Question

Pro forma income statement The marketing department of Metroline Manufacturing estimates that its sales in 2020 will be $1.55 million. Interest expense is expected to remain unchanged at $36,000, and the firm plans to pay $65,000 in cash dividends during 2020. Metroline Manufacturing's income statement for the year ended December 31, 2019, is given , 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, 2020 b. Use fixed and variable cost data to develop a pro forma income statement for the year ended December 31, 2020 c. Compare and contrast the statements developed in parts a. and b. Which statement probably provides the better estimate of 2020 income? Explain why. a. Use the percent-of-sales method to prepare a pro forma income statement for the year ended December 31, 2020. Complete the pro forma income statement for the year ended December 31, 2020 below: (Round the percentage of sales to four decimal places and the pro forma income statement amounts to the nearest dollar.) Pro Forma Income Statement Metroline Manufacturing, Inc. for the Year Ended December 31, 2020 (percent-of-sales method) 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 To retained earnings

Answer 1

a. Please find attached proforma income statement based on percent of sales method:

Only Column "Amount as per Dec 31, 2020" is answer to this question and year 2019 are presented for understanding the computation:

Proforma income statement for year ended Dce 31, 2020 based on percent of sales method of year ending Dec 31, 2019 Dec 31, 2020 Dec 31, 2019 As same as in Year Dec 31, Expense / Sales Description Reference Amount 2019 Amount Revenue*100 Sales Revenue 1,550,000.00 1,395,000.00 Less:Cost of goods sold B=A*65.09% 1,008,895.00 65.09% 908,000.00 65.09% Gross Profit CEA-B 541,105.00 487,000.00 Less: Operaing Expenses DA*8.82% 136,710.00 8.82% 123,000.00 8.82% Operating Profit E=C-D 404,395.00 364,000.00 Less: Interest Expense 36,000.00 36,000.00 Net profit before taxes GEE-F 368,395.00 328,000.00 Less: Taxes @ 40% H=G*40% 147,358.00 131,200.00 Net profit after taxes I=G-H 221,037.00 196,800.00 Less:Cash Dividends 65,000.00 60,000.00 To retained earnings K=I-) 156,037.00 136,800.00

b. Please find attached proforma income statement based on fixed and variable cost method:

Only Column "Amount as per Dec 31, 2020" is answer to this question and year 2019 are presented for understanding the computation:

Proforma income statement for year ended Dce 31, 2020 based on fixed and variable cost method of year ending Dec 31, 2019 Dec 31, 2020 Dec 31, 2019 As same as in Year Dec 31, Expense / Sales Description Reference Amount 2019 Amount Revenue*100 Sales Revenue A 1,550,000.00 1,395,000.00 Less:Cost of goods sold Fixed Cost Besame as year 2019 216,000.00 216,000.00 Variable Cost B=A*49.61% 768,955.00 49.61% 692,000.00 49.61% Gross Profit CEA-B 565,045.00 487,000.00 Less: Operaing Expenses Fixed Cost D=same as year 2019 39,000.00 39,000.00 Variable Cost D=A*6.02% 93,310.00 6.02% 84,000.00 6.02% Operating Profit E=C-D 432,735.00 364,000.00 Less: Interest Expense F 36,000.00 36,000.00 Net profit before taxes GEE-F 396.735.00 328,000.00 Less: Taxes @ 40% H=G*40% 158,694.00 131,200.00 Net profit after taxes I=G-H 238,041.00 196,800.00 Less:Cash Dividends 65,000.00 60,000.00 To retained earnings K=1-) 173,041.00 136,800.00

c. The proforma income statement developed using the fixed and variable cost data projects a "higher" net profit after taxes due to "lower" cost of goods sold and operating expenses.Although the percent of sales method projects a more "conservative"  estimate of net profit after taxes, the proforma income statement that classified fixed and variable is "more" accurate.