- Course: Finance for Absolute Beginners
- Module: Accounts Receivable, Accounts Payable and Inventory
- Lesson Type: Video
- Lesson Duration: 6:26
It is Day 6 of our Lemonade Stand.
Let’s check the updated weather forecast. Wonderful news! No rain! The demand will be 10-15 cups more.
Let’s check our supplies. After Day 3, we purchased supplies for 90 cups of lemonade.
We used supplies for 20 cups on Day 4 and 40 cups on Day 5.
We have supplies for 30 cups. That's 90 minus 20 minus 40. Should we buy more?
Potential forecast is 25 to 50 cups, that’s 10 - 35 cups from the market research plus 10-15 extra due to the baseball game. We have supplies only for 30 cups. Yes, let’s buy supplies for 30 more cups.
We are at the grocery store. The cost of supplies to make 1 cup of lemonade is $.40. We are buying supplies for 30 cups of lemonade
We forgot cash. The store manager agrees to sell us the supplies with a promise to pay tomorrow. We owe the store $12. How does this impact our financials?
When we buy supplies to store in our inventory and don’t pay at the time of purchase, one side of the transaction is inventory is increased, the other side of the transaction is accounts payable are increased.
This is our Income Statement and the Balance sheet. When we buy supplies to store in our inventory and we do not pay at the time of purchase, we record $12 under inventory to reflect increase in inventory and $12 under accounts payable to reflect increase in accounts payable.
While you were setting up for the big day, your friends came by to pay $5 for the lemonade they purchased the day before. How does this impact our financials?
When our customers pay us back, one side of the transaction is, cash is increased, the other side of the transaction is, accounts receivable are decreased.
This is our Income Statement and the Balance sheet. When the customer pays us back, we record $5 under cash and negative $5 under Accounts Receivable.
With the baseball game and beautiful weather let’s make 50 cups of lemonade. If we sell less, we will have to discard the rest.
This means that we will transfer the cost of 50 cups of lemonade from inventory to Cost of Goods Sold, or $20.
What was our demand on Day 6? We sold 50 cups of lemonade.
Our price was a $1 per cup of lemonade.We sold 50 cups for a total of $40 in cash and $10 on credit. How does this impact our financials?
When we sell lemonade for cash, sales are increased and cash is increased.When we sell lemonade on credit, sales are increased and accounts receivable are increased.These are the two sides of this transaction. Sales of $50 include 40 cups at $1 each we sold for cash and 10 cups at $1 each we sold on credit. Since we used supplies from our inventory to make and sell lemonade, we need to reduce our inventory and reflect the cost of those supplies as cost of goods sold. We made 50 cups of lemonade, we will transfer the cost of the 50 cups of lemonade.
To reduce our inventory by the cost of supplies we used to make lemonade we sold and reflect it as Cost of Goods Sold, one side of the transaction is, inventory is decreased, the other side of the transaction is, cost of goods sold is increased. Inventory is decreased by $20. Cost of Goods Sold is increased by $20.
These are the other two sides of this transaction. Each transaction can have more then one account on each side. Totals of each side have to equal.
This is our Income Statement and the Balance sheet. When we sell lemonade, we record $50 under sales reflecting increase in sales, $40 under cash reflecting increase in cash and $10 under accounts receivable reflecting increase in accounts receivable. We record negative $20 under inventory reflecting decrease in inventory for the supplies we used to make the lemonade and positive $20 under cost of goods sold reflecting the cost of supplies we used to make lemonade.
At the end of the day you went to the store to pay $12 back. How does this impact the financials?
When we pay for what we purchased earlier from our vendors, cash is decreased and accounts payable are decreased.
This is our Income Statement and the Balance sheet. When we pay for what we purchased earlier from our vendors, we record negative $12 under cash reflecting decrease in cash and negative $12 under accounts payable reflecting decrease in accounts payable.
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Module 1 0/5
Setting The Foundation
Module 2 0/2
Module 3 0/1
Module 4 0/1
Module 5 0/4
Accounts Receivable, Accounts Payable and Inventory
Module 6 0/1
Interpreting Financial Statements
Module 7 0/5