
a)
Determine the percentage increase in sales and prepare the pro forma income statement.
a)

Explanation of Solution
Income statement: The financial statement which reports revenues and expenses from business operations and the result of those operations as net income or net loss for a particular time period is referred to as income statement.
Compute the percentage of increase in sales:
Hence, the percentage of increase in sales is 13.59%.
Prepare the pro forma income statement:
Company P | |
Income Statement | |
For the year ended | |
Particulars | Amount |
Sales revenue (1) | $3,635,000 |
Cost of goods sold | $2,544,500 |
Gross profit | $1,090,500 |
Selling & administrative expenses (2) | $423,500 |
Net income | $ 667,000 |
Table (1)
Working note 1: Calculate the sales value:
The company expects net income to increase by 15%, so the increased net income is $667,000
Consider sales as X:
Hence, sales are $3,635,000.
Working note 2: Compute selling and administration expenses:
Hence, the selling and administration expenses are $423,500.
b)
Prepare the pro forma income statement and the other ideas to reach the Company P’s goal.
b)

Explanation of Solution
Income statement: The financial statement which reports revenues and expenses from business operations and the result of those operations as net income or net loss for a particular time period is referred to as income statement.
The cost of goods sold could be reduced by 2% if production procedure is improved. So, the revised cost of goods sold is $2,195,200
The budgeted level of selling and administrative expenses is $337,800
Prepare the pro forma income statement:
Company P | |
Income Statement | |
For the year ended | |
Particulars | Amount |
Sales revenue | $3,200,000 |
Less: Cost of goods sold | $2,195,200 |
Gross profit | $1,004,800 |
Less: Selling & administrative expenses | $337,800 |
Net income | $667,000 |
Table (2)
The management has to reduce the selling and administrative expenses by $42,200
c)
Explain whether the company can reach the goal of Company P.
c)

Explanation of Solution
Income statement: The financial statement which reports revenues and expenses from business operations and the result of those operations as net income or net loss for a particular time period is referred to as income statement.
Compute projected sales:
Hence, the projected sales are $3,680,000.
Compute the projected cost of goods sold:
Hence, the projected cost of goods sold is $2,756,000.
Prepare a pro forma income statement:
Company P | |
Income Statement | |
For the year ended | |
Sales revenue | $3,680,000 |
Less: Cost of goods sold | $2,576,000 |
Gross profit | $1,104,000 |
Less: Selling & administrative expenses | $460,000 |
Net income | $644,000 |
Table (3)
Hence, the net income is $644,000.
The projected net income under this situation is $644,000 which is less than the actual income of $667,000. So, the company would not be able to reach its goal.
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Chapter 14 Solutions
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