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Questions and Answers
If the sale transaction was at a profit, how would it have affected the owner's equity?
What are retained earnings?
What must be done at the beginning of each new week concerning earnings?
Which of the following statements about dividends is correct?
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What happens to earnings that are not distributed to shareholders?
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Why is retaining earnings considered beneficial for a business?
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Study Notes
Business Starts
- The business begins with 5incashanda5 in cash and a 5incashanda5 investment in inventory.
- The 10profitfromlemonadesalesisinitiallyrecordedasa10 profit from lemonade sales is initially recorded as a 10profitfromlemonadesalesisinitiallyrecordedasa10 increase in owner's equity.
Bank Loan
- The business owner borrows 50fromabankandusesthemoneytopayoffa50 from a bank and uses the money to pay off a 50fromabankandusesthemoneytopayoffa50 debt, bringing Notes Payable on the balance sheet to $50.
Inventory Sale
- The lemonade business sells its remaining inventory (worth $2) at cost in cash, meaning a sale is recorded but no profit occurs.
Retained Earnings
- Prior week's earnings are labeled as Retained Earnings and are moved to the company's equity.
- Current week's earnings are recorded in Earnings Week to Date.
Beginning Balance Sheet
- Each week, the balance sheet is updated by moving Retained Earnings from the previous week to the beginning balance and by converting Ending Inventory to Beginning Inventory.
Growth and Financing
- The lemonade business owner seeks to grow the business rather than relying on personal loans from family.
- Seeking bank loans is seen as a sign of a real businessperson.
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Description
Test your knowledge on fundamental accounting principles as they relate to starting a lemonade business. This quiz covers topics such as owner’s equity, bank loans, inventory sales, and retained earnings. Perfect for anyone looking to understand the basics of business finance.
