Use the Percent-Of-Sales Method to Prepare a Pro Forma Income

Multiple Choice

Use the percent-of-sales method to prepare a pro forma income statement for the year ended December 31, 2004, for Saw
Lumber, Inc.

Saw Lumber, Inc. estimates that its sales in 2000 will be $4,500,000. Interest expense is to remain unchanged at $105,000 and the firm plans to pay cash dividends of $150,000 during 2004. The income statement for the year ended December 31, 2003
is shown below.
Income Statement
Saw Lumber, Inc.
For the Year Ended December 31, 2003
$\begin{array}{lc}\text { Sales Revenue } & \$ 4,200,000 \\\text { Less: Cost of goods sold } & 3,570,000 \\& -\cdots \cdots \cdot-\cdot \\\text { Gross profits } & \$ 630,000 \\\text { Less: Operating expenses } & 210,000\\& -\cdots \cdots \cdot-\cdot \\\text { Operating profits } & \$ 420,000 \\\text { Less: Interest expense } & 105,000 \\& -\cdots-. \\\text { Net income before taxes } & \$ 315,000 \\\text { Less: Taxes }(40 \%) & 126,000\\& -\cdots-. \\\text { Net income after taxes } & \$ 189,000 \\\text { Less: Cash dividends } & 120,000 \\& -\cdots-. \\\text { To: Retained earnings }&\$69,000\end{array}$
-The pro forma accumulated retained earnings account on the balance sheet is projected to. ______________(See Figure 4.2)

A) decrease $52,500
B) increase $57,000
C) increase $52,500
D) decrease $57,000