Account Settlement

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

true.