ManagementThe income statement, also known as the profit and loss (P&L) statement, provides a snapshot of the financial performance of a company during aspecified period of time. It reports a firm's gross income, expenses, net income, and the income that is available for distribution to its preferred andcommon shareholders.The income statement is prepared using the generally accepted accounting principles (GAAP) that match the firm's revenues and expenses to the periodin which they were incurred, not necessarily when cash was received or paid. Investors and analysts use the information given in the income statementand 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% nextyear.1. Fuzzy Button is able to achieve this level of increased sales, but its interest costs increase from 10% to 15% of earnings before interestand taxes (EBIT).2. The company's operating costs (excluding depreciation and amortization) remain at 60% of net sales, and its depreciation andamortization 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 $1,173,000 of preferred and common stock dividends, respectively.Complete the Year 2 income statement data for Fuzzy Button, then answer the questions that follow. Be sure to round each dollar value to the nearestwhole dollar.Fuzzy Button Clothing CompanyIncome Statement for Year Ending December 3178° TagementFuzzy Button Clothing CompanyIncome Statement for Year Ending December 31Year 1Year 2 (Forecasted)Net sales$20,000,000$4Less: Operating costs, except depreciation and amortization12,000,000Less: Depreciation and amortization expenses800,000800,000Operating income (or EBIT)$7,200,000Less: Interest expense720,000Pre-tax income (or EBT)$6,480,000$4Less: Taxes (40%)2,592,000Earnings after taxes$3,888,000$4Less: Preferred stock dividends150,000Earnings available to common shareholders$3,738,000$4Less: Common stock dividends972,000Contribution to retained earnings$2,766,000$3,369,000Given the results of the previous income statement calculations, complete the following statements:• In Year 2, if Fuzzy Button has 10,000 shares of preferred stock issued and outstanding, then each preferred share should expect to receivein annual dividends.• 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 fromin Year 1 toin Year 2.• Fuzzy Button's before interest, taxes, depreciation and amortization (EBITDA) value changed fromin Year 1 toin Year 2.• It isto 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 annualcontribution to retained earnings, $2,766,000 and $3,369,000, respectively. This is becauseof the items reported in the incomestatement involve payments and receipts of cash.

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The income statement, also known as the profit and loss (P&L) statement, provides a snapshot of the financial performance of a company d 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 p in which they were incurred, not necessarily when cash was received or paid. Investors and analysts use the information given in the income stater 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% year. Fuzzy Button is able to achieve this level of increased sales, but its interest costs increase from 10% to 15% of earnings before interest

The income statement, also known as the profit and loss (P&L) statement, provides a snapshot of the financial performance of a company d 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 p in which they were incurred, not necessarily when cash was received or paid. Investors and analysts use the information given in the income stater 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% year. Fuzzy Button is able to achieve this level of increased sales, but its interest costs increase from 10% to 15% of earnings before interest

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Chapter1: Financial Statements And Business Decisions

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Question

Management
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:
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 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 40% of its pre-tax income or earnings before taxes (EBT).
4. In Year 2, Fuzzy Button expects to pay $150,000 and $1,173,000 of preferred and common stock dividends, respectively.
Complete the Year 2 income statement data for Fuzzy Button, then answer the questions that follow. Be sure to round each dollar value to the nearest
whole dollar.
Fuzzy Button Clothing CompanyIncome Statement for Year Ending December 31
78°

Tagement
Fuzzy Button Clothing CompanyIncome Statement for Year Ending December 31
Year 1
Year 2 (Forecasted)
Net sales
$20,000,000
$4
Less: Operating costs, except depreciation and amortization
12,000,000
Less: Depreciation and amortization expenses
800,000
800,000
Operating income (or EBIT)
$7,200,000
Less: Interest expense
720,000
Pre-tax income (or EBT)
$6,480,000
$4
Less: Taxes (40%)
2,592,000
Earnings after taxes
$3,888,000
$4
Less: Preferred stock dividends
150,000
Earnings available to common shareholders
$3,738,000
$4
Less: Common stock dividends
972,000
Contribution to retained earnings
$2,766,000
$3,369,000
Given the results of the previous income statement calculations, complete the following statements:
• In Year 2, if Fuzzy Button has 10,000 shares of preferred stock issued and outstanding, then each preferred share should expect to receive
in annual dividends.
• 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
in Year 1 to
in Year 2.
• Fuzzy Button's before interest, taxes, depreciation and amortization (EBITDA) value changed from
in Year 1 to
in Year 2.
• It is
to 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, $2,766,000 and $3,369,000, respectively. This is because
of the items reported in the income
statement involve payments and receipts of cash.

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