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Questions and Answers
If the sale transaction was at a profit, how would it have affected the owner's equity?
If the sale transaction was at a profit, how would it have affected the owner's equity?
- Eliminate owner's equity
- Not affect owner's equity
- Increase owner's equity (correct)
- Decrease owner's equity
What are retained earnings?
What are retained earnings?
- Earnings for future projections
- Current week's earnings
- Earnings from past accounting periods (correct)
- Earnings distributed to shareholders
What must be done at the beginning of each new week concerning earnings?
What must be done at the beginning of each new week concerning earnings?
- Ignore last week's earnings
- Convert Ending Inventory to Beginning Inventory (correct)
- Maintain the same earnings balance
- Distribute all earnings to shareholders
Which of the following statements about dividends is correct?
Which of the following statements about dividends is correct?
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What happens to earnings that are not distributed to shareholders?
What happens to earnings that are not distributed to shareholders?
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Why is retaining earnings considered beneficial for a business?
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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