In: Finance
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:
Cute Camel Woodcraft 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. | Cute Camel 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 25% of its pre-tax income or earnings before taxes (EBT). |
4. | In Year 2, Cute Camel expects to pay $200,000 and $1,281,375 of preferred and common stock dividends, respectively. |
Complete the Year 2 income statement data for Cute Camel, then answer the questions that follow. Be sure to round each dollar value to the nearest whole dollar.
Given the results of the previous income statement calculations, complete the following statements:
Cute Camel Woodcraft Company |
||
---|---|---|
Income Statement for Year Ending December 31 |
||
Year 1 | Year 2 (Forecasted) | |
Net sales | $20,000,000 | |
Less: Operating costs, except depreciation and amortization | 14,000,000 | |
Less: Depreciation and amortization expenses | 800,000 | 800,000 |
Operating income (or EBIT) | $5,200,000 | |
Less: Interest expense | 520,000 | |
Pre-tax income (or EBT) | 4,680,000 | |
Less: Taxes (25%) | 1,170,000 | |
Earnings after taxes | $3,510,000 | |
Less: Preferred stock dividends | 200,000 | |
Earnings available to common shareholders | 3,310,000 | |
Less: Common stock dividends | 1,053,000 | |
Contribution to retained earnings | $2,257,000 | $2,789,875 |
In Year 2, if Cute Camel has 5,000 shares of preferred stock issued and outstanding, then each preferred share should expect to receive 100,000 - 80,000 - 40,000 - 60,000 in annual dividends. |
If Cute Camel has 400,000 shares of common stock issued and outstanding, then the firm’s earnings per share (EPS) is expected to change from 13 - 11.70 - 8.78 - 8.28 in Year 1 to 16.75 - 10.18 - 10.68- 14.24 in Year 2. |
Cute Camel’s earnings before interest, taxes, depreciation and amortization (EBITDA) value changed from 8,710,000 - 6,000,000 - 6,370,000 - 19,200,000 in Year 1 to 26,005,000 - 7,500,000 - 21,771,250 - 10,971,250 in Year 2. |
It is correct - incorrect to say that Cute Camel’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, $2,257,000 and $2,789,875, respectively. This is because all but one - all of the items reported in the income statement involve payments and receipts of cash. |
SEE THE IMAGE. ANY DOUBTS, FEEL FREE TO ASK. THUMBS UP PLEASE
dividend on preference share = 40 per share, i think options have some mistake