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Class 1
Podcast
Take a few minutes to revisit the big ideas from class. Then try the five practice questions below to see what stuck.
Quick Practice
These questions are just for practice. Choose your answer before opening Check your answer.
1. A potential investor wants to know how successfully a company operated during the month. Which financial statement would be the best place to start?
A. Balance Sheet
B. Income Statement
C. Statement of Retained Earnings
D. Statement of Cash Flows
Check your answer
Answer: B. Income Statement
The Income Statement reports revenues minus expenses for a period of time, which tells users whether the company generated net income or a net loss during that period.
2. A company begins the month with $0 of Retained Earnings. During the month, it earns $12,000 of revenues, incurs $10,000 of expenses, and pays $1,000 in dividends. What is ending Retained Earnings?
A. $1,000
B. $2,000
C. $11,000
D. $21,000
Check your answer
Answer: A. $1,000
First calculate Net Income: $12,000 − $10,000 = $2,000. Then calculate ending Retained Earnings: $0 + $2,000 − $1,000 = $1,000. This is one example of how information flows from one financial statement to another.
3. A company reports total assets of $36,000 and total liabilities of $25,000. Based on the basic accounting equation, what is total Stockholders' Equity?
A. $11,000
B. $25,000
C. $36,000
D. $61,000
Check your answer
Answer: A. $11,000
The basic accounting equation is Assets = Liabilities + Stockholders' Equity. Therefore, Stockholders' Equity = $36,000 − $25,000 = $11,000.
4. A company borrows $20,000 from a bank and receives the cash. On the Statement of Cash Flows, how should this cash receipt be classified?
A. Operating activity
B. Investing activity
C. Financing activity
D. Revenue activity
Check your answer
Answer: C. Financing activity
Financing activities involve transactions with creditors and stockholders that provide financing to the business. Borrowing cash from a bank is therefore a financing activity.
5. A company reports positive Net Income for the month. Which statement about its cash is correct?
A. Cash must have increased by exactly the amount of Net Income.
B. Cash must be greater than the company's liabilities.
C. Cash may have increased or decreased during the month.
D. Cash must equal the company's Retained Earnings.
Check your answer
Answer: C. Cash may have increased or decreased during the month.
Net Income is not necessarily equal to the change in cash. Revenues are reported when earned and expenses when incurred, regardless of when the related cash is received or paid. The Statement of Cash Flows separately explains why the cash balance changed.
How did you do? If one of these felt shaky, go back to that part of the podcast or your class materials and try the question again.
Class 2
Every Resource Has a Source
This podcast recaps Chapter 1, Class 2 and reinforces the ideas, examples, and connections we worked through in class.
Quick Practice
Try each question before opening Check your answer.
1. A company orders a delivery van today, but the van will not be delivered or transferred to the company for two months. How should the van be classified today?
A. Asset
B. Liability
C. Expense
D. It is not yet recorded as an asset
Check your answer
Answer: D. It is not yet recorded as an asset
The company does not yet control the van. Ordering something does not make it an asset until the company actually controls the resource.
2. A company performs $3,000 of services for a customer who promises to pay next month. What happens when the service is performed?
A. Cash increases by $3,000 and revenue increases by $3,000
B. Accounts receivable increases by $3,000 and revenue increases by $3,000
C. Accounts payable increases by $3,000 and revenue increases by $3,000
D. Nothing is recorded until the customer pays
Check your answer
Answer: B. Accounts receivable increases by $3,000 and revenue increases by $3,000
The company earned the revenue even though it has not received the cash yet. The amount the customer owes is recorded as Accounts Receivable. Remember: revenue is not cash.
3. Which situation is most likely to create a Notes Payable rather than an Accounts Payable?
A. A supplier delivers office supplies today and allows the company 30 days to pay
B. A company receives its monthly utility bill
C. A company signs a two-year bank loan with a stated interest rate and payment schedule
D. A vendor delivers inventory and sends an invoice that is due next month
Check your answer
Answer: C. A company signs a two-year bank loan with a stated interest rate and payment schedule
Notes Payable generally involves a formal borrowing agreement with specific repayment terms and interest. Accounts Payable usually results from routine purchases from suppliers on account.
4. A company begins the year with Retained Earnings of $8,000. During the year, it earns $6,000 of revenue, incurs $4,000 of expenses, and pays $500 in dividends. What is ending Retained Earnings?
A. $5,500
B. $8,500
C. $9,500
D. $10,000
Check your answer
Answer: C. $9,500
Net Income is $6,000 - $4,000 = $2,000.
Ending Retained Earnings is $8,000 + $2,000 - $500 = $9,500.
Retained Earnings carries forward from prior periods, so the beginning balance must be included.
5. The owners invest $40,000 cash in a new company in exchange for common stock. Which effect on the accounting equation is correct?
A. Assets increase $40,000 and liabilities increase $40,000
B. Assets increase $40,000 and stockholders' equity increases $40,000
C. Liabilities decrease $40,000 and stockholders' equity increases $40,000
D. Revenue increases $40,000 and assets increase $40,000
Check your answer
Answer: B. Assets increase $40,000 and stockholders' equity increases $40,000
Cash increases because the company received a resource, and Common Stock increases because the owners provided the financing. The accounting equation remains in balance.
Class 1
The Mechanical Code of Double Entry
This podcast recaps Chapter 2, Class 1 and reinforces the ideas, examples, and connections we worked through in class.
Quick Practice
Try each question before opening Check your answer.
1. A company purchases equipment for $12,000 cash. What is the effect on the accounting equation?
A. Assets increase by $12,000 and liabilities increase by $12,000
B. One asset increases by $12,000 and another asset decreases by $12,000
C. Assets decrease by $12,000 and expenses increase by $12,000
D. Assets increase by $12,000 and stockholders' equity increases by $12,000
Check your answer
Answer: B. One asset increases by $12,000 and another asset decreases by $12,000
Equipment increases by $12,000 and cash decreases by $12,000. Total assets do not change, and the accounting equation remains in balance.
2. A company purchases $4,000 of supplies on account. Which accounts are affected?
A. Supplies increases and cash decreases
B. Supplies increases and accounts payable increases
C. Supplies expense increases and cash decreases
D. Accounts receivable increases and accounts payable increases
Check your answer
Answer: B. Supplies increases and accounts payable increases
The company receives supplies now but will pay later. Supplies is an asset, and Accounts Payable is a liability.
3. Which account normally has a credit balance?
A. Cash
B. Accounts receivable
C. Common stock
D. Supplies
Check your answer
Answer: C. Common stock
Assets normally have debit balances. Common Stock is part of stockholders' equity, and stockholders' equity accounts normally have credit balances.
4. A company performs services for a customer and receives $2,500 cash immediately. Which journal entry correctly records the transaction?
A. Debit Cash $2,500; Credit Revenue $2,500
B. Debit Revenue $2,500; Credit Cash $2,500
C. Debit Accounts Receivable $2,500; Credit Cash $2,500
D. Debit Cash $2,500; Credit Accounts Payable $2,500
Check your answer
Answer: A. Debit Cash $2,500; Credit Revenue $2,500
Cash is an asset, so an increase in cash is recorded with a debit. Revenue increases stockholders' equity, so an increase in revenue is recorded with a credit.
5. Why are T-accounts useful when analyzing transactions?
A. They replace the need to understand the accounting equation
B. They show whether a transaction should be recorded on the income statement or balance sheet only
C. They help organize increases and decreases in individual accounts and track debit and credit effects
D. They are used only for cash transactions
Check your answer
Answer: C. They help organize increases and decreases in individual accounts and track debit and credit effects
T-accounts provide a simple way to visualize how individual accounts change and whether those changes are recorded as debits or credits.
Class 2
How the Current Ratio Determines Survival
This podcast recaps Chapter 2, Class 2 and reinforces the ideas, examples, and connections we worked through in class.
Quick Practice
Try each question before opening Check your answer.
1. What does a trial balance tell you?
A. That every transaction was recorded correctly
B. That total debits equal total credits
C. That current assets exceed current liabilities
D. That the company earned a profit
Check your answer
Answer: B. That total debits equal total credits
A trial balance is used to check whether the total debit balances equal the total credit balances. A balanced trial balance does not guarantee that every transaction was recorded correctly.
2. Which of the following would normally be classified as a current asset?
A. Equipment expected to be used for five years
B. Land held for long-term use
C. Accounts receivable expected to be collected within the next year
D. A building used in operations
Check your answer
Answer: C. Accounts receivable expected to be collected within the next year
Current assets are expected to be used up or converted into cash within one year. Accounts receivable that will be collected within that period meets that definition.
3. A company has a Notes Payable that is due in two years. How should it be classified on the balance sheet today?
A. Current asset
B. Noncurrent asset
C. Current liability
D. Noncurrent liability
Check your answer
Answer: D. Noncurrent liability
Classification depends on when the obligation is due. Because the note is not due within the next year, it is a noncurrent liability.
4. A company has current assets of $90,000 and current liabilities of $45,000. What is its current ratio?
A. 0.50
B. 1.00
C. 2.00
D. 45,000
Check your answer
Answer: C. 2.00
The current ratio is calculated as:
Current Assets ÷ Current Liabilities
$90,000 ÷ $45,000 = 2.00
The current ratio is used to evaluate a company's short-term ability to pay its obligations.
5. A company purchases equipment for cash. What will happen to its current ratio, assuming current liabilities do not change?
A. It will increase because equipment is a current asset
B. It will decrease because cash, a current asset, decreases
C. It will decrease because current liabilities increase
D. It will remain unchanged because total assets do not change
Check your answer
Answer: B. It will decrease because cash, a current asset, decreases
Cash is a current asset, while equipment is a noncurrent asset. Paying cash for equipment reduces current assets while current liabilities stay the same, so the current ratio decreases.
How the Accounting Equation Reveals Truth
Quiz 1 Review - Class 1
This episode reviews the accounting equation and the connections among assets, liabilities, stockholders' equity, revenues, expenses, dividends, and the financial statements. Use it to reinforce the relationships behind the numbers as you prepare for Quiz 1.
Quick Practice
Try each question before opening Check your answer.
1. A company has assets of $85,000 and liabilities of $32,000. What is total stockholders' equity?
A. $32,000
B. $53,000
C. $85,000
D. $117,000
Check your answer
Answer: B. $53,000
The accounting equation is: Assets = Liabilities + Stockholders' Equity. Therefore, $85,000 - $32,000 = $53,000 of stockholders' equity.
2. Owners invest $20,000 cash in a company in exchange for common stock. What happens to the accounting equation?
A. Assets increase $20,000 and liabilities increase $20,000
B. Assets increase $20,000 and stockholders' equity increases $20,000
C. Assets decrease $20,000 and stockholders' equity increases $20,000
D. Liabilities decrease $20,000 and stockholders' equity increases $20,000
Check your answer
Answer: B. Assets increase $20,000 and stockholders' equity increases $20,000
Cash increases by $20,000, so assets increase. Common stock also increases by $20,000, so stockholders' equity increases by the same amount.
3. A company earns $6,000 of revenue on account. What is the effect on the accounting equation?
A. Assets increase $6,000 and stockholders' equity increases $6,000
B. Assets increase $6,000 and liabilities increase $6,000
C. Assets decrease $6,000 and stockholders' equity increases $6,000
D. Liabilities decrease $6,000 and stockholders' equity increases $6,000
Check your answer
Answer: A. Assets increase $6,000 and stockholders' equity increases $6,000
Accounts receivable increases because the customer owes the company money. Revenue also increases, which ultimately increases retained earnings and stockholders' equity.
4. Beginning retained earnings is $14,000. The company earns net income of $9,000 and pays $3,500 in dividends. What is ending retained earnings?
A. $19,500
B. $23,000
C. $26,500
D. $5,500
Check your answer
Answer: A. $19,500
Ending retained earnings = beginning retained earnings + net income - dividends.
$14,000 + $9,000 - $3,500 = $19,500.
5. Which statement best describes the relationship among the financial statements?
A. The financial statements are independent and do not share information.
B. Net income from the income statement affects retained earnings, which becomes part of stockholders' equity on the balance sheet.
C. Dividends are reported as an expense on the income statement.
D. Accounts receivable appears only on the income statement.
Check your answer
Answer: B.
Net income flows from the income statement into retained earnings. Ending retained earnings is then included in stockholders' equity on the balance sheet. The financial statements tell one connected story.
Computer Services, Inc. Accounting Cycle Prep
Quiz 1 Review - Class 2
This episode pulls the accounting process together from beginning to end. Follow the flow from beginning account balances and business transactions to journal entries, T-accounts, a trial balance, and the financial statements.
Quick Practice
These are a little more challenging. Work through each one before opening Check your answer.
1. At the beginning of the month, accounts receivable has a $1,400 debit balance. During the month, the company provides $2,600 of services on account and collects $1,900 from customers. What is the ending balance in accounts receivable?
A. $700
B. $1,900
C. $2,100
D. $3,300
Check your answer
Answer: C. $2,100
Start with the $1,400 debit balance. Services performed on account increase accounts receivable by $2,600. Collections decrease accounts receivable by $1,900.
$1,400 + $2,600 - $1,900 = $2,100
This is why posting the beginning balance to your T-account before recording the month's transactions is so important.
2. A company begins the month with a $900 credit balance in accounts payable. During the month, it purchases $500 of supplies on account, receives a $300 utility bill that it has not yet paid, and pays $900 that was owed at the beginning of the month. What is the ending balance in accounts payable?
A. $0
B. $300
C. $500
D. $800
Check your answer
Answer: D. $800
Accounts payable begins with a $900 credit balance.
+ $500 supplies purchased on account
+ $300 utility bill incurred but not yet paid
- $900 payment of the beginning payable
$900 + $500 + $300 - $900 = $800
Be careful about which payable is being paid. A payment of an existing liability reduces accounts payable. It does not automatically eliminate liabilities created later in the month.
3. On September 8, a customer pays $750 that was already included in accounts receivable from the previous month. Which journal entry should the company record?
A. Debit cash $750; credit revenue $750
B. Debit cash $750; credit accounts receivable $750
C. Debit accounts receivable $750; credit revenue $750
D. Debit accounts payable $750; credit cash $750
Check your answer
Answer: B. Debit cash $750; credit accounts receivable $750
The revenue was earned when the service was originally performed. The customer is now simply paying an amount already owed.
Cash increases, so cash is debited. Accounts receivable decreases, so accounts receivable is credited.
No new revenue is recorded.
4. A company has the following adjusted ending balances: service revenue $7,800, salaries expense $2,100, utilities expense $700, and dividends $1,000. Beginning retained earnings is $1,600. What amount of retained earnings will appear on the balance sheet?
A. $3,000
B. $4,600
C. $5,600
D. $6,000
Check your answer
Answer: C. $5,600
First calculate net income:
$7,800 - $2,100 - $700 = $5,000 net income
Then calculate ending retained earnings:
$1,600 + $5,000 - $1,000 = $5,600
Notice the sequence: the income statement produces net income, net income flows into the statement of retained earnings, and ending retained earnings then appears in stockholders' equity on the balance sheet.
5. A company's trial balance has equal total debits and credits. Which situation could still have occurred?
A. A $1,200 transaction was completely omitted from the accounting records.
B. A $700 debit was recorded without any corresponding credit.
C. A $500 debit was accidentally recorded as $5,000 while the credit remained $500.
D. The debit side of a journal entry was posted twice while the credit side was posted once.
Check your answer
Answer: A. A $1,200 transaction was completely omitted from the accounting records.
If an entire transaction is omitted, neither the debit nor the credit is recorded. The trial balance can therefore still balance even though the accounting records are incomplete.
The other errors would cause total debits and credits to differ.
A balanced trial balance tells you that total debit balances equal total credit balances. It does not prove that every transaction was recorded or recorded correctly.
Quiz 1 Resources
Extra practice to help you prepare for Quiz 1.
Quiz 1 Flashcards Mini Calculation Drill Quiz 1 Mistakes to AvoidWhy Profit is Not the Same as Cash
Chapter 3 - Class 1
This episode introduces the difference between cash-basis and accrual-basis accounting. It focuses on when revenues are recognized, when expenses are recorded, and why the timing of cash receipts and payments can be different from the timing of the underlying business activity.
Quick Practice
Try each question before opening Check your answer.
1. A company performs $4,800 of services on September 20 and allows the customer to pay in October. Under accrual accounting, what should the company report in September?
Check your answer
Answer: C. $4,800 of revenue and $4,800 of accounts receivable
The company earned the revenue in September because that is when the service was performed. Cash collection in October does not determine when the revenue is recognized.
2. A company receives $6,000 cash from a customer on September 1 for services that will be performed in October. How much revenue should be reported in September?
Check your answer
Answer: A. $0
The company received cash, but it has not yet earned the revenue. Until the service is performed, the amount represents an obligation to the customer.
Cash received and revenue earned are not always the same event.
3. Employees earn $3,200 in wages during September, but the company will not pay them until October. In which month should the expense be reported?
Check your answer
Answer: A. September
The employees performed the work in September, so the expense belongs in September. The fact that cash will be paid in October does not change when the expense is incurred.
4. A company pays $12,000 cash on September 1 for 12 months of insurance coverage. How much of that payment represents September's insurance expense?
Check your answer
Answer: B. $1,000
The $12,000 payment provides 12 months of benefit.
$12,000 ÷ 12 months = $1,000 per month
Only the portion of the benefit used during September belongs in September's expense.
5. Which situation best explains why a profitable company could still have relatively little cash?
Check your answer
Answer: A. It earned significant revenue on account that customers have not yet paid.
Revenue earned on account increases net income even though the related cash has not yet been collected.
That is one of the key reasons profit is not the same as cash.
Why Your Bank Balance Isn't Profit
Chapter 3 - Class 2
This episode continues the Chapter 3 focus on accrual accounting by looking at the timing differences between cash and the underlying business activity. It reinforces when revenues and expenses belong in a period, why cash receipts and payments do not determine profit, and why a company's bank balance does not tell the same story as its net income.
Quick Practice
Try each question before opening Check your answer.
1. A company performs $8,000 of services during September. Customers pay $5,500 in September and will pay the remaining $2,500 in October. How much revenue should be reported for September under accrual accounting?
Check your answer
Answer: C. $8,000
Revenue is recognized when it is earned, not when cash is collected.
The company performed $8,000 of services in September, so all $8,000 belongs in September revenue.
2. A company receives $12,000 cash in September for services that will not be performed until October. How much revenue should be reported in September?
Check your answer
Answer: A. $0
The company has received cash, but it has not yet earned the revenue.
Cash received and revenue earned are not always the same event.
3. Employees perform $4,000 of work during September, but they will not be paid until October. In which month should the $4,000 expense be reported?
Check your answer
Answer: A. September
The expense belongs in the period in which the employees provided the service.
Under accrual accounting, the timing of the cash payment does not determine the timing of the expense.
4. A company receives $20,000 of cash during September but reports only $14,000 of revenue. Which explanation is most likely?
Check your answer
Answer: A. Some of the cash received relates to revenue that has not yet been earned.
A company can receive cash before it earns the related revenue.
That is one reason the amount of cash received during a period can be different from the amount of revenue reported.
5. Company A reports net income of $18,000 for September but collects only $9,000 of cash from customers. Company B collects $18,000 of cash but reports net income of only $9,000. What does this illustrate?
Check your answer
Answer: C. Profit and cash are different because revenues and expenses are recognized based on business activity, not simply cash movement.
Accrual accounting separates the timing of economic activity from the timing of cash receipts and payments.
That is why a company's bank balance is not the same thing as its profit.
How Adjusting Entries Reveal Economic Reality
Chapter 4 - Class 1
This episode introduces the role of adjusting entries in accrual accounting. It focuses on why accounts need to be updated at the end of a period, how timing differences create accrued and deferred revenues and expenses, and how adjusting entries help the financial statements reflect the economic activity that actually occurred during the period.
Quick Practice
Work through each question before opening Check your answer.
1. Why are adjusting entries needed at the end of an accounting period?
Check your answer
Answer: B. To update accounts so revenues and expenses are reported in the proper period
Not every economic event and cash transaction happens at the same time.
Adjusting entries update the accounts so the financial statements reflect the revenues earned and expenses incurred during the period.
2. Employees have earned $3,600 of wages by the end of September, but they will not be paid until October. Which type of timing difference does this represent?
Check your answer
Answer: D. Accrued expense
The expense has already been incurred, but the cash payment will occur later.
The economic activity comes first and the cash follows.
3. A company receives cash from a customer before providing the related service. At the time the cash is received, what has the company created?
Check your answer
Answer: B. A liability because the company still owes the customer a service
Receiving cash does not automatically mean revenue has been earned.
Until the company performs the service, it has an obligation to the customer. That obligation is recorded as unearned revenue, a liability.
4. A company purchased $5,000 of supplies earlier in the year. At the end of the period, only $1,400 of supplies remain. How much of the supplies should be recognized as expense?
Check your answer
Answer: B. $3,600
Start with what the company had and subtract what is still left:
$5,000 - $1,400 = $3,600 of supplies used
The amount used during the period becomes supplies expense. The $1,400 remaining continues to be reported as an asset.
5. A company forgets to record an accrued wage expense at the end of the period. What effect will that have on the financial statements?
Check your answer
Answer: A. Expenses will be understated and net income will be overstated.
If the company fails to record wages that were already incurred, the expense is too low.
Because expenses are understated, net income is overstated. The related liability would also be understated.
The Mechanics of Adjusting and Closing Entries
Chapter 4 - Class 2
This episode brings the end-of-period accounting process together. It reviews how adjusting entries update accounts before the financial statements are prepared, how those adjustments affect revenues, expenses, assets, and liabilities, and how closing entries prepare the temporary accounts for the next accounting period.
Quick Practice
Work through each question before opening Check your answer.
1. A company paid $12,000 for one year of insurance on October 1. Before the October 31 adjustment, the entire $12,000 is still recorded in prepaid insurance. What amounts should remain after the adjustment?
Check your answer
Answer: B. prepaid insurance $11,000; insurance expense $1,000
One month of the 12-month insurance policy has expired:
$12,000 ÷ 12 months = $1,000 per month
The $1,000 that has been used becomes insurance expense. The remaining $11,000 still provides a future benefit, so it remains in prepaid insurance.
2. Employees have earned $4,200 of wages by the end of the month, but the company will not pay them until next month. Which adjusting entry is required?
Check your answer
Answer: A. Debit wages expense $4,200; credit wages payable $4,200
The employees performed the work during the current period, so the expense belongs in the current period.
Because the company has not yet paid the employees, it also needs to recognize a liability.
3. A company's unearned revenue account has a $9,000 balance before adjustment. By the end of the period, the company has earned $3,500 of that amount. What should the balance in unearned revenue be after the adjustment?
Check your answer
Answer: B. $5,500
Unearned revenue represents services the company still owes its customers.
$9,000 beginning liability - $3,500 now earned = $5,500 still unearned
The $3,500 that has been earned becomes revenue.
4. Before closing entries are recorded, a company has revenues of $48,000, expenses of $35,000, and dividends of $4,000. By how much will retained earnings increase as a result of closing these temporary accounts?
Check your answer
Answer: A. $9,000
First calculate net income:
$48,000 revenue - $35,000 expenses = $13,000 net income
Net income increases retained earnings, while dividends decrease retained earnings:
$13,000 - $4,000 = $9,000 increase in retained earnings
5. Which set of accounts should have zero balances after the closing process is complete?
Check your answer
Answer: C. revenues, expenses, and dividends
Revenues, expenses, and dividends are temporary accounts. They measure activity for one accounting period and are closed so that they begin the next period with zero balances.
Assets, liabilities, common stock, and retained earnings are permanent accounts. Their ending balances carry forward into the next accounting period.
How Adjusting Entries Fix Financial Statements
Quiz 2 Review
This episode reviews how adjusting entries make financial statements more accurate. It focuses on recognizing revenues and expenses in the correct accounting period, understanding how adjusting entries change account balances, and identifying the effects of missing adjustments on net income, assets, liabilities, and stockholders' equity.
Quick Practice
These questions require you to think about both the adjusting entry and its effect on the financial statements. Try each question before opening Check your answer.
1. A company purchased $7,200 of supplies during the year. At year-end, $2,100 of supplies remain unused. If the company fails to record the adjusting entry, what effect will this have on the financial statements?
Check your answer
Answer: C. Assets overstated by $5,100; net income overstated by $5,100
Supplies used = $7,200 - $2,100 = $5,100.
The company should decrease supplies and recognize $5,100 of supplies expense.
Without the adjustment, the supplies asset remains too high and expenses remain too low. As a result, both assets and net income are overstated by $5,100.
2. On October 1, a company received $12,000 cash for six months of services to be provided equally through March 31. The company initially recorded the receipt as unearned revenue. What is the effect of failing to make the December 31 adjusting entry?
Check your answer
Answer: A. Liabilities overstated by $6,000; net income understated by $6,000
$12,000 / 6 months = $2,000 per month.
October, November, and December represent three months of services:
$2,000 × 3 = $6,000 earned.
The adjustment should decrease unearned revenue and increase revenue by $6,000.
Without it, the liability remains too high and revenue is understated. Net income is therefore understated.
3. Equipment cost $60,000 and has accumulated depreciation of $18,000 before the current year's adjustment. Annual depreciation expense is $6,000. If the company fails to record depreciation, which statement is correct?
Check your answer
Answer: D. Net book value is overstated by $6,000
Correct accumulated depreciation:
$18,000 + $6,000 = $24,000.
Correct net book value:
$60,000 - $24,000 = $36,000.
Without the adjustment, net book value would remain $42,000.
That is $6,000 too high. Depreciation expense would also be understated, causing net income to be overstated.
4. A company has $3,800 of wages earned by employees but not yet paid at year-end. The adjusting entry is accidentally omitted. Which combination correctly describes the errors?
Check your answer
Answer: A. Expenses understated; liabilities understated; retained earnings overstated
The required adjustment is:
Debit wages expense $3,800.
Credit wages payable $3,800.
Without the entry, both the expense and the liability are too low.
Understated expenses cause net income to be overstated. That overstatement also flows through to ending retained earnings.
5. Before adjusting entries, a company reports revenue of $85,000 and expenses of $52,000. At year-end, the accountant identifies the following:
What is net income after all three adjustments?
Check your answer
Answer: B. $33,000
First, update revenue:
$85,000 + $4,000 = $89,000.
Then update expenses:
$52,000 + $2,500 + $1,500 = $56,000.
Adjusted net income:
$89,000 - $56,000 = $33,000.
Notice that the adjustments can affect revenue, expenses, assets, and liabilities. The final net income calculation must use the adjusted balances.
Why Cash Accounting Lies About Profit
Quiz 2 Review - Class 2
This episode takes another look at one of the biggest ideas behind Quiz 2: cash movement and profitability are not the same thing. It connects the accrual accounting concepts from Chapter 3 with the adjusting entries from Chapter 4 and reinforces why revenues belong in the period they are earned, expenses belong in the period they are incurred, and the financial statements sometimes need to be adjusted before they tell the correct story.
Quick Practice
Try each question before opening Check your answer.
1. During December, a company performs $18,000 of services but collects only $12,000 from customers. The remaining amount will be collected in January. How much revenue should the company report for December?
Check your answer
Answer: C. $18,000
Revenue is recognized when it is earned, not when the cash is collected.
The company earned $18,000 by performing the services in December. The $6,000 that has not yet been collected becomes accounts receivable.
2. On December 1, a company receives $9,000 cash from a customer for services that will be performed entirely in January. What should the company report on December 31?
Check your answer
Answer: B. $9,000 unearned revenue
The company has received the cash, but it has not yet earned the revenue.
Until the service is performed, the company owes the customer a service. That obligation is a liability called unearned revenue.
3. Employees have earned $5,400 of wages by December 31, but they will not be paid until January. If the company fails to record the adjusting entry, what happens to December net income?
Check your answer
Answer: B. Net income will be overstated by $5,400.
The employees performed the work during December, so the $5,400 wage expense belongs in December even though the cash will not be paid until January.
If the adjustment is omitted, expenses are understated by $5,400. Because net income equals revenues minus expenses, net income is overstated by $5,400. The related liability is also understated.
4. On October 1, a company pays $24,000 for 12 months of insurance coverage. What amounts should be reported on December 31 after the appropriate adjustment?
Check your answer
Answer: B. Insurance expense $6,000; prepaid insurance $18,000
The insurance costs $2,000 per month:
$24,000 ÷ 12 months = $2,000 per month
Three months of coverage have been used by December 31:
$2,000 × 3 months = $6,000 insurance expense
The remaining $18,000 represents future insurance coverage, so it remains an asset in prepaid insurance.
5. A company collected $70,000 cash from customers during the year. It earned $82,000 of revenue and incurred $57,000 of expenses. What was the company's net income?
Check your answer
Answer: B. $25,000
Net income is based on revenues earned and expenses incurred:
$82,000 revenue - $57,000 expenses = $25,000 net income
The $70,000 of cash collected does not determine profit. Some revenue may have been earned without collecting cash during the same period, while some cash receipts may relate to activity from a different period.
That is exactly why cash in the bank and profit are not the same thing.
Quiz 2 Resources
Extra practice to help you prepare for Quiz 2.
Quiz 2 Flashcards Mini Calculation Drill Quiz 2 Mistakes to Avoid Depreciation: Follow the Asset, Not the Cash Closing Entries: Reset the Scoreboard, Keep the StoryHow Retailers Account for Inventory Costs
Chapter 6 - Class 1
This episode introduces the accounting for merchandising companies and follows inventory from the moment it is purchased until it is sold. It reinforces what belongs in inventory cost, how the perpetual inventory system keeps the inventory account updated, and why a sale of merchandise creates both revenue and cost of goods sold.
Quick Practice
Try each question before opening Check your answer.
1. A retailer purchases merchandise for $12,000 on account. Under a perpetual inventory system, which account is debited?
Check your answer
Answer: B. inventory
Under a perpetual inventory system, the inventory account is updated whenever merchandise is purchased.
The merchandise is still owned by the company and has not yet been sold, so its cost is recorded as an asset.
2. A retailer pays $600 of freight to bring purchased merchandise to its store. Under a perpetual inventory system, how should the freight cost be recorded?
Check your answer
Answer: B. Debit inventory for $600
The freight cost is part of the cost of getting the merchandise ready and available for sale.
Because the merchandise has not yet been sold, that cost becomes part of inventory rather than an immediate expense.
3. A retailer returns $1,500 of merchandise to a supplier. The merchandise had originally been purchased on account. Under a perpetual inventory system, what happens to inventory?
Check your answer
Answer: B. Inventory decreases by $1,500.
The company no longer owns the returned merchandise, so the inventory asset must decrease.
Because the purchase was originally made on account, accounts payable also decreases.
4. A retailer sells merchandise to a customer for $9,000. The merchandise originally cost the retailer $5,400. Under a perpetual inventory system, why are two entries needed?
Check your answer
Answer: B. One records sales revenue and one records the cost of the inventory sold.
A merchandise sale affects the accounting system in two different ways.
The company earns $9,000 of sales revenue. At the same time, $5,400 of inventory leaves the business and becomes cost of goods sold.
5. A retailer has $30,000 of merchandise available for sale. During the period, merchandise costing $18,000 is sold. What amount remains in inventory?
Check your answer
Answer: A. $12,000
Inventory represents the cost of merchandise the company still owns.
$30,000 available for sale - $18,000 sold = $12,000 ending inventory
The $18,000 of merchandise that was sold is no longer an asset. Its cost has moved from inventory to cost of goods sold.
How Multistep Income Statements Work
Chapter 6 - Class 2
This episode focuses on how a multistep income statement organizes a retailer's operating results. It reinforces the relationships among net sales, cost of goods sold, gross profit, operating expenses, operating income, and net income, and shows why the additional subtotals help us understand how the business actually performed.
Quick Practice
Try each question before opening Check your answer.
1. A retailer reports sales revenue of $120,000, sales returns and allowances of $4,000, and sales discounts of $2,000. What are net sales?
Check your answer
Answer: A. $114,000
Net sales begins with sales revenue and subtracts both sales returns and allowances and sales discounts.
$120,000 - $4,000 - $2,000 = $114,000 net sales
2. A company reports net sales of $150,000 and cost of goods sold of $90,000. What is gross profit?
Check your answer
Answer: A. $60,000
Gross profit measures how much remains from net sales after subtracting the cost of the merchandise that was sold.
$150,000 - $90,000 = $60,000 gross profit
3. A retailer reports gross profit of $72,000 and operating expenses of $45,000. What is operating income?
Check your answer
Answer: A. $27,000
Operating income focuses on the results of the company's normal operations.
$72,000 gross profit - $45,000 operating expenses = $27,000 operating income
4. Why does a multistep income statement report gross profit separately?
Check your answer
Answer: B. It shows the difference between net sales and cost of goods sold.
Gross profit isolates the relationship between what the company earned from selling merchandise and what that merchandise cost the company.
That makes it easier to evaluate the profitability of the company's core merchandising activity before considering operating expenses.
5. A retailer reports net sales of $200,000, cost of goods sold of $125,000, operating expenses of $48,000, and interest expense of $3,000. What is net income?
Check your answer
Answer: A. $24,000
First find gross profit:
$200,000 - $125,000 = $75,000 gross profit
Then subtract operating expenses:
$75,000 - $48,000 = $27,000 operating income
Finally, subtract the $3,000 interest expense:
$27,000 - $3,000 = $24,000 net income
This is exactly why the multistep format is useful: it lets you see where each layer of profitability comes from.
Quiz 3 Resources
Additional Quiz 3 practice resources will be posted here the week before the quiz.