The income statement, also known as a profit and loss $($P&L$)$ statement, provides a snapshot of a company$$s financial performance during a specified period of time. It reports a firm$$s 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 firm$$s revenues and expenses to the period in which they are incurred, not necessarily when cash is received or paid. Investors and analysts use the information presented in the income statement, and the other financial statements and reports, to evaluate the company$$s financial performance and condition.

Consider the following scenario:

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

$1.$ 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 company$$s operating costs $($excluding depreciation and amortization$)$ remain at $65\mathrm{.}00\%$ 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 $2,$ Blue Hamster expects to pay $$100,000$ and $$1,419,075$ 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 Statement for Year Ending December $31$

Year $1$ Year $2($Forecasted$)$

Net sales $$20,000,000$

$

Less: Operating costs, except depreciation and amortization $13,000,000$

Less: Depreciation and amortization expenses $800,000800,000$

Operating income $($or EBIT$)$ $$6,200,000$

$

Less: Interest expense $620,000$

Pre$-$tax income $($or EBT$)$ $$5,580,000$

$

Less: Taxes $(40\%)2,232,000$

Earnings after taxes $$3,348,000$

$

Less: Preferred stock dividends $100,000$

Earnings available to common shareholders $$3,248,000$

$

Less: Common stock dividends $1,171,800$

Contribution to retained earnings $$1,828,925$ $$2,535,425$

Given the results of the previous income statement calculations, complete the following statements:

$$ In Year $2,$ if Blue Hamster has $10,000$ shares of preferred stock issued and outstanding, then each preferred share should expect to receive in annual dividends.

$$ If Blue Hamster has $500,000$ shares of common stock issued and outstanding, then the firm$$s earnings per share $($EPS$)$ is expected to change from in Year $1$ to in Year $2.$

$$ Blue Hamster$$s before interest, taxes, depreciation and amortization $($EBITDA$)$ value changed from in Year $1$ to in Year $2.$

$$ It is to say that Blue Hamster$$s net inflows and outflows of cash at the end of Years $1$ and $2$ are equal to the company$$s annual contribution to retained earnings, $$1,828,925$ and $$2,535,425,$ respectively. This is because of the items reported in the income statement involve payments and receipts of cash.