a. Prepare an income statement and statement of cash Ous financing proposals h. Write a short memorandum explaining why one financing alternative provides more come but less cash flow than the other ATC 10-7 Ethical Dilemma I don't want to pay taxes Dana Harbert recently started a very successful small business. Indeed, the business had grown so rapidly that she was no longer able to finance its operations by investing her own resou in the business. She needed additional capital but had no more of her own money to put into riend, Gene Watson, was willing to invest $100,000 in the business. Harbert ncrease revenue by estimated that with Watson's investment, the company would be able to i S40,000. Furthermore, she believed that operating expenses would increase by on Harbert and Watson agree that Watson's investment should entitle him to receive a casn equal to 20 percent of net income. A set of forecasted statements with and without s investment is presented here. (Assume that all transactions involving revenue dividend expense, and dividends are cash transactions.) Financial Statements Forecast 2 Forecast 1 without Watson's Investment with Watson's Investment Income Statements $160,000 (77,000) Revenue Operating expenses Income before interest and taxes income tax expense (effective tax rate is 30%) Net income $120,000 0,000) (15,000) S 35,000 S 58,100 Statements of Changes in Stockholders' Equity Beginning retained earnings Plus: Net income Less: Dividend to Watson (20% of S58, 100) Ending retained earnings $ 15,000 35,000 S 15,000 58,100 50,000 61.480 Balance Sheets Assets (computations explained in following paragraph) $400,000 $511,480 Equity Common stock Retained earnings 350,000 50,000 $400,000 61,480 $511.480 Total liabilities and equity