balance sheets and income statements under different valuation rules Ralph manages a two-product firm. The major events, in terms of cash flow, are as follows.

a. Just before the start of period t = 1 the firm (a corporation) is formed by Ralph and friends investing 1,500 in cash.

b. Just after the start of period t = 1 the firm purchases equipment, paying cash, for 1,500.

c. At the end of period 1, 1,200 net cash flow is reeeived:

2,000 reeeived from the first product's customer;

400 wages paid;

300 paid to suppliers of materials; and 100 paid to miscellaneous suppliers.

d. Dividends of 1,200 are dec1ared and paid at the start of period 2.

e. At the end of period 2, 720 net cash flow is reeeived:

1,600 received from the second product's customer;

300 wages paid;

500 paid to suppliers of materials; and 80 paid to miscellaneous suppliers.

f Dividends of 720 are dec1ared and paid at the start of period 3 and the firm dissolves.

a] Prepare a series of three balance sheets (for the start of period 1, the end of period 1 and the end of period 2) and associated income statements for the two periods. The statements should be based on eeonomie valuation; assume an interest rate of 20%. (So the initial balanee sheet shows eash of 1,500 and capital stock of 1,500 and the first period ineome is 300.)

b] Prepare the same statements using aecrual accounting. For this purpose, assume the cash outflow at the end of period 1 is expensed in period 1; similarly, the eash outflow at the end of period 2 should be expensed in period 2. Also use straight line depreciation.

e] Repeat [a] assuming 1/4 of the eash outflow at the end of period 2 relates to the first product.

dj Is eeonomie ineome affected by the change in assumption in part [e]? Explain.

e J Of the firm's total ineome of 420, how mu ch can be assigned to each of the products? Do you see a conflict between the apparently unambiguous nature of eeonomie ineome measurement and the assignment of profit or eost to each of the products?

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