- Course: Finance for Absolute Beginners
- Module: Day 3
- Lesson Type: Video
- Lesson Duration: 6:01
It is Day 3 of our Lemonade Stand business. Let’s check the weather forecast.
Before we buy supplies, let’s check the weather forecast.
There is going to be a baseball game nearby. The demand may be 10 to 15 cups more!
We are at the grocery store. And there is a 50% off sale.
The cost of supplies to make 1 cup of lemonade is $.20.
With the expected weather forecast, we decide to buy supplies to make 35 cups of lemonade. We pay $7 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 and Day 2. Purchasing supplies for $7 is recorded as a negative $7 under cash reflecting decrease in cash and as a positive $7 under expenses reflecting increase in expenses.
Let’s find out the demand for our lemonade on Day 3!
Our demand on day 3 was 40 cups!
Can we sell 40 cups of lemonade? No.
We purchased supplies for only 35 cups. The maximum we can sell is 35 cups. 5 cups represent lost sales or missed opportunity.
Our price was $1 per cup of lemonade. We sold 35 cups for a total of $35 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 $35 worth of lemonade is reflected as $35 increase in cash and $35 increase in sales.
Let’s total up our results for 3 days of selling lemonade.
This is our financial statements, the income statement and the balance sheet, with the breakdown of each transaction. Let’s total up our sales.
$25 on day 1 plus $20 on day 2 plus $35 on day 3 equal $80 in sales for three days.
We now see $80 in sales on the income statement. Let’s total up all expenses.
Our total expenses for three days were $27.
We now see $27 under expenses on the income statement.Income statement shows our sales and expenses for a certain period, in our case for three days. Balance sheet shows balances of the accounts at the end of the period. In our case, at the end of day 3. Let’s calculate ending balance of our cash.
It is the beginning balance of $30 we invested from personal savings plus cash received minus cash paid. The ending cash balance at the end of day three is $83.
We now see $83 as the ending cash balance. Let’s calculate our profit.
Profit is calculated as sales minus expenses. Our profit for three days is 80 minus 27 or $53. We now see $53 under profit on our income statement.
Income statement shows our financial performance for a certain period of time, a day, a week, month, quarter, year. In our case for three days. Balance sheet shows balances of the accounts at the end of that period. In our case at the end of day 3. Balance sheet shows our financial position.
At the end of the period, profit, or net income is transferred to the balance sheet as retained earnings. This is how income statement and balance sheet are connected.
Let’s now calculate ending balance of assets, liabilities and equity. Ending balance of Assets is $83. Ending balance of liabilities is 0. Ending balance of equity is $83. A sum of both liabilities and equity is also $83. The key financial statements equation is Assets have to equal Liabilities plus Equity. If they don’t equal, it means that something is missing. It is an error that has to be researched.
Anna designs and delivers learning and change facilitation experiences that speak to the learner and inspire people and organization reach for potential and create an impact with. She applies engaging,...Anna's Full Bio
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