Exercise 2-3 Required: Compute 2014 earnings per share. (Extreme Edge had 50,000 shares of stock outstanding in 2014). The various income categories mentioned above result from Extreme Edge's income statement presentation method. As noted, the Internet firm reported four expense categories, each of which resulted in a measure of profit (e.g., gross profit, income from continuing operations, pretax income, and net income). Managers refer to this type of disclosure as a multiple-step income statement. Conversely, a single-step income statement first reports all categories of revenues and gains, and then subtracts all expenses and losses from them to determine pretax income. While GAAP allows either method, managers find the multiple-step format more informative and often recast single-step income statements into multiple-step ones. Cost of goods sold (cost of sales) is the historical cost of inventory sold during a reporting period. Merchants and manufacturers deduct their cost of sales from sales revenues to determine gross profit (gross margin or gross profit margin). Extreme Edge's gross profits were $400,000 in 2012 and $540,000 in 2013. Apart from its cost of goods sold, Extreme Edge's other expenses consist of operating expenses (sometimes called selling, general and administrative, or SG&A, expenses). Deducting these recurring expenses from gross profit determines income from continuing operations (or operating income). This income number represents earnings from core business activities. Our Internet merchant made income from continuing operations of $55,000 from selling merchandise in its second year of business (2013). Other revenues (and gains) and expenses and losses) change income, but do not affect operating income. The most prominent item in this category is interest on borrowed funds. Extreme Edge incurred a $20,000 interest (financial) expense in 2013, which represented interest on borrowed funds (i.e., notes payable).' Adjusting operating income for non-operating expenses and revenues) produces income before taxes or (pretax income). Governments tax these earnings on a percentage basis, producing income tax expense (provision for income tax). Extreme Edge's tax rate was 40% for each year reported, as derived by dividing income tax expense by pretax earnings. In 2012, for example, we compute the income tax rate as follows: $22,000/S55,000 = 40%. computations) Exhibit 2-1 Extreme Edge Financial Statements in thousands of S) Mainad For the Year Ended December 2014 2013 2012 $1305 Cost of Princess Nam Dodaci N owy 2013 N Dividende Halance of the 31, 2013 ce of 1. 2014 Cecil parale Dividends declared and paid Balance of the 2014 ses e b ile olan bulan C w ty ack 450017 Total de Retained in Total Shared Equity Tural Liabilities and Shareholders' Equity 9135 55 A Ma s of Cash Flows in the anda) Par er add the SI Cathew Total contributed capital 500 Retained earnings 66 Total Shareholders' Equity 566 Total Liabilities and Shareholders' Equity $ 9155 500 420 44 25 544_445 835$ 780 2114 2113 2112 24 S 120 21 $ 120 33 100 Statements of Cash Flows (in thousands) For the Year Ended December 31 Cash flows from operating activities: Net Income Depreciation expense, equipment Changes in current accounts: Accounts Receivable Inventory Prepaid Expenses Accounts Payable Accrued Liabilities Net cash provided (used) by operating activities (35) (20) (45) (120) (220) (10) 160 (110) (34) 55 144 Cash flows from investing activities: Purchase of equipment Net cash provided (used) by investing activities . - _(100)_(500) (100) (500) - Cash flows from financing activities: Issue (retire) notes payable Issue common stock Pay cash dividend Net cash provided (used) by financing activities Net change in cash _(2)_ (2) 142 S 100 80 (2)__ 178 15 S 120 420 (8) 532 30 $ Cash, beginning of the year Net change in cash Cash, end of the year $ 45 $ -142- $ 187 $ 30$ 15 - 45 $ . 30 30 Our discussion of the financial statement disclosures in this chapter will be limited to 2012 and 2013, the first two years of operations. Data from the last year's financial statements, 2014, will serve as inputs for chapter exercises