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Les Accounting Education Spring 1997 Instructional Case: Christy's Lemonade Stand: An Introduction to Accrual Accounting Barry E. Cushing ABSTRACT: The purpose of this case is to illustrate the most basic features of accrual accounting, and how it differs from cash-basis accounting, in a business context that is as simple as possible. The case involves a business scenario to which every student can understand and relate. It is designed to be used early in the term possibly even on the first day of class. It is presented through a child's eyes to help students feel comfortable about participating in a discus- sion of accounting issues despite their own limited understanding of accounting concepts. The case is analyzed using the accounting equation, and does not involve debits and credits START-UP sells 80 cups of lemonade Christy gets N the first Saturday after school $15 from her piggy bank, and then goes is out, Christy and her family go to the grocery store with Mom. They buy to the park for a picnic. After the items on Mom's list for $10. lunch, Christy, who is eight years old, When they arrive home, they find takes a walk around the park with her that Uncle Eldon has delivered the lem- Dad. At one end of the park, she sees a onade stand. It has a counter, a sign that young girl selling lemonade in front of a says "Lemonade-25c" and a bench for house across the street. She recognizes Christy to sit on Christy's dad says that the girl as one of her classmates, and she can use this stand every Saturday Christy and Dad cross the street for a for the rest of the summer, or a total of chat. Her classmate, Abigail, is doing a 11 Saturdays. Eldon has already left, but brisk business selling lemonade at 25 has told Dad that he will be there at per cup, and shows Christy a shoebox 9:00AM tomorrow to fill his jug with lem- full of dollar bills and quarters onade before he goes fishing, and that On the way home, Christy asks if she he will collect the $11 for the lemonade can set up a lemonade stand next Satur- stand sometime after he gets home day. Her Uncle Eldon, who likes to build Sunday afternoon things with wood, offers to build her a While they are setting up the stand lemonade stand if she can pay him for in the front yard, Cousin Rex drops by. the materials (about $10, he thinks), plus After Christy tells Rex what she is plan- $1 for his labor. Her little brother, Andy. ning to do, he gives her a dollar and says offers to help out, and Christy agrees to he will bring his family around the next pay him $2 to be her assistant day for 4 cups of lemonade. The next Friday, Christy's Mom es- timates the amount of lemonade mix and Barry E. Cushing is a Professor of Ac other supplies that she will need if she counting at the University of Utah. O 162 Issues in Accounting Education Christy counts her money. She has ises to pay him the next day. She has $3 already earned $6 from her business, worth of lemonade ingredients left over and she hasn't even started working yet! to use the following week. In addition, a neighbor, Mr. Lee, owes her $1 for four SATURDAY cups she served to his family after he Saturday turns out to be a typical promised to pay her the next day. hot summer day. Christy's house is stra- tegically located across from a EPILOGUE schoolyard that is busy all day long with Early on Sunday, Mr. Lee stops by soccer, baseball and basketball games. to pay Christy his $1. Christy then pays She serves her first four cups to Uncle Andy his $2 in wages. After lunch, Eldon at 9:00AM for $1. During the re- Christy takes $4 from her shoebox to the mainder of the day, business is brisk, store to buy a toy. Uncle Eldon stops by and Christy serves 100 more cups of lem. later that afternoon, and Christy pays onade, including four to Cousin Rex and him the $11 for the lemonade stand his family. At 2:00pm Dad takes $6 from A summary of Christy's Lemonade her shoebox to the store to buy more Stand's transactions on Friday, Saturday lemonade ingredients and Sunday appears in table 1. The daily At the end of the day, Christy counts net cash flows are tallied at the bottom the money in her shoebox. It comes to of the table. As you can see, Christy's $24. Andy asks for his $2, but she prom- business earned" $6 on Friday and another $18 on Saturday, but lost $16 on Sunday. TABLE 1 Christy's Lemonade Stand Cash-Basis Accounting (for the first weekend of operation) Friday Saturday Sunday Friday 1. Christy gets $15 from the piggy bank to fund her business. - $15 2. Christy buys $10 of lemonade ingredients and supplies -10 3. Eldon delivers lemonade stand, but will collect Sunday 4. Cousin Rex pays $1 for 4 cups he will get Saturday Saturday 5. A total of 96 cups are sold for cash 250 each $24 6. Mr. Lee buys 4 cups, but will pay tomorrow 7. Rex and his family pick up their 4 cups of lemonade. 8. Dad goes to store to buy $6 more lemonade ingredients 9. Andy earns $2 in wages by helping out 10. Leftover ingredients and supplies amount to $3. 11. The lemonade stand is good for another 10 weeks Sunday 12. Mr. Loe brings his $1 due for yesterday's purchase +51 13. Christy pays Andy his $2 in wages. 14. Christy takes $4 to the store to buy herself a toy. 15. Uncle Eldon collects $11 for the lemonade stand. -11 Net Cash-Basis "Earnings $18 - $16 JOURNAL PAGE 3 DATE DESCRIPTION POST REF DEBIT CREDIT 12 ta 11 ST 21 3 21 11 Name MINI-PRACTICE SET 1 (Continued INSTRUCTION 13 Compute Accrual Basia ner income (Rerere Expensed for each day individually Friday: Saturday Sunday: 130 Mini-Practice Set