The income statement, also known as a profit and loss (P&L) statement, provides a snapshot of a companys financial performance during a specified period of time. It reports a firms gross income, expenses, net income, and the income that is available for distribution to its preferred and common shareholders.

The income statement is prepared using the generally accepted accounting principles (GAAP) that match the firms revenues and expenses to the period in which they are incurred, not necessarily when cash is received or paid. Investors and analysts use the information presented in the income statement, and the other financial statements and reports, to evaluate the companys financial performance and condition.

Consider the following scenario:

Blue Hamster Manufacturing Inc.s income statement reports data for its first year of operation. The firms CEO would like sales to increase by 25% next year.

1.Blue Hamster 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 companys operating costs (excluding depreciation and amortization) remain at 70.00% of net sales, and its depreciation and amortization expenses remain constant from year to year.3.The companys tax rate remains constant at 40% of its pre-tax income or earnings before taxes (EBT).4.In Year 2, Blue Hamster expects to pay $100,000 and $896,963 of preferred and common stock dividends, respectively.

Complete the Year 2 income statement data for Blue Hamster, then answer the questions that follow. Round each dollar value to the nearest whole dollar.

Blue Hamster Manufacturing Inc.Income StatementYears Ending December 31Year 2 (Forecasted)Year 1Net sales$15,000,000Fixed operating costs, except depreciation and amortization

(

)

(10,500,000)Depreciation and amortization expenses(600,000)(600,000)Net operating income (or EBIT)$3,900,000Interest

(

)

(390,000)Earnings before taxes (or EBT)$3,510,000Taxes (40%)

(

)

(1,404,000)Net Income$2,106,000Preferred dividends

(

)

(100,000)Earnings available to common stockholders (EAC)$2,006,000Common dividends

(

)

(737,100)Addition to retained earnings$1,565,787$1,268,900