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

Consider the following scenario:

Green Caterpillar Garden Supplies 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.

$1.$ Green Caterpillar 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 $60\%$ 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 $2,$ Green Caterpillar expects to pay $$100,000$ and $$1,407,600$ of preferred and common stock dividends, respectively.

Complete the Year $2$ income statement data for Green Caterpillar, then answer the questions that follow. Be sure to round each dollar value to the nearest whole dollar.

Green Caterpillar Garden Supplies Inc. Income Statement

For Year Ending December $31$

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

Net sales $$15,000,000$

$$18,750,000$

Less: Operating costs, except depreciation and amortization $9,000,000$

$11,250,000$

Less: Depreciation and amortization expenses $600,000$

$600,000$

Operating income $($or EBIT$)$ $$5,400,000$

$$6,900,000$

Less: Interest expense $540,000$

$1,035,000$

Pre$-$tax income $($or EBT$)4,860,000$

$5,865,000$

Less: Taxes $(40\%)1,944,000$

Earnings after taxes $$2,916,000$

$

Less: Preferred stock dividends $100,000$

Earnings available to common shareholders $2,816,000$

Less: Common stock dividends $1,166,400$

Contribution to retained earnings $$1,649,600$