Ans Doc 106



P3–15 Pro forma income statement

The marketing department of Metroline Manufacturing estimates that its sales in 2010 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 2010. Metroline Manufacturing’s income statement for the year ended December 31, 2009, is given below, along with a breakdown of the firm’s cost of goods sold and operating expenses into their fixed and variable components. Metroline Manufacturing Income Statement for the Year Ended December 31, 2009

Sales revenue $ 1,400,000.00
Less: Cost of goods sold $ 910,000.00
Gross profits $ 490,000.00
Less: Operating expenses $ 120,000.00
Operating profits $ 370,000.00
Less: Interest expense $ 35,000.00
Net profits before taxes $ 335,000.00
Less: Taxes (rate40%) $ 134,000.00
Net profits after taxes $ 201,000.00
Less: Cash dividends $ 66,000.00
To retained earnings $ 135,000.00

Metroline Manufacturing Breakdown of Costs and Expenses into Fixed and Variable Components for the Year Ended December 31, 2009

Cost of goods sold
Fixed cost $ 210,000.00
Variable cost $ 700,000.00
Total cost $ 910,000.00
Operating expenses
Fixed expenses $ 36,000.00
Variable expenses $ 84,000.00
Total expenses $ 120,000.00

a. Use the percent-of-sales method to prepare a pro forma income statement for the year ended December 31, 2010.
b. Use fixed and variable cost data to develop a pro forma income statement for the year ended December 31, 2010.
c. Compare and contrast the statements developed in parts a and b. Which statement probably provides the better estimate of 2010 income? Explain why.


The SEC is trying to get companies to notify the investment
community more quickly when a “material change” will affect their forthcoming financial results. In what sense might a financial manager be seen as “more ethical” if he or she follows this directive and issues a press release indicating that sales will not be as high as previously anticipated?