The Lemonade Stand: Accounting Basics
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Questions and Answers

How much did we have in total sales?

30

What was the cost of lemonade?

13.00

What is the profit or earnings from the lemonade sale?

17.00

Are we in balance after recognizing the bad debt?

<p>False</p> Signup and view all the answers

What is the amount of the bad debt expense?

<p>4.00</p> Signup and view all the answers

What must we do to recognize a bad debt?

<p>Reduce Accounts Receivable</p> Signup and view all the answers

What does the bad debt expense reduce?

<p>Earnings</p> Signup and view all the answers

How many glasses of lemonade were sold on the first day?

<p>fifty</p> Signup and view all the answers

What was the total sales amount from lemonade sold?

<p>$25</p> Signup and view all the answers

What was the cost to produce 50 glasses of lemonade?

<p>$10</p> Signup and view all the answers

What is the gross profit from the lemonade sales?

<p>$15</p> Signup and view all the answers

What constitutes expenses in running the lemonade stand?

<p>Glass rental, advertising, rent</p> Signup and view all the answers

How much was charged as a glass rental fee?

<p>$2</p> Signup and view all the answers

What is the difference between gross profit and net profit?

<p>Expenses are deducted from gross profit to calculate net profit.</p> Signup and view all the answers

What does the equation Assets = Liabilities + Owner's Equity represent?

<p>The basic rule of accounting.</p> Signup and view all the answers

What is the purpose of a balance sheet?

<p>To show the financial position of a business at a specific point in time.</p> Signup and view all the answers

What is the term for the financial statement that shows income over a period of time?

<p>Income Statement</p> Signup and view all the answers

Which one of the following items is not found on a Balance Sheet?

<p>Gross Profit</p> Signup and view all the answers

Which accounting system most accurately reflects profitability?

<p>Accrual Accounting</p> Signup and view all the answers

An account receivable is:

<p>an Asset</p> Signup and view all the answers

Which of the following is most important to the daily operations of a business?

<p>Cash</p> Signup and view all the answers

When people speak about the bottom line, they are referring to:

<p>Net Profit</p> Signup and view all the answers

A prepaid expense is:

<p>an Asset</p> Signup and view all the answers

Is LIFO/FIFO a method of:

<p>Inventory Evaluation</p> Signup and view all the answers

Which would you find on an Income Statement?

<p>Expense</p> Signup and view all the answers

Which of the following expenses does not affect your cash position in running a business?

<p>Depreciation Expense</p> Signup and view all the answers

Which of the following is a basic accounting equation?

<p>Assets = Liabilities + Owner’s Equity</p> Signup and view all the answers

What is the purpose of the Accounting Game?

<p>To teach basic accounting principles in a fun and engaging manner.</p> Signup and view all the answers

What did you sell your remaining inventory of lemonade for?

<p>Two dollars</p> Signup and view all the answers

The transaction of selling lemonade resulted in profit.

<p>False</p> Signup and view all the answers

What is the inventory that was purchased from the grocer?

<p>Sugar</p> Signup and view all the answers

What type of account did you set up with the grocer?

<p>Accounts payable</p> Signup and view all the answers

What was the total sales for the week?

<p>25 dollars</p> Signup and view all the answers

Beginning Inventory was zero before starting the business.

<p>True</p> Signup and view all the answers

How much did you pay for 100 lemons?

<p>$20.00</p> Signup and view all the answers

How much cash did you receive from total sales?

<p>$20.00</p> Signup and view all the answers

How much was spent on sugar and lemons?

<p>12 dollars</p> Signup and view all the answers

What is the formula to calculate Cost of Goods Sold (COGS)?

<p>Beginning Inventory + Purchases - Ending Inventory</p> Signup and view all the answers

Accounts payable typically involves cash transactions.

<p>False</p> Signup and view all the answers

What color are the accounts receivable funds expected to be?

<p>Almost green</p> Signup and view all the answers

What do we call the amount remaining after subtracting Cost of Goods Sold from Sales?

<p>Gross Profit</p> Signup and view all the answers

You recorded the sale of lemonade to your friends who promised to pay later.

<p>True</p> Signup and view all the answers

What type of Balance Sheet is created at the start of a new week?

<p>Beginning Balance Sheet</p> Signup and view all the answers

An account set up for money owed to you is called _____ receivable.

<p>accounts</p> Signup and view all the answers

What happens to the Ending Inventory from one week when the new week starts?

<p>It becomes Beginning Inventory</p> Signup and view all the answers

What does Retained Earnings represent?

<p>Earnings from past accounting periods</p> Signup and view all the answers

A loan repayment appears on the Income Statement.

<p>False</p> Signup and view all the answers

Match the following terms with their definitions:

<p>Net Profit = Total earnings after subtracting expenses Gross Profit = Sales minus Cost of Goods Sold Ending Inventory = Inventory not sold by the end of the period Retained Earnings = Profits retained in the business from previous periods</p> Signup and view all the answers

What do we call the five one-dollar bills in the context of the lemonade stand?

<p>Cash</p> Signup and view all the answers

What is the first investment made to start the lemonade stand?

<p>Original Investment</p> Signup and view all the answers

What item did the author use to keep the cash safe?

<p>Cigar box</p> Signup and view all the answers

What colors are used for liabilities and owner's equity on the scorecard?

<p>Pink for Liabilities, Black for Owner's Equity</p> Signup and view all the answers

The left side of the scorecard will always equal the right side.

<p>True</p> Signup and view all the answers

What is the formula representing the relationship between assets, liabilities, and owner's equity?

<p>Assets = Liabilities + Owner's Equity</p> Signup and view all the answers

What is the term for raw materials used in producing a product?

<p>Inventory</p> Signup and view all the answers

How much did the author plan to charge for a glass of lemonade?

<p>Fifty cents</p> Signup and view all the answers

The lemonade stand required _____ to make the lemonade.

<p>lemons, sugar, and water</p> Signup and view all the answers

What does the left side of the scorecard represent?

<p>What we have</p> Signup and view all the answers

What does the right side of the scorecard represent?

<p>Who owns it</p> Signup and view all the answers

What is an example of a note payable?

<p>IOU to Mom</p> Signup and view all the answers

How many glasses can be filled with the lemonade made from the ingredients purchased?

<p>Sixty glasses</p> Signup and view all the answers

What does the author compare the scorecard to?

<p>A snapshot</p> Signup and view all the answers

Study Notes

The Lemonade Stand - A Learning Tool

  • The Lemonade Stand is common childhood business for many people
  • The book uses this simple concept to help the reader learn accounting basics
  • The book utilizes storytelling to bring the concepts to life and engage the reader
  • The early days setting helps the reader remember childhood experiences, which are ingrained in the long-term memory.
  • The reader is invited to visualize the story to enhance the learning experience.
  • This approach to learning is called "accelerative learning"
  • Accelerative Learning uses multiple senses and emotions to help readers learn and retain information long term.
  • The Lemonade Stand setting also provides opportunities to learn about the basic concepts in accounting
  • The book promises to teach a college semester's worth of accounting concepts.
  • The authors believe that traditional accounting teaching methods are often too focused on details and fail to explain the overall framework of how accounting works.
  • The book aims to provide a clear and engaging introduction to key accounting concepts that every businessperson needs to know.

Lemonade Stand Business

  • The story follows a child who sets up a lemonade stand and uses basic accounting principles to track their finances.
  • The child starts with $5 in cash, which is considered an "Original Investment" on the scorecard.
  • The child borrows $10 from their parents, which becomes a "Notes Payable" liability.

Accounting Principles

  • The scorecard has two sides:
    • Assets (what the business owns) on the left side.
    • Liabilities & Owner's Equity (who owns the assets) on the right side.
  • The fundamental rule of accounting is Assets = Liabilities + Owner's Equity.
  • The right side represents:
    • Liabilities are what the business owes to others (represented in pink).
    • Owner's Equity is the owner's stake in the business (represented in black).

Starting the Business

  • The child spends $12 for supplies (lemons, sugar), which becomes "Inventory" and reduces the cash.
  • The lemonade stand is opened for business with 60 glasses made, costing $12 to produce.
  • Each glass costs $0.20 to produce.
  • The lemonade is sold for $0.50 per glass.

Financial Transactions

  • The child sells 50 glasses for $25.
  • This results in $15 in profit before expenses are subtracted.
  • The cost of goods sold (COGS) for the 50 glasses is 10,leaving10, leaving 10,leaving15 gross profit on the sales.
  • This profit is added to the Owner’s Equity side of the scorecard, representing the earnings.

Lessons Learned

  • The child learns the importance of tracking expenses and profits.
  • The child learns how to record income and expenses in a scorecard.
  • The story illustrates the basic accounting principles used to manage a small business.
  • The importance of knowing the cost of goods sold (COGS) is highlighted.
  • The child is reminded of the importance of paying back loans and recognizing "Glass Rental Fee" as an expense.

Lemonade Stand Accounting

  • The text details the financial aspects of running a lemonade stand.
  • The Balance Sheet is a snapshot of a business's financial position at a specific point in time.
  • The Balance Sheet uses the formula: Assets = Liabilities + Owner's Equity.
  • Assets are THINGS & STUFF.
  • Liabilities are the people you owe money to.
  • Owner's Equity is what YOU own.
  • The Balance Sheet connects THINGS & STUFF to PEOPLE.
  • The Balance Sheet doesn't show every activity that occurs within a business, like sales or expenses.
  • The Income Statement is like a movie and covers a period of time.
  • The Income Statement uses the formula: Sales - COGS = Gross Profit - Expenses = Net Profit
  • Cost of Goods Sold (COGS) is the cost of producing the lemonade.
  • Expenses are the additional costs of running the business.
  • Net Profit is also known as the "bottom line".
  • The Income Statement shows how Earnings are created.
  • The Balance Sheet and Income Statement are connected.
  • The Income Statement shows detailed information about Earnings.
  • The Balance Sheet can be seen as a zoomed-out map showing where Earnings are while the Income Statement is a zoomed-in map showing how Earninngs were generated.
  • Both scorecards are important.

Beginning Balance Sheet

  • Beginning inventory is $0.00
  • Beginning Earnings is $0.00

Ending Balance Sheet

  • Ending inventory is $2.00
  • Ending Earnings is $10.00

Financial Statements

  • Income Statement: Shows how much money a business earns during a specific accounting period (e.g., a week).
  • Balance Sheet: Shows how much money a business has and owes at a specific point in time.

Connecting Financial Statements

  • Income Statement connects the Beginning Balance Sheet and Ending Balance Sheet.
  • It shows how the business's financial position changed during the accounting period.

Loan Payback

  • Loan payback does not appear on the Balance Sheet or Income Statement.
  • It is not included on the Balance Sheet because the loan is paid back and no longer owed.
  • It is not included on the Income Statement because the principal of the loan does not represent earned money. Only interest on the loan would appear as an expense.

Cash Flow Statement

  • Not all transactions are reflected in the Income Statement and Balance Sheet.
  • Cash flow is important for understanding a business's liquidity and ability to manage its cash flow.

Converting Ending Balance Sheet to Beginning Balance Sheet

  • Ending Inventory becomes Beginning Inventory for the next week.
  • Ending Earnings are rolled up into Retained Earnings to make room for earnings from the current accounting period

Retained Earnings

  • Retained earnings represent profits from past accounting periods that have not been distributed to owners.

Bank Loan

  • The lemonade stand owner borrows $50 from the bank.
  • This increases cash and creates a liability called Notes Payable.

Selling Remaining Inventory

  • The owner sells the remaining $2 worth of lemonade to a friend at cost.
  • This reduces inventory to 0andincreasescashby0 and increases cash by 0andincreasescashby2.
  • It is considered a sale on the Income Statement but does not generate a profit.

Setting Up a Credit Account

  • The lemonade stand owner sets up a credit account with Pappy Parker's grocery store.
  • The owner buys $4 worth of sugar on credit.
  • This increases the inventory by $4 and creates a liability called Accounts Payable.

Accounts Payable

  • Accounts Payable represents money owed to suppliers for goods or services received on credit.
  • It is a common liability for businesses.

Liabilities

  • Notes Payable and Accounts Payable are both liabilities
  • Notes Payable is a loan from a bank, usually long-term
  • Accounts Payable is a credit account with a store, short-term and typically due within 30 days
  • Notes Payable typically has interest charges, while Accounts Payable does not

Inventory

  • There are three types of inventory:
    • Raw materials: The ingredients used to make lemonade
    • Work-in-process: The lemonade being made
    • Finished goods: The lemonade that is ready to be sold

Cost of Production

  • The cost of production includes the cost of raw materials, labor, and expenses
  • Labor cannot be expensed until the inventory is sold
  • The cost of production for the lemonade is $13.00

Sales

  • Sales include cash sales and credit sales
  • The lemonade stand made 30.00insales:30.00 in sales: 30.00insales:20.00 in cash and $10 in account
  • Credit sales are recorded as Accounts Receivable, an asset

Bad Debt

  • A bad debt is a loss incurred when a customer does not pay for goods or services
  • The lemonade stand lost $4.00 due to a bad debt from a customer who moved
  • Bad debt acts as an expense, reducing earnings
  • To record a bad debt, Accounts Receivable must be reduced by the amount of the loss

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The Accounting Game PDF

Description

Explore the engaging world of 'The Lemonade Stand', a book designed to teach accounting fundamentals through storytelling. This approach utilizes accelerative learning, tapping into childhood experiences to enhance retention and understanding of key concepts. Discover how simple scenarios can convey complex ideas in an accessible way.

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