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:
Green Caterpillar Garden Supplies 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. Green Caterpillar 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 80% 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, Green Caterpillar expects to pay $300,000 and $722,925 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 $30,000,000
Less: Operating costs, except depreciation and amortization 21,000,000
Less: Depreciation and amortization expenses 1,200,000 1,200,000
Operating income (or EBIT) $7,800,000
Less: Interest expense 780,000
Pre-tax income (or EBT) 7,020,000
Less: Taxes (25%) 1,755,000
Earnings after taxes $5,265,000
Less: Preferred stock dividends 200,000
Earnings available to common shareholders 5,065,000
Less: Common stock dividends 1,579,500
Contribution to retained earnings $3,485,500 $4,284,812