cash versus accruai recognition Ralph has designed a consumer product, and launched a manufaeturing and sales organization. To keep the problem uncluttered, the organization has a life of exactly three years. The organization is incorporated at time t = 0, with Ralph acquiring all shares for 1,389.93. (No apologies are o ffe re d for this obtuse amount.)

You will also notice Ralph lives in a tax-free environment.

Subsequent to incorporation, the following cash transactions occur.

time t = 0 end yr 1 end yr 2 end yr 3 payment for equipment 1,389.93 materials 200 100 0 labor 300 400 300 sundry serviees 200 600 600 receipt from enstomers 1,400 1,600 1,500 disposal of equipment 0 dividends paid 1,800 Any cash on hand is held in a non-interest bearing aecount.

a] Assume straight line depreciation. Prepare income statements and end-ofperiod balanee sheets for each of the three years. Treat the material, labor, and administrative items as eompletely expensed in the year incurred. Also treat the customer reeeipts as revenue in the year reeeived. (For the final year, prepare the balanee sheet assuming the dividends have been paid. It may, however, be instructive to eonstruct the balance sheet as of the end of the final year and just before the final dividend is declared and paid.)

b] Repeat the above, using eash basis accounting. Here the focus should be on the faet the only asset reeognized is the end-of-period eash balanee. OO the three eash ineome statements, and then the balanee sheets if this is not clearo (Hint: assets total 700 at the end of year 1.)
e] Prepare a brief paragraph explaining why the total ineome over the 3 years is the same in the eash basis and aecroal basis models.AppendixLO1