Christy Lemonade Stand

Topics: Generally Accepted Accounting Principles, Deferral, Income Pages: 1 (290 words) Published: October 10, 2014
Christy’s Lemonade Stand Case
1) No, Christy concept of "earnings" is not a good way to measure how much she earned from her lemonade business. She is recording revenue when she receives the cash rather than when it is earned. Christy still has a liability to meet (product to deliver) and she can only record revenue when the work is performed, in her case, when the lemonade is delivered to the client. Earning an income means that the total revenues exceed the total expenses. Revenues are earned when the service is performed or when the product is delivered rather than when the customer requests it or at the time cash is received. 2) Yes, Christy was measuring the Income from her lemonade stand under the cash basis of accounting method, meaning that, she recorded revenue at the moment that cash was received rather than when it is earned, therefore, violating the revenue recognition principle. I would measure the Income under the accrual basis of accounting method, in other words, revenues would only be recorded when earned (Revenue Recognition Principle) and expenses when incurred (Matching Principle). Friday

Cash
A/R
Inv
Equip
Liab
Equity
Rev
Exp
Investment
15
 
 
 
 
15
 
 
Buy Supplies
-10
 
10
 
 
 
 
 
Buy Stand
 
 
 
11
11
 
 
 
Pay in advance
1
 
 
 
1
 
 
 
Net Income = 0
Saturday
Cash
A/R
Inv
Equip
Liab
Equity
Rev
Exp
Sales
24
 
 
 
 
 
24
 
On credit
 
1
 
 
 
 
1
 
Deliver goods
 
 
 
 
-1
 
1
 
Buy Supplies
-6
 
6
 
 
 
 
 
Promise to pay
 
 
 
 
2
 
 
-2
Supplies used
 
 
-13
 
 
 
 
-13
Net Income = (24+1+1)-(2+13) = 11
Sunday
Cash
A/R
Inv
Equip
Liab
Equity
Rev
Exp
Collect revenue
1
-1
 
 
 
 
 
 
Pay brother
-2
 
 
 
-2
 
 
 
Pay self
-4
 
 
 
 
-4
 
 
Pay for stand
-11
 
 
 
-11
 
 
 
Wear & Tear
 
 
 
-1
 
 
 
-1
Net Income = -1...
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