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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 reviews why cash flow and profitability are not the same thing. It focuses on the difference between cash-basis and accrual-basis accounting, when revenue is recognized, when expenses are recorded, and how the timing of cash can differ 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 record in September?
Check your answer
Answer: C. Debit accounts receivable $4,800; credit revenue $4,800
The revenue belongs in September because that is when the service was performed and the revenue was earned. 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. What should the company report in September?
Check your answer
Answer: B. $6,000 of unearned revenue
The company received cash but has not yet earned the revenue. Until the service is performed, the company owes the customer that service, so the amount is recorded as a liability.
This is a deferral because cash came first and the economic activity comes later.
3. During September, employees earn $3,200 in wages that will not be paid until October. What should the company record in September?
Check your answer
Answer: C. Debit wages expense $3,200; credit wages payable $3,200
The expense was incurred in September because the employees worked in September. The fact that payment will occur in October does not change the period in which the expense belongs.
This is an accrual because the economic activity happened before the cash payment.
4. A company pays $12,000 on September 1 for 12 months of insurance coverage. How much insurance expense should be reported for September?
Check your answer
Answer: B. $1,000
The $12,000 payment provides 12 months of benefit, so only one month belongs in September.
$12,000 ÷ 12 months = $1,000 per month
The remaining amount is still an asset because it will benefit future periods.
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.
Accrual accounting records revenue when it is earned, not when cash is received. A company can therefore report revenue and net income while still waiting to collect the related cash.
That is one of the key reasons net income is not the same as cash flow.
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 how revenues and expenses are recognized, why accruals and deferrals matter, and why a company's cash balance does not tell the same story as its profit.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.