8. Income statement Aa Aa E 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: Blue Hamster Manufacturing 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. Blue Hamster 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 75% 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, Blue Hamster expects to pay $100,000 and $1,216,031 of preferred and common stock dividends, respectively. Complete the Year 2 income statement data for Blue Hamster, then answer the questions that follow. Be sure to round each dollar value to the nearest whole dollar. Blue Hamster Manufacturing Inc. Income Statement for Year Ending December 31 Year 1 Year 2 (Forecasted) $31,250,000 23,437,500 1,000,000 Net sales Less: Operating costs, except depreciation and amortization Less: Depreciation and amortization expenses Operating income (or EBIT) Less: Interest expense Pre-tax income (or EBT) Less: Taxes (40%) Earnings after taxes Less: Preferred stock dividends Earnings available to common shareholders Less: Common stock dividends Contribution to retained earnings $25,000,000 18,750,000 1,000,000 $5,250,000 525,000 4,725,000 1,890,000 $2,835,000 100,000 2,735,000 992,250 $1,742,750 $2,158,344 Given the results of the previous income statement calculations, complete the following statements: In Year 2, if Blue Hamster has 10,000 shares of preferred stock issued and outstanding, then each preferred share should expect to receive in annual dividends. Different companies have different debt-related expenses, depreciation and amortization expenses, and tax expenses. Changes in any of these variables can affect a company's income statement. Specifically, an increase in Blue Hamster's interest expense will cause its net income to Blue Hamster's before interest, taxes, depreciation and amortization (EBITDA) value changed from in Year 2. in Year 1 to It is to say that Blue Hamster'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, $1,742,750 and $2,158,344, respectively. This is because of the item reported in the income statement involve payments and receipts of cash