ERF Fashions has a cash balance of $2,000 on July 1. It produces a single product with a selling price of $80 per unit and has the following cost structure:

Direct materials $ 20 / unit

Direct labour 10 / unit

Variable overhead 10 / unit

Total direct cost $ 40 / unit

Even though there is a pronounced seasonal pattern to sales, management has had a policy of smoothing production to keep its core skilled workforce employed throughout the r and to make efficient use of its production facilities. Starting in June and progressing through February, the projected production and sales figures (in units) are as follows:

Month Production Sales Month Production Sales

June 150 75 November 200 300

July 150 100 December 200 300

August 200 150 January 150 150

September 300 200 February 100 100

October 300 200

Other information:

All direct costs are paid in the month of production.

All sales are on credit and collected in full in the month following the sale.

A new machine will be purchased and installed at the beginning of July at a cost of $10,000. The machine will be paid for in October. For accounting purposes, the machine will depreciate on a straight-line basis over its useful life at a rate of $75 per month to an estimated salvage value of $1,000.

Indirect overhead and other operating expenses (excluding depreciation and other noncash expenses) are $2,000 per month and are paid each month.

Required: a) Prepare a partial pro forma income statement for ERF Fashions before interest and income taxes, for each of the six months from July to December, based on the information provided above.

b) Explain why projected cash flows in a cash budget will not equal the profit or loss amount in the pro forma income statement.