EMPA U6010
Accounting for Public Affairs
CASE 1
Cindy’s Lemonade Stand1
An 11-year-old girl, Cindy, decides to make a little bit of money by setting up a lemonade
stand. She plans to sell lemonade every Saturday for ten weekends during the summer. The
following events take place on the first weekend:
Friday
a. Cindy takes $25 from her drawer and puts it in a box that she will use for the
lemonade stand business.
b. She gives her mother the money to buy some lemonade and cups. The lemonade
and cups cost $10.
c. She asks her father to make a little tent for her to sell the lemonade under, which
she expects to use for all ten weekends. It cost $30. She promises to pay her father
back after the weekend is over. She expects the tent to last the summer, but not
past Labor Day.
d. A neighbor gives her $4 as payment in advance for four cups of lemonade. The
neighbor will come by on Saturday and get the 4 cups.
Friday cash summary:
Cash into the business = 25+4 = 29
Cash out of the business = 10
Net cash movement = +19
Saturday
e. Cindy collects $60 from people who buy lemonade. She actually gives out 65 cups
of lemonade, since the neighbor who paid in advance comes by and she also gives
a cup to a friend who promises to give her a dollar the next day.
f. During the day, she sells so many cups of lemonade that she has to ask her mother
to buy another $20 worth of lemonade. She gives her mother $20 from the box.
g. She is so busy she asks a little boy next door to help her. She promises to give him
$10 on Sunday.
h. At the end of the day, she realizes she has ingredients left that cost $4.
i. She takes $2 out of the box, and buys candy as a treat for herself. She has worked
hard.
Saturday cash summary:
1
Cash into the business: 60
Cash out of the business: 20+2 = 22
Net cash movement = +38
This example is based on Cushing, B. E. (1997). Instructional case: Christy's lemonade stand: An introduction to
accrual accounting. Issues in Accounting Education, 12, 161-170.
Sunday
j. Cindy pays her father $30 for the tent.
k. She pays the boy next door $10 for helping her on Saturday.
l. She receives the $1 owed her for the lemonade from the day before.
Sunday cash activity: Cash into business: $1
Cash out of business: 10+30 = 40
Net cash movement = -39
Weekend cash summary = +19 +38 -39 = +18.
Questions
1. If Cindy just used cash basis accounting, would she consider her business
profitable or unprofitable?
2. Under accrual accounting,
a. Which of the events represent buying an asset?
b. Which of the events involve creating a liability?
c. Which of the events represent earning revenue? And when is revenue
earned?
d. Which of the events represent incurring an expense?
e. Over what period of time should the cost of the lemonade stand be
allocated to an expense?
f. How should the initial movement of $25 to the business be treated?
Should it be considered part of the business’s income?
g. How should the movement of $2 out of the business for a treat for Cindy
be treated? Is it an expense?
3. Using the data in the problem, compute the income under the accrual basis.
4. Using the data in the problem, compute the assets, liabilities, and equity of this
business as of Sunday evening.
5. For each of the events, indicate how you think it affects the fundamental
accounting equation on that day.