Listen. Practice. Strengthen what you Learned.
The Course Companion gives you ungraded, self-paced review and practice
through podcasts, flashcards, mini calculation drills, mistakes to avoid,
quick practice, and step-by-step walkthroughs.
-
Companion, not shortcut:
Use it alongside class, your Notes Guide, handouts, and the TA village. -
Active over passive:
Try the question or calculation yourself before revealing the answer. -
Learn like a kindergartener:
Make mistakes, figure out what you do not know, and keep practicing.
Do something every day. Small, consistent effort adds up.
The Big Picture
Accounting tells the story of a business through its financial statements. Each statement tells us something different, but together they explain what the business owns, what it owes, how profitable it is, and where its cash comes from and goes.
These statements are connected. Net income affects retained earnings, retained earnings is part of stockholders' equity, and the balance sheet shows the company's financial position. But profitability and cash flow are not the same thing.
The takeaway: No single financial statement tells the whole story. You need to understand how they fit together.
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
The Big Picture
Every business resource has a source of financing. Assets tell us what the business has, while liabilities and stockholders' equity explain how those assets were financed. That's why the accounting equation must always balance.
The five major types of accounts help us understand what changes when a business conducts transactions. Revenues and expenses affect net income, which ultimately affects retained earnings. Dividends reduce retained earnings, but they aren't expenses.
The takeaway: Every transaction changes something, but the accounting equation must still balance.
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 Big Picture
Every business transaction changes at least two accounts, and double-entry accounting gives us a systematic way to record those changes while keeping the accounting equation in balance. Debits and credits are simply the tools we use to record what happened.
A debit doesn't always mean an increase, and a credit doesn't always mean a decrease. It depends on the type of account. Once you understand which accounts are affected and whether they're increasing or decreasing, you can determine the correct debit and credit. T-accounts help you see those changes and keep track of account balances.
The takeaway: Don't start by guessing the debits and credits. Figure out what happened to the accounts first, and the journal entry will follow.
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
The Big Picture
Recording transactions is only the beginning. The trial balance brings account balances together and checks that total debits equal total credits. But balancing doesn't guarantee that every transaction was recorded correctly. We still need to understand what those balances tell us about the business.
The classified balance sheet helps us evaluate a company's financial position by separating current and noncurrent assets and liabilities. The current ratio takes that information one step further by comparing resources available to meet short-term obligations with the obligations coming due. It's an important measure of liquidity, but it doesn't tell us everything about a company's financial health.
The takeaway: A balanced trial balance tells us the debits and credits agree. A classified balance sheet and current ratio help us understand whether the company can meet its short-term obligations.
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.
The Big Picture
Everything we've learned so far connects back to one simple idea: a business's resources must come from somewhere. Assets show what the company has, while liabilities and stockholders' equity explain how those resources were financed. Every transaction changes the accounting equation, but it must remain in balance.
Revenues and expenses affect net income, which flows into retained earnings. Dividends also affect retained earnings, but they're distributions to owners, not expenses. These relationships connect the income statement, statement of retained earnings, and balance sheet into one financial story.
The takeaway: Don't treat the accounting equation, journal entries, and financial statements as separate topics. They're different ways of describing the same business activities.
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.
The Big Picture
Everything we've learned so far comes together in the accounting cycle. Business transactions change individual accounts, journal entries record those changes, and T-accounts help us track how each account balance changes throughout the period. The trial balance then checks whether total debits equal total credits.
Those account balances become the foundation for the financial statements. Net income flows into retained earnings, and ending retained earnings becomes part of stockholders' equity on the balance sheet. Each step builds on the one before it, so an error early in the process can affect the financial statements.
The takeaway: Don't treat journal entries, T-accounts, the trial balance, and financial statements as separate assignments. They're all connected steps in telling the financial story of a business.
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 AvoidThe Big Picture
Cash doesn't always change hands when a business earns revenue or incurs an expense. That's why financial statements prepared under GAAP generally use accrual accounting rather than cash-basis accounting. Accrual accounting gives us a more accurate picture of how a business performed during a particular period.
Under the revenue recognition principle, revenue is recognized when it's earned, regardless of when cash is collected. Expenses are recognized when they're incurred, not necessarily when they're paid. Accruals and deferrals help us understand situations in which the cash transaction and the related revenue or expense happen in different periods.
The takeaway: The timing of cash doesn't determine the timing of revenue and expenses. What matters is when they're earned or incurred.
Why 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.
The Big Picture
Under accrual accounting, a business can earn revenue before collecting cash or receive cash before earning revenue. The same timing differences apply to expenses. Cash can be paid before an expense is incurred or after the business has already incurred it. These differences explain why cash receipts and payments don't necessarily belong on the income statement in the period they occur.
Accruals and deferrals aren't just accounting terms. They describe the relationship between when cash changes hands and when the underlying business activity occurs. Recognizing revenues and expenses in the proper period helps the income statement measure performance, while related assets and liabilities reflect amounts to be collected, obligations to be paid, or benefits and services still to be received or provided.
The takeaway: Cash tells us what moved through the bank. Accrual accounting tells us what the business actually earned and incurred during the period. They're two different stories, and both matter.
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.
The Big Picture
Recording transactions throughout the month doesn't necessarily mean our account balances are correct at the end of the month. Some revenues have been earned but not yet recorded, some expenses have been incurred but not yet recorded, and some assets or liabilities have changed as time passes. Adjusting entries make sure those changes are reflected in the financial statements.
Each adjusting entry connects what happened during the period to its effect on the financial statements. For example, using supplies decreases an asset and increases an expense. Earning previously unearned revenue decreases a liability and increases revenue. Without these adjustments, both the income statement and balance sheet can report incorrect amounts, even if every original transaction was recorded properly.
The takeaway: Adjusting entries aren't about correcting mistakes. They're about making sure the financial statements reflect what the business actually earned, incurred, owes, and still has at the end of the period.
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 Big Picture
At the end of an accounting period, we have two important jobs: make sure the accounts reflect what actually happened, then prepare them for the next period. Adjusting entries accomplish the first job by recognizing revenues and expenses in the correct period and updating related assets and liabilities.
After adjustments and financial statement preparation, closing entries accomplish the second job. Revenues and expenses are closed to retained earnings through net income, while dividends reduce retained earnings separately. Temporary accounts start the next period at zero, but permanent accounts carry their balances forward. This allows each new period to measure its own performance without losing the company's financial history.
The takeaway: Adjusting entries make sure we finish the current period correctly. Closing entries make sure we're ready to start the next one.
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.
The Big Picture
Adjusting entries do more than update individual accounts. They make sure the income statement reports what the business actually earned and incurred during the period, while the balance sheet reflects the assets and liabilities that remain at the end of that period. Both financial statements depend on the same adjustments.
When an adjusting entry is omitted, the error doesn't stay in just one account. Missing an expense can overstate net income and assets or understate liabilities. Missing earned revenue can understate net income and assets or overstate liabilities. Understanding what the adjustment should have changed allows us to trace the effects of leaving it out.
The takeaway: Don't memorize whether an omission causes an overstatement or understatement. Figure out what the adjusting entry should have done, then follow what happens when it isn't recorded.
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.
The Big Picture
Chapters 3 and 4 are really telling us one connected story: cash movement and business performance are not the same thing. Accrual accounting determines when revenues and expenses belong on the income statement, while adjusting entries make sure those amounts are properly recorded before the financial statements are prepared.
The timing differences also explain what's happening on the balance sheet. Revenue earned but not yet collected creates an asset. Expenses incurred but not yet paid create liabilities. Cash received before revenue is earned creates a liability, while payments for future benefits create assets. As those obligations are fulfilled or benefits are used, adjusting entries update the accounts.
The takeaway: Cash tells us when money moved. Accrual accounting tells us when revenues were earned and expenses were incurred. Adjusting entries make sure the financial statements reflect the difference.
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 StoryThe Big Picture
When a business sells merchandise, two things happen: it earns revenue from the customer and gives up inventory that has a cost. That's why every merchandise sale requires two journal entries.
Until merchandise is sold, its cost remains an asset (Inventory). Once it's sold, that cost becomes an expense (Cost of Goods Sold).
The takeaway: Selling merchandise is about more than making a sale. We also have to account for what it cost the business.
How 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.Check your answer
Check your answer
Check your answer
Check your answer
Check your answer
The Big Picture
Making sales doesn't necessarily mean making a profit. First, a business must cover the cost of the merchandise it sells. Then it must cover the expenses of running the business.
The multistep income statement shows how we get from sales to net income, while gross profit percentage helps us evaluate how much of each sales dollar remains after covering the merchandise's cost.
The takeaway: Net income tells us how much profit a business earned. The multistep income statement helps us understand where that profit came from.
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.Check your answer
Check your answer
Check your answer
Check your answer
Check your answer
The Big Picture
Inventory costing methods do not change the total cost of goods available for sale. They change where those costs end up - either in Cost of Goods Sold or in ending inventory.
When inventory costs are rising, LIFO assigns the newer, higher costs to Cost of Goods Sold. That usually means higher Cost of Goods Sold, lower gross profit, and lower net income than FIFO. The important connection is that lower income can also mean lower income taxes, which means the company may actually keep more cash.
So the big idea is not simply that FIFO and LIFO produce different accounting numbers. The inventory method can affect reported profitability, the balance sheet, income taxes, and ultimately cash flow.
How LIFO Accounting Saves Real Cash
Chapter 7 - Class 1
FIFO, LIFO, and weighted average all begin with the same inventory costs, but they can produce very different amounts for Cost of Goods Sold and ending inventory. In this episode, we focus on why those differences matter beyond the accounting records.
Quick Practice
Try each question before opening Check your answer.
1. A company has the following inventory available:
100 units at $10 each
100 units at $14 each
The company sells 120 units. Under FIFO, what amount will be reported as Cost of Goods Sold?
Check your answer
Answer: B. $1,280
FIFO sends the oldest costs to Cost of Goods Sold first.
100 × $10 = $1,000
20 × $14 = $280
Cost of Goods Sold = $1,280
2. Using the same inventory information, what amount will be reported as Cost of Goods Sold under LIFO?
Check your answer
Answer: D. $1,600
LIFO sends the newest costs to Cost of Goods Sold first.
100 × $14 = $1,400
20 × $10 = $200
Cost of Goods Sold = $1,600
3. When inventory costs are rising, which statement generally describes the effect of LIFO compared with FIFO?
Check your answer
Answer: B. LIFO produces higher Cost of Goods Sold and lower net income.
When costs are rising, LIFO assigns the newer, higher inventory costs to Cost of Goods Sold. Higher Cost of Goods Sold lowers gross profit and net income.
4. Why can LIFO result in a real cash benefit when inventory costs are rising?
Check your answer
Answer: C. Lower reported income can result in lower income taxes.
LIFO does not directly create cash. The cash effect can come through lower income taxes when higher Cost of Goods Sold reduces taxable income.
5. Which statement about FIFO and LIFO is correct?
Check your answer
Answer: C. They allocate the same total inventory cost differently between Cost of Goods Sold and ending inventory.
The total cost available does not change. The costing method determines which costs are assigned to Cost of Goods Sold and which remain in ending inventory.
The Big Picture
Inventory accounting does much more than determine the number reported for Inventory on the balance sheet. Because ending inventory is part of the Cost of Goods Sold calculation, an inventory error can flow directly into Cost of Goods Sold, net income, and retained earnings.
We also use inventory information to evaluate whether inventory may have lost value and how efficiently a company is managing it. Lower of Cost or Market addresses declines in inventory value, while inventory turnover and days sales in inventory help us evaluate how quickly inventory is being sold.
The big idea is that an inventory number does not stay isolated on the balance sheet. It can affect expenses, profit, equity, and the way we evaluate a company’s operations.
How Inventory Accounting Affects Reported Profit
Chapter 7 - Class 2
In this episode, we follow inventory beyond FIFO, LIFO, and weighted average to see what happens when inventory is counted incorrectly, loses value, or sits too long before being sold. We connect ending inventory to Cost of Goods Sold and reported profit, examine how shipping terms determine inventory ownership, and look at the ratios companies use to evaluate inventory management.
Quick Practice
Try each question before opening Check your answer.
1. A company purchases inventory that is shipped FOB Destination on December 30. The inventory is still in transit on December 31. Who owns the inventory on December 31?
Check your answer
Answer: C. The seller, because the goods have not yet reached the buyer.
Under FOB Destination, ownership transfers when the goods reach the buyer’s destination. Until delivery occurs, the seller still owns the inventory and should include it in ending inventory.
2. A company understates ending inventory by $8,000. What is the effect on Cost of Goods Sold and net income?
Check your answer
Answer: B. Cost of Goods Sold is overstated and net income is understated.
Remember the relationship:
Beginning Inventory + Purchases − Ending Inventory = Cost of Goods Sold
If ending inventory is too low, too little is subtracted. That makes Cost of Goods Sold too high. Higher Cost of Goods Sold lowers net income.
3. Inventory has a recorded cost of $52,000, but its market value has fallen to $47,000. Under Lower of Cost or Market, at what amount should the inventory be reported?
Check your answer
Answer: A. $47,000
Lower of Cost or Market requires the company to compare the inventory’s recorded cost with its market value and report the lower amount.
Because market value has fallen below cost, the inventory is written down from $52,000 to $47,000.
4. A company reports Cost of Goods Sold of $420,000. Beginning inventory was $70,000 and ending inventory was $50,000. What is the company’s inventory turnover?
Check your answer
Answer: B. 7.0 times
First calculate average inventory:
($70,000 + $50,000) ÷ 2 = $60,000
Then calculate inventory turnover:
$420,000 ÷ $60,000 = 7.0 times
This means the company sold and replaced its average inventory approximately seven times during the period.
5. The company in Question 4 has an inventory turnover of 7.0 times. Approximately how many days of inventory does it hold?
Check your answer
Answer: C. Approximately 52 days
Days sales in inventory converts inventory turnover into an approximate number of days:
365 ÷ 7.0 = approximately 52 days
This means inventory remains on hand for about 52 days, on average, before being sold.
One last connection: A higher inventory turnover is not automatically better. Too much inventory ties up cash and creates storage, damage, and obsolescence risks. Too little inventory can cause a company to run out of products and lose sales. The goal is to manage inventory efficiently while still having enough available to meet customer demand.
But wait! There’s more!
Want a little more help with the parts of inventory that tend to get messy? These short walkthroughs break them down one step at a time, with examples you can work before revealing the answers.
Periodic vs. Perpetual LIFO: Same Inventory, Different COGS Inventory Errors: Follow the ChainQuiz 3 Resources
Extra practice to help you prepare for Quiz 3.
Quiz 3 Flashcards Mini Calculation Drill Quiz 3 Mistakes to Avoid Inventory: Follow the Cost, Not the Product Inventory Costing: Same Goods, Four Different StoriesThe Big Picture
Selling on account helps companies increase sales, but it also creates a new problem: not every customer will pay.
Companies therefore need a way to estimate the portion of Accounts Receivable that probably will not be collected. Under the allowance method, Bad Debt Expense is recognized in the same period as the related credit sales, while the Allowance for Doubtful Accounts reduces Accounts Receivable to the amount the company actually expects to collect.
The big idea is that the company is not waiting until a specific customer fails to pay before recognizing the expected loss. Instead, it uses estimates to report both expense and Accounts Receivable more realistically.
How Companies Account for Bad Debt
Chapter 8 - Class 1
In this episode, we look at how companies account for customers who may never pay what they owe. We connect Bad Debt Expense, the Allowance for Doubtful Accounts, and Net Accounts Receivable, then follow what happens when a specific account is eventually written off.
Quick Practice
Try each question before opening Check your answer.
1. Why do companies use an Allowance for Doubtful Accounts?
Check your answer
Answer: B. To estimate the portion of Accounts Receivable that may not be collected.
The allowance account represents the amount of Accounts Receivable the company estimates it will not collect. It allows the balance sheet to report receivables at their expected collectible amount.
2. A company estimates $6,000 of its receivables will be uncollectible. Which adjusting entry records the estimate?
Check your answer
Answer: C. Debit Bad Debt Expense $6,000; Credit Allowance for Doubtful Accounts $6,000.
The estimate creates an expense on the income statement and increases the Allowance for Doubtful Accounts, which is a contra-asset account.
3. Accounts Receivable has a balance of $80,000 and Allowance for Doubtful Accounts has a $5,000 credit balance. What is Net Accounts Receivable?
Check your answer
Answer: A. $75,000
Net Accounts Receivable is the amount the company expects to collect:
$80,000 Accounts Receivable − $5,000 Allowance = $75,000 Net Accounts Receivable
4. A company writes off a specific $1,200 customer account that it has determined will not be collected. What happens to Net Accounts Receivable?
Check your answer
Answer: C. It does not change.
When a specific account is written off, both Accounts Receivable and the Allowance for Doubtful Accounts decrease by the same amount.
Because both decrease equally, Net Accounts Receivable does not change.
5. Which statement best explains the difference between estimating bad debts and writing off a specific account?
Check your answer
Answer: B. The estimate records Bad Debt Expense, while the later write-off uses the allowance already established.
Bad Debt Expense is recognized when the company estimates its expected uncollectible accounts. When a particular customer's account is later written off, the company reduces Accounts Receivable and the Allowance for Doubtful Accounts. It does not record a new expense at that point.
The Big Picture
Companies that sell on account face a basic problem: some customers will not pay.
Accounting for bad debts requires companies to estimate expected losses before they know exactly which customers will default. The key is to distinguish between methods that estimate Bad Debt Expense and methods that estimate the desired ending balance in Allowance for Doubtful Accounts.
Once receivables are on the books, companies also evaluate how quickly customers are paying by using receivables turnover and days to collect.
When Customers Don’t Pay
Chapter 8 - Class 2
In this episode, we look at how companies estimate bad debts, why percentage of sales and aging of receivables use different targets, what happens when a previously written-off account is recovered, and how companies evaluate collection speed.
Quick Practice
Try each question before opening Check your answer.
1. A company has $400,000 of credit sales and estimates that 2% will be uncollectible. Using the percentage-of-sales method, what is Bad Debt Expense?
Check your answer
$400,000 × 2% = $8,000 Bad Debt Expense
Percentage of sales directly estimates the amount of expense to record.
2. An aging analysis indicates that Allowance for Doubtful Accounts should have a $12,000 credit balance. Before adjustment, the account already has a $4,000 credit balance. What adjustment is needed?
Check your answer
Desired ending Allowance = $12,000 credit
Existing Allowance = $4,000 credit
$12,000 − $4,000 = $8,000 adjustment
Bad Debt Expense is therefore $8,000.
3. Why does the existing Allowance balance matter under the aging method but not in the same way under percentage of sales?
Check your answer
Percentage of sales estimates Bad Debt Expense directly.
Aging estimates the desired ending Allowance balance, so the company must consider the balance already in the account to determine the required adjustment.
4. A customer whose account was previously written off later pays the company. Does the recovery create new revenue?
Check your answer
No.
The original revenue was recorded when the sale occurred.
The recovery is recorded in two steps: first reinstate the receivable, then record the cash collection.
5. Net credit sales are $600,000 and average net receivables are $75,000. What is receivables turnover, and approximately how many days does it take customers to pay?
Check your answer
Receivables Turnover:
$600,000 ÷ $75,000 = 8.0 times
Days to Collect:
365 ÷ 8.0 = 45.6 days
On average, customers take about 46 days to pay.
The Big Picture
Long-lived assets create two separate accounting questions: what belongs in the asset's cost and how that cost should be allocated over time. Costs necessary to acquire an asset and prepare it for its intended use are generally capitalized. Once the asset is ready for use, depreciation allocates the depreciable cost across the periods that benefit from using the asset. The key is to keep cost, accumulated depreciation, and book value separate. Depreciation does not reduce the original asset cost account, and it is not an attempt to estimate the asset's market value.Plant Asset Capitalization and Depreciation Strategies
Chapter 9 - Class 1 In this episode, we look at how companies determine the recorded cost of long-lived assets, distinguish capital expenditures from current-period expenses, and apply different depreciation methods. We also connect depreciation expense, accumulated depreciation, and book value so you can see how the pieces fit together.Quick Practice
Try each question before opening Check your answer.Check your answer
Check your answer
Check your answer
Check your answer
Check your answer
The Big Picture
Long-lived assets do not stay on the Balance Sheet at one fixed amount forever. Their reported values depend on estimates about useful life, residual value, impairment, and what happens when the asset is eventually sold or retired.
That means book value is not the same thing as market value. It is an accounting amount built from historical cost and accumulated allocations.
The key ideas in this class are to calculate book value correctly, update depreciation before a disposal, distinguish finite-life from indefinite-life intangibles, and understand how impairment and asset turnover affect the financial statements.
Why Balance Sheets Are Often Educated Guesses
Chapter 9 - Class 2
In this episode, we look at why long-lived asset values on the Balance Sheet depend on estimates and judgment. We connect book value, impairment, disposals, intangible assets, and fixed asset turnover to show how companies report assets after the purchase date.
Quick Practice
Try each question before opening Check your answer.
1. Equipment originally cost $90,000 and has accumulated depreciation of $54,000. What is its book value?
Check your answer
Book Value = Cost − Accumulated Depreciation
$90,000 − $54,000 = $36,000
2. An asset has a book value of $36,000 and is sold for $41,000. Does the company record a gain or a loss, and for how much?
Check your answer
Cash Proceeds − Book Value
$41,000 − $36,000 = $5,000 gain
Because the cash received is greater than book value, the company records a gain.
3. What should a company do before calculating the gain or loss if an asset is sold between normal reporting dates?
Check your answer
Update depreciation through the disposal date first.
That gives the correct accumulated depreciation and book value on the date of sale.
4. What is the difference between a finite-life intangible asset and an indefinite-life intangible asset?
Check your answer
A finite-life intangible is amortized over its useful life.
An indefinite-life intangible is not regularly amortized. Instead, it is evaluated for impairment.
5. An asset's carrying amount is reduced from $50,000 to $42,000 because of impairment. What is the impairment loss, and what happens to the financial statements?
Check your answer
$50,000 − $42,000 = $8,000 impairment loss
The impairment reduces:
Assets, Net Income, and Stockholders' Equity.
6. Net Sales Revenue is $1,500,000. Beginning Net Fixed Assets are $350,000 and ending Net Fixed Assets are $400,000. What is fixed asset turnover?
Check your answer
Average Net Fixed Assets:
($350,000 + $400,000) ÷ 2 = $375,000
Fixed Asset Turnover:
$1,500,000 ÷ $375,000 = 4.0 times
The company generates $4 of sales for each $1 invested in average net fixed assets.
Quiz 4 Resources
Extra practice to help you prepare for Quiz 4.
Quiz 4 Flashcards Mini Calculation Drill Quiz 4 Mistakes to Avoid Receivables: Estimate, Collect, Analyze Long-Lived Assets: From Purchase to DisposalThe Big Picture
Liabilities are more than just amounts a company owes. They tell us who the company owes, when payment is due, and what additional costs may be building up over time.
Some liabilities come from everyday operations, such as payroll, sales taxes, and purchases on account. Others come from borrowing, where the company may owe both principal and interest.
The key is to separate the obligation itself from any related cost, then determine whether the liability should be classified as current or long-term.
The Hidden Costs of Corporate Liabilities
Chapter 10 - Class 1
In this episode, we look at the different ways liabilities arise and why the amount a company owes is not always as simple as it first appears. We connect payroll, sales taxes, notes payable, accrued interest, and current-versus-long-term classification to show how obligations build over time.
Quick Practice
Try each question before opening Check your answer.
1. A company collects $5,000 of sales tax from customers. Is that $5,000 revenue?
Check your answer
No.
The company is collecting the money on behalf of the government. Until it is remitted, the amount is a liability.
2. Why is gross pay different from the amount of cash an employee actually receives?
Check your answer
Gross pay is the employee's total earnings before deductions.
Amounts withheld for taxes and other deductions reduce the cash paid to the employee and create liabilities that the employer must later pay to others.
3. A company signs a $20,000, 6% note payable that is outstanding for 3 months. How much interest accrues?
Check your answer
Interest = Principal × Annual Rate × Time
$20,000 × 6% × 3/12 = $300 interest
4. A note payable has a balance of $40,000. Of that amount, $10,000 is due within the next year. How should the liability be classified?
Check your answer
$10,000 is current because it is due within the next year.
The remaining $30,000 is long-term.
5. Why can a note payable create both a principal liability and an interest liability?
Check your answer
The principal is the amount borrowed.
Interest is the cost of borrowing that accrues over time. If interest has been incurred but not yet paid, the company records Interest Payable in addition to the note itself.
The Big Picture
Bonds are long-term borrowing, but the accounting gets more interesting once market interest rates enter the picture.
The bond's face value tells us what will be repaid at maturity, while the stated rate determines the cash interest payment. The market rate determines what investors are willing to pay for the bond.
That difference is what creates premiums and discounts. From there, the key is to follow the bond's carrying value over time and use that carrying value when calculating interest expense and any gain or loss on early retirement.
The Real Math of Corporate Debt
Chapter 10 - Class 2
In this episode, we look at why bonds sell above or below face value, how stated and market interest rates play different roles, how premiums and discounts change carrying value over time, and what happens when a company retires debt before maturity.
Quick Practice
Try each question before opening Check your answer.
1. A $200,000 bond has a 6% stated annual interest rate and pays interest semiannually. How much cash interest is paid every six months?
Check your answer
Annual cash interest:
$200,000 × 6% = $12,000
Semiannual cash interest:
$12,000 ÷ 2 = $6,000
Cash interest is based on face value × stated rate.
2. The stated rate on a bond is 5%, while the market rate is 7%. Will the bond sell at face value, a premium, or a discount?
Check your answer
Discount.
The bond's stated rate is below the return investors can earn in the market, so investors will pay less than face value for it.
3. Bonds have a face value of $300,000 and an unamortized discount of $9,000. What is the carrying value?
Check your answer
Carrying Value = Face Value − Unamortized Discount
$300,000 − $9,000 = $291,000
4. Under the effective-interest method, what amount is used to calculate interest expense?
Check your answer
Beginning carrying value × market interest rate
Remember the split:
Cash interest uses the stated rate.
Interest expense uses the market rate.
5. A company retires bonds with a carrying value of $425,000 by paying $417,000. Does the company record a gain or a loss?
Check your answer
Carrying Value = $425,000
Cash Paid = $417,000
$425,000 − $417,000 = $8,000 gain
The company eliminated a $425,000 liability by paying only $417,000.
6. What happens to the carrying value of a premium bond as it approaches maturity?
Check your answer
It decreases toward face value.
By maturity, the premium has been fully amortized and carrying value equals face value.
Quiz 5 Resources
Extra practice to help you prepare for Quiz 5.
Quiz 5 Flashcards Mini Calculation Drill Quiz 5 Mistakes to Avoid