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Summarizing All Financials

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Lesson:

Summarizing All Financials

Lesson Content

Congratulations on completing 6 days of running the Lemonade Stand. Let’s now take a look of how all of our results sum up together. Let’s total up our results for 6 days of selling lemonade.

This are our financial statements, the income statement and the balance sheet, with the breakdown of all transactions. Income statement shows transactions for the second 3 days. Balance Sheet shows beginning balances after the first 3 days and transactions during the second 3 days of selling lemonade. Let’s total up our sales.

$20 on day 4 plus $35 on day 5 plus $50 on day six equal $105 in sales during the second 3 days.

We now see $105 under sales, that’s our total sales over day 4, day 5 and day 6. Let’s now total up cost of goods sold. Our total cost of goods sold during day 4, day 5 and day 6 is $44.

We now see $44 under cost of goods sold on the income statement. Let’s recall that income statement shows our sales and expenses for a certain period, in our case for the second 3 days. Balance sheet shows balances of the accounts at the end of the period. In our case, at the end of day 6. Let’s calculate our profit for day 4, day 5 and day 6.

Profit is calculated as sales minus cost of goods sold minus expenses. Our profit for the second 3 days is 105 minus 44 or $61.

Our Income Statement now shows $61 in profit for the second 3 days of selling lemonade. For simplicity of this illustration, we assume there are no interest and taxes. We will now calculate Retained Earnings.

Retained Earnings represent profit that was retained in the business since it’s inception. Retained earnings for 6 days of our lemonade stand equals $61 as the profit for the second 3 days plus $53 as retained earnings at the end of the first 3 days. Retaining earnings at the end of day 6 equal $114.

Profit of $61 for the second 3 days is now included in the retained earnings on the balance sheet. This is how Income Statement and Balance Sheet are connected. We will now calculate the cash balance.

It is the beginning balance of $83 that we had at the end of day 3 plus cash received minus cash paid. The ending cash balance at the end of day 6 is $130.

We now see $130 as the ending cash balance. Let’s calculate the balance of accounts receivable.

We did not have any balance in accounts receivable at the end of day 3. The ending balance at the end of day 6 is $10 and it shows the balance of how much our customers owe us. It is comprised of what we sold on credit and what our customers paid us back.

We now see $10 as the ending accounts receivable balance. Our next calculation is the balance of inventory.

We didn’t have any inventory balance at the end of day 3. The ending balance at the end of day 6 is $4. It is comprised of supplies we purchased and supplies we took out of inventory to make lemonade.

Inventory balance is $4 in the assets section of the Balance Sheet. We will now calculate balance of accounts payable.

We did not have a beginning balance in accounts payable. The ending balance is also zero. The breakdown of the transactions shows what we incurred as owed to our suppliers and what we paid them back.

Zero balance in accounts payable is now shown in the liabilities section of the Balance Sheet. We will now calculate total assets and total liabilities and equity.

Total assets is a sum of all balances in the assets section of the balance sheet. Total liabilities and equity is a sum of all balances in the liabilities, owner’s investment and retained earnings sections of the balance sheet. 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. In our illustration, total assets equal $144 and total liabilities and equity also equal $144.

We have reviewed the most common transactions and how they get reflected on the financial statements. Understanding what each amount or balance is comprised of is the foundation for being able to interpret financial results and evaluate impact of decisions, events, what we do as well as ideas and suggestions. When we understand what is behind each number, we are much more open to express our ideas for growth and improvement because we can provide rationale for possible financial impact.

Anna Samorukova

Instructor:

Anna Samorukova

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,...

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