Question

Jacob Long, the controller of Arvada Corporation, is trying to prepare a sales budget for the coming year. The income statements for the last four quarters follow:

  

	First Quarter				Second Quarter				Third Quarter				Fourth Quarter				Total
Sales revenue	$	180,000			$	210,000			$	220,000			$	270,000			$	880,000
Cost of goods sold		90,000				105,000				110,000				135,000				440,000
Gross profit		90,000				105,000				110,000				135,000				440,000
Selling & administrative expenses		18,000				21,000				22,000				27,000				88,000
Net income	$	72,000			$	84,000			$	88,000			$	108,000			$	352,000

Historically, cost of goods sold is about 50 percent of sales revenue. Selling and administrative expenses are about 10 percent of sales revenue.

Fred Arvada, the chief executive officer, told Mr. Long that he expected sales next year to be 10 percent for each respective quarter above last year’s level. However, Rita Banks, the vice president of sales, told Mr. Long that she believed sales growth would be only 5 percent.

Required  

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

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

Answer 1

Summary of the question:

(A) Computation of pro forma income statement including quarterly budgets for the coming year using Mr. Arvada's estimate Given that the sales will be increased by 10 percent with each respect to quarter i.e; 110 percent of sales given Amount in Dollars ($) Particulars Quarter 1 Quarter 2 Quarter 3 Quarter 4 Total Sales revence(1) 198000 231000 242000 297000 968000 180000*110% 210000*110% 220000*110% 270000*110% 880000*110% Cost of Goods sold(2) 99000 115500 121000 148500 484000 (1)*50% 198000*50% 231000*50% 242000*50% 297000*50% 968000*50% Gross Profit (3)=(1)-(2) 99000 115500 121000 148500 484000 Selling and administrative expenses (4) 19800 23100 24200 29700 96800 (1)*10% 198000*10% 231000*10% 242000*10% 297000*10% 968000*10% Net Income (5)=(3)-(4) 79200 92400 96800 118800 387200 (B) Computation of pro forma income statement including quarterly budgets for the coming year using Ms. Banks's estimate Given that the sales will be increased by 5 percent with each respect to each quarter i.e; 105 percent of sales given Amount in Dollars ($) Particulars Quarter 1 Quarter 2 Quarter 3 Quarter 4 Total Sales revence(1) 189000 220500 231000 283500 924000 180000*105% 210000*105% 220000*105% 270000*105% 880000*105% Cost of Goods sold(2) 94500 110250 115500 141750 462000 (1)*50% 198000*50% 231000*50% 242000*50% 297000*50% 968000*50% Gross Profit (3)=(1)-(2) 94500 110250 115500 141750 462000 Selling and administrative expenses (4) 18900 22050 23100 28350 92400 (1)*10% 198000*10% 231000*10% 242000*10% 297000*10% 968000*10% Net Income (5)=(3)-(4) 75600 88200 92400 113400 369600 Activate Windows

As per Mr. Arvada's estimate the sales increased by 10% compared to the previous year i.e; 110 % of sales revenue.

As per Ms. Bank's eatimate the sales increased by 5% compared to the previous year i.e; 105% of sales revenue.

Given that Cost of Goods Sold (COGS) is 50% of sales revenue and sales & administrative expenses are 10% of sales revenue.

Net income as per Mr. Arvada's is $ 387200 and Ms. Bank's is $369600 the net difference is $ 17600.