Question
The income statement , also known as a profit and loss (P&L) statement , provides a snapshot of a companys financial performance during a specified
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:
Fuzzy Button Clothing Companys income statement reports data for its first year of operation. The firms CEO would like sales to increase by 25% next year.
| 1. | Fuzzy Button 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 80.00% 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, Fuzzy Button expects to pay $200,000 and $321,300 of preferred and common stock dividends, respectively. |
Complete the Year 2 income statement data for Fuzzy Button, then answer the questions that follow. Round each dollar value to the nearest whole dollar.
| Fuzzy Button Clothing Company | ||
|---|---|---|
| Income Statement | ||
| Years Ending December 31 | ||
| Year 2 (Forecasted) | Year 1 | |
| Net sales | $10,000,000 | |
| Fixed operating costs, except depreciation and amortization | (
) | (8,000,000) |
| Depreciation and amortization expenses | (400,000) | (400,000) |
| Net operating income (or EBIT) | $1,600,000 | |
| Interest | (
) | (160,000) |
| Earnings before taxes (or EBT) | $1,440,000 | |
| Taxes (40%) | (
) | (576,000) |
| Net Income | $864,000 | |
| Preferred dividends | (
) | (200,000) |
| Earnings available to common stockholders (EAC) | $664,000 | |
| Common dividends | (
) | (259,200) |
| Addition to retained earnings | $549,700 | $404,800 |
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