Economic Summary Report: The Lemonade Stand BusinessResearch Paper

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Economic Summary Report: The Lemonade Stand Business

The Lemonade Stand business has been in operation for three seasons. It deals primarily in the sale of lemonade to its customers and is has become quite popular in the region due to the uniqueness of its lemonade and good customer service. To understand and value the business, Wahlen, Baginski, and Bradshaw (2011) state that the owners have to analyze the financial statements in order to determine the net income, financial ratios, and the financial position at the end of the period, which will measure overall productivity. An economic summary report should also be prepared to show the opportunity costs that may have been lost; and revenues gained from immeasurable activities in a given period.

This text presents the income statement, balance sheet and financial rations of the Lemon Stand Business. It analyses the data to provide information about its performance and to identify the opportunity costs in the three seasons it has been in operation. It also includes an economic summary report, which reveals the implicit and explicit revenues earned, as well as the implicit and explicit expenses that determine the economic profit at the end of the period. Various ways to improve productivity are then recommended.

The balance sheet

The balance sheet for the Lemonade Stand shows the asset owned by the business, the liabilities, and how the business has been financed (Bull, 2008). Table 1 shows the balance sheet as at the end of the three seasons it has been in operation.

Table 1

Combined Balance Sheet for Seasons 1, 2 and 3 Ending

Assets

Season_1

Season_2

Season_3

Cash

Inventories

12.64

13.25

15.20

Equipment

11

15

17.10

Total Assets

Liabilities

Accounts Payable

31.90

20.00

35.50

Total Liabilities

31.9

20.00

35.50

Equity

Owner, Capital

50.00

47.75

35.2

Retained Earnings

Total Equity

Total Equity & Liabilities

The balance sheet for the Lemon Stand Business reveals much about is economic viability. For instance, the cash reserves stand at $117.5, $214.8 and $332 for season one two and three respectively, which indicates that the cash sales have increased steadily over the three seasons. This is good for the business because it indicates a good level of consumer loyalty, an important factor in economic markets. The business, however, incurs the opportunity cost of holding too much cash instead of investing it in other profitable areas. Despite the fact that the number of equipment has also increased, a lot of revenue is lost as the machinery is idle for most of the day because the business only operates for seven hours. The next best alternative is to use cash reserves for product promotion for the owner to be motivated enough to work for more hours even if the sales in a day are not encouraging. Inventories have also increased, with the figure at $15.20 in the final season. The Lemon Stand Business should apply the first in first out (FIFO) method of accounting for inventory due to the increase in inventory as it deals with highly perishable products. With expenses amounting to $31.90 in the first season, $20 in the second and $35.50 in the third, it seems the Lemon Stand Business will not maintain its profitability for long. The reason for this is that most of its cash reserves will be used to pay the creditors, reducing its liquidity significantly in the process.

In the equity segment of the balance sheet, it is evident that for the three seasons, the business has forgone the alternative of increasing the capital by debt financing and selling shares. It was financed more with retained earnings and owner contributions while it would have instantly acquired a loan amounting to $50 with only 1% interest, which would have been used for equipment and product promotion. The amount of retained earnings, however, has increased over the three seasons, indicating that it was able to reduce the costs of running the business. At $261.37 in the third season, the business will be attractive to various investors because it is generating enough revenues to sustain itself. The next best alternative for the business is to consider faster ways of securing finance, such as bonds and loans. This will increase funds for advertising and purchase of better equipment.

The income statement

The income statement for the Lemonade Stand Business shows the revenue that was generated in the three periods, the expenditures incurred, and the resultant figures for the net income (Wahlen, Baginski and Bradshaw 2011). Table 2 shows the income statement for the lemonade stand business.

Table 2

Income Statement for Seasons 1, 2 and 3

Season_1

Season_2

Season_3

Revenue

Implict and explicit expenses

58.26

38.9

71.13

Net Income

The net income is computed by deducting the expenses for the business from the revenue earned in the three periods. The revenues were $177.5, $214.8, and $332.5 for the first, second, and third season respectively. This is a sign of good performance for the business because it signifies that sales have increased over the period. The expenses reduced by $19.36 in the second season but increased by $32.23. This is disadvantageous to the Lemon Stand Business because it is losing a total of $12.93 to implicit costs. The business could be earning additional revenue by increasing the working hours in order to sell more lemonade in a day. It also incurs the opportunity cost of diversifying its operations to complementary products like cookies, cupcakes or scones that can accompany the lemonade. The next best alternative is to diversify and sell complementary products and for the owner to work for a few more hours in a day.

Financial ratios

Financial ratios are useful in determining the economic feasibility of a business, which will indicate whether the financial resources are adequate to sustain it (Bull, 2008). The financial ratios for the Lemonade Stand business for the three periods are as detailed in Table 3 below.

Table 3

Financial Ratios for Seasons 1, 2 and 3

Season_1

Season_2

Season_3

ROE

59.28%

70%

43%

ROA

58%

63%

38%

Profit Margin

67.12%

81.61%

78.86%

InventoryTurnover

64%

75.54

81.04

Asset Turnover

0.86

0.99

0.921

Current Ratio

1.76

1.94

5.24

Cash Ratio

3.0

3.9

6.2

Debt-Equity Ratio

0.15

0.18

0.232

The return on equity (ROE) shows the net income returned to the Lemonade Stand Business as a percentage of equity owned by shareholders. It calculated by dividing the net income by the shareholders equity. In the first season, the business got a 59.28% return on their investment, 70% in the second season, and 43% in the third season. The second season, therefore, generated the most money for the shareholders. The season also generated the most money from its assets at with the return on assets (ROA) stood at 63% and the asset turnover at 0.99. The Lemonade Stand Business has increased its assets significantly, which comes at a lost opportunity cost for assets to contribute to an equal amount in the revenue.

The profit margin increased by $14.49 in the second season but decreased by $2.75 in the third season. This signifies that the business would be more profitable if more sales could be saved as retained earnings. The next best alternative for the owners would be to invest in better machines in order to reduce wastage of fruits, which increases the expenditure. The inventory turnover reveals the number of times the business sells and replaces its inventory. It is calculated by dividing the total sales by the inventory for the period. The third season has the highest inventory turnover ratio, an indication that the business manages inventory effectively as it deals with perishable products. The current and cash ratio measure the liquidity of the business and it is evident that in all the seasons, the Lemonade Stand Business was able to meet short-term obligations because it was liquid. The debt to equity ratio measures the financial leverage for the company and this ratio stands at 0.232 in the third season, indicating that it used more debt financing in this season. The business owners must consider the opportunity cost associated with borrowing too much. It should finance more with equity.

The economic profit statement

The economic profit statement shows the explicit and implicit revenues and expenses. Table 4 shows the expenses for the Lemonade Stand Business for the three seasons.

Table 4

Economic profit statement for Seasons 1, 2 and 3

Season_1

Season_2

Season_3

Explicit Revenue

Implicit Revenue

65

50

50

Total Revenues

Explicit Expenses

58.26

38.9

71.13

Implicit Expenses

Total Costs

Econnomic Profit

37.24

50.9

In addition to the explicit revenues, the Lemonade Stand business generated implicit revenues that were gained from the increase of assets that could not be recorded. In the first season, implicit revenues amounted to $65 because the owners were able to start and run a Lemonade Stand business at the expense of other activities. Season 2 and 3 both earned implicit revenues amounting to $50 gained from running the business themselves and being their own bosses. The figures for the explicit costs can be confirmed by… [END OF PREVIEW]

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