Question

Correctly answer all parts of question #3

Aa Aa E 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: Cute Carnel Woodcraft Company's income statement reports data for its first year of operation. The firm's CEO would like sales to increase by 25% net year. Cute Camel is able to achieve this level of increased sales, but its interest costs increase from 10% to 1S% of earnings before interest and taxes (EBIT). The mpany's operating costs (excluding depreciation and amortization) reman at 65% of net sales, and its depreciation and amortization expenses remain constant from year to year 1. 2 3. The company's tax rate remains constant at 40% of its pre-tax income or earnings before taxes (EBT). 4. In Year 2, Cute Camel expects to pay $300,000 and $1,824,525 of preferred and common stock dividends, respectively.

Answer 1

Cute Camel Woodcraft Company

Income statement for year ending December 31

Year 2 Net sales $ 25,000,000 less: operating cost 16,250,000 less: Depreciation and amortization expenses 800,000 operating inome 7,950,000 less: interest expenses 1,192,500 pre-tax Income 6,757,500 less: tax 40 % 2,703,000 earnings after taxes 4,054,500 less: preferred stock dividends 300,000 earnings available to common share holders 3,754,500 less: Common stock dividend 1,824,525 contribution to retained earnings 1,929, 975

working Notes

1. Net sales Increased by 25 % i.e, 20,000,000 x 25% = 25,000,000

2. operating cost 65% of Net Sales i.e, 25,000,000 x 65% = 16,250,000

3. Interest expenses - 15% of EBIT i.e., 7,950,000x15% = 1,192,500

4.tax- 40% of pre tax Income i.e, 6, 757,500 x 40% = 2,703,000

5. preferred stock and Common stock dividend already given in the problem - 300,000 and 1,824,525 respectively.

* In year 2, if Cute Camel has 25000 shares of preferred stock Issued and outstanding, then each preferred share should expect to receive $ 12 in annual dividends.

* If Cute Camel has 200000 shares of common stock issued and outstanding, then firm's earning per share [EPS] is expected to change from $ 15.24 in year 1 to $ 18.77 in year2

EPS = Net Income - preferred dividend / Average Stock outstanding i.e, $ 30,48,000/ 200000 for 1 year = $ 15.24, for 2 year Eps-$ 3754500/200000 = $ 18.77

*Cute Camel's before Interest, taxes, depreciation and amortization [EBITDA] value changed from $ 7,000,000 in year 1 to $ 8,750,000 in year 2

*It is incorrect to say that cute Camel's net inflows and outflows of cash at the end of years 1 and 2 equal to the company's annual contribution to retained earning $ 1, 541, 400 and $ 1,929, 975 respectively. This is because of all of these item reported in the income statement does not involve payment and receipt of cash.