Copyright

Blue Hamster Manufacturing Inc.'s income statement reports data for its first year of operation....

Question:

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 $300,000 and $1,563,469 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)
Net sales $25,000,000 _______
Less: Operating costs, except depreciation and amortization 18,750,000 _______
Less: Depreciation and amortization expenses 1,000,000 1,000,000
Operating income (or EBIT) $5,250,000 _______
Less: Interest expense 525,000 _______
Pre-tax income (or EBT) 4,725,000 _______
Less: Taxes (40%) 1,890,000 _______
Earnings after taxes $2,835,000 _______
Less: Preferred stock dividends 200,000 _______
Earnings available to common shareholders $2,535,000 _______
Less: Common stock dividends 1,275,750 _______
Contribution to retained earnings $1,259,250 $1,610,906

■ In Year 2, if Blue Hamster has 25,000 shares of preferred stock issued and outstanding, then each preferred share should expect to receive _____ in annual dividends.

■ If Blue Hamster 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 3.

■ Blue Hamster's before interest, taxes, depreciation, and amortization (EBITDA) value changed from _____ in Year 1 to _____ in Year 2.

■ 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, $1,259,250 and $1,610,906, respectively. This is because _____ of the item reported in the income statement involve payments and receipts of cash.

Income Statement:

The income statement must be prepared to prepare the balance sheet because the net income calculated in the income statement is transferred to the retained earnings of the company to calculate the total shareholders' equity.

Answer and Explanation:

Blue Hamster Manufacturing Inc.
Income Statement
for Year Ending December 31
Particular Year 1 Year 2 (Forecasted)
Net sales 25000,000 31250000
Less: Operating costs, except depreciation and amortization 18750000 23437500
Less: Depreciation and amortization expenses 1000000 1000000
Operating income (or EBIT) 5250000 6812500
Less: Interest expense 525000 1021875
Pre-tax income (or EBT) 4725000 5790625
Less: Taxes (40%) 1890000 2316250
Earnings after taxes 2835000 3474375
Less: Preferred stock dividends 200000 300000
Earnings available to common shareholders 2535000 3174375
Less: Common stock dividends 12,75,750 1563469
Contribution to retained earnings 1259250 1610906

  • In Year 2, if Blue Hamster has 25,000 shares of preferred stock issued and outstanding, then each preferred share should expect to receive $12 (300,000 / 25,000) in annual dividends.
  • If Blue Hamster has 200,000 shares of common stock issued and outstanding, then the firm's earnings per share (EPS) is expected to change from $6.38 (12,75,750 / 200,000) in Year 1 to $7.82 (15,63,469 / 200,000) in Year 3.
  • Blue Hamster's before interest, taxes, depreciation, and amortization (EBITDA) value changed from $6,250,000 in Year 1 to $7,812,500 in Year 2.
  • It is hard 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, $1,259,250 and $1,610,906, respectively. This is because few of the item reported in the income statement involve payments and receipts of cash.

Learn more about this topic:

Loading...
What Is an Income Statement? - Purpose, Components & Format

from Accounting 101: Financial Accounting

Chapter 2 / Lesson 2
45K

Related to this Question

Explore our homework questions and answers library