In this YouTube tutorial, CPA Bill Hanna teaches his two sons (and the audience) the fundamentals of financial statements by walking through a simple childhood kite‑selling venture. He starts with a $100 investment from his dad, classifying it as owner’s equity, then purchases $50 of raw materials, turning cash into inventory. After converting raw materials into 10 finished kites, the family sells them for $200, generating $200 in revenue and $50 in cost of goods sold, resulting in a $150 profit. Bill shows how each transaction updates the balance sheet (assets: cash and inventory; liabilities/equity: initial investment and retained earnings) and the income statement (sales, COGS, profit). He explains how profit flows into owner’s equity, balancing the sheet, and illustrates equity distribution if the business were liquidated. The video concludes with a brief promotion of his Controller Academy and Controller Lab.
Chapters
Today's video, I'm going to explain financial statements to a 10-year-old, my son. So I have my 2 sons here. They're watching. We'll go through some transactions. If they can understand financial statements, then you for sure can understand financial statements. I also have my beautiful wife right here. She is also an accountant so that if I make a misstep or make a mistake, she can keep me honest. Okay. So in today's video, we're talking about a business I started as a child. So when I was growing up in Egypt in the 1980s, there was a trend of flying kites. If anybody here has read the novel The Kite Runner or has seen the movie version of that novel, will have seen that story happened in Afghanistan where the kids were flying kites as a contest, right? So if you have the best kite, the biggest kite, you can take down your opponent's kite, you win that contest. So we saw that same happening as kids growing up in Egypt in the 1980s, and me and my two brothers who were older than me wanted to capitalize on that thing. So we wanted to build kites. So we wanted to start that business. So what we did is we took $100 from my dad at the time to start that business. Of course, it wasn't $100; it was £100. But we make a dollar just to make it easy to understand. Okay, so we took. $100 from my dad. And do you guys think that we, uh, me and my brothers used financial statements back then?
No.
Okay, so we didn't use any financial statements. We simply counted our money, and if the money went up, we were doing great. If the money went down, we were losing money. But if we were to use financial statements and we get into the business of selling kites— so the kites at that time looked something like this. With a tail to keep it balanced, right? And then you put the thread this way and you fly that kite. So we wanted to start this business. We took $100 from my dad. So when we take $100 from my dad, right, and we are trying to simulate here a balance sheet and an income statement. To give you a recap on the balance sheet, what is a balance sheet? You can refer to the video. I'm going to leave a link up here. To the previous video explaining a balance sheet to a 10-year-old. A balance sheet has to balance because it's two-sided. One side has what you own. What you own in the business is what? Cash, inventory. Remember I talked about inventory? Cash, inventory, uh, other things you have in a business, maybe a building, a land. These are the things that you own in the business. The side of the balance sheet that you own is going to equal the side that you owe. What do you owe? So when I take $100 from my dad, I owe him $100, right? Take $100, I owe it to him, right? Well, that could be one of two things. It could be a loan or it could be owner's equity. It depends. If my dad said, I'm going to give you the $100 and you have to give it back to me, to my dad, that means it's a loan, right? But my dad said, no, I don't want to give it to you as a loan. I'll give it to you as an investment. I want to invest. I want to own 25% of that business. So we said, okay, great, we'll take your $100, we'll put it in owner's equity. So I owe it to my dad as an equity, right? If, if ever this business gets liquidated, I have to give my dad back the $100 that he invested, right? And my cash here is $100. Okay, so I have $100 now, David, right? I'm gonna start doing the business. How do I start doing the business? I start getting the raw materials. To make my kite. Okay, what do I need for my kite? So the kites at that time were made out of bamboo sticks. So we need bamboos, we need the thread to tie it together. So we need thread, we needed paper. So wrapping paper, and we need the glue. So the glue was going to help us construct the kite. Okay, so now I have my raw material. I'm going to call this Raw material. I'm going to spend on raw material $50. Okay, so I'm going to spend $50 raw material. That's going to create some movement here in my balance sheet. What is it going to do? Well, I bought $50 raw material. That is raw material inventory, right? I still haven't built the kites yet. I just buy these things here: bamboo, thread, paper, and glue. That is raw material. That's going to sit in inventory at raw material For $50, right? My cash is going to go down to what? If I had $100, I spent $50, what do I have left with?
$50.
$50. Okay, so I got $50, right? Still balanced. I have $100 here, I have $100 here, I'm still balanced. I'm always checking that I'm balanced on the balance sheet because the name is balance, so it always has to balance. Okay, great. So now I have $50 raw material. I'm gonna go ahead and start making my kites. We started making kites and we made ourselves 10 kites with that. So we made 10 kites and now we're going to start selling the kites. It cost us $50 to make them. When we sell them, how much are we going to sell them for? Are we going to sell them for $50 or are we going to sell them for more?
More.
More. Okay, so if you, if you make it for, for $50, how much would you sell it for? You think it would be good?
$100.
So double. Right, to make profit.
Yeah.
Okay, we sold it for 200. We wanted to make more than double. We wanted to quadruple. Is that quadruple? That's four times our money, whatever that is. Okay.
Yes, quadruple.
So we're gonna sell it for $200, right? So we go ahead and sell our kite for $200. That means we're gonna start making sales. The sales are gonna go in the income statement. $200 are gonna go in the income statement. Sales. That sounds great to me. Every— in accounting, we said last time when we talked, to everything that we do in accounting, whenever there's an action, there's a reaction. The same equal in force but opposite in direction. So if we sell $200 in sales, the opposite of it is that we have a cost, right? So the cost is going to go here in the income statement. How much is the cost of our sales in this case?
$100.
Can you guess how much is the cost of the sale? So we sold something for $200. How much is the cost of it? You can guess, it's okay.
$50.
$50. Say it in the microphone.
$50.
$50. Okay, perfect. So I'm gonna put $50 at my cost. Now, Max, question for you. If the sales were $200 and the cost is $50, uh, what would be the profit?
$150.
$150, that's right. Okay. So the profit is $150. Okay, so don't forget the balance sheet. As we're doing all of this, in the balance sheet, something happened. The raw material, $50, turned into finished goods, $50, right? Because we turned our raw material into actual kites. And now we sold it, so that's even going to go away because we just sold it. It's gone.
Right?
So that $50 is gone from inventory. Okay, but remember, so the inventory is gone, but remember we sold cash. We got $200 in cash. Can you guys tell me where the $200 in cash will go here in the balance sheet? Which part of the balance sheet the $200 would go?
Inventory?
No, it'll be cash because we received $200 in cash. Okay? So I'm going to put my $200 here instead of $50. That would be $250. Okay? Now you look at the balance sheet and you say, well, I need to balance my balance sheet. I have here on the asset side $250, and on the liabilities and owner's equity, I have $100. It doesn't quite balance. Well, how does it balance? From the income statement, we have a profit of $150, right? That profit of $150 will be taken and we'll say that gets added to our equity because any profit we make in the company, that becomes a form of equity in the company. Equity is the stuff that the company has rights to, that if the business gets liquidated, we have to sell the business, no more in business, that is the money that is left over that you can give back to the investors, which is my dad in this case.
Right.
So the $200— the $150 from profit will go right into my equity. You add it to the $100 that we had from before. So now we're going to have $250 in owner's equity. Now my balance sheet is going to balance. $250 here on the asset side and $250 here on the liabilities and owner's equity side. Okay, so balance sheet equals the asset side, Total, $250,000. Uh, liabilities, owner's equity, $250,000. Is that somewhat clear? You guys follow more or less the balance sheet and the income statement?
I just got a little confused on the owner's equity part.
The owner's equity, right? This is one of the, the sort of the most advanced topics in accounting, owner's equity. Um, but you just got to remember that equity is, uh, if you today we shut down the business What is left in equity is what gets distributed to shareholders.
What is left of what?
Of the business. So let's say in this business today, after we just sold 10 kites, we decided to— no more, we're not a business anymore, right? Shut it down. What do we have left? Well, let's take a look. We have cash, $250,000, and we have equity of $250,000. We shut it down and that $250,000 gets distributed to shareholders. Who are the shareholders in this case? Like, who's the owners of this business? In this case, it's my dad and my 2 brothers and me. So there are 4 of us. So we'll take the $250,000, which is— we have it in the form of cash, and we will just split it amongst ourselves 4 ways, and each one of us would get a share from the $250,000. So equity, owner's equity, just means what the owner has in the business. Once the business is finished, no more in business, we'll take that owner's equity and divide it amongst ourselves. Okay, so if you guys liked the format of the video and how I break down things so that a 10-year-old can follow along, uh, you can be sure to check out my Controller Academy where I teach CPE credits courses, career courses based on my experience as a controller. And you can check out the Controller Lab where I give you material to have hands-on practice for those of you who are trying to break into the workforce but don't have the necessary hands-on Skills. Be sure to like the video, tap that like button, and if you haven't subscribed, subscribe to the channel, and I'll see you guys in the next video.
