The income statement, also known as the profit and loss (PRO) statement, provides a snapshot of the financial performance of a company during a specified period of time. It reports firm's gross income, expenses, net income, and the income that is available for distribution to its preferred and common thareholders The income statement is prepared using the generally accepted accounting principles (GAAP) that match the firm's revenues and expenses to the pened 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 Blue Hamster Manufacturing Inc.'s income statement reports data for its furst 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% of net sales, and its depreciation and amortization expenses remain constant from year to year 3. The company's tax rate remains constant at 10% of its pre-tax income or earnings before taxes (EBT) 4. In Year 2. Blue Hamster expects to pay $200,000 and $1,824,525 of preferred and common stock dividends, respectively. Blue Hamster Manufacturing Inc. Income Statement For Year Ending December 31 Year 1 Year 2 (Forecasted) Net sales $30,000,000 S Less Operating costs, except depreciation and amortiration 19,500,000 Les Depreciation and amortization expenses 1,200,000 Operating income (or EBIT) $9,300,000 ass: Interest expense 930,000 Pre-tax income (or EBT) 8,370,000 Less Taxes (406) 3,348,000 Earnings after taxes $5,022,000 Less: Preferred stock dividends 200,000 Earnings available to common shareholders 4,822.000 Less Common stock dividends 3,506,600 Contribution to retained earnings $3,315,400 Given the results of the previous income statement calculation, complete the following statements: In Year 2, if Blue Hamster has 5.000 shares of preferred stock und and outstanding, then each preferred she should expect to receive in annual dividends. - Blue Hamster as 400,000 shares of common stock issued and outstanding, then the firm's earnings per stare (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 to say that Blomster's niet in and outflows of cash at the end of Years and are equal to the company's contribution to retained earnings. This is because of the item reported in the income statement involve payments and receipts of
