Question

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 60% 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, Cold Goose expects to pay $100,000 and $2,052,750 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 1 Year 2 (Forecasted) Net sales $20,000,000 12,000,000 Less: Operating costs, except depreciation and amortization Less: Depreciation and amortization expenses 800,000 Operating income (or EBIT) Less: Interest expense Pre-tax income (or EBT) Less: Taxes (25%) 800,000 $7,200,000 720,000 6,480,000 1,620,000 $4,860,000 100,000 4,760,000 1,701,000 $3,059,000 Earnings after taxes Less: Preferred stock dividends Earnings available to common shareholders Less: Common stock dividends Contribution to retained earnings $3,712,250

Answer 1

Cold Goose Income Statement
	Year 1	Year 2
Net Sales	20,000,000	25,000,000
Less: Operating Expenses	12,000,000	15,000,000
Less: Depreciation and Amortization	800,000	800,000
Operating Income	7,200,000	9,200,000
Less: Interest expense	720,000	1,380,000
Pre-tax Income	6,480,000	7,820,000
Less: Taxes	1,620,000	1,955,000
Earnings after taxes	4,860,000	5,865,000
Less: Preferred Stock Dividends	100,000	100,000
Earnings available to Common Shareholders	4,760,000	5,765,000
Less: Common Stock Dividends	1,701,000	2,052,750
Contribution to Retained Earnings	3,059,000	3,712,250

2 Bc 1 Cold Goose Income Statement Year 1 Year 2 3 Net Sales 20000000 =B3*1.25 4 Less: Operating Expenses 12000000 =C3*60% 5 Less: Depreciation and Amortization 800000 800000 6 Operating Income =B3-B4-B5 =C3-C4-C5 7 Less: Interest expense 720000 =C6*15% 8 Pre-tax Income =B6-B7 =C6-C7 9 Less: Taxes =B8*25% =C8*25% 10 Earnings after taxes =B8-B9 =C8-C9 11 Less: Preferred Stock Dividends 100000 100000 12 Earnings available to Common Shareholders (=B10-B11 =C10-C11 13 Less: Common Stock Dividends 11701000 1701000 2052750 14 Contribution to Retained Earnings =B12-B13 =C12-C13