Jacob Long, the controller of Arvada Corporation, is trying to prepare a sales b

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:

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.

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

Explanation / Answer

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.

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

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