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 FourthQuarter Total
Sales Revenue $90,000 $ 100,000 $105,00 $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 & Administrating 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:
1) Prepare a pro forma income statement including quarterly budgets for the coming year using Mr. Arvada’s estimate.
2) Prepare a pro forma income statement including quarterly budgets for the coming year using Ms. Banks’ estimate.

Arvada Corporation

1) Pro Forma Income Statement for the coming year using Mr. Arvada's Estimate:

(Based on 8% above each quarter's sales level)

                                             First       Second      Third      Fourth    Total

                                         Quarter     Quarter    Quarter  Quarter

Sales Revenue                $97,200 $108,000 $113,400 $140,400 $459,000

Cost of goods sold          (58,320)   (64,800) (68,040)   (84,240)  (275,400)

Gross profit                       38,880     43,200   45,360      56,160    183,600

Selling & Administrative

Expenses                           (9,720)     10,800    (11,340)   (14,040)    (45,900)

Net income                    $ 29,160 $ 32,400 $34,020  $ 42,120   $137,700

2) Pro Forma Income Statement for the coming year using Ms. Banks' Estimate:

(Based on 5% above each quarter's sales level)

                                           First       Second      Third      Fourth    Total

                                       Quarter     Quarter    Quarter  Quarter

Sales Revenue             $94,500 $ 105,000  $110,250 $136,500 $446,250

Cost of goods sold       (56,700)    (63,000)    (66,150)   (81,900)  (267,750)

Gross profit                    37,800      42,000      44,100     54,600     178,500

Selling & Administrative

Expenses                        (9,450)     10,500      (11,025)    (13,650)    (44,625)

Net income                $ 28,350   $ 31,500   $ 33,075 $ 40,950   $133,875

Explanation:

a) Data and Calculations:

Income Statements for the last four quarters:

                                           First       Second      Third      Fourth    Total

                                       Quarter     Quarter    Quarter  Quarter

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

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