60.1K

Verified Solution

Link Copied!

Pro forma income statementScenario analysisAllen Products, Inc., wants to do a scenario analysis for the coming year. The pessimistic prediction for sales is $ 903,000; the most likely amount of sales is $ 1,120,000; and the optimistic prediction is $ 1,277,000. Allen's income statement for the most recent year is shown here Allen Products, Inc. Income Statement for the Year Ended December 31, 2015 Sales revenue $ 938,100 Less: cost of good sold 438,093 Gross profits $ 500,007 Less: operating expenses 218,577 Operating profits $ 281,430 Less: interest expense 29,081 Net profit before taxes $ 252,349 Less: taxes (rate 25%) 63087 Net profits after taxes $189,262 . a. Use the percent-of-sales method, the income statement for December 31, 2015, and the sales revenue estimates to develop pessimistic, most likely, and optimistic pro forma income statements for the coming year. b. Explain how this method could result in overstatement of profits for the pessimistic case and understatement of profits for the most likely and optimistic cases. c. Restate the pro forma income statements prepared in part a. to incorporate the following assumptions about the 2015 costs: $ 258,539 of the cost of goods sold isfixed; the rest is variable. $ 155,351 of the operating expenses is fixed; the rest is variable. All the interest expense is fixed. (Please see: Allen Products, Inc. Income Statement for the Year Ended December 31, 2015 Sales revenue $ 938,100 Less: cost of good sold Fixed 258,539 Variable 179,554 Gross profits $ 500,007 Less: operating expenses Fixed 155,351 Variable 63,226 Operating profits $ 281,430 Less: interest expense 29,081 Net profit before taxes $ 252,349 Less: taxes (rate 25%) 63,087 Net profits after taxes $189,262 .) d. Compare your findings in part c. to your findings in part a. Do your observations confirm your explanation in part b? a. Use the percent-of-sales method, the income statement for December 31, 2015, and the sales revenue estimates to develop pessimistic, most likely, and optimistic pro forma income statements for the coming year. Complete the pro forma income statement for the year ending December 31, 2016 that is shown below (pessimistic scenario): (Round the percentage of sales to one decimal place and the pro forma income statement accounts to the nearest dollar.) Pro Forma Income Statement Allen Products, Inc. for the Year Ended December 31, 2016 Pessimistic Sales $ Less: Cost of goods sold $ % Gross profits $ Less: Operating expense $ % Operating profits $ Less: Interest expense $ % Net profits before taxes $ Taxes (25%) $ Net profits after taxes $ Complete the pro forma income statement for the year ending December 31, 2016 that is shown below (most likely scenario): (Round the percentage of sales to one decimal place and the pro forma income statement accounts to the nearest dollar.) Pro Forma Income Statement Allen Products, Inc. for the Year Ended December 31, 2016 Most Likely Sales $ Less: Cost of goods sold $ % Gross profits $ Less: Operating expense $ % Operating profits $ Less: Interest expense $ % Net profits before taxes $ Taxes (25%) $ Net profits after taxes $ Complete the pro forma income statement for the year ending December 31, 2016 that is shown below (optimistic scenario): (Round the percentage of sales to one decimal place and the pro forma income statement accounts to the nearest dollar.) Pro Forma Income Statement Allen Products, Inc. for the Year Ended December 31, 2016 Optimistic Sales $ Less: Cost of goods sold $ % Gross profits $ Less: Operating expense $ % Operating profits $ Less: Interest expense $ % Net profits before taxes $ Taxes (25%) $ Net profits after taxes $ b. Explain how this method could result in overstatement of profits for the pessimistic case and understatement of profits for the most likely and optimistic cases.(Select from the drop-down menus.) The simple percent-of-sales method assumes that all costs are variable. In reality some of the expenses will be fixed. In the pessimistic most likely optimistic case this assumption causes all costs to decrease with the lower level of sales when in reality the fixed portion of the costs will not decrease. The opposite occurs for the pessimistic most likely optimistic forecast since the percent-of-sales assumes all costs increase when in reality only the variable portion will increase. This pattern results in an understatement overstatement of costs in the pessimistic most likely optimistic case and an understatement overstatement of profits. The opposite occurs in the pessimistic most likely optimistic scenario. c. Restate the pro forma income statements prepared in part a. to incorporate the following assumptions about the 2015 costs: $258,539 of the cost of goods sold isfixed; the rest is variable. $155,351 of the operating expenses is fixed; the rest is variable. All the interest expense is fixed. Complete the pro forma income statement for the year ending December 31, 2016 that is shown below (pessimistic scenario): (Round the percentage of sales to four decimal places and the pro forma income statement accounts to the nearest dollar.) Pro Forma Income Statement Allen Products, Inc. for the Year Ended December 31, 2016 Pessimistic Sales $ Less: Cost of goods sold Fixed $ Variable $ % Gross profits $ Less: Operating expense Fixed $ Variable $ % Operating profits $ Less: Interest expense $ Net profits before taxes $ Taxes (25%) $ Net profits after taxes $ Complete the pro forma income statement for the year ending December 31, 2016 that is shown below (most likely scenario): (Round the percentage of sales to four decimal places and the pro forma income statement accounts to the nearest dollar.) Pro Forma Income Statement Allen Products, Inc. for the Year Ended December 31, 2016 Most Likely Sales $ Less: Cost of goods sold Fixed $ Variable $ % Gross profits $ Less: Operating expense Fixed $ Variable $ % Operating profits $ Less: Interest expense $ Net profits before taxes $ Taxes (25%) $ Net profits after taxes $ Complete the pro forma income statement for the year ending December 31, 2016 that is shown below (optimistic scenario): (Round the percentage of sales to four decimal places and the pro forma income statement accounts to the nearest dollar.) Pro Forma Income Statement Allen Products, Inc. for the Year Ended December 31, 2016 Optimistic Sales $ Less: Cost of goods sold Fixed $ Variable $ % Gross profits $ Less: Operating expense Fixed $ Variable $ % Operating profits $ Less: Interest expense $ Net profits before taxes $ Taxes (25%) $ Net profits after taxes $ d. Compare your findings in part c. to your findings in part a. Do your observations confirm your explanation in part b? (Select from the drop-down menus.) The profits for the pessimistic most likely optimistic case are larger in part a. than in part c. For the pessimistic most likely optimistic case, the profits are lower in part a. than in part c. This outcome confirms disproves the results as stated in part b. Enter any number in the edit fields and then continue to the next question.

Answer & Explanation Solved by verified expert

See Answer