We are now ready to begin Day 2 of our Lemonade Stand business. Let’s check the weather forecast.

Before we buy supplies, let’s check the weather forecast.

There is a 30% chance of rain. Demand may be 5-10 cups less.

We are at the grocery store. The cost of supplies to make 1 cup of lemonade is $.40.

With the expected weather forecast, we decide to buy supplies for only 20 cups of lemonade. We pay $8 in cash.

How does this impact our financial results?

When we buy supplies and pay cash at the time of purchase and with our assumption of no inventory, one side of the transaction is, cash is decreased. The other side of the transaction is, expenses are increased.

Let’s see how this transaction maps on the financial statements.

This is our income statement and the balance sheet with the numbers from Day 1. Purchasing supplies for $8 is reflected as a negative $8 under cash reflecting decrease in cash and as a positive $8 under expenses reflecting increase in expenses.

Let’s find out the demand for our lemonade on Day 2! How many cups did we sell?

We sold 20 cups of lemonade!

Our price was $1 per cup of lemonade. We sold 20 cups for a total of $20 in cash. How does this impact our financial results?

When we sell lemonade and receive cash at the time of sale and with our assumption of no inventory, one side of the transaction is, cash is increased, the other side of the transaction is, sales are increased.

Let’s see how this transaction maps on the financial statements. Selling $20 worth of lemonade is reflected as $20 increase in cash and $20 increase in sales.