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	$	90,000			$	100,000			$	105,000			$	130,000			$	425,000
Cost of goods sold		54,000				60,000				63,000				78,000				255,000
Gross profit		36,000				40,000				42,000				52,000				170,000
Selling & administrative expenses		8,500				10,000				10,500				13,000				42,000
Net income	$	27,500			$	30,000			$	31,500			$	39,000			$	128,000

Historically, cost of goods sold is about 60 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 8 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

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

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

Answer 1

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

	First Quarter	Second Quarter	Third Quarter	Fourth Quarter	Total
Sales revenue	97,200 [90,000+(90,000*8%)]	108,000 [100,000+(100,000*8%)]	113,400 [105,000+(105,000*8%)]	140,400 [130,000+(130,000*8%)]	459,000
Cost of goods sold	58,320 (97,200*60%)	64,800 (108,000*60%)	68,040 (113,400*60%)	84,240 (140,400*60%)	275,400
Groos profit	38,880	43,200	45,360	56,160	183,600
Selling and administrative expenses	9,720 (97,200*10%)	10,800 (108,000*10%)	11,340 (113,400*10%)	14,040 (140,400*10%)	45,900
Net income	29,160	32,400	34,020	42,120	137,700

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

	First Quarter	Second Quarter	Third Quarter	Fourth Quarter	Total
Sales revenue	94,500 [90,000+(90,000*5%)]	105,000 [100,000+(100,000*5%)]	110,250 [105,000+(105,000*5%)]	136,500 [130,000+(130,000*5%)]	446,250
Cost of goods sold	56,700 (94,500*60%)	63,000 (105,000*60%)	66,150 (110,250*60%)	81,900 (136,500*60%)	267,750
Groos profit	37,800	42,000	44,100	54,600	178,500
Selling and administrative expenses	9,450 (94,500*10%)	10,500 (105,000*10%)	11,025 (110,250*10%)	13,650 (136,500*10%)	44,625
Net income	28,350	31,500	33,075	40,950	133,875