The Red-Bearded Baron

Once upon a time many, many years ago, a feudal landlord lived in a small province of
Central Europe. The landlord, called the Red Bearded Baron, lived in a castle high on a
hill. This benevolent fellow took responsibility for the wellbeing of many peasants who
occupied the lands surrounding his castle. Each spring, as the snow began to melt, the
Baron would decide how to provide for all his serf dependents during the coming year.
One spring, the Baron was thinking about the wheat crop of the coming growing season.
!" believe that #$ acres of my land, being worth five bushels of wheat per acre, will
produce enough wheat for ne%t winter,& he mused, !but who should do the farming' "
believe "(ll give "van the "ndefatigable and "gor the "mmutable the task of growing the
wheat.& )hereupon he summoned "van and "gor, two gentry noted for their hard work
and not overly active minds, for an audience.
!"van, you will farm on the *$acre plot of ground, and "gor will farm the +$acre plot,&
the Baron began. !" will give "van *$ bushels of wheat for seed and *$ pounds of
fertili,er. -Twenty pounds of fertili,er are worth two bushels of wheat.. "gor will get +$
bushels of wheat for seed and +$ pound of fertili,er. " will give each of you an o% to pull
a plow, but you will have to make arrangements with /eyador, the 0lowmaker, for a plow.
The o%en, incidentally, are only three years old and have never been used for farming, so
they should have a good +$ years of farming ahead of them. Take good care of them,
because an o% is worth 1$ bushels of wheat. Come back ne%t fall and return the o%en and
the plows along with your harvest.&
"van an "gor bowed and withdrew from the 2reat 3all, taking with them the things
provided by the Baron.
The summer came and went. 4fter the harvest "van and "gor returned to the 2reat 3all to
account to their master for the things given them in the spring. "van, pouring **# bushels
of wheat onto the floor, said, !5y 6ord, " present you with a slightly used o%, a plow
broken beyond repair, and **# bushels of wheat. ", unfortunately, owe /eyador, the
0lowmaker, three bushels of wheat for the low " got from him last fall. 4nd, as you might
e%pect, " used all the fertili,er and seed you gave me last spring. 7ou will also remember,
my 6ord, that you took *$ bushels of my harvest for your own personal use.&
"gor, who had seen given +$ acres of land, +$ bushels of wheat, and +$ pounds of
fertili,er, spoke ne%t. !3ere, my 6ord, is a partially usedup o%, the plow for which " gave
/eyador, the 0lowmaker, three bushels of wheat from my harvest, and +$8 bushels of
wheat. ", too, used all my seed and fertili,er last spring. 4lso, my 6ord, you took #$
bushels of wheat several days ago for your own table. " believe the plow is good for two
more seasons.&
!9naves, you did well,& said the Red Bearded Baron. Blessed with this benediction, the
two serfs departed.
4fter the servants had taken their leave, the Red Bearded Baron, watching the two hungry
o%en slowly eating the wheat piled on the floor, began to contemplate what had
happened. !7es,& he thought, !they did well, but " wonder which one did better'&
a. )hat measuring unit should the Red Bearded Baron use to measure financial
position and operating performance'
b. 0repare a balance sheet for "van and for "gor at both the beginning and the end of
the period.
c. 0repare an income statement for "van and for "gor for the period.
d. 0repare a schedule reconciling the change in owner(s e:uity between the
beginning and the end of the period.
e. ;id "van or "gor perform better during the period' E%plain.
Case: Red Bearded Baron
B/S at the Beginning for Ivan

6iabilities Bushels of )heat 4ssets Bushels of )heat
E:uity +<* 6and +$$
O%en 1$
Current 4ssets=
)heat *$
/ertiliser * **
Total +<* Total +<*
Income Statement for Ivan
E%penses Bushels of )heat "ncome Bushels of )heat
/ertiliser * 0roduction *1#
)heat >eeds *$
;epreciation of O% 1
;epreciation of
plow
#
0rofit *+1
Total *1# Total *1#
B/S at the end for Ivan
6iabilities Bushels of )heat 4ssets Bushels of )heat
E:uity +<*
6ess= ;rawings *$
+1* 6and +$$
0rofit *+1 O%en 1$
6ess=
;epreciation 1
#<
0low maker(s debt # Current 4ssets=
)heat **#
Total #8? Total #8?

B/S at the Beginning for Igor

6iabilities Bushels of )heat 4ssets Bushels of )heat
E:uity +$+ 6and 8$
O%en 1$
Current 4ssets=
)heat +$
/ertiliser + ++
Total +$+ Total +$+
Income Statement for Igor
E%penses Bushels of )heat "ncome Bushels of )heat
/ertiliser + 0roduction +#@
)heat >eeds +$
;epreciation of O% 1
;epreciation of
plow
+
0rofit +**
Total +#@ Total +#@
B/S at the end for Igor
6iabilities Bushels of )heat 4ssets Bushels of )heat
E:uity +$+
6ess= ;rawings#$
A+ 6and 8$
0rofit +** O%en 1$
6ess=
;epreciation 1
#<
0low #
6ess=
;epreciation +
*
Current 4ssets=
)heat +$8
Total +?# Total +?#
d. )e cannot simply compare the amounts of net income for "van and "gor because
the Red Bearded Baron entrusted them with different amounts of resources. )e
must relate the net income amounts to some base. >everal possibilities include=
"B4C "2OR
Cet "ncomeD4verage Total 4ssetsEE.. @*.*F @#.$F
Cet "ncomeDBeginning Total 4ssetsEE +#*.+F +*$.@F
Cet "ncomeD4verage Concurrent 4ssetsE. +88.+F +#A.+F
Cet "ncomeDBeginning Concurrent 4ssetsE +8*.?F +#8.<F
Cet "ncomeD4verage Owner(s E:uityE. @*.<F @*.$F
Cet "ncomeDBeginning Owner(s E:uityE. +#*.+F +*$.@F
Cet "ncomeD4creEEEEEEEE.. +$.A$ +*.*$