Let's break this down step-by-step.

Part 1: Pro Forma Income Statement

1. Sales: Given as $967,000.

2. Cost of Goods Sold (COGS): Given as $511,000.

3. Gross Profit: $\text{Gross Profit} = \text{Sales} - \text{Cost of Goods Sold}$ $\text{Gross Profit} = 967,000 - 511,000 = 456,000$

4. Depreciation Expense: Given as $100,000.

5. Earnings Before Interest and Taxes (EBIT): $\text{EBIT} = \text{Gross Profit} - \text{Depreciation}$ $\text{EBIT} = 456,000 - 100,000 = 356,000$

6. Taxes (28%): Given that the tax rate is 28%, you calculate taxes as: $\text{Taxes} = \text{EBIT} \times 0.28$ $\text{Taxes} = 356,000 \times 0.28 = 99,680$

7. Pro Forma Earnings: $\text{Earnings} = \text{EBIT} - \text{Taxes}$ $\text{Earnings} = 356,000 - 99,680 = 256,320$

Summary of the Pro Forma Income Statement:

Category	Amount ($)
Sales	967,000
Cost of Goods Sold	511,000
Gross Profit	456,000
Depreciation	100,000
EBIT	356,000
Taxes (28%)	99,680
Earnings	256,320

Part 2: Pro Forma Free Cash Flow

Free Cash Flow (FCF) can be calculated as:

$\text{FCF} = \text{Earnings} + \text{Depreciation}$ Using the values we found earlier:

$\text{FCF} = 256,320 + 100,000 = 356,320$

Final Results:

• Pro Forma Earnings: $256,320
• Pro Forma Free Cash Flow: $356,320

Would you like any further details or clarifications?

Related Questions:

1. How would the free cash flow change if depreciation increased?
2. What would happen if the tax rate was 35% instead of 28%?
3. How is EBIT different from operating income?
4. Why is depreciation added back when calculating free cash flow?
5. How does an increase in sales affect gross profit?

Tip: Depreciation is a non-cash expense, which is why it’s added back to earnings to calculate free cash flow.