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Principles of Finance: Unit 3, Simplified Lemonade Stand 17 Views
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Description:
Let's dive into an income statement and examine its revenues, its expenses, and its various other ins and outs. Hopefully more ins than outs.
Transcript
- 00:00
principles of finance. a la shmoop. simplified Lemonade Stand. alright people
- 00:07
time to simplify simplify and yet Thoreau still has nothing on us. all [old man in the woods]
- 00:11
right well let's go back to our little lemonade stand and drill into some of
- 00:14
the more difficult elements of the income statement. the income statement
- 00:19
right here this thing read through it and you're skimming reading are you
Full Transcript
- 00:22
paying attention good. okay so let's think about when our big question here
- 00:26
is easy. when are revenues revenues? all right. that's also from Jeopardy. well
- 00:31
when a customer stands at your stand and pays you the dollar for their lemonade
- 00:35
and they drink it they say boy howdy that was good. and they walk away well
- 00:39
that constitutes a clean sale. we're gonna assume that thirty minutes later [kid sells lemonade]
- 00:43
they aren't throwing up from food poisoning and then coming back to sue
- 00:47
you. and even if they did while the cost of defending yourself wouldn't be a
- 00:50
revenue item on the income statement, it would be in a new category you just
- 00:55
realized you need legal and insurance or something like that.
- 00:58
so clean sale makes for clean revenues. well when are they dirty?
- 01:01
well revenues are dirty when a sale may or may not happen. that is there isn't
- 01:06
certainty of revenues, but when is there really certainty? well you could posit
- 01:11
that when cash goes into your Bank of America coffers, that's a sale. but what
- 01:15
if there's a three-month money-back guarantee attached to it? don't you have
- 01:18
to reserve some amount of money for the number of people who will exercise their
- 01:23
right to that money-back guarantee? how do you do that ?well in the beginning
- 01:27
you really have no history so you essentially make all revenues deferred.
- 01:32
and yep that's a new category. and as soon as the 90 days are up then you can [deferred revenue defined]
- 01:36
call them revenues. but over time if you have one percent of your revenues pretty
- 01:39
steadily being redeemed for the money-back guarantee, well then you can
- 01:42
start to reserve way less than the hundred percent you started with. and
- 01:46
it's rational that in a given month if you took in a million dollars that you
- 01:50
reserve and at ten thousand dollars for that kind of guarantee. well why would
- 01:54
you have started with a hundred percent reserves? one word yeah GAAP we whispered.
- 01:58
it art we'll say it loud. loud GAAP. and not the Levi's store people. the religion
- 02:02
of GAAP tells you that you must do the most rationally conservative thing that
- 02:07
you can do when accounting for money. and since you were just starting a business
- 02:11
you had no idea if the product was going end up being a defective clunker or [cash counted on many screens]
- 02:16
something really good, where 1% or less was ever redeemed. okay so that's
- 02:20
deferred revenues. and what about the credit card issue here? well we noted
- 02:24
earlier that credit card companies take a fair chunk out of your purchases. in
- 02:29
this made-up example of nothingness, let's say the credit card companies take
- 02:33
3 percent of sales. well on a million dollars, you pay them 30 grand. and you
- 02:37
keep $970,000. would you book revenues as a million dollars or is
- 02:43
970,000? answer 1 million. why ?well this isn't the most conservative so why
- 02:49
wouldn't you claim revenues at just 970,000 instead of goosing them up to be
- 02:55
a million. because credit cards are a very common way of doing business. in
- 02:59
theory everyone in your industry uses them and it's fair to assume that a very
- 03:04
large part of say a bicycle shops revenues will be paid via credit card. [graphic showing many pay with credit card]
- 03:08
when standard practice dictates a certain set of costs that are common to
- 03:12
an industry you adopt the most common methods of accounting in that industry.
- 03:17
all right now here's another twist. what if revenues are suspect or iffy or
- 03:21
uncertain of being paid. imagine your rep providing lemonade to the Super bowl. well
- 03:26
if there's a risk that you won't in fact be paid for your million cups of
- 03:31
lemonade you know from those deadbeats at the NFL. should you still book the
- 03:35
million dollars promised you as revenues? no of course not. you do still suffer the
- 03:40
expenses of having had to produce and deliver the lemonade however and you are
- 03:44
still liable if people get sick from it even if you never get paid by the NFL [lemonade in a glass]
- 03:50
people. well maybe think about that when you negotiate your contract, ie that they
- 03:54
pay you X percent up front so that if they renege on the deal you've at least
- 03:59
collected enough cash upfront to cover your cups and a little bit more. well the
- 04:03
hard part here is figuring out what to deduct for risk of non-payment. is the
- 04:08
NFL going bankrupt anytime soon? well not bloody likely. do they have a history of
- 04:13
not paying their vendor bills? no will they claim non performance on your part
- 04:18
ie that you didn't actually deliver the million cups of lemonade? also not likely.
- 04:23
it had a lot of that on Camera now. well do they have a history of
- 04:25
sub charging you, that is claiming that the cups you brought left a mess on the
- 04:31
floor and now they had to clean up the sticky mess and deal with the ants, so [trash on the ground]
- 04:35
instead of paying you the million bucks you thought they would now they're gonna
- 04:39
deduct 50 grand for cleanup and just pay you 950 K .all right well all these
- 04:43
factors play into how you calculate revenues. no hard and fast numbers are
- 04:48
embedded here you just need to demonstrate that you thought about this
- 04:51
rationally. why would someone want to state revenues as being really low and
- 04:56
the regulator is not be okay with that? because you're being super conservative
- 04:59
here right? well revenues being stated as overly conservatively low have a big
- 05:04
effect on one particular line item on the income statement all else being held
- 05:08
equal. want to guess which one rhymes with sh max's. yeah if you had
- 05:12
expenses of 400 grand in revenues a million dollars long you'd have pre-tax
- 05:16
profits of 600 grand and pay your 30 percent tax or whatever the number is in [equation]
- 05:20
your state, and country and so on of $180,000 thirty percent on a 600 yeah
- 05:24
that's how we got there, to net 420 grand in earnings. but if you somehow came up
- 05:29
with a rental guarantee on the lemonade with the notion being that then well
- 05:34
nobody really buys lemonade they rent it, right? and then you were somehow able to
- 05:39
defer those revenues to be recognized some years later well then maybe you can
- 05:44
show only 500 grand of revenues instead of that million this year. you still have
- 05:48
the four hundred thousand bucks in expenses, nothing else changed here ,not
- 05:52
even sales commissions to your reps, so you'd show just a hundred grand in
- 05:55
profits, pay your 30 percent tax and you'll have paid 30 grand in taxes
- 05:59
instead of a hundred 80 grand you paid before .key idea here you still collected [equation]
- 06:04
the full million dollars in revenues it's just sitting in your bank account.
- 06:07
you're just not recognizing it yet as clean revenues .yes it's accounting
- 06:13
chicanery book cooking and other falsities when
- 06:16
you go to these fake extents to be conservative. and if you do find yourself
- 06:20
being encouraged by your CEO or whoever to do your accounting like this either
- 06:25
consult glassdoor.com fast or think about whether or not your body looks
- 06:30
good doing stripes. yeah they're slimming. [boy behind bars in black and white stripes]
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