Your company had pretax income of $37,400 last year on sales of $423,000. Sales are expected to increase by 8% next year and the tax rate is 35%. What is the expected net income for next year if your firm uses the percentage of sales approach when compiling pro forma statements?

Question

Quizplus · Accepted Answer

Using the percentage of sales approach, we calculate the expected net income for next year as follows:

1. Calculate the expected sales for next year:
    Expected sales = Current sales * (1 + sales growth rate)
    Expected sales = $423,000 * (1 + 0.08) = $456,840

2. Calculate the expected pretax income for next year:
    Expected pretax income = Pretax margin * Expected sales
    Pretax margin = Pretax income / Sales
    Pretax margin = $37,400 / $423,000 = 0.0883
    Expected pretax income = 0.0883 * $456,840 = $40,336

3. Calculate the expected net income for next year:
    Net income = Expected pretax income * (1 - tax rate)
    Net income = $40,336 * (1 - 0.35) = $26,255

Therefore, the expected net income for next year using the percentage of sales approach is $26,255, which corresponds to choice (C).

Your Company Had Pretax Income of $37,400 Last Year on Sales