3. Income statement The income statement, also known as the profit and loss (P&L

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3. Income statement 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 Cold Goose Metal Works 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. Cold Goose 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 75% 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, Cold Goose expects to pay $300,000 and $1,876,163 of preferred and common stock dividends, respectively Complete the Year 2 income statement data for Cold Goose, then answer the questions that follow. Be sure to round each dollar value to the nearest whole dollar Cold Goose Metal Works Inc. Income Statement for Year Ending December 31 Year 2 Year 1 (Forecasted) $30,000,000 22,500,000 1,200,000 $6,300,000 630,000 5,670,000 2,268,000 $3,402,000 300,000 3,102,000 1,530,900 $1,571,100 Net sales Less: Operating costs, except depreciation and amortization Less: Depreciation and amortization expenses $37,500,000 28,125,000 1,200,000 Operating income(or EBIT) Less: Interest expense Pre-tax income (or EBT) Less: Taxes (40%) Earnings after taxes Earnings available to common shareholders Contribution to retained earnings Less: Preferred stock dividends 300,000 Less: Common stock dividends 1,876,163 $1,993,087 Given the results of the previous income statement calculations, complete the following statements In Year 2, if Cold Goose has 25,000 shares of preferred stock issued and outstanding, then each preferred share should expect to receive in annual dividends If Cold Goose has 200,000 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 Year2

Explanation / Answer

Year 1 = $3,102,000 / 200,000 = $15.51

Year 2 = $3,869,250 / 200,000 = $19.34625 or $19.35

Particulars Year 2 Net Sales ($30,000,000 + 25%) $37,500,000 Less: Operating costs, except depreciation and amortization ($37,500,000 x 75%) $28,125,000 Less: Depreciation and amortization $1,200,000 EBIT $8,175,000 Less: Interest ($8,175,000 x 15%) $1,226,250 EBT $6,948,750 Less: Taxes @40% $2,779,500 Earnings after taxes $4,169,250 Less: Preferred stock dividends $300,000 Earnings available to common stockholders $3,869,250 Less: Common stock dividends $1,876,163 Contribution to retained earnings $1,993,087

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