On January $2,2003,$ Alexander, together with a number of relatives and friends, established

Chemalite, Inc.; $500,000$ shares were issued,of which Alexander received $125,000$ in exchange forhis

patent, and the remainder were sold to the other investors at $ per share. During the period January

$2,2003,$ through June $30,2003,$ Chemalite, Inc., made the following expenditures:

$$January $15-$Paid $$7,500$ in legal fees, charter costs, and printing expenses associated with the

incorporation of the company.

$$

June $15-$Spent $$62,500$ building the machinery that would be used to produce the first

commercial models of the Chemalite.

June $24-$Purchased $$75,000$ worth of plastics and chemicals for use in the production of

commercial Chemalites.

Toward the end of June, Alexander, who had assumed a very active role in the management of

Chemalite, Inc., met with the rest of the stockholders to present a state of the corporation report and

to discuss strategies for the future marketing of the Chemalites. He was hopeful that the company

would be producing Chemalites by the end of August. Susan Peterson, a friend of Alexander who

had invested a substantial sum in the company, indicated at the meeting that she had received

inquiries from an auto parts distributor about the availability of Chemalites and their expected price.

The distributor wished to purchase a substantial number of the lights as part of a highway safety

promotion and was interested in pursuing the possibility of private branding.

At this point in the meeting, Mr$.$ Larson, one of the stockholders, but a man with very little

business experience and even less understanding of financial statements, interjected: $$All this

Visiting Professor David A$.$ Wilson prepared this case and it was revised by Professor Charles Christensen. HBS cases are developed solely as the

basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management.

Chemalite,Inc.

discussion of what we are going to do is well and good, but all I can see is that six months ago we

had $$375,000$ and now we have $$230,000.$ By my reckoning, we've managed to lose $$145,000$ in six

months and haven't much to show for it$."$

Some of the stockholders agreed with Larson. Indeed, between January $2$ and June $30,$the

company's bank balance had fallen from $$375,000$ to $$230,000.$ Ms$.$ D'Cruz, a stockholder, suggested

that since Chemalite's operations were not in full swing, these preoperating outlays should probably

be considered more as investments in the business by the business rather than as losses. After

considerable discussion by all the stockholders, it was agreed that they would meet again in early

January $2004$ to study the state of the corporation. It was generally felt that the company should be in

full operation by then and that the problems created by the preoperating period spoken of would be

overcome by year$-$end.

During the last half of $2003,$ Chemalite, Inc., did indeed go into full operation. To prepare for the

shareholders' meeting in early January $2004,$ Bill Murray, the firm's recently hired bookkeeper,

produced the following data:

$1.$ In early July $2003,$ a consulting engineer delivered the prototypes of the Chemalite that he had

been developing, and he was paid a total of $$23,750.$

$2.$ During the six months from July to December $2003,$ Chemalite sold $$754,500$ of its product.

The largest single purchaser, the auto parts distributor with whom Peterson had negotiated,

still owed Chemalite, Inc., $$69,500.$ All other customers' accounts were paid in full by year$-$

end.

$3.$ Additional chemicals and plastics were purchased for a total of $$175,000.$ All of these

purchases were paid for in cash.

$4.$ Chemalite, Inc., spent $$22,500$ on televiion and trade journal advertising to introduce the

product.

$5.$ During the six months ended December $31,2003,$ the company expended $$350,000$ on direct

manufacturing labor and on manufacturing$-$related overhead $($rent$,$ utilities, supervisory

labor$).$ An additional $$80,000$ was spent on corporate salaries and other corporate expenses.

$6.$ In early July, a further $$150,000$ was spent on machinery to be used in the production of

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