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Questions and Answers
How will paying yourself a $4 salary in cash affect the cash balance on the Balance Sheet?
How will paying yourself a $4 salary in cash affect the cash balance on the Balance Sheet?
- No effect
- Increase by $8
- Increase by $4
- Decrease by $4 (correct)
What impact does a $4 salary payment have on earnings?
What impact does a $4 salary payment have on earnings?
- Double the earnings
- No effect on earnings
- Increase earnings by $4
- Decrease earnings by $4 (correct)
After the salary is paid, how does this transaction reflect on cash flow management?
After the salary is paid, how does this transaction reflect on cash flow management?
- It eliminates all liabilities
- It is a cash outflow (correct)
- It improves liquidity
- It reports profit
When preparing a Balance Sheet after the salary transaction, what change should be recorded in retained earnings?
When preparing a Balance Sheet after the salary transaction, what change should be recorded in retained earnings?
What distinction should be understood regarding profit versus cash in the case of paying a salary?
What distinction should be understood regarding profit versus cash in the case of paying a salary?
What is the total value of Current Assets?
What is the total value of Current Assets?
Which entry represents the total amount depreciated on fixed assets to date?
Which entry represents the total amount depreciated on fixed assets to date?
What is the value of Total Equity?
What is the value of Total Equity?
What is implied by the company having relatively new fixed assets?
What is implied by the company having relatively new fixed assets?
Which of the following best describes the difference between profit and cash?
Which of the following best describes the difference between profit and cash?
What does the term 'Net Fixed Assets' represent?
What does the term 'Net Fixed Assets' represent?
If Total Liabilities are $35.00 and includes a Tax Liability of $3, what is the remaining liabilities amount?
If Total Liabilities are $35.00 and includes a Tax Liability of $3, what is the remaining liabilities amount?
Why is it important to analyze both Total Assets and Total Liabilities?
Why is it important to analyze both Total Assets and Total Liabilities?
What is a key issue identified with the business's financial situation?
What is a key issue identified with the business's financial situation?
Which of the following statements accurately describes retained earnings?
Which of the following statements accurately describes retained earnings?
What is the primary risk indicated by having zero cash despite high retained earnings?
What is the primary risk indicated by having zero cash despite high retained earnings?
What can be inferred about cash flow when sales do not occur?
What can be inferred about cash flow when sales do not occur?
What does the balance sheet indicate when it shows plenty of assets but no cash?
What does the balance sheet indicate when it shows plenty of assets but no cash?
Why is it misleading to interpret retained earnings as cash available for spending?
Why is it misleading to interpret retained earnings as cash available for spending?
What does having significant assets but no cash imply about the business's operations?
What does having significant assets but no cash imply about the business's operations?
In financial statement analysis, what does the left side of the scorecard primarily reflect?
In financial statement analysis, what does the left side of the scorecard primarily reflect?
What does accelerated depreciation allow a company to do in terms of tax savings?
What does accelerated depreciation allow a company to do in terms of tax savings?
What is the impact of inflation on saving future dollars compared to saving current dollars?
What is the impact of inflation on saving future dollars compared to saving current dollars?
If a company has $12 in earnings and the tax rate is 25%, what amount is owed in taxes?
If a company has $12 in earnings and the tax rate is 25%, what amount is owed in taxes?
How does accelerated depreciation affect a company's financial statements?
How does accelerated depreciation affect a company's financial statements?
What does the concept of tax liability refer to in a corporate profit scenario?
What does the concept of tax liability refer to in a corporate profit scenario?
What type of asset is the wagon considered after purchase?
What type of asset is the wagon considered after purchase?
What is the cost of the wagon that was purchased?
What is the cost of the wagon that was purchased?
Why is the wagon not included with other fixed assets immediately after purchase?
Why is the wagon not included with other fixed assets immediately after purchase?
What might be a reason for slow business at the lemonade stand despite good weather?
What might be a reason for slow business at the lemonade stand despite good weather?
What did the seller state about the wagon's expected lifespan?
What did the seller state about the wagon's expected lifespan?
What payment method was used to buy the wagon?
What payment method was used to buy the wagon?
What is one suggested solution to improve lemonade sales when business is slow?
What is one suggested solution to improve lemonade sales when business is slow?
What kind of business strategy is implied by going to where the customers are?
What kind of business strategy is implied by going to where the customers are?
Which of the following actions should be taken at the beginning of the new week in managing the lemonade stand?
Which of the following actions should be taken at the beginning of the new week in managing the lemonade stand?
Who sold the wagon to the buyer?
Who sold the wagon to the buyer?
What could be an underlying factor affecting the decision to make the lemonade stand mobile?
What could be an underlying factor affecting the decision to make the lemonade stand mobile?
What characteristic of the wagon was highlighted as a quality feature?
What characteristic of the wagon was highlighted as a quality feature?
What was the last recorded total for assets at the lemonade stand?
What was the last recorded total for assets at the lemonade stand?
What is implied by no sales occurring despite the presence of many customers at the park?
What is implied by no sales occurring despite the presence of many customers at the park?
What time of year is the lemonade stand expecting to close operations?
What time of year is the lemonade stand expecting to close operations?
What is a potential benefit of setting up a mobile lemonade stand compared to a stationary one?
What is a potential benefit of setting up a mobile lemonade stand compared to a stationary one?
What distinguishes equipment from buildings when categorized as Fixed Assets?
What distinguishes equipment from buildings when categorized as Fixed Assets?
Why might a company separate equipment from buildings on the Balance Sheet?
Why might a company separate equipment from buildings on the Balance Sheet?
What can be inferred about the wagon's classification as a Fixed Asset?
What can be inferred about the wagon's classification as a Fixed Asset?
What is the primary reason for using different depreciation methods for equipment?
What is the primary reason for using different depreciation methods for equipment?
What does the classification of Fixed Assets imply about a company's operational strategy?
What does the classification of Fixed Assets imply about a company's operational strategy?
How does categorizing assets as Fixed Assets benefit financial reporting?
How does categorizing assets as Fixed Assets benefit financial reporting?
What is a potential impact of having a movable Fixed Asset like a wagon compared to an immovable asset?
What is a potential impact of having a movable Fixed Asset like a wagon compared to an immovable asset?
In which scenario would the classification as equipment rather than a building matter most?
In which scenario would the classification as equipment rather than a building matter most?
What is the Gross Profit for the week based on the income statement?
What is the Gross Profit for the week based on the income statement?
How much was the total cash collected from sales?
How much was the total cash collected from sales?
What percentage of net profit before taxes was paid in taxes?
What percentage of net profit before taxes was paid in taxes?
What is the Net Profit After Taxes for the week?
What is the Net Profit After Taxes for the week?
What was the total expenses incurred for the week?
What was the total expenses incurred for the week?
What is the Change in Cash for the week?
What is the Change in Cash for the week?
What is the value of Cost of Goods Sold for the week?
What is the value of Cost of Goods Sold for the week?
What two items make up Total Expenses for the week?
What two items make up Total Expenses for the week?
What was the amount of cash the clerk received for the lemonade?
What was the amount of cash the clerk received for the lemonade?
Why did the clerk initially refuse to allow the balance to be charged?
Why did the clerk initially refuse to allow the balance to be charged?
What did the boy offer to leave as collateral for the balance of the lemonade?
What did the boy offer to leave as collateral for the balance of the lemonade?
What reaction did the manager have when approving the opening of the account?
What reaction did the manager have when approving the opening of the account?
How much lemonade did the clerk give in exchange for the cash?
How much lemonade did the clerk give in exchange for the cash?
What effect does paying a $4 salary have on the company's earnings?
What effect does paying a $4 salary have on the company's earnings?
What remains unchanged on the balance sheet after recording the $4 salary transaction?
What remains unchanged on the balance sheet after recording the $4 salary transaction?
Which of the following statements best describes how to account for the $4 salary in the balance sheet?
Which of the following statements best describes how to account for the $4 salary in the balance sheet?
How should the transaction of paying the salary be recorded in the cash flow statement?
How should the transaction of paying the salary be recorded in the cash flow statement?
What is the primary impact of the salary payment on the company's retained earnings?
What is the primary impact of the salary payment on the company's retained earnings?
What is one main reason business was initially slow for the lemonade stand?
What is one main reason business was initially slow for the lemonade stand?
What is the suggested solution to improve sales at the lemonade stand?
What is the suggested solution to improve sales at the lemonade stand?
What financial activity should be done at the start of the new week for the lemonade stand?
What financial activity should be done at the start of the new week for the lemonade stand?
What could be inferred about the effectiveness of a stationary lemonade stand?
What could be inferred about the effectiveness of a stationary lemonade stand?
Why might having a mobile lemonade stand benefit the business?
Why might having a mobile lemonade stand benefit the business?
What challenge faced by the lemonade stand illustrates a strategic problem in business?
What challenge faced by the lemonade stand illustrates a strategic problem in business?
What can be a crucial factor in deciding to create a mobile lemonade stand?
What can be a crucial factor in deciding to create a mobile lemonade stand?
What does the need for a mobile lemonade stand suggest about customer behavior?
What does the need for a mobile lemonade stand suggest about customer behavior?
What distinguishes the wagon from being categorized alongside buildings on the Balance Sheet?
What distinguishes the wagon from being categorized alongside buildings on the Balance Sheet?
Why might a company choose to depreciate a wagon differently than a building on the Balance Sheet?
Why might a company choose to depreciate a wagon differently than a building on the Balance Sheet?
What is one significant advantage of classifying the wagon as equipment on the Balance Sheet?
What is one significant advantage of classifying the wagon as equipment on the Balance Sheet?
Which of the following effects does categorizing the wagon as movable equipment have on financial reporting?
Which of the following effects does categorizing the wagon as movable equipment have on financial reporting?
How does the classification of the wagon impact the financial analysis of a company?
How does the classification of the wagon impact the financial analysis of a company?
What might be a consequence of treating all Fixed Assets the same on the Balance Sheet?
What might be a consequence of treating all Fixed Assets the same on the Balance Sheet?
What aspect of financial management is significantly affected by distinguishing between movable and immovable Fixed Assets?
What aspect of financial management is significantly affected by distinguishing between movable and immovable Fixed Assets?
What financial characteristic does a movable Fixed Asset like a wagon suggest about a company’s operational strategy?
What financial characteristic does a movable Fixed Asset like a wagon suggest about a company’s operational strategy?
What problem arises when you discover Pappy's grocery store is closed?
What problem arises when you discover Pappy's grocery store is closed?
Why is borrowing money from the bank not a viable solution?
Why is borrowing money from the bank not a viable solution?
What alternative strategy do you consider when faced with a cash shortage?
What alternative strategy do you consider when faced with a cash shortage?
What dilemma is created by finding a warehouse store open near the ball park?
What dilemma is created by finding a warehouse store open near the ball park?
What common solution seems ineffective in this situation, despite being a typical approach?
What common solution seems ineffective in this situation, despite being a typical approach?
How does your current cash balance impact potential business decisions at the lemonade stand?
How does your current cash balance impact potential business decisions at the lemonade stand?
In the scenario described, what is suggested about the ability to sell the mobile unit quickly?
In the scenario described, what is suggested about the ability to sell the mobile unit quickly?
What characteristic of the business's situation is highlighted by the need for immediate cash?
What characteristic of the business's situation is highlighted by the need for immediate cash?
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Study Notes
Current Assets
- Current assets are assets easily converted to cash within a year.
- Examples include cash, accounts receivable, inventory, and prepaid expenses.
- Total current assets in this example are $74.
Fixed Assets
- Three entries for fixed assets: gross fixed assets, accumulated depreciation, and net fixed assets.
- Gross fixed assets represent the total purchase price.
- Accumulated depreciation is the total depreciation to date.
- Net fixed assets (net book value) is the difference between gross fixed assets and accumulated depreciation. In this example, it's $27.
- Comparing accumulated depreciation to gross fixed assets helps assess asset age.
Balance Sheet
- Total assets are $101.
- Total liabilities, including 3intaxliability,are3 in tax liability, are 3intaxliability,are35.
- Total equity is $66.
- Assets = Liabilities + Equity (The balance sheet balances)
Business Transactions and Financial Statements
- Purchasing a lemonade stand for $20 cash is recorded.
- Purchasing lemonade for $30 cash is recorded.
- Accounts Payable is adjusted to maintain Balance sheet balance.
- A crucial point is highlighted: earnings are not cash. Retained earnings are tied up in assets, not readily available as cash to spend.
Cash Flow Concerns
- The business has significant assets but zero cash.
- This lack of cash is a critical issue, even with positive retained earnings. Retained earnings are not spendable cash.
- The business faces risks if sales stop due to factors like bad weather.
Business Owner's Salary
- The owner pays themselves $4 in salary.
- This is recorded as an expense, reducing retained earnings by $4.
- A new balance sheet is needed to reflect this transaction.
Week Five: Business Slowdown and Mobile Lemonade Stand
- Business slows down despite good weather and a popular new stand.
- The reason is discovered: many potential customers are at a softball tournament, but the lemonade stand is stationary.
- A mobile lemonade stand (wagon) is purchased to address this issue.
Fixed Assets and Depreciation
- The existing lemonade stand is a fixed asset attached to the land (like a building).
- The wagon is a movable fixed asset classified as equipment.
- Different types of fixed assets can be depreciated differently.
Balance Sheet Changes After Wagon Purchase
- The balance sheet is updated to reflect the purchase of the wagon, increasing total assets.
- The wagon is added as a separate fixed asset (equipment).
Inventory Crisis at the Softball Tournament
- The owner needs more lemonade for the tournament but Pappy's grocery store is closed.
- A nearby store sells lemonade in bulk at a higher price (30vs.30 vs. 30vs.20).
- The owner only has $21 in cash.
Financial Problem Solving
- The owner considers but rejects options like borrowing money (bank is closed) or floating a check.
- Selling the mobile unit is also deemed impractical as it provides storage for lemonade.
- The owner tries to use earnings to buy more lemonade but is informed that only cash can be spent.
Credit and Accounts Payable
- The owner approaches the warehouse store clerk to charge the lemonade, offering cash and credit references.
- The clerk initially refuses but after a discussion agrees to open an account due to Pappy Parker's (grocer) recommendation.
- A transaction is made: 21cashisgiven,andtheremainingbalancefor21 cash is given, and the remaining balance for 21cashisgiven,andtheremainingbalancefor30 worth of lemonade will be paid as a liability.
Updated Balance Sheet After Lemonade Purchase
- The balance sheet is updated reflecting $21 reduction in cash, an increase in Accounts Payable (a current liability) representing the credit for the lemonade purchased, and no change in owner's equity.
Salary and Expenses
- The owner pays themselves a $4 salary.
- This is recorded as an expense and reduces earnings by the same amount.
- A final balance sheet is prepared, reflecting the salary transaction.
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