Question

The income statement, also known as the profit and loss (P&L) statement, provides a snapshot of the financial perforrmance 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: Fuzzy Button Clothing 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. Fuzzy Button 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 40% of its pre-tax income or earnings before taxes (EBT). 4. In Year 2, Fuzzy Button expects to pay $150,000 and $427,125 of preferred and common stock dividends, respectively.

Answer 1

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ACCOUNTS latest - Microsoft Excel (Product Activation Failed) View Add-Ins File Home Insert Page Layout Formulas Data Review - 2x % Cut Σ AutoSum : A 11 Dr General AA = = = A E E = 5 Wrap Text Fat Merge Merge & Center Center U st $ - % $ % , .0 .00 8. Insert Delete Format Conditional Format Formatting as Table Styles Cell Styles Fill 2 Clear Sort & Filter Editing Find & Select Alignment Number Cells Calibri E Copy Paste Format Painter B I Clipboard AY764 AR AS 755 D Font fix AT AU AV AW AX AY A Z BA 756 LESS LESS EBIT 757 758 759 760 761 762 763 764 765 766 767 LESS YEAR 1 YEAR 2 (FORECASTED) NET SALES 10000000 12500000 OPERATING COST 7000000 8750000 70% OF SALES DEPRECIATION & AMORT EXP 400000 400000 2600000 3350000 INTEREST 260000 502500 2340000 2847500 TAX 936000 1139000 1404000 1708500 PREFERRED STOCK DIVIDEND 150000 150000 EARNINGS FOR COMMON SHAREHOLDERS 1254000 1558500 COMMON STOCK DIVIDENDS 351000 427125 CONTRIBUTION TO RETAINED EARNINGS 903000 1131375 EBT LESS EAT 000 LESS 768 LESS 769 770 771 NO OF SHARES EPS 200000 6.27 200000 7.79 772 773 FIFO budget 45 days cycle ROE, BV MV ratio VARIANCE BEP, OL FL ratios DETROIT float B-S profit loss SALES BUDGET dupont 0 CASH BUDGET ferences: CR58 DIFF ANALYSIS BO ovel < 130% Rea _ 0 + D E R 9 * * OENG 01-12-2019

- O WOULD File Home Insert In Year - Microsoft Word (Product Activation Failed) View Page Layout References Mailings Review Cut Ea Copy Paste - Format Painter Clipboard Calibri (Body) - 12 AA Aa A S E T 1 T АавьСcІ АавьСcІ АаВЫС Аавьсс Аав Аавьсс. АавьСcl | BI Uabe X, X Aab-A ETT 1 Normal 1 No Spaci... Heading 1 Heading 2 Title Subtitle Subtle Em... Font Paragraph Styles 12 :1:1:1: 1:1:1:2:1 3:14:15:1:6:1:7:18:19 :110 | 11 | 12 | 13 | 14 | 15 | 16 4 17 1 Change Styles Find ac Replace hos Select Editing 18 : 1: 1: 1.2 In Year 2, if Fuzzy Button has 10,000 shares of preferred stock issued and outstanding, then each preferred share should expect to receive $15 in annual dividends. (150000/10000) 1: ' 2:1 If Fuzzy Button has 200,000 shares of common stock issued and outstanding, then the firm's earnings per share (EPS) is expected to change from $6.27 (=1254000/200000) in Year 1 to $7.79 (=1558500/200000) in Year 2. ' ' 3 1 ' 4 1 Fuzzy Button 's before interest, taxes, depreciation and amortization (EBITDA) value changed from $3,000,000 (=10,000,000 - 7,000,000) in Year 1 to $3,750,000 (=12,500,000- 8,750,000) in Year 2 '5 '1 ' 6 '1 ' 7 It is to WRONG say that Fuzzy Button '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, $903,000 and $1,131,375, respectively. This is because NOT ALL of the item reported in the income statement involve payments and receipts of cash. ' '8 I Pag ds: 3,816 English (India) DE 33 130% 1a e 9 . B A .lll 01-12-2019