Accounting Essay, Research Paper
Christy?s Lemonade Stand
On the first Saturday after school is out, Christy and her family go to the park for a picnic. After lunch, Christy, who is eight years old, takes a walk around the park with her Dad. At one end of the park, she sees young girl selling lemonade in front of a house across the street. She recognizes the girl as one of her classmates, and Christy and Dad cross the street for a chat. Her classmate, Abigail is doing a brisk business selling lemonade at 25cents per cup, and shows Christy a shoebox full of dollar bills and quarters.
On the way home, Christy asks if she can set up a lemonade stand next Saturday. Her Uncle Eldon, who likes to build things with wood, offers to build her a lemonade stand if she can pay him for the materials (about $10, he thinks), plus $1 for his labor. Her little brother, Andy, offers to help out, and Christy agrees to pay him $2 to be her assistant.
The next Friday, Christy?s Mom estimates the amount of lemonade mix and other supplies that she will need if she sells 80 cups of lemonade. Christy gets $ 15 from her piggy bank, and then goes to the grocery store with Mom. They buy the items on Mom?s list for $10.
When they arrive home, they find that Uncle Eldon has delivered the lemonade stand. It has a counter, a sign that says, ?Lemonade ? 25 cents? and a bench for Christy to sit on. Christy?s dad says that she can use this stand every Saturday for the rest of the summer, or a total of 11 Saturdays, Eldon has already left, but has told Dad that he will be there at 9:00 a.m. tomorrow to fill his jug with lemonade before he goes fishing, and that he will collect the $11 for the lemonade stand sometime after he gets home Sunday afternoon.
While they are setting up the stand in the front yard, Cousin Rex drops by. After Christy tells Rex what she is planning to do, he gives her a dollar and says he will bring his family around the next day for 4 cups of lemonade.
Christy counts her money. She has already earned $6 from her business and she hasn?t even started working yet!
Saturday turns out to be a typical, hot summer day. Christy’s house is strategically located across from a schoolyard that is busy all day long with soccer, baseball, and basketball games. She serves her first four cups to Uncle Eldon at 9:00 a.m. for $1. During the remainder of the day, business is brisk, and Christy serves 100 more cups of lemonade, including four to Cousin Rex and his family. At 2:00 p.m. Dad takes $6 from her shoebox to the store to buy more lemonade ingredients.
At the end of the day, Christy counts the money in her shoebox. It comes to $24. Andy asks for his $2, but she promises to pay him the next day. She has $3 worth of lemonade ingredients left over to use the following week. In addition, a neighbor, Mr. Lee, owes her $1 for four cups she served to his family after he promised to pay her the next day.
Early on Sunday, Mr. Lee stops by to pay Christy his $1. Christy then pays Andy his $2 in wages. After lunch, Christy takes $4 from her shoebox to the store to buy a toy. Uncle Eldon stops by later that afternoon, and Christy pays him the $11 for the lemonade stand.
1. From a cash perspective how much did Christy ?earn?? (Cash basis income) There are nine cash transactions that should be included in your analysis. Do you believe that this concept of ?earnings? (the increase in the amount of cash that her business has) is a good way to measure how much she earned from her lemonade business? Why or why not? What does it mean to ?earn? income?
2. Can you think of a better way to measure the income from Christy?s Lemonade Stand? If so, what was the income of Christy?s Lemonade Stand using this better method? Hint: Analyze each of Christy?s transactions in terms of the accounting equation, which may be written? Assets = Creditors? Claims + Owners? Claims. The net income of Christy?s Lemonade Stand may then be measured in terms of another equation: Revenues ? Expenses = Net Income. You may want to use the attached form to analyze the various transactions. There are 15 transactions that should be included in your analysis.
Analysis of Transactions
Christy?s Lemonade Stand
(ASSETS) WHAT IS OWNED = What is Owed + OWNER?S CLAIMS
Trans# Cash Other Assets (Description and Amount) Liabilities Amount Indicate if it is a revenue, an expense, or an owner?s claim