Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

The income statement, also known as the profit and loss (P&L) statement, provides a snapshot of the financial perforrmance of a company during a specified

image text in transcribed
image text in transcribed
image text in transcribed
The income statement, also known as the profit and loss (P&L) statement, provides a snapshot of the financial perforrmance 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: Fuzzy Button Clothing Company'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. 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 company's operating costs (excluding depreciation and amortization) remain at 70% 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, Fuzzy Button expects to pay $150,000 and $427,125 of preferred and common stock dividends, respectively. Complete the Year 2 Income statement data for Fuzzy Button, then answer the questlons that follow. Be sure to round each dollar value to the nearest hole dollar. Fuzzy Button Clothing Company Income Statement for Year Ending December 31 Year 2 (Forecasted) Year 1 $10,000,000 Net sales Lesa: Operating costs, except depreciation and amortization 7,000,000 Less: Depreciation and amortization expenses 400,000 400,000 Operating income (or EBIT) $2,600,000 Less: Interest expense 260,000 Pre-tax income (or EBT) Less: Taxes (40 % ) 2,340,000 936,000 Earnings after taxes Less: Preferred stock dividends $1,404,000 150,000 Earnings available to common shareholders Less: Common stock dividends Contribution to retained earnings 1,254,000 351,000 $903,000 $1,131,375 In Year 2, If Fuzzy Button has 10,000 shares of preferred stock issued and outstanding, then each preferred share should expect to receive in annual dividends. If Fuzzy Button has 200,000 shares of common stock issued and outstanding, then the firm's earnings per share (EPS) is expected to change in Year 2. from in Year 1 to Fuzzy Button's eanings before interest, taxes, depreciation and amortization (EBITDA) value changed from in Year 1 to in Year 2. It is to say that Fuzzy Button'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, $903,000 and $1,131,375, respectively. This is because statement involve payments and receipts of cash. of the item reported in the income

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Multinational Finance

Authors: Kirt C. Butler

4th Edition

1405181184, 978-1405181181

More Books

Students also viewed these Finance questions

Question

2. Be tactful, but dont avoid talking about tough issues.

Answered: 1 week ago

Question

1-4 How will MIS help my career?

Answered: 1 week ago