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Assignment 03 Financial Statements, Cash Flow, and Taxes 3. Income statement Aa The income statement, also known as the profit and soss (PaL) statement, provides a snapshot of the financial performance or a company during a speciried period or time. It reports a tirm's gross income, expenses, net income, and the income that is available tor distribution to its preterred and common shareholders. The incame statement is prepared using the generally accepted accaunting principles (GAAP) that match the firm's revenues and expenses ta the periad in which they were incurred, nut necessarily when cash was received or paid. Irvestors and analysts use the infarmation giver in the incurnie staternent and other financial statements and reports to eveluate the company's financial performance and condition. Consider the fellowing scenario Fuzzy Button Clothing Company's income statement reparts data for its first year af operatian. The firm's CEO would like sales to increas by 25% next year 1. Fuzzy Button is able to achieve this level or increased sales, but its interest costs increase rrom 10% to 15% or earnings before interest and taxes (EBIT 2. The company's operating costs (excluding depreciation and amortization) remain at 60% of net sales, and its depreciation and amortization expenses remain constant from year to year, 3. The campany's tax rate remains constant at 40% of its pre-tax income or earnings before taxes (EBT). 4. In Year 2, Fuzzy Button expects to pay s150,0o0 and $1,173,000 of preferred and common stock dividends, respectively Complete the Year 2 income statement data for Fuzzy Button, then answer the questians that follow. Be sure ta raund each dollar value to the nearest whole dollar Fuzzy Button Clothing Company Income Statement for Year Ending December 31 A-7 Year 2 (Forecasted) Year 1 Year 1 Net sales 20,000,000 12,000,c00 O0,000 S7,200,000 720,000 6,4B0,DD0 2,592,000 S3,888,0G00 50,000 3,738,000 972,000 S2,766,000 Less: Operating costs, except depreciation and amortizatian Less: Dereciation and amortization expenses B00,000 Operating incame (or EBIT) Less: Interest expense Pre-tax income (or EBT) Less: Taxes (40%} Earnings after taxes Less: Preferred stack dividends Earnings available to common shareholders Less: Common stock dividends Contribution to retained earnings $3,359,000 Given the results af the previous income statement calculations, complete the fellowing statements: In Year 2, ir Fuzzy Button has 10,000 shares of preferred stock issued and outstanding, en each preferred share should expect to receive in annual dividends If Fuzzy Button has 200,000 shares of common stack issued and outstanding, then the firm's carnings per share (EPS) is expected to change from in Year 1 to in Year 2. Fuzzy Button's before interest, taxes, depreciation and amortization (EBITDA) value changed from in Year 1 to inYear 2. It is to say that Fuzzy Button's net inflows and outflows of cash ot the end of Years 1 and 2 are equal to the company's annu contribution to retained earnings, $2,756,000 and $3,369,000, respectively. This is because income statement involve payments and receipts af cash of the item reported in the A-Z
