ShmoopTube

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Finance- a la shmoop what are accounts payable and accounts receivable? easy. they're

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accounts. they live on the balance sheet right here and here. accounts payable [balance sheet shown]

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refers to bills you owe for stuff you bought or committed to buy. accounts

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receivable refers to stuff you sold, and are you know waiting to be paid for.

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you're the CEO of Shmesla. you make flying electric cars. you've built a

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thousand of these units and they're ready to sell. the machine takes five

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grand worth of aluminum ,eight grand worth of computers, three grand for the

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blades, and so on. so flying schmess la in total costs 50 grand to build then sells [equations]

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for about 80 grand each. only problem with your build of inventory you didn't

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have the money to pay for all of the equipment that goes into the Shmesla

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up front. so you cut a deal with your suppliers to pay them six months after [forklift]

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they've shipped you that construction materials. by building a thousand units

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you'll spend 50 million bucks on raw materials ordered on credit, which shows

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up on your balance sheet as a short-term liability, in the accounts payable slot [balance sheet]

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right there 50 million. well as sales come in, yeah cha-ching, cha-ching, cha-ching,

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you feel ready to pay off at least one of your suppliers, and send them a check

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for a million bucks .and that cool million shows up as an expense on your [hands exchange check]

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income statement, and your accounts payable figure declines by a million

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bucks .your sales end up being solid you quickly sell 500 units you built for 80

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grand each and that's half your stock. unfortunately the buyers can't pay you

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right away they promise to pay you in writing within 120 days of taking [hand signs document]

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possession of the Schmesla. so that's 500 Schmeslas for 80 grand each

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giving you 40 million bucks worth of accounts receivable that you show on

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your books right there. well a few months go by and you start to collect. some

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buyers pay early a quick 500k comes in as buyers pay off their Schmeslas, and [men in suits]

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that 40 million in accounts receivable is now 35 million, and that five million

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plops right in your cash account at the old Bank of America. you feel good [bank of America logo]

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about the business and hate having accounts payable, so you take 4 million

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of that 5 million bucks in cash, and well you pay some bills you pay down the 49

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million you owed ,you now be 45 million in accounts payable.the contracted for

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payments of the Shmeslas all come in and another 35 million dollars comes in [men stand by stacks of cash]

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the door, taking away all of the remaining thirty five million dollars in

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accounts receivable so that account now goes to zero, and that thirty five

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million bucks well it gets dumped into your cash account, which now has 36

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million dollars in it. why well because you had a million dollars sitting there

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from the first set of payments remember? you still owe 45 million bucks in your

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accounts payable but you can bring that obligation down fast by paying 30 [hands exchange check]

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million down immediately and make your suppliers dance. so what are the key

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factors of your balance sheet at this point? well you have five million in cash

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nice asset that cash there. you have five hundred cars yet unsold you think you

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can get 80 grand each for them or 40 million dollars in revenues to you. you

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hold them as inventory on the asset side of the balance sheet right here. you are

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no longer owed anything because all the buyers who bought your first 500 cars [car flies through the air]

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have now paid you. and while you owe another 15 million bucks to your

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suppliers to clean them up so don't start strutting around like you're Elon

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Musk just yet you've still got a ways to go before Schmesla Galactic can found

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its first colony on Mars. schmooping in space yeah it's a dream come [man in space suit meets alien]

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true.

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