Ace Manufacturing, Inc., is preparing pro forma financial statements for 2011. T

Question

Ace Manufacturing, Inc., is preparing pro forma financial statements for 2011. The firm utilizied the percent-of-sales method to estimate costs for the next year. Sales in 2010 were $2 million and are expected to increase to $2.4 million in 2011. The firm has a 40 percent tax rate. Given the 2010 income statement, estimate net profit and retained earnings for 2011.

Income Statement
Ace Manufacturing, Inc.
For the Year Ended December 31, 2010

Sales $2,000,000
Less: Cost of Goods Sold $1,200,000
Gross Profit $800,000
Less: Selling Expense $200.000
General & administrative expense $60,000
Less: Depreciation $40,000
Operating profit $500,000
Less: Interest $80,000
Earnings before taxes $420,000
Less: Taxes (40%) $168,000
Net Profit after taxes / EACS $252,000
Common stock dividends $100,000

Explanation / Answer

for proforma analysis, since sales has grown by 20%, everything else will also grow by 20%. Sales = 2,400,000 (20% growth) Less: Cost of Goods Sold $1,440,000 Gross Profit $960,000 Less: Selling Expense $240.000 General & administrative expense $72,000 Less: Depreciation $48,000 Operating profit $600,000 Less: Interest $96,000 Earnings before taxes $504,000 Less: Taxes (40%) $201,600 Net Profit after taxes / EACS $302,400

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