Week 8 · Midterm study guide

Midterm Exam — Study Guide

Financial Accounting Free sample edition

Coverage — what the midterm covers

The midterm is cumulative over Weeks 1 to 7, which is Objectives 1 to 5 as taught in those weeks. It opens in the Week 8 module and closes at the due time your instructor sets. There is no time limit, and you get one attempt. The questions appear one at a time, and you cannot go back once you move on.

Format: 25 questions, and every question counts the same. Twenty-two ask you to pick one option, two ask you to pick every option that fits, and one asks you to judge a statement as true or false. Every amount and event a question uses is written out in the question, and some questions ask you to compute from those amounts. The midterm is closed to AI.

What is in scope, with the number of midterm questions on each course objective:

Midterm coverage by course objective: the weeks its questions come from, its main skills, and its number of questions out of 25
Course objective	Weeks its questions come from	Main skills	Questions
The accounting environment	1, 2, and 3	Users and the two branches of accounting; the three forms of organization; the entity rule; GAAP, the FASB, the SEC, and IFRS; the AICPA's six principles; the four statements	7
Recording transactions	2 and 3	Assets, liabilities, and equity; transaction analysis; the drivers of retained earnings; debits, credits, and normal balances; the journal, the ledger, and the trial balance	6
Accrual accounting	4 and 5	Cash basis and accrual basis; revenue recognition; deferrals and accruals; depreciation; the no-Cash rule; adjusting before reporting	3
Completing the cycle	5 and 6	The statements in order; the classified balance sheet; temporary and permanent accounts; closing entries; the cycle's steps; the multi-step form	3
Merchandising and inventory	6 and 7	Perpetual and periodic systems, credit terms and discounts; freight terms; cost of goods sold, gross profit, and gross margin; FIFO, LIFO, and weighted average; lower of cost and net realizable value	6

The accounting environment carries the most questions, 7, and recording transactions and merchandising and inventory come next with 6 each. By week, Week 2 holds 6 of the 25, Week 1 holds 5, Week 6 holds 4, Weeks 5 and 7 hold 3 each, and Weeks 3 and 4 hold 2 each. So put extra review time on Week 2's transaction analysis, on Week 1's environment and rule-setters, and on Week 6's purchases and sales. By difficulty, 8 questions are easy, 11 are medium, and 6 are hard. Week 8's new material on internal control is not tested on the midterm, and it returns in Week 9.

Topic-by-topic review

Each week below follows the order Week 8 used for its review. It names the one distinction the week asks you to keep, then the key idea in plain words, the course's own definitions, the course example, and the predictable mistakes with their cures. The deeper review for every topic is that week's chapter, lecture, slide deck, and readings. Every bicycle-shop figure below is from the course's illustrative running case.

Week 1 — Accounting and the business environment

The distinction: financial accounting against managerial accounting, and the body that sets a rule against the body that enforces it.
Key idea: accounting is how a business tells people what happened to it, and the people outside it read a different report from the people running it.
Accounting is the system a business uses to measure its economic events, keep a record of them, and report them to the people who need the information.
Financial accounting produces general-purpose financial statements for external users such as investors and lenders. Managerial accounting produces information for internal decision-makers, such as managers deciding what to stock or how to schedule staff.
Users: internal users run the business from inside, such as managers and owner-operators. External users rely on its financial statements from outside: investors, lenders, suppliers, customers, tax authorities, and regulators.
Three forms of organization. A sole proprietorship is owned by one person, with no legal separation between the business and its owner. A partnership is owned by two or more people who share its ownership. A corporation is a legal entity apart from its owners, the shareholders, who have limited liability for its debts beyond what they invested. The IRS's tax-year 2022 counts are said in words: about 31.0 million nonfarm sole proprietorship returns, over 4.5 million partnership returns, and about 6.8 million active corporate returns.
The entity rule. The economic entity assumption keeps a business's records apart from its owners' personal records, even for a one-owner business.
Who sets the rules. GAAP (generally accepted accounting principles) are the standards U.S. companies follow in statements for outside users. The FASB is the independent, private-sector, not-for-profit standard setter, established in 1973. It is not a government agency. The SEC is the federal agency with legal authority over public-company reporting, created by the Securities Exchange Act of 1934, and it recognizes the FASB as its standard setter. The FASB's Accounting Standards Codification is the source of authoritative GAAP for nongovernmental entities.
IFRS (International Financial Reporting Standards) are set by the IASB, the International Accounting Standards Board. The course sets IFRS beside GAAP and describes where they differ by the effects, never as better or worse.
Ethics: the AICPA Code of Professional Conduct sets out six principles: Responsibilities, The Public Interest, Integrity, Objectivity and Independence, Due Care, and Scope and Nature of Services.
The four statements: the income statement reports a period's revenues and its expenses, with the net income or net loss that results; the retained earnings statement shows how kept earnings changed; the balance sheet reports what the business has, what it owes, and the owners' claim at one moment; and the cash flow statement reports where cash came from and went during the period.
Course example: the bicycle shop's plan. Two founders plan to invest $30,000 for 30,000 shares of $1-par common stock, so each share costs 30,000 ÷ 30,000 = $1. Its 12 planned Month 1 transactions sort by who stands on the other side: 2 with shareholders, 4 with customers, 5 with vendors, and 1 with the employee, so 2 + 4 + 5 + 1 = 12.
Predictable mistakes → cures: (1) financial and managerial accounting read as one thing. Cure: ask who reads it, an outsider or a manager. (2) a personal purchase by the owner read as a business expense. Cure: the entity rule keeps it out. (3) the FASB read as a government agency. Cure: it is private-sector; the SEC is the agency. (4) the SEC read as a creation of the 1933 Securities Act. Cure: it came from the 1934 law. (5) IFRS read as the same as GAAP, or as better or worse. Cure: compare them by their effects.

Week 2 — Transaction analysis and the equation

The distinctions: an asset against an expense, a liability against an expense, and equity against cash.
Key idea: every resource a business has came from its creditors or its owners, so the two sides always balance.
An asset is a resource a business controls that is expected to provide future benefits, such as cash, amounts customers owe it, supplies, insurance paid in advance, or equipment. A liability is an obligation to transfer resources, such as cash or services, to others: what the business owes its creditors.
Stockholders' equity is the owners' residual claim on the assets, equal to total assets minus total liabilities. It is a claim on the business, not a sum of cash.
The equation: Assets = Liabilities + Stockholders' Equity. Every transaction keeps it in balance.
Equity's two parts: contributed capital, recorded in Common Stock, is what owners paid in for shares. Retained earnings is the part that comes from the business's own profits and has not been paid out.
The three drivers of retained earnings: revenue (what the business earns from goods or services in its ordinary operations, cash or on account) increases it. Expenses (the cost of resources used up to earn revenue) and dividends (a distribution of assets to owners) decrease it. A dividend is never an expense.
Transaction analysis is the routine of deciding which accounts an event changes, in which direction, and whether the equation still balances.
Course example: Dataset A's twelve Month 1 transactions end at total assets of $33,200 = liabilities $1,500 + equity $31,700. Revenues of $5,300 (3,500 + 1,800), minus expenses of $3,100 (1,500 + 1,600), minus the $500 dividend, give retained earnings effects of $1,700. The shop holds $17,100 of cash, which is not the same as its $31,700 of equity.
Predictable mistakes → cures: (1) equity read as cash. Cure: equity is a claim; cash is an asset. (2) a dividend read as an expense. Cure: it is a distribution to owners. (3) buying equipment read as an expense. Cure: one asset is swapped for another. (4) a purchase on account read as changing equity. Cure: an asset and a liability rise together. (5) a customer's payment on account read as revenue. Cure: the revenue was recorded when the work was done.

Week 3 — Debits, credits, and the trial balance

The distinction: a debit against an increase. A debit is an amount on the left side of an account, and a credit is an amount on the right side. Whether either one raises or lowers an account depends on the account's type.
Key idea: double-entry bookkeeping is a habit of balance. Every entry puts equal amounts on the left and the right.
Normal balances: assets, expenses, and dividends increase with debits. Liabilities, common stock, retained earnings, and revenues increase with credits. A contra account reduces another account and carries the opposite balance. Accumulated Depreciation and Allowance for Doubtful Accounts are contra assets with credit balances.
Double-entry bookkeeping records every transaction in at least two accounts so that its debits equal its credits. Pacioli's Summa de arithmetica, geometria, proportioni et proportionalita, printed in Venice in 1494, holds the first published description of the method. Pacioli described it; he did not invent it.
The records: the journal is the book of original entry, in date order. The chart of accounts lists every account the business uses, so each one keeps one name. Posting copies each journal amount to the same side of the named account. The general ledger is the full set of accounts with their balances.
The trial balance lists every ledger balance in a debit or a credit column to check that the totals are equal. Balanced columns do not prove the books are right: an omitted entry, a duplicated entry, or a posting to the wrong account of the same type leaves them balanced.
Course example: the shop's Cash T-account has 30,000 + 1,200 + 3,500 + 1,000 = $35,700 on the left and 12,000 + 2,400 + 1,500 + 600 + 1,600 + 500 = $18,600 on the right, for a balance of 35,700 − 18,600 = $17,100. Its trial balance before any adjustment, the unadjusted trial balance, shows $36,800 on each side. If Transaction 9 had never been journalized, each column would total 36,800 + 600 = $37,400 and still agree.
Predictable mistakes → cures: (1) debit read as increase for every account. Cure: it means left, and the account type decides. (2) "credit" read as good news. Cure: it means right. (3) a balanced trial balance read as proof the books are correct. Cure: name the three errors it cannot catch. (4) the journal and the ledger read as one record. Cure: entries start in the journal and are posted to the ledger.

Week 4 — Accrual accounting and adjusting entries

The distinctions: the cash basis against the accrual basis, revenue against cash received, and a deferral against an accrual.
Key idea: a month's statements show what the business earned and used in that month, whenever the cash moved.
The cash basis records revenues only when cash is received and expenses only when cash is paid. The accrual basis records revenues when earned and expenses when incurred, regardless of when cash moves. GAAP requires accrual-basis statements.
The time period assumption divides a business's life into periods, such as months, so it can report on each one.
Revenue recognition records revenue in the period it is earned. The FASB's update No. 2014-09 (2014) sets five steps, which the Week 4 chapter quotes in the standard's own words. In short: identify the contract, identify the promises it makes, set the transaction price, allocate that price to the promises, and recognize revenue as each promise is kept. Each promise is a performance obligation: a promise to provide a good or a service.
Expense recognition, often called matching, records an expense in the period in which the business uses the resources to produce that period's revenues.
Adjusting entries come at the end of a period. A deferral is an item where cash moved first: a prepaid expense (a cost paid in advance, held as an asset until used) or an unearned revenue (cash a customer paid for work not yet done, a liability until the work is done). An accrual is an item where cash moves later: an accrued revenue (earned but not yet billed or collected) or an accrued expense (incurred but not yet paid).
Depreciation allocates a long-lived asset's cost to the periods that use it. It is not a market value and not a cash outflow. Accumulated Depreciation is a contra asset with a credit balance, and cost minus it is book value.
The no-Cash rule: every accrual or deferral adjusting entry affects one income statement account and one balance sheet account, and never Cash.
Qualitative characteristics (the FASB's Concepts Statement No. 8): relevance and faithful representation are fundamental. Comparability, verifiability, timeliness, and understandability are the enhancing ones.
Course example: Dataset B's six adjustments. The deferrals are (a) supplies used, 900 − 350 = $550; (b) insurance expired, 2,400 ÷ 12 = $200; (c) depreciation, 12,000 ÷ 60 = $200; and (d) unearned revenue earned, 1,200 ÷ 4 = $300. The accruals are (e) wages accrued, $400, and (f) revenue accrued, $250. Adjustments (c), (e), and (f) open new amounts on both sides, so 36,800 + 200 + 400 + 250 = $37,650 on each side of its adjusted trial balance.
Predictable mistakes → cures: (1) revenue read as earned on the day the cash comes in. Cure: it is earned when the work is done. (2) unearned revenue read as revenue. Cure: it is a liability until the work is done. (3) an adjusting entry read as involving Cash. Cure: accruals and deferrals never touch it. (4) depreciation read as a fall in market value. Cure: it allocates cost. (5) Accumulated Depreciation read as a liability. Cure: it is a contra asset.

Week 5 — Completing the accounting cycle

The distinction: a temporary account against a permanent account.
Key idea: the statements come out in a fixed order because each one hands a figure to the next, and closing resets the period's scoreboard to zero.
The order: the income statement first (net income), then the retained earnings statement (which uses net income), then the balance sheet (which uses ending retained earnings). All three are prepared from an adjusted trial balance.
Net income is a period's revenues minus its expenses. It measures what the business earned, not the cash it has.
The classified balance sheet sorts current assets and current liabilities (those expected to turn into cash, be used up, or be settled within one year or the operating cycle) from property, plant, and equipment and long-term liabilities.
Temporary accounts (revenues, expenses, and dividends) measure one period and are closed. Permanent accounts (assets, liabilities, and stockholders' equity, including contra assets such as Accumulated Depreciation) carry their balances forward.
Closing entries move the temporary balances into Retained Earnings. Revenues and expenses pass through Income Summary, which holds the net income for a moment. Dividends are closed straight to Retained Earnings, never to Income Summary.
After closing, a final trial balance lists only permanent accounts and checks that debits equal credits.
The accounting cycle in order: analyze transactions; journalize; post; prepare a trial balance; journalize and post adjusting entries; prepare an adjusted trial balance; prepare the statements; journalize and post closing entries; and prepare a trial balance after closing.
Course example: Dataset B's statements. Net income is 5,850 − 4,450 = $1,400. Ending retained earnings is 0 + 1,400 − 500 = $900. Total assets are 20,700 + 11,800 = $32,500, equal to liabilities $1,600 + equity $30,900. After the four closing entries, each side of the shop's post-closing trial balance shows $32,700, which is 32,500 + 200, because Accumulated Depreciation sits in the credit column there.
Predictable mistakes → cures: (1) the statements prepared in any order. Cure: follow the figure that passes from one to the next. (2) closing entries read as closing the balance sheet accounts. Cure: only temporary accounts close. (3) dividends closed to Income Summary. Cure: they go straight to Retained Earnings. (4) net income read as the cash the business has. Cure: compare the shop's $1,400 of net income with its $17,100 of cash.

Week 6 — Merchandising operations

The distinctions: a perpetual system against a periodic system, and gross profit against net income.
Key idea: a business that resells goods carries them as an asset, Inventory, until they are sold, and only then does their cost become an expense.
The merchandising operating cycle: buy goods, hold them as inventory, sell them, often on account, and collect the cash.
A perpetual system updates Inventory and Cost of Goods Sold with every purchase and every sale. A periodic system finds cost of goods sold at the end of the period from a count of the goods left.
Credit terms of 2⁄10, n⁄30 offer a 2 percent discount if the invoice is paid within 10 days, with the full amount due within 30. A purchase discount lowers the cost recorded in Inventory in a perpetual system; it is not revenue.
Freight terms: under FOB shipping point the buyer owns the goods once they ship and pays the freight, which becomes part of its inventory cost. Under FOB destination the seller owns them until they arrive and pays the freight.
A sale in a perpetual system takes two entries: one records Sales Revenue at the selling price, and one moves the cost from Inventory to Cost of Goods Sold. Sales returns and allowances reduce sales revenue through a contra revenue account.
Gross profit is sales revenue minus cost of goods sold; it is not net income. Gross margin is gross profit ÷ sales revenue, written as a percentage. The multi-step form of the income statement shows gross profit, then operating income, then other items (other revenues and other expenses), then net income.
Course example: Dataset C. Ten bicycles cost 4,000 + 180 − 80 = $4,100, or $410 each. Six sell for 6 × $820 = $4,920, with cost of goods sold of 6 × $410 = $2,460. Gross profit is 4,920 − 2,460 = $2,460, and 2,460 ÷ 4,920 = 0.50, a gross margin of 50 percent. The 4 bicycles left cost 4 × $410 = $1,640.
Predictable mistakes → cures: (1) freight under FOB shipping point read as the seller's cost. Cure: the buyer owns the goods in transit. (2) a purchase discount read as revenue. Cure: it lowers inventory cost. (3) gross profit read as net income. Cure: operating expenses still come off. (4) cost of goods sold read as the cost of everything bought. Cure: it counts only the goods sold.

Week 7 — Inventory costing

The distinction: FIFO against LIFO, read by their effects and never ranked.
Key idea: the method decides how one pool of cost is split between the goods sold and the goods left. It moves costs, not boxes.
Cost of goods available for sale is beginning inventory plus purchases. A cost flow assumption decides which unit costs go to cost of goods sold, and which stay in ending inventory, and it need not match the order in which goods physically leave.
The methods: specific identification tracks each unit's actual cost and fits goods that are few, costly, and easy to tell apart. FIFO counts the oldest unit costs as sold first. LIFO counts the newest unit costs as sold first. Weighted average gives every unit the same average cost, cost available ÷ units available.
When costs are rising, FIFO gives lower cost of goods sold, with higher ending inventory and gross profit, while LIFO gives cost of goods sold closer to current costs. The course states these effects and never says which method is better.
Consistency: a business applies the same method from period to period and discloses it, so a change is never costless for readers comparing years.
IFRS does not allow LIFO, as the SEC stated in 2008, while U.S. GAAP permits it. The course states this rule plainly and does not rank the frameworks.
The lower of cost and net realizable value applies to inventory measured by FIFO or average cost (said in words: under the FASB's update No. 2015-11). Net realizable value is what the business expects to receive, less the costs to finish and sell. A write-down reduces the inventory to that lower figure and is an expense of the period.
An inventory error throws off both net income and cost of goods sold in one year and the opposite way the next, because one year's ending inventory is the next year's beginning inventory.
Course example: Dataset D. The helmets available cost 600 + 1,320 + 1,440 = $3,360 for 100 helmets. FIFO cost of goods sold is $2,280 and LIFO cost of goods sold is $2,430, a gap of 2,430 − 2,280 = $150. Weighted average is 3,360 ÷ 100 = $33.60 a helmet, so 70 × $33.60 = $2,352. At $34 a helmet, the 30 left are worth $1,020, so FIFO's $1,080 is written down by $60.
Predictable mistakes → cures: (1) FIFO and LIFO read as which goods leave first. Cure: they say which costs count as sold. (2) LIFO read as giving lower cost of goods sold when costs rise. Cure: the newest, costliest units count as sold first. (3) LIFO read as allowed under IFRS. Cure: it is not. (4) a method change read as costless. Cure: consistency is what makes years comparable.

Week 8's new idea (not tested on the midterm)

Week 8 adds one light topic, internal control: the set of policies and procedures a business uses to protect its assets, keep its records reliable, run efficiently, and follow the law. The GAO's Green Book, adapting the COSO framework, names five components: the control environment, risk assessment, control activities, information and communication, and monitoring. COSO issued its framework in 1992, and the 2002 Sarbanes-Oxley Act requires management of public companies to report on internal control over financial reporting. Control gives reasonable assurance, not a guarantee. None of it is on the midterm, and all of it returns in Week 9.

Representative practice

These are fresh variants, not the midterm's questions. Work each worked example yourself first, then compare your steps. Every business below is illustrative, invented for this guide, and describes no real company. Every number is computed and checked in advance, and every entry balances.

Worked example — three businesses, three forms (Week 1)

A town has three illustrative businesses. A mural painter works alone with no corporate charter. Two photographers co-own a portrait studio. A kombucha brewery is owned by 60 people who each hold shares of its stock.

Name each form. The painter's business is a sole proprietorship: one owner and no legal line between owner and business. The portrait studio is a partnership: two owners who share ownership. The brewery is a corporation: a legal entity apart from its 60 shareholders, who have limited liability.
Apply the entity rule. The painter buys a ladder for jobs and, on a separate trip, a new couch for home. Only the ladder goes in the business's records. The entity assumption keeps the couch out, even though the law draws no line between this owner and the business.
Sort the brewery's readers. Its managers deciding next month's batch sizes are internal users, served by managerial accounting. A bank weighing a loan and the IRS asking what tax is owed are external users. The bank reads the brewery's financial statements, prepared under GAAP.
Name the rule-setters. GAAP is set by the FASB, a private-sector body. If the brewery ever sold its shares to the public, its reporting would also fall under the SEC's legal authority.

Why it matters: the form tells you who owns the business, and the reader tells you which kind of accounting serves them. The plain sentence: the brewery is a corporation apart from its 60 owners, so its records hold only the brewery's own resources and claims.

Worked example — a yoga studio's first month (Week 2)

An illustrative yoga studio, set up as a corporation, records seven transactions in its first month. Keep a running total after each one.

An illustrative yoga studio's first-month transactions, the accounts each one changes, and the running totals of assets, liabilities, and equity in dollars
Day	Event	Accounts that change	Assets	Liabilities	Equity
1	Founders invest $18,000 cash for common stock	Cash +18,000; Common Stock +18,000	18,000	0	18,000
2	Buys $2,600 of mats, blocks, and sound equipment on account	Equipment +2,600; Accounts Payable +2,600	20,600	2,600	18,000
3	Pays $2,100 for three months of studio rent in advance	Cash −2,100; Prepaid Rent +2,100	20,600	2,600	18,000
9	Teaches a workshop for a company and bills it $950	Accounts Receivable +950; retained earnings +950 (service revenue)	21,550	2,600	18,950
16	Pays $1,300 of the $2,600 owed for equipment	Cash −1,300; Accounts Payable −1,300	20,250	1,300	18,950
23	Pays $680 of instructor wages	Cash −680; retained earnings −680 (wages expense)	19,570	1,300	18,270
30	Pays a $250 cash dividend	Cash −250; retained earnings −250 (dividends)	19,320	1,300	18,020

Days 2 and 3. The equipment bought on account raises an asset and a liability together, so equity does not move. Prepaying rent swaps Cash for Prepaid Rent, an asset, so no total moves.
Day 9. Revenue is recorded when the workshop is taught, before any cash arrives.
Day 30. The dividend lowers retained earnings, but it is a distribution to owners, not an expense.
The ending check. Cash is 18,000 − 2,100 − 1,300 − 680 − 250 = $13,670. Assets are 13,670 + 950 + 2,100 + 2,600 = $19,320. Retained earnings effects are 950 − 680 − 250 = $20, so equity is 18,000 + 20 = $18,020. Then 19,320 = 1,300 + 18,020, and the equation balances.

Why it matters: every line keeps both sides equal. The plain sentence: the studio controls $19,320 of assets, creditors claim $1,300 of them, and the owners' claim is $18,020, which is not the $13,670 of cash it holds.

Worked example — a print shop's trial balance and what it misses (Week 3)

An illustrative print shop closes its first month with these ledger balances: Cash $8,350, Accounts Receivable $1,240, Supplies $760, Equipment $9,800, Accounts Payable $1,180, Common Stock $15,000, Service Revenue $6,470, Wages Expense $1,900, Utilities Expense $380, and Dividends $220.

Sort by normal balance. Assets, expenses, and dividends sit in the debit column. Liabilities, Common Stock, and revenue sit in the credit column.
Foot the debit column. 8,350 + 1,240 + 760 + 9,800 + 1,900 + 380 + 220 = $22,650.
Foot the credit column. 1,180 + 15,000 + 6,470 = $22,650. The columns agree.
Test a duplicated entry. Suppose a customer's $310 payment was journalized twice. Cash would read 8,350 + 310 = $8,660, while Accounts Receivable would read 1,240 − 310 = $930. Both are debit-column accounts, so the debit total stays 22,650 + 310 − 310 = $22,650. The columns still agree.
Test the wrong account of the same type. Suppose the $380 utilities bill was posted to Wages Expense. Wages Expense would read 1,900 + 380 = $2,280 and Utilities Expense $0, and both columns would still total $22,650.

Why it matters: equal columns prove the ledger is in balance, not that it is right. The plain sentence: the print shop's trial balance shows $22,650 on each side, and two different errors would leave that total untouched.

Worked example — a pottery studio's month-end (Week 4)

An illustrative pottery studio's trial balance, before any adjustment, shows $28,400 on each side. It needs five adjustments at month-end.

(a) Supplies used. It bought $1,340 of clay and glaze, and a count finds $410 left, so 1,340 − 410 = $930 was used. Entry: Supplies Expense 930 (debit), Supplies 930 (credit). A deferral: cash moved first.
(b) Maintenance expired. It paid $1,260 in advance for six months of kiln servicing, so one month is 1,260 ÷ 6 = $210. Entry: Maintenance Expense 210 (debit), Prepaid Maintenance 210 (credit). A deferral.
(c) Depreciation. The kiln cost $7,200 and should last 8 years, or 8 × 12 = 96 months, with no residual value. So 7,200 ÷ 96 = $75 a month. Entry: Depreciation Expense 75 (debit), Accumulated Depreciation 75 (credit). The kiln's book value becomes 7,200 − 75 = $7,125.
(d) Revenue accrued. It finished a $560 custom glazing job for a café and has not billed it. Entry: Accounts Receivable 560 (debit), Service Revenue 560 (credit). An accrual: cash moves later.
(e) Wages accrued. Its studio assistant worked the last three days of the month for $290 not yet paid. Entry: Wages Expense 290 (debit), Wages Payable 290 (credit). An accrual.
The no-Cash check. Each entry pairs one income statement account with one balance sheet account, and none of them touches Cash. That is 3 deferrals + 2 accruals = 5 adjustments.
The new totals. Entries (a) and (b) move amounts within the debit column. Entries (c), (d), and (e) add to both columns, so its adjusted trial balance shows 28,400 + 75 + 560 + 290 = $29,325 on each side.

Why it matters: adjustments put each revenue and expense in its month. The plain sentence: after five adjustments that never touch Cash, the studio's books show the clay it used, the kiln time it consumed, the work it finished, and the wages it owes.

Worked example — a car wash closes its first year (Week 5)

An illustrative car wash's adjusted trial balance at the end of Year 1 lists Cash $11,480, Accounts Receivable $620, Supplies $540, Prepaid Insurance $900, Equipment $16,000, and Accumulated Depreciation $3,200. It also lists Accounts Payable $760, Wages Payable $360, Unearned Revenue $470, and Common Stock $20,000. Its period accounts are Dividends $1,450, Service Revenue $25,000, and five expenses: Wages $9,200, Supplies $2,860, Utilities $1,740, Insurance $1,800, and Depreciation $3,200.

Income statement. Expenses are 9,200 + 2,860 + 1,740 + 1,800 + 3,200 = $18,800. Net income is 25,000 − 18,800 = $6,200.
Retained earnings statement. The car wash starts with $0, so 0 + 6,200 − 1,450 = $4,750 at year-end.
Classified balance sheet. Current assets are 11,480 + 620 + 540 + 900 = $13,540. Equipment, net of Accumulated Depreciation, is 16,000 − 3,200 = $12,800. Total assets are 13,540 + 12,800 = $26,340. Current liabilities are 760 + 360 + 470 = $1,590, and equity is 20,000 + 4,750 = $24,750. Then 1,590 + 24,750 = $26,340, and the sheet balances.
Closing entries. (1) Service Revenue 25,000 (debit), Income Summary 25,000 (credit). (2) Income Summary 18,800 (debit), and the five expense accounts (credit) for 9,200, 2,860, 1,740, 1,800, and 3,200. (3) Income Summary 6,200 (debit), Retained Earnings 6,200 (credit). (4) Retained Earnings 1,450 (debit), Dividends 1,450 (credit).
After closing. Only permanent accounts remain. Debits are 11,480 + 620 + 540 + 900 + 16,000 = $29,540. Credits are 3,200 + 760 + 360 + 470 + 20,000 + 4,750 = $29,540. That is 26,340 + 3,200, because Accumulated Depreciation is a credit balance on a trial balance and a subtraction on the balance sheet.

Why it matters: each statement hands a figure to the next, and closing sends the year's activity to Retained Earnings. The plain sentence: the car wash earned $6,200, kept $4,750 after its dividend, and starts Year 2 with every temporary account at zero.

Worked example — a snowboard shop's purchase and sale (Week 6)

An illustrative snowboard shop uses a perpetual system. It buys 15 snowboards at $260 each on account, terms 2⁄10, n⁄30, FOB shipping point, and pays $168 of freight.

The purchase. 15 × 260 = $3,900. Entry: Inventory 3,900 (debit), Accounts Payable 3,900 (credit).
The freight. Under FOB shipping point the shop owns the boards in transit, so the freight is part of their cost. Entry: Inventory 168 (debit), Cash 168 (credit).
The payment within 10 days. The discount is 3,900 × 0.02 = $78, so the shop pays 3,900 − 78 = $3,822. Entry: Accounts Payable 3,900 (debit), Inventory 78 (credit), and Cash 3,822 (credit). The debit of 3,900 equals the credits of 78 + 3,822.
The unit cost. 3,900 + 168 − 78 = $3,990 for 15 boards, so 3,990 ÷ 15 = $266 each.
The sale. It sells 9 boards at $380 each on account. Revenue entry: 9 × 380 = $3,420, so Accounts Receivable 3,420 (debit), Sales Revenue 3,420 (credit). Cost entry: 9 × 266 = $2,394, so Cost of Goods Sold 2,394 (debit), Inventory 2,394 (credit).
Gross profit and margin. 3,420 − 2,394 = $1,026, and 1,026 ÷ 3,420 = 0.30, a gross margin of 30 percent.
What is left. 6 boards × $266 = $1,596, which matches 3,990 − 2,394 = $1,596 in Inventory.
The contrast. Under FOB destination the supplier would pay the freight, so the 15 boards would cost 3,900 − 78 = $3,822, or $254.80 each.

Why it matters: freight in and discount out set the cost, and the cost follows each board to the income statement when it sells. The plain sentence: the shop earned a gross profit of $1,026 on 9 boards, 30 cents of every sales dollar, before paying any of its operating costs.

Worked example — a tea shop's tins costed three ways (Week 7)

An illustrative tea shop keeps one blend on a periodic system. It starts with 20 tins at $8, buys 40 tins at $9, then buys 20 tins at $12. It sells 50 tins at $18 each.

Available. 20 + 40 + 20 = 80 tins, costing 160 + 360 + 240 = $760. Sales are 50 × 18 = $900, and 80 − 50 = 30 tins remain.
FIFO. Cost of goods sold is 20 × 8 + 30 × 9 = 160 + 270 = $430. Ending inventory is 10 × 9 + 20 × 12 = 90 + 240 = $330. Check: 430 + 330 = $760. Gross profit is 900 − 430 = $470.
LIFO. Cost of goods sold is 20 × 12 + 30 × 9 = 240 + 270 = $510. Ending inventory is 20 × 8 + 10 × 9 = 160 + 90 = $250. Check: 510 + 250 = $760. Gross profit is 900 − 510 = $390.
Weighted average. 760 ÷ 80 = $9.50 a tin. Cost of goods sold is 50 × 9.50 = $475, and ending inventory is 30 × 9.50 = $285. Gross profit is 900 − 475 = $425.
The comparison. LIFO cost of goods sold is 510 − 430 = $80 higher than FIFO's, and FIFO gross profit is 470 − 390 = $80 higher than LIFO's. All three methods split the same $760.
Lower of cost and net realizable value. The shop expects $10.50 a tin, net of selling costs, so the 30 tins are worth 30 × 10.50 = $315. FIFO's $330 is written down by 330 − 315 = $15. The weighted-average $285 is already below $315, so it needs no write-down.

Why it matters: the methods divide one pool of cost differently, and none of them is the better choice. The plain sentence: under LIFO the tea shop reports $80 more cost of goods sold than under FIFO, because the newest, costliest tins count as sold first.

Self-check questions

Try each one, then read the check and the one-line why.

An illustrative phone-repair kiosk sends a bank a report showing where its cash came from and where it went over the year. Name the statement. Check: the cash flow statement. Why: it covers a period and follows cash, not profit.
Which body sets IFRS? Check: the IASB, the International Accounting Standards Board. Why: the FASB sets GAAP, and the course compares the two without ranking.
Where does a bookkeeper find authoritative GAAP for a private company? Check: in the Accounting Standards Codification, kept by the FASB. Why: it is the source of authoritative GAAP for nongovernmental entities.
An illustrative bakery buys $1,150 of flour and sugar on account. Which accounts change, and does equity move? Check: Supplies rises $1,150, and so does Accounts Payable; equity does not move. Why: nothing is used up yet, so there is no expense.
An illustrative pet-sitting service pays $560 it owes a supplier. What happens to its total assets and total liabilities? Check: both fall by $560, and equity does not change. Why: paying a debt shrinks both sides by the same amount.
A friend reads an illustrative thrift store's $12,000 of equity as money in its bank account. What is the fix? Check: equity is the owners' residual claim, total assets minus total liabilities; the cash is whatever the Cash account shows. Why: equity is a claim, not a sum of cash.
On which side does each account increase: Unearned Revenue, Dividends, and Accumulated Depreciation? Check: credit, debit, and credit. Why: Unearned Revenue is a liability, Dividends lowers equity, and Accumulated Depreciation is a contra asset.
How do the journal and the general ledger differ? Check: the journal records each transaction first, in date order; the ledger holds every account with its balance, built by posting. Why: one is the book of original entry, and the other is the set of accounts.
An illustrative florist has decorated a hall for an event, a $340 job it has not yet billed. Which adjustment is it, and what is the entry? Check: an accrued revenue. Entry: Accounts Receivable 340 (debit), Service Revenue 340 (credit). Why: the work is done, and the cash comes later.
Which two qualitative characteristics are the fundamental ones? Check: relevance and faithful representation. Why: the other four, comparability, verifiability, timeliness, and understandability, enhance them.
Which of these appear after closing: Unearned Revenue, Income Summary, Accumulated Depreciation, Supplies Expense? Check: Unearned Revenue and Accumulated Depreciation. Why: only permanent accounts carry forward; Income Summary and the expenses are closed to zero.
An illustrative thrift store works out cost of goods sold only at the end of each quarter, from a count of what is left. Which inventory system is that? Check: a periodic system. Why: a perpetual system would update cost of goods sold at every sale.
Goods ship FOB destination. Who pays the freight, and is it part of the buyer's inventory cost? Check: the seller pays it, and it is not part of the buyer's cost. Why: the seller owns the goods until they arrive.
Does IFRS allow LIFO? Check: no, as the SEC stated in 2008; U.S. GAAP permits it. Why: this is a documented rule, stated without ranking either framework.

Check yourself — choose one. Write two or three sentences to a friend.

(a) Explain why the adjusting entry for wages the assistant has worked for but not been paid never touches Cash, using the pottery studio's $290 as your evidence.
(b) Explain why the course sets FIFO beside LIFO by its effects and never ranks the two, using the tea shop's $80 gap as your evidence.

Either one rehearses an explain-why skill the midterm checks.

Watch before the exam

These seven videos come from the course's vetted Week 8 pool, and every one has captions. Each was already linked in the week it reviews. Use them to review and to connect weeks, not to learn anything new. Their dollar amounts are the videos' own examples, not the course's.

Understanding Financial Statements and Accounting — CrashCourse (video, 13 min) (captions: creator) reviews the Week 1 objective on the entity rule and the four statements. It opens with keeping business and personal purchases apart, then walks an income statement, a balance sheet, and a cash flow statement. It skips the retained earnings statement, so add it back from Week 5. One line calls a loan due after a year a long-term asset, so check that against the Week 5 chapter.
Accounting equation explained — The Finance Storyteller (video, 4 min) (captions: creator) reviews the Week 2 objective on transaction analysis. It follows one startup through the founders' cash, inventory bought on credit, a sale on credit whose profit lands in retained earnings, and a van bought for cash, checking the totals after each step. It describes equity as what the company owes its shareholders; the course reads equity as the owners' residual claim, not a debt.
Trial balance explained — The Finance Storyteller (video, 6 min) (captions: creator) reviews the Week 3 objective on journal entries, T-accounts, and the trial balance. Listen for its warning that a balancing trial balance can still hide an error, the same lesson as the print shop above.
Adjusting Entries: Deferrals and Accruals — Accounting with Audra (video, 10 min) (captions: creator) reviews the Week 4 objective on the four kinds of adjustment and depreciation. She says deferred revenue where the course says Unearned Revenue. The cash entries she shows are the original payments and collections, not the adjustments, which never touch Cash.
Closing entries in accounting — The Finance Storyteller (video, 7 min) (captions: creator) reviews the Week 5 objective on temporary and permanent accounts and closing through Income Summary, with dividends closed straight to retained earnings. Its example includes cost of goods sold, which connects Week 5 to Week 6.
Cost Of Goods Sold (COGS) explained — The Finance Storyteller (video, 11 min) (captions: creator) is a synthesis across Weeks 5, 6, and 7. It reads cost of goods sold as a line on several companies' income statements, then works a small purchase and sale with three journal entries, gross profit, the inventory left, and beginning inventory plus purchases minus ending inventory. Its closing FIFO and LIFO section previews Week 7. The company figures are the video's own, and the course keys none of them.
FIFO vs LIFO example — The Finance Storyteller (video, 11 min) (captions: creator) reviews the Week 7 objective on FIFO and LIFO when costs rise. It costs each month's sales as they happen rather than with one count at the end, and it ends on the same pattern as the helmets: FIFO shows the lower cost of goods sold.

Study plan

A short countdown. Count back from the day you plan to sit the midterm.

Two weeks out: as you finish Week 6, start a one-page list of the course's swapped pairs. Begin with asset and expense, liability and expense, equity and cash, and a debit and an increase. Add cash basis and accrual basis, deferral and accrual, and temporary and permanent. Add perpetual and periodic, then FIFO and LIFO when Week 7 arrives.
One week out: as you finish Week 7, reread the Week 2 topic review and redo the yoga studio worked example without looking. Week 2 holds 6 of the midterm's 25 questions.
At the start of Week 8: take the practice exam once, cold. Note which objectives cost you the most. Remember that it leans less on Week 2 than the midterm does.
Three or four days before you sit it: reread the topic reviews for your two weakest objectives. Then redo the matching worked examples from scratch, and check that every entry balances.
Two days before: run the paired exam-prep tutorial (the copy-and-paste chatbot tutor, or its no-AI route) for active recall. Tell it which areas the practice exam exposed.
The day before: retake the practice exam, explain every miss out loud, and work the self-check questions above. Then say each week's distinction in one sentence.
Right before: skim the "predictable mistakes → cures" lines for all seven weeks. Then stop studying, and take a few slow breaths.

This guide is for review. The exam-prep tutorial and the practice exam are where you rehearse. Pulling ideas back out of memory, not rereading, is what makes them stick.

Exam format

Every one of the 25 questions counts the same, and the midterm checks your own understanding without AI. The questions come one at a time, and there is no going back, so settle each one before you move on.

Test-taking strategies for this material:

Name the pair before you choose. Most questions turn on two neighboring ideas, such as an asset and an expense, or revenue and cash received. Say which pair is in play first.
Walk the transaction. Ask what happened, which accounts change and in which direction, which is the debit and which is the credit, and whether the equation still balances.
Ask when. For any revenue or expense, ask whether the work was done or the resource used this period, whatever the cash did.
Write the arithmetic out. Set each computation down step by step, and foot any total before you compare it with the options.
Check that it balances. An entry whose debits and credits differ is wrong, however reasonable its accounts look.
Watch for rankings. An option that calls one inventory method, or one framework, the better one has slipped from the course's way of comparing them.
For a "pick every option that fits" question, judge each statement on its own, as if it were a true-or-false question.

Built with The Course Maker · samples.thecoursemaker.com