Question

The amount of interest expense shown on the pro forma income statement is typically drawn from the?

1) sales budget
2) inventory purchases budget
3) selling and administrative expense budget
4) cash budget

Answer 1

The interest expense on a pro forma income statement comes from the cash budget, which accounts for financing activities. Taking an example, a firm with $1 million in sales and total expenses of $950,000 (labor, capital, materials) would have an accounting profit of $50,000. Therefore, the correct option is 4.

Step-by-step explanation:

The amount of interest expense shown on the pro forma income statement is typically drawn from the cash budget. This is because the cash budget includes projections of the firm's cash inflows and outflows, and it reflects the firm's need to finance activities, possibly through borrowing, which in turn incurs interest expenses. To calculate accounting profit, we subtract all the expenses from the sales revenue. Let's take an example: A firm has sales revenue of $1 million. The expenses are $600,000 for labor, $150,000 for capital, and $200,000 for materials.

Accounting profit is calculated by subtracting these expenses from the sales revenue:

Sales Revenue - Labor Costs - Capital Costs - Material Costs = Accounting Profit

$1,000,000 - $600,000 - $150,000 - $200,000 = $50,000

Therefore, the firm's accounting profit would be $50,000.