Understanding Financial Statements
Toying with a Business Idea
We know what you're thinking: It's nice to know that accounting deals with real-life situations, but while you wish Connie the best, you don't know enough about the confectionary business to appreciate either the business decisions or the financial details. Is there any way to bring this lesson a little closer to home? Besides, while knowing what financial statements will tell you is one thing, you want to know how to prepare them.
Agreed. So let's assume that you need to earn money while you're in college and that you've decided to start a small business. Your business will involve selling stuff to other college students, and to keep things simple, we'll assume that you're going to operate on a "cash" basis: you'll pay for everything with cash, and everyone who buys something from you will pay in cash.
A Word about Cash. You probably have at least a little cash on you right now - some currency, or paper money, and coins. In accounting, however, the term cash refers to more than just paper money and coins. It also refers to the money that you have in checking and savings accounts and includes items that you can deposit in these accounts, such as money orders and different types of checks.
Your first task is to decide exactly what you're going to sell. You've noticed that with homework, exams, social commitments, and the hectic lifestyle of the average college student, you and most of the people you know always seem to be under a lot of stress. Sometimes you wish you could just lie back between meals and bounce a ball off the wall. And that's when the idea hits you: Maybe you could make some money by selling a product called the "Stress-Buster Play Pack". Here's what you have in mind: you'll buy small toys and other fun stuff - instant stress relievers - at a local dollar store and pack them in a rainbow-colored plastic treasure chest labeled "Stress-Buster".
And here's where you stand: You have enough cash to buy a month's worth of plastic treasure chests and toys. After that, you'll use the cash generated from sales of Stress-Buster Play Packs to replenish your supply. Each plastic chest will cost $1.00, and you'll fill each one with a variety of five of the following toys, all of which you can buy for $1.00 each:
- A happy face stress ball
- A roomarang (an indoor boomerang)
- Some silly putty
- An inflatable beach ball
- A coil "slinky" spring
- A paddle-ball game
- A ball for bouncing off walls
You plan to sell each Stress-Buster Play Pack for $10 from a rented table stationed outside a major dining hall. Renting the table will cost you $20 a month. Because your own grades aren't what your parents and the dean would like them to be, you decide to hire fellow students (trustworthy people with better grades than yours) to staff the table at peak traffic periods. They'll be on duty from noon until 2:00 p.m. each weekday, and you'll pay them $6 an hour. Wages, therefore, will cost you $240 a month (2 hours × 5 days × 4 weeks = 40 hours × $6). Finally, you'll run ads in the college newspaper at a monthly cost of $40. Thus your total monthly costs will amount to $300 ($20 + $240 + $40).