: Cash dividends Metroline Manufacturing Income Statement for the Year Ended December 31, 2015 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 5201,000 Less: Cash dividends 66,000 To retained earnings $135,000 Metroline Manufacturing Breakdown of Costs and Expenses into Fixed and Variable Components for the Year Ended December 31, 2015 Cost of goods sold Fixed cost $210,000 Variable cost 700,000 Total cost $910,000 Operating expenses Fixed expenses $36,000 Variable expenses 84,000 Total expenses $120,000 To retained earnings Print Done

Answer 1

A В C D Е 92 Metroline Manufacturing 93 94 Income Statement 95 for the Year Ended December 31, 2016 96 2015 Percent of Sales 2016 97 Sales Revenue $ $15,00,000 65% $ 9,75,000 $ 5,25,000 9% $ 1,28,571 $ 3,96,429 14,00,000 98 Less cost of goods sold 99 Gross profits 100 Less Operating Expenses 101 Operating Profits 102 Less Interest Expense 103 Net profits before taxes 104 Less Taxes (rate-40%) $ 9,10,000 $ 4,90,000 $ 1,20,000 $ 3,70,000 $ $ 35,000 35,000 $ 3,61,429 $ 1,44,571 $ 2,16,857 $ 3,35,000 $ 1,34,000 $ 105 Net profits after taxes 2,01,000 $ $ 106 Less : Cash Dividends 66,000 70,000 107 To Retained Earnings $ 1,46,857 $ 1,35,000 108 109

A В C E 109 Metroline Manufacturing 110 Breakdown of Costs and Expenses 111 112 for the Year Ended December 31, 2016 113 2016 2015 114 Costs of Goods Sold Fixed Costs will remain fixed in -Fixed Cost 115 $ 2,10,000 $ 2,10,000 both years Difference between Total Costs -Variable Cost $ 7,65,000 $ 7,00,000 and Fixed Costs will be Variable 116 Costs Total Costs will be taken from the Total Cost 117 $ $9,75,000 9,10,000 above income statement 118 119 Operating Expenses Fixed Costs will remain fixed in -Fixed Expenses 120 $ $ 36,000 36,000 both years Difference between Total Costs -Variable Expenses $ 84,000 and Fixed Costs will be Variable 3,60,429 121 Costs Total Costs will be taken from the $ 3,96,429 Total Expenses 122 $ 1,20,000 above income statement 123 124 dar

A C E 92 Metroline Manufacturing 93 94 Income Statement 95 for the Year Ended December 31, 2016 96 2015 Percent of Sales 2016 97 Sales Revenue 98 Less cost of goods sold 99 Gross profits 100 Less : Operating Expenses 101 Operating Profits 102 Less : Interest Expense 103 Net profits before taxes 104 Less Taxes (rate 40%) 105 Net profits after taxes 106 Less : Cash Dividends 107 To Retained Earnings 1400000 1500000 C98/$C$97 =E97*D98 910000 C97-C98 -E97-E98 E97*D100 -C100/$C$97 120000 -E99-E100 C99-C100 35000 35000 C101-C102 E101-E102 =+E103*40% =+C103*40% C103-C104 -E103-E104 66000 70000 C105-C106 -E105-E106 108 109

A C E 108 109 110 Metroline Manufacturing 111 Breakdown of Costs and Expenses 112 for the Year Ended December 31, 2016 113 2016 2015 114 Costs of Goods Sold Fixed Costs will remain fixed in -Fixed Cost both years 115 C115 210000 Difference between Total Costs -Variable Cost and Fixed Costs will be Variable 116 700000 E117-E115 Costs Total Costs will be taken from the Total Cost 117 -SUM(C115:C116) above income statement E98 118 119 Operating Expenses Fixed Costs will remain fixed in -Fixed Expenses 120 both years 36000 C120 Difference between Total Costs -Variable Expenses and Fixed Costs will be Variable 121 E122-E120 84000 Costs Total Costs will be taken from the Total Expenses 122 -SUM(C120:C121) above income statement E101 123 124
Part c. Income Statement provides better estimate in terms of the overall picture of the organisation. However for detailed expense wise analysis, breakdown statement will be more useful.

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