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common shareholders. The income statement is prepared using the generally accepted accounting principles (GAAP) that match the firm's revenues and expenses to the period in
common shareholders. The income statement is prepared using the generally accepted accounting principles (GAAP) that match the firm's revenues and expenses to the period in which they were incurred, not necessarily when cash was received or paid. Investors and analysts use the information given in the income statement and other financial statements and reports to evaluate the company's financial performance and condition. Consider the following scenario: Cute Camel Woodcraft Company's income statement reports data for its first year of operation. The firm's CEO would like sales to increase by 25% next year. 1. Cute Camel is able to achieve this level of increased sales, but its interest costs increase from 10% to 15% of earnings before interest and taxes (EBIT). 2. The company's operating costs (excluding depreciation and amortization) remain at 70% of net sales, and its depreciation and amortization expenses remain constant from year to year. 3. The company's tax rate remains constant at 40% of its pre-tax income or earnings before taxes (EBT). 4. In Year 2, Cute Camel expects to pay $100,000 and $1,025,100 of preferred and common stock dividends, respectively. Complete the Year 2 income statement data for Cute Camel, then answer the questions that follow. Be sure to round each dollar value to the nearest whole dollar Complete the Year 2 income statement data for Cute Camel, then answer the questions that follow. Be sure to round each dollar value to the nearest whole dollar. Cute Camel Woodcraft Company Income Statement For Year Ending December 31 Year 1 Year 2 (Forecasted) Net sales $15,000,000 $ Less: Operating costs, except depreciation and amortization 10,500,000 Less: Depreciation and amortization expenses 600,000 Operating income (or EBIT) $3,900,000 $ Less: Interest expense 390,000 Pre-tax income (or EBT) 3,510,000 1,404,000 Less: Taxes (40%) Earnings after taxes $2,106,000 $ Less: Preferred stock dividends Earnings available to common shareholders 100,000 2,006,000 842,400 Less: Common stock dividends Contribution to retained earnings $1,163,600 Given the results of the previous income statement calculations, complete the following statements: In Year 2, if Cute Camel has 5,000 shares of preferred stock issued and outstanding, then each preferred share should expect to receive Ch 02: Assignment - Financial Statements, Cash Flow, and Taxes 600,000 $3,900,000 $ 390,000 3,510,000 1,404,000 Less: Depreciation and amortization expenses Operating income (or EBIT) Less: Interest expense Pre-tax income (or EBT) Less: Taxes (40%) Earnings after taxes Less: Preferred stock dividends Earnings available to common shareholders Less: Common stock dividends Contribution to retained earnings $2,106,000 $ 100,000 2,006,000 842,400 $1,163,600 Given the results of the previous income statement calculations, complete the following statements: In Year 2, if Cute Camel has 5,000 shares of preferred stock issued and outstanding, then each preferred share should expect to receive in annual dividends. If Cute Camel has 400,000 shares of common stock issued and outstanding, then the firm's earnings per share (EPS) is expected to change from in Year 1 to in Year 2. Cute Camel's before interest, taxes, depreciation all ion (EBITDA) value changed from in Year 1 to in Year 2 all but one It is to say that Cute Camel's net tflows of cash at the end of Years 1 and 2 are equal to the company's annual contribution to retained earnings. This is because of the item reported in the income statement involve payments and receipts of cash
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