Pro forma income statement The marketing department of Metroline Manufacturing e
ID: 2808519 • Letter: P
Question
Pro forma income statement
The marketing department of Metroline Manufacturing estimates that its sales in 2020 will be $1.53
million. Interest expense is expected to remain unchanged at $ 36, 000 and the firm plans to pay $75,000 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.
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.
(Click on the icon located on the top-right corner of the data tables below in order to copy its contents into a spreadsheet.)
Metroline Manufacturing
Income Statement
for the Year Ended December 31, 20192019
Sales revenue
$1,403,000
Less: Cost of goods sold
918,000
Gross profits
$485,000
Less: Operating expenses
113,000
Operating profits
$372,000
Less: Interest expense
36,000
Net profits before taxes
$336,000
(rate equals 40 %rate=40%)
134,400
Net profits after taxes
$201,600
Less: Cash dividends
61,000
To retained earnings
$140,600
Metroline Manufacturing
Breakdown of Costs and Expenses
into Fixed and Variable Components
for the Year Ended December 31, 20192019
Cost of goods sold
Fixed cost
$219,000
Variable cost
699,000
Total cost
$918,000
Operating expenses
Fixed expenses
$37,000
Variable expenses
76,000
Total expenses
$113,000
Metroline Manufacturing
Income Statement
for the Year Ended December 31, 20192019
Sales revenue
$1,403,000
Less: Cost of goods sold
918,000
Gross profits
$485,000
Less: Operating expenses
113,000
Operating profits
$372,000
Less: Interest expense
36,000
Net profits before taxes
$336,000
Less: Taxes(rate equals 40 %rate=40%)
134,400
Net profits after taxes
$201,600
Less: Cash dividends
61,000
To retained earnings
$140,600
Metroline Manufacturing
Breakdown of Costs and Expenses
into Fixed and Variable Components
for the Year Ended December 31, 20192019
Cost of goods sold
Fixed cost
$219,000
Variable cost
699,000
Total cost
$918,000
Operating expenses
Fixed expenses
$37,000
Variable expenses
76,000
Total expenses
$113,000
. Use the pancantaaios mathod to prepare pro b. Use iooed and venable cust datao develUp prtiorme incorme statement for 'wr srded December 31, 2020 e. Comaara an nontrast tha stataments davalpea n parts a. And b. When statament probably promsas tha bener estrnata nt incarna? Explain why a pro tarma income acmantor the year anded Decerber 31, 2020 Complete he o forma income sto ement or te year endeo December 31, 2020 bclo Reund te percent c cf sales o four decr plaC“ nd te pro oma ncome statement amounts to thc nearest colar. amounts to oHorma Income Stasament for the Year Lnded December 31, 2020 Gross profits Lees Operangexpenses Operatng pratt Less Interes cxpense Net prefita ber H8 Net prefits after taxes Less Cash cividendsExplanation / Answer
A) Income Statement Metroline Manufacturing, Inc.
for the Year Ended December 31, 2020(percent-of-sales method)
Sales
1530000
Less: cost of goods sold (65.4% of sales)
(1001079)
Gross profits
528921
Less: operating expenses (8.05% of sales)
(123165)
Operating profits
405756
Less: interest expense
(36000)
Net profits before taxes
369756
Less: taxes
(147902)
Net profits after taxes
221854
Less: dividend
(75000)
Retained earnings
146854
B)
Income Statement
Metroline Manufacturing,Inc.
for the Year Ended December 31 ,2020(based on fixed and variable cost data)
Sales
1530000
Less: cost of goods sold
- fixed cost
(219000)
- variable cost
(762246)
Gross profits
548754
Less: operating expenses
- fixed expenses
(37000)
- variable expenses (5.41% of sales)
(82773)
Operating profits
428981
Less: interest expenses
(36000)
Net profits before taxes
392981
Less: taxes
(157192)
Net profits after taxes
235789
Less: dividend
(75000)
Retained earnings
160789
C)
The 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 income statement that classifies fixed and variable cost is more accurate.
Sales
1530000
Less: cost of goods sold (65.4% of sales)
(1001079)
Gross profits
528921
Less: operating expenses (8.05% of sales)
(123165)
Operating profits
405756
Less: interest expense
(36000)
Net profits before taxes
369756
Less: taxes
(147902)
Net profits after taxes
221854
Less: dividend
(75000)
Retained earnings
146854
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