Joe's Lemonade Stand — Small Business Accounting
An interactive four-step accounting workbook · Reset all progress
Joe's Lemonade Stand
Joe wants to open a lemonade stand. Work through each step by filling in the financial statements yourself — just like completing a real accounting worksheet. Your answers and progress are saved automatically.
Starting Up
Build the Day 1 balance sheet from scratch. Project three weeks of P&L. Learn why a profitable business can still run out of cash.
A New Customer
Week 1 was a blowout! A construction company wants 150 cups/week — but won't pay for two weeks. Introduces accounts receivable.
Cash Crisis
Sales are booming but Joe is running out of cash. Multiple store trips and slow AR collection are draining the bank account.
The Smart Fix
Establish store credit and buy in bulk. See how accounts payable transforms the cash picture — same sales, completely different outcome.
📋 Step 1 — Your Assignment
- I. Calculate the Day 1 Balance Sheet — categorize all items as Current or Fixed assets, and Current or Long-Term liabilities. Build the complete starting balance sheet.
- II. Complete the 3-week Profit & Loss projection (50, 100, 200 cups). Note: freight is expensed separately — it is not included in inventory value.
- III. Project the balance sheet at the end of each of the three weeks.
Reference Data — Startup Costs & Sales Forecast
Use the figures below to complete your financial statements.
| Equipment / Supplies | Cost |
|---|---|
| Freezer | $575 + $25 delivery = $600 |
| Table | $75.00 |
| Sign | $35.00 |
| Ice (per bag / covers 20 cups) | $0.50 / bag |
| Cups | $10.00 / hundred |
| Frozen Concentrate (makes 10 cups) | $1.50 / can |
| Freight per store trip | $10.00 |
| Operating / Funding | Amount |
|---|---|
| Selling price | $0.40 / cup |
| Contract labor | $10.00 / week |
| Utilities | $5.00 / week |
| Week 1 forecast | 50 cups |
| Week 2 forecast | 100 cups |
| Week 3 forecast | 200 cups |
| Inventory lot size | 200 cups at a time |
| Owner — Stock equity | $100 |
| Owner — Subordinate loan | $300 |
| SBA bank loan | $400 |
| Total startup funds | $800 |
💡 The Balance Sheet Equation
Everything on a balance sheet must balance: Assets = Liabilities + Equity. Assets are what the business owns; liabilities are what it owes; equity is the owners’ stake (investment minus any accumulated losses).
💡 Why Is Freight a Prepaid Expense?
On Day 1, Joe pays $10 freight for the first inventory delivery before any cups are sold. Because this cost is paid in advance of the benefit it provides, it is recorded as a Prepaid Expense (Current Asset) on the starting balance sheet. Then in Week 1, when those cups are actually sold, the $10 moves from the balance sheet to the P&L as a Freight expense under Cost of Goods Sold. This is the matching principle: expenses are recognized in the same period as the revenue they help generate.
I. Day 1 — Starting Balance Sheet
| Account | Amount | Category |
|---|---|---|
| ASSETS | ||
| Current Assets | ||
| Cash (remaining after all purchases) | H(s1b0_0,25,"Total funding raised (loans + equity) minus cost of equipment, inventory, and prepaid expenses") | Current |
| Prepaid Expenses (freight prepayment) | H(s1b0_1,10,"The initial store trip freight ($10) is paid before the first sale and recorded here as a prepaid expense. It moves to the P&L as Freight in Week 1.") | Current |
| Inventory (200-cup lot, excl. freight) | H(s1b0_2,55,"Add up the material cost of ice bags, cups, and concentrate needed for a 200-cup lot. Freight is NOT included in inventory value.") | Current |
| Total Current Assets | H(s1b0_3,90,"Cash + Prepaid Expenses + Inventory") | |
| Fixed Assets | ||
| Furniture, Fixtures & Equipment | H(s1b0_4,710,"Add all three equipment purchases: freezer (including delivery), table, and sign") | Fixed |
| Total Fixed Assets | H(s1b0_5,710,"Same as FF&E — there is only one fixed asset category here") | |
| TOTAL ASSETS | H(s1b0_6,800,"Total Current Assets + Total Fixed Assets") | |
| LIABILITIES & EQUITY | ||
| Long-Term Liabilities | ||
| Bank Loan – SBA | H(s1b0_7,400,"The bank loan received from the SBA — see the scenario description") | Debt |
| Subordinate Loans (owner personal loan) | H(s1b0_8,300,"The owner contributed a total personal amount, split between stock equity and a personal loan to the business") | Debt |
| Total Long-Term Liabilities | H(s1b0_9,700,"SBA Loan + Subordinate Loan") | |
| TOTAL LIABILITIES | H(s1b0_10,700,"No current liabilities at startup — same as Total Long-Term Debt") | |
| Equity | ||
| Stock (owner equity contribution) | H(s1b0_11,100,"The equity portion of the owner's contribution (the remainder is the subordinate loan)") | Equity |
| Retained Earnings | H(s1b0_12,0,"The business just opened — no profit or loss has occurred yet") | Equity |
| Total Equity | H(s1b0_13,100,"Stock + Retained Earnings") | |
| TOTAL LIABILITIES + EQUITY | H(s1b0_14,800,"Must equal Total Assets. The equation: Assets = Liabilities + Equity") | |
💡 How COGS Works
Cost of Goods Sold = Starting Inventory + Purchases + Freight − Ending Inventory. The 200-cup lot costs $55 total ($0.275/cup). Each cup's material cost = $55 ÷ 200 = $0.275. Unsold cups remain as inventory on the balance sheet. Freight is expensed in the period paid, not capitalized into inventory.
II. 3-Week P&L Projection
| Line Item | Week 1 50 cups | Week 2 100 cups | Week 3 200 cups |
|---|---|---|---|
| SALES | |||
| Total Sales (@ $0.40/cup) | H(s1pl_0,20,"Week 1 cups sold × selling price per cup") | H(s1pl_1,40,"Week 2 cups sold × selling price per cup") | H(s1pl_2,80,"Week 3 cups sold × selling price per cup") |
| COST OF GOODS SOLD | |||
| Starting Inventory | H(s1pl_3,55,"The full inventory lot purchased at startup") | H(s1pl_4,41.25,"Ending inventory from the prior week becomes the next week's starting inventory") | H(s1pl_5,13.75,"Ending inventory from the prior week becomes the next week's starting inventory") |
| Purchases | H(s1pl_6,0,"No new purchases needed — the startup lot covers Week 1 demand") | H(s1pl_7,0,"Check cups remaining from Week 1 against Week 2 demand — are new purchases required?") | H(s1pl_8,55,"Check cups remaining from Week 2 against Week 3 demand — buy in full lots as needed") |
| Freight | H(s1pl_9,10,"The initial order included freight. It is expensed in the period it is paid.") | H(s1pl_10,0,"No new store trip this week — no freight charge") | H(s1pl_11,10,"One new store trip is needed for the Week 3 reorder") |
| Ending Inventory (enter as negative) | H(s1pl_12,-41.25,"Cups remaining after Week 1 sales × cost per cup (enter as a negative number)") | H(s1pl_13,-13.75,"Cups remaining after Week 2 sales × cost per cup (enter as a negative number)") | H(s1pl_14,-13.75,"Cups remaining after Week 3 sales × cost per cup (enter as a negative number)") |
| Total Cost of Materials | H(s1pl_15,23.75,"Starting Inventory + Purchases + Freight − Ending Inventory") | H(s1pl_16,27.50,"Starting Inventory + Purchases + Freight − Ending Inventory") | H(s1pl_17,65,"Starting Inventory + Purchases + Freight − Ending Inventory") |
| Contract Labor | $10.00 | $10.00 | $10.00 |
| Total COGS | H(s1pl_18,33.75,"Total Cost of Materials + Contract Labor") | H(s1pl_19,37.50,"Total Cost of Materials + Contract Labor") | H(s1pl_20,75,"Total Cost of Materials + Contract Labor") |
| Gross Profit / (Loss) | H(s1pl_21,-13.75,"Total Sales − Total COGS") | H(s1pl_22,2.50,"Total Sales − Total COGS") | H(s1pl_23,5,"Total Sales − Total COGS") |
| EXPENSES | |||
| Utilities & Telephone | $5.00 | $5.00 | $5.00 |
| Total Expenses | $5.00 | $5.00 | $5.00 |
| Operating Profit / (Loss) | H(s1pl_24,-18.75,"Gross Profit − Total Expenses") | H(s1pl_25,-2.50,"Gross Profit − Total Expenses") | H(s1pl_26,0,"Gross Profit − Total Expenses") |
III. Balance Sheet — End of Each Week
| Account | Starting BS | End Wk 1 | End Wk 2 | End Wk 3 |
|---|---|---|---|---|
| CURRENT ASSETS | ||||
| Cash | $25.00 | H(s1bw_0,30,"Prior cash + revenue this week − labor − utilities. The startup freight was already spent before Week 1 opened.") | H(s1bw_1,55,"Prior cash + revenue − labor − utilities. No new purchases were made this week.") | H(s1bw_2,55,"Prior cash + revenue − new purchases − freight − labor − utilities") |
| Prepaid Expenses (freight prepayment) | $10.00 | $0.00 | $0.00 | $0.00 |
| Inventory | $55.00 | H(s1bw_3,41.25,"Cups remaining after this week’s sales × cost per cup") | H(s1bw_4,13.75,"Cups remaining after this week’s sales × cost per cup") | H(s1bw_5,13.75,"Cups remaining after this week’s sales × cost per cup") |
| Total Current Assets | $90.00 | H(s1bw_6,71.25,"Cash + Inventory (prepaid expensed in Week 1)") | H(s1bw_7,68.75,"Cash + Inventory") | H(s1bw_8,68.75,"Cash + Inventory") |
| FF&E | $710.00 | $710.00 | $710.00 | $710.00 |
| TOTAL ASSETS | $800.00 | H(s1bw_9,781.25,"Total Current Assets + Fixed Assets") | H(s1bw_10,778.75,"Total Current Assets + Fixed Assets") | H(s1bw_11,778.75,"Total Current Assets + Fixed Assets") |
| LIABILITIES | ||||
| Long-Term Debt (SBA + Owner) | $700.00 | $700.00 | $700.00 | $700.00 |
| TOTAL LIABILITIES | $700.00 | $700.00 | $700.00 | $700.00 |
| EQUITY | ||||
| Stock | $100.00 | $100.00 | $100.00 | $100.00 |
| Retained Earnings (cumulative) | $0.00 | H(s1bw_12,-18.75,"This period’s operating profit (or loss) from the P&L") | H(s1bw_13,-21.25,"Prior period’s retained earnings + this period’s operating profit/loss") | H(s1bw_14,-21.25,"Prior period’s retained earnings + this period’s operating profit/loss") |
| Total Equity | $100.00 | H(s1bw_15,81.25,"Stock + Retained Earnings") | H(s1bw_16,78.75,"Stock + Retained Earnings") | H(s1bw_17,78.75,"Stock + Retained Earnings") |
| TOTAL LIABILITIES + EQUITY | $800.00 | H(s1bw_18,781.25,"Must equal Total Assets") | H(s1bw_19,778.75,"Must equal Total Assets") | H(s1bw_20,778.75,"Must equal Total Assets") |
⚠️ Key Insight After Step 1
Even with growing weekly sales, Joe loses money in weeks 1 and 2 and merely breaks even in week 3. Startup costs dominate early results. Notice that cash and profit tell very different stories — cash actually grows while the business is losing money on paper!
📋 Step 2 — Your Assignment
🎉 Huge breakthrough! Week 1 was a blowout — Joe sold 150 cups instead of the projected 50! Even better, a local construction company wants a standing weekly order. The catch: they pay on 2-week terms. Joe keeps making one store trip per week as before, paying cash for supplies.
- I. Complete the 3-week P&L. Joe still makes one trip per week ($10 freight). Account sales are recorded as revenue but the cash won't arrive for two weeks.
- II. Complete the 3-week balance sheet. Where do the Construction Account's unpaid invoices appear? What happens to cash?
Situation Update — Week 1 Actual & New Contract
| Sales by Week | Detail |
|---|---|
| Week 1 actual | 150 cups × $0.40 = $60 (all retail) |
| Week 2 | 150 Construction Account + 250 retail = 400 cups / $160 |
| Week 3 | 150 Construction Account + 350 retail = 500 cups / $200 |
| Terms & Purchasing | Detail |
|---|---|
| Construction co. payment | 2 weeks after delivery |
| Store trips (this step) | Multiple as needed, $10/trip |
| Inventory lot size | 200 cups = $55 (excl. freight) |
| Starting cash / inventory | $35 cash / $55 inventory |
I. 3-Week P&L
| Line Item | Week 1 150 cups retail | Week 2 400 cups total | Week 3 500 cups total |
|---|---|---|---|
| SALES | |||
| Total Sales | $60.00 | H(s2pl_0,160,"Total cups sold this week × selling price per cup") | H(s2pl_1,200,"Total cups sold this week × selling price per cup") |
| COST OF GOODS SOLD | |||
| Starting Inventory | $55.00 | H(s2pl_2,13.75,"Ending inventory from the prior week") | H(s2pl_3,13.75,"Ending inventory from the prior week") |
| Purchases (200-cup lots) | $0.00 | H(s2pl_4,110,"Cups needed minus cups on hand, rounded up to full lots — multiply lots by cost per lot") | H(s2pl_5,165,"Cups needed minus cups on hand, rounded up to full lots — multiply lots by cost per lot") |
| Freight (1 trip/week = $10 flat) | $10.00 | H(s2pl_6,10,"Number of store trips this week × freight cost per trip") | H(s2pl_7,10,"Number of store trips this week × freight cost per trip") |
| Ending Inventory (enter as negative) | ($13.75) | H(s2pl_8,-13.75,"Cups remaining after this week's sales × cost per cup (enter as a negative)") | H(s2pl_9,-41.25,"Cups remaining after this week's sales × cost per cup (enter as a negative)") |
| Total Cost of Materials | $51.25 | H(s2pl_10,120,"Starting Inventory + Purchases + Freight − Ending Inventory") | H(s2pl_11,147.50,"Starting Inventory + Purchases + Freight − Ending Inventory") |
| Contract Labor | $10.00 | $10.00 | $10.00 |
| Total COGS | $61.25 | H(s2pl_12,130,"Total Cost of Materials + Contract Labor") | H(s2pl_13,157.50,"Total Cost of Materials + Contract Labor") |
| Gross Profit / (Loss) | ($1.25) | H(s2pl_14,30,"Total Sales − Total COGS") | H(s2pl_15,42.50,"Total Sales − Total COGS") |
| Utilities | $5.00 | $5.00 | $5.00 |
| Operating Profit / (Loss) | ($6.25) | H(s2pl_16,25,"Gross Profit − Total Expenses") | H(s2pl_17,37.50,"Gross Profit − Total Expenses") |
💡 Accounts Receivable (AR)
AR = money earned but not yet collected. When the construction company takes 150 cups on credit, you record the full $160 in Week 2 sales — but only $100 arrives as cash. The $60 owed sits as a Current Asset labeled “Accounts Receivable.” It counts toward your total assets but cannot pay your suppliers today.
II. Balance Sheet Projection
| Account | Beginning | End Wk 1 | End Wk 2 | End Wk 3 |
|---|---|---|---|---|
| CURRENT ASSETS | ||||
| Cash | $25.00 | $70.00 | H(s2bl_0,35,"Prior cash + retail sales only (account sales go to AR, not cash) − cash expenses paid this week") | H(s2bl_1,-15,"Prior cash + retail sales only − all cash expenses paid this week including purchases") |
| Prepaid Expenses (freight prepayment) | $10.00 | $0.00 | $0.00 | $0.00 |
| Accounts Receivable | $0.00 | $0.00 | H(s2bl_2,60,"Account sales this week: construction company cups × selling price per cup") | H(s2bl_3,120,"Prior week's AR (still uncollected on 2-week terms) + this week's new account sales") |
| Inventory | $55.00 | $13.75 | H(s2bl_4,13.75,"Ending inventory from the P&L this period") | H(s2bl_5,13.75,"Ending inventory from the P&L this period") |
| Total Current Assets | $90.00 | $83.75 | H(s2bl_6,108.75,"Cash + Prepaid Expenses ($0) + Accounts Receivable + Inventory") | H(s2bl_7,146.25,"Cash + Accounts Receivable + Inventory") |
| FF&E | $710.00 | $710.00 | $710.00 | $710.00 |
| TOTAL ASSETS | $800.00 | $793.75 | H(s2bl_8,818.75,"Total Current Assets + Fixed Assets") | H(s2bl_9,856.25,"Total Current Assets + Fixed Assets") |
| LIABILITIES | ||||
| Long-Term Debt (SBA + Owner) | $700.00 | $700.00 | $700.00 | $700.00 |
| TOTAL LIABILITIES | $700.00 | $700.00 | $700.00 | $700.00 |
| EQUITY | ||||
| Stock | $100.00 | $100.00 | $100.00 | $100.00 |
| Retained Earnings | $0.00 | ($6.25) | H(s2bl_10,18.75,"Prior retained earnings + this week's operating profit from the P&L") | H(s2bl_11,56.25,"Prior retained earnings + this week's operating profit from the P&L") |
| Total Equity | $100.00 | $93.75 | H(s2bl_12,118.75,"Stock + Retained Earnings") | H(s2bl_13,156.25,"Stock + Retained Earnings") |
| TOTAL LIABILITIES + EQUITY | $800.00 | $793.75 | H(s2bl_14,818.75,"Must equal Total Assets") | H(s2bl_15,856.25,"Must equal Total Assets") |
⚠️ Cash Crisis: Profitable but Overdrawn
Despite strong and growing profits, cash goes negative by Week 3 — even with single-trip freight. Why? The Construction Account's $60/week sits in Accounts Receivable while Joe still pays cash for inventory, freight, labor, and utilities every week. He's making money on paper but running out of real dollars. In Steps 3 and 4, we'll explore two approaches to fix this.
📋 Step 3 — Attempted Fix (Your Assignment)
Joe saw the cash problem in Step 2 and thought he could manage it by making smaller, more frequent store trips instead of one big weekly order. Did it help?
- I. Complete the P&L. Joe now makes as many trips as needed (2 trips in Week 2, 3 trips in Week 3). Freight is $10 per trip. Fields carried forward from Step 2 are pre-filled.
- II. Complete the balance sheet. Compare the cash line to Step 2 — did multiple trips make things better or worse?
Managing Inventory the Hard Way — Multiple Store Trips
| Week | Cups Needed | Trips | Freight | Cash Purchases |
|---|---|---|---|---|
| Week 1 | 150 | 1 (startup) | $10 | $0 new |
| Week 2 | 400 | 2 | $20 | $110 |
| Week 3 | 500 | 3 | $30 | $165 |
I. P&L — Multiple Store Trips
| Line Item | Week 1 | Week 2 2 trips = $20 | Week 3 3 trips = $30 |
|---|---|---|---|
| SALES | |||
| Total Sales | $60.00 | PF(s3pl_0,160,"Carried forward from Step 2 — same sales volume") | PF(s3pl_1,200,"Carried forward from Step 2 — same sales volume") |
| COST OF GOODS SOLD | |||
| Starting Inventory | $55.00 | PF(s3pl_2,13.75,"Carried forward from Step 2 — same starting inventory") | PF(s3pl_3,13.75,"Carried forward from Step 2 — same starting inventory") |
| Purchases | $0.00 | PF(s3pl_4,110,"Carried forward from Step 2 — same purchases needed") | PF(s3pl_5,165,"Carried forward from Step 2 — same purchases needed") |
| Freight (multiple trips!) | $10.00 | H(s3pl_6,20,"Number of trips × freight cost per trip") | H(s3pl_7,30,"Number of trips × freight cost per trip") |
| Ending Inventory (enter as negative) | ($13.75) | PF(s3pl_8,-13.75,"Carried forward from Step 2 — same ending inventory") | PF(s3pl_9,-41.25,"Carried forward from Step 2 — same ending inventory") |
| Total Cost of Materials | $51.25 | H(s3pl_10,130,"Starting Inventory + Purchases + Freight − Ending Inventory") | H(s3pl_11,167.50,"Starting Inventory + Purchases + Freight − Ending Inventory") |
| Contract Labor | $10.00 | $10.00 | $10.00 |
| Total COGS | $61.25 | H(s3pl_12,140,"Total Cost of Materials + Contract Labor") | H(s3pl_13,177.50,"Total Cost of Materials + Contract Labor") |
| Gross Profit / (Loss) | ($1.25) | H(s3pl_14,20,"Total Sales − Total COGS") | H(s3pl_15,22.50,"Total Sales − Total COGS") |
| Utilities | $5.00 | $5.00 | $5.00 |
| Operating Profit / (Loss) | ($6.25) | H(s3pl_16,15,"Gross Profit − Total Expenses") | H(s3pl_17,17.50,"Gross Profit − Total Expenses") |
II. Balance Sheet — Multiple Trips
| Account | Beginning | End Wk 1 | End Wk 2 | End Wk 3 |
|---|---|---|---|---|
| CURRENT ASSETS | ||||
| Cash | $25.00 | $70.00 | H(s3bl_0,25,"Prior cash + retail sales only − all cash expenses (freight, purchases, labor, utilities)") | H(s3bl_1,-17.50,"Prior cash + retail sales only − all cash expenses. Watch this one — it may go negative!") |
| Prepaid Expenses (freight prepayment) | $10.00 | $0.00 | $0.00 | $0.00 |
| Accounts Receivable | $0.00 | $0.00 | PF(s3bl_2,60,"Carried from Step 2 — same Construction Account AR") | PF(s3bl_3,120,"Carried from Step 2 — same cumulative AR") |
| Inventory | $55.00 | $13.75 | PF(s3bl_4,13.75,"Carried from Step 2 — same inventory balance") | PF(s3bl_5,13.75,"Carried from Step 2 — same inventory balance") |
| Total Current Assets | $90.00 | $83.75 | H(s3bl_6,98.75,"Cash + Prepaid Expenses ($0) + Accounts Receivable + Inventory") | H(s3bl_7,116.25,"Cash + Accounts Receivable + Inventory") |
| FF&E | $710.00 | $710.00 | $710.00 | $710.00 |
| TOTAL ASSETS | $800.00 | $793.75 | H(s3bl_8,808.75,"Total Current Assets + Fixed Assets") | H(s3bl_9,826.25,"Total Current Assets + Fixed Assets") |
| LIABILITIES | ||||
| Long-Term Debt (SBA + Owner) | $700.00 | $700.00 | $700.00 | $700.00 |
| TOTAL LIABILITIES | $700.00 | $700.00 | $700.00 | $700.00 |
| EQUITY | ||||
| Stock | $100.00 | $100.00 | $100.00 | $100.00 |
| Retained Earnings | $0.00 | ($6.25) | H(s3bl_10,8.75,"Prior retained earnings + this week's operating profit") | H(s3bl_11,26.25,"Prior retained earnings + this week's operating profit") |
| Total Equity | $100.00 | $93.75 | H(s3bl_12,108.75,"Stock + Retained Earnings") | H(s3bl_13,126.25,"Stock + Retained Earnings") |
| TOTAL LIABILITIES + EQUITY | $800.00 | $793.75 | H(s3bl_14,808.75,"Must equal Total Assets") | H(s3bl_15,826.25,"Must equal Total Assets") |
⚠️ Multiple Trips Made Things Worse
Compared to Step 2: net profit dropped from $37.50 to $17.50 in Week 3 because extra freight ate into margins. Cash position stayed negative. The attempted fix of making more store trips increased expenses without solving the AR collection problem. A different approach is needed.
📋 Step 4 — Your Assignment
- I. Complete the P&L using the improved approach: one store trip per week ($10 freight flat) and purchases on one-week store credit.
- II. Complete the balance sheet. An Accounts Payable row has already been added under Current Liabilities for you — enter the store credit balance owed to the supplier at the end of each week.
The Smart Solution — One Trip + Store Credit
| Week | Purchases (on credit) | Freight |
|---|---|---|
| Week 1 | $0 | $10 (startup, paid cash) |
| Week 2 | $110 on AP | $10 (1 trip) |
| Week 3 | $165 on AP | $10 (1 trip) |
| Cash Flow Logic | Detail |
|---|---|
| Wk2 cash receipts | Retail $100 only (AR not collected) |
| Wk2 cash paid out | Freight $10 + Labor $10 + Util $5 = $25 |
| Wk3: pay Wk2 AP | −$110 (settle last week's credit) |
| Construction co. | Still 2-week terms → still AR |
💡 Accounts Payable (AP) — the Mirror of AR
AP = costs incurred but not yet paid in cash. It's a Current Liability — but used strategically, it's a cash management tool. By buying supplies on one-week credit, Joe keeps cash on hand while waiting to collect his AR. He's using the same deferred-payment tool that the construction company uses on him.
I. P&L — One Trip + Store Credit
| Line Item | Week 1 | Week 2 1 trip = $10 | Week 3 1 trip = $10 |
|---|---|---|---|
| SALES | |||
| Total Sales | $60.00 | PF(s4pl_0,160,"Carried from Step 3 — same sales volume") | PF(s4pl_1,200,"Carried from Step 3 — same sales volume") |
| COST OF GOODS SOLD | |||
| Starting Inventory | $55.00 | PF(s4pl_2,13.75,"Carried from Step 3 — same starting inventory") | PF(s4pl_3,13.75,"Carried from Step 3 — same starting inventory") |
| Purchases (on store credit) | $0.00 | PF(s4pl_4,110,"Carried from Step 3 — same purchases needed") | PF(s4pl_5,165,"Carried from Step 3 — same purchases needed") |
| Freight (ONE trip!) | $10.00 | H(s4pl_6,10,"One consolidated order per week regardless of volume — flat freight charge") | H(s4pl_7,10,"One consolidated order per week regardless of volume — flat freight charge") |
| Ending Inventory (enter as negative) | ($13.75) | PF(s4pl_8,-13.75,"Carried from Step 3 — same ending inventory") | PF(s4pl_9,-41.25,"Carried from Step 3 — same ending inventory") |
| Total Cost of Materials | $51.25 | H(s4pl_10,120,"Starting Inventory + Purchases + Freight − Ending Inventory") | H(s4pl_11,147.50,"Starting Inventory + Purchases + Freight − Ending Inventory") |
| Contract Labor | $10.00 | $10.00 | $10.00 |
| Total COGS | $61.25 | H(s4pl_12,130,"Total Cost of Materials + Contract Labor") | H(s4pl_13,157.50,"Total Cost of Materials + Contract Labor") |
| Gross Profit / (Loss) | ($1.25) | H(s4pl_14,30,"Total Sales − Total COGS") | H(s4pl_15,42.50,"Total Sales − Total COGS") |
| Utilities | $5.00 | $5.00 | $5.00 |
| Operating Profit / (Loss) | ($6.25) | H(s4pl_16,25,"Gross Profit − Total Expenses") | H(s4pl_17,37.50,"Gross Profit − Total Expenses") |
II. Balance Sheet — One Trip + Store Credit
| Account | Beginning | End Wk 1 | End Wk 2 | End Wk 3 |
|---|---|---|---|---|
| CURRENT ASSETS | ||||
| Cash | $25.00 | $70.00 | H(s4bl_0,145,"Prior cash + retail sales only − cash expenses (freight, labor, utilities). Purchases are on store credit — no cash paid for inventory yet.") | H(s4bl_1,177.50,"Prior cash + retail sales only − last week's AP payment − freight − labor − utilities. New purchases go on AP again.") |
| Prepaid Expenses (freight prepayment) | $10.00 | $0.00 | $0.00 | $0.00 |
| Accounts Receivable | $0.00 | $0.00 | PF(s4bl_2,60,"Carried from Step 3 — same Construction Account AR") | PF(s4bl_3,120,"Carried from Step 3 — same cumulative AR") |
| Inventory | $55.00 | $13.75 | PF(s4bl_4,13.75,"Carried from Step 3 — same inventory balance") | PF(s4bl_5,13.75,"Carried from Step 3 — same inventory balance") |
| Total Current Assets | $90.00 | $83.75 | H(s4bl_6,218.75,"Cash + Prepaid Expenses ($0) + Accounts Receivable + Inventory") | H(s4bl_7,311.25,"Cash + Accounts Receivable + Inventory") |
| FF&E | $710.00 | $710.00 | $710.00 | $710.00 |
| TOTAL ASSETS | $800.00 | $793.75 | H(s4bl_8,928.75,"Total Current Assets + Fixed Assets") | H(s4bl_9,1021.25,"Total Current Assets + Fixed Assets") |
| CURRENT LIABILITIES | ||||
| Accounts Payable (store credit!) | $0.00 | $0.00 | H(s4bl_10,110,"Inventory purchased on store credit this week — owed to the supplier, due next week") | H(s4bl_11,165,"Inventory purchased on store credit this week (last week's AP was paid in cash)") |
| Total Current Liabilities | $0.00 | $0.00 | H(s4bl_12,110,"Same as Accounts Payable balance") | H(s4bl_13,165,"Same as Accounts Payable balance") |
| Long-Term Debt (SBA + Owner) | $700.00 | $700.00 | $700.00 | $700.00 |
| TOTAL LIABILITIES | $700.00 | $700.00 | H(s4bl_14,810,"Total Current Liabilities + Long-Term Debt") | H(s4bl_15,865,"Total Current Liabilities + Long-Term Debt") |
| EQUITY | ||||
| Stock | $100.00 | $100.00 | $100.00 | $100.00 |
| Retained Earnings | $0.00 | ($6.25) | H(s4bl_16,18.75,"Prior retained earnings + this week's operating profit") | H(s4bl_17,56.25,"Prior retained earnings + this week's operating profit") |
| Total Equity | $100.00 | $93.75 | H(s4bl_18,118.75,"Stock + Retained Earnings") | H(s4bl_19,156.25,"Stock + Retained Earnings") |
| TOTAL LIABILITIES + EQUITY | $800.00 | $793.75 | H(s4bl_20,928.75,"Must equal Total Assets") | H(s4bl_21,1021.25,"Must equal Total Assets") |
✅ Two Changes, Two Wins
1. Consolidate trips → lower freight: One trip at $10/week instead of multiple trips restores the same low-freight cost as Step 2 — profit jumps back to $37.50 vs. $17.50 in Step 3.
2. Store credit (AP) → positive cash: By paying for supplies next week instead of today, Joe bridges the gap between paying his supplier and collecting from the Construction Account. Cash grows to $177.50 by Week 3 vs. −$15 in Step 2 and −$17.50 in Step 3.
The lesson: Accounts Payable isn't just a liability — used strategically it's a cash management tool that can be the difference between a thriving business and a bankrupt one.
Notice the balance sheet: When Joe buys $110 on credit, both Inventory (asset) and Accounts Payable (liability) increase by $110 simultaneously. Assets = Liabilities + Equity stays perfectly balanced — because he has the goods and owes for them.
All Four Steps — Side by Side
Same lemonade stand, same customers, dramatically different outcomes based on how Joe manages inventory trips, freight, and supplier terms.
Net Profit by Week — All Steps
Cash on Hand — Steps 2, 3 & 4 Compared
📋 End-of-Week-3 Comparison
| Metric | Step 1 Simple retail | Step 2 AR cash crunch | Step 3 Multi-trip fix | Step 4 Store credit |
|---|---|---|---|---|
| Week 3 Revenue | $80 | $200 | $200 | $200 |
| Week 3 Net Profit | $0.00 | $37.50 | $17.50 | $37.50 |
| Week 3 Freight | $10 | $10 | $30 | $10 |
| Week 3 Cash | $55 | ($15) | ($17.50) | $177.50 |
| Week 3 AR | $0 | $120 | $120 | $120 |
| Week 3 AP | $0 | $0 | $0 | $165 |
| Week 3 Total Assets | $778.75 | $856.25 | $826.25 | $1,021.25 |
| Week 3 Retained Earnings | ($21.25) | $56.25 | $26.25 | $56.25 |
| Solvent (can pay bills)? | ✅ | ❌ No | ❌ No | ✅ |
🎓 Concepts Covered
Assets = Liabilities + Equity, always. Assets are current (within a year) or fixed (long-term). Every transaction changes at least two accounts but the equation always balances.
COGS = Starting Inv + Purchases + Freight − Ending Inv. Gross Profit = Sales − COGS. Operating Profit = Gross Profit − Expenses. Retained Earnings accumulates on the balance sheet.
Money earned but not yet collected. A current asset — it shows on the balance sheet but can’t pay your bills. Growing AR without corresponding cash is a cash flow trap.
Money owed but not yet paid. A current liability — and a cash management tool. By buying on credit you defer outflows and bridge the gap between slow AR collection and daily operating costs.
The #1 lesson: Profit ≠ Cash. Profitable businesses fail every year due to cash flow mismanagement. Monitor both your P&L and your cash position — they tell different stories.
Only costs tied to units actually sold are expensed. Unsold inventory stays on the balance sheet as an asset. Freight is expensed in the period paid, not added to inventory value.
🧠 Final Quiz
🎉 Congratulations!
You’ve completed all four steps of the exercise. You now understand how Balance Sheets and P&L statements work, why profitable businesses can still run out of cash, and how smart use of Accounts Receivable and Accounts Payable can make or break a small business. We hope you find these concepts useful in managing your own business!
Optimum Transitions helps business owners navigate transitions with confidence.
Equipment (FF&E = $710 total)
| Freezer (incl. $25 delivery) | $600.00 |
| Table | $75.00 |
| Sign | $35.00 |
Inventory Supplies — 200-cup lot
| Ice (1 bag = 20 cups) | $0.50/bag |
| Cups | $10.00/hundred |
| Concentrate (makes 10 cups) | $1.50/can |
| Freight per store trip | $10.00 |
| 200-cup lot (excl. freight) | $55.00 |
| Cost per cup | $0.275 |
Operations
| Selling price | $0.40/cup |
| Contract labor | $10.00/wk |
| Utilities | $5.00/wk |
Startup Funding ($800 total)
| Owner — Stock | $100.00 |
| Owner — Subordinate loan | $300.00 |
| SBA bank loan | $400.00 |
Step 1 Forecast
| Week 1 | 50 cups |
| Week 2 | 100 cups |
| Week 3 | 200 cups |
Steps 2-4 Actual Sales
| Week 1 actual | 150 cups / $60 |
| Week 2 | 400 cups / $160 |
| Week 3 | 500 cups / $200 |
| Construction Account terms | 2-week payment |