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Week 16 · Final study guide

Final Exam — Study Guide

Financial Accounting Free sample edition

Coverage — what the final covers

The final is cumulative over Weeks 1–15, and it checks all nine course objectives. It opens in Week 16, the finals week, 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: 40 questions, and every question counts the same. Thirty-three ask you to pick the one best option from a short list, four ask you to mark every option that applies, and three ask you to judge a statement true or false. Every balance, transaction, or schedule a question uses is written out in words in the question, so nothing depends on reading a chart. Many questions ask for a short computation with the figures the question gives you, and scratch paper is enough for each one.

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

Final coverage by course objective: the weeks that teach it, its main skills, and its number of questions out of 40
Course objective Weeks that teach it Main skills Questions
1. What financial accounting is for 1, used again in 3 Financial and managerial accounting; users; the three forms of business; the economic entity assumption; GAAP, the FASB, the SEC, and IFRS 1
2. The equation, the journal, and the trial balance 2 and 3, carried into 9 Assets = Liabilities + Stockholders' Equity; debits, credits, and normal balances; balanced entries; what a trial balance proves 1
3. Accrual accounting and adjusting entries 4, carried into 10, 11, and 12 Revenue when earned and expenses when incurred; deferrals and accruals; no adjusting entry touches Cash 3
4. The statements and closing 5, carried into 13, 14, and 15 The statements in order; the classified balance sheet; closing the temporary accounts 4
5. Merchandising and inventory 6 and 7, carried into 15 Perpetual and periodic systems; gross profit and gross margin; the cost flow assumptions 1
6. Internal control, cash, and receivables 8, 9, and 10 Control activities over cash; the bank reconciliation; the allowance method and the aging schedule; simple interest on a note 8
7. Long-lived assets, short-term debts, and payroll 11 and 12, carried into 13 An asset's cost; three depreciation methods; disposals; current liabilities; gross pay, withholdings, and net pay 11
8. Bonds and the owners' equity 13 and 14 Bonds at face, at a discount, and at a premium; carrying value; stock issues, dividends, and treasury stock; earnings per share 6
9. Cash flows and the four ratios 15 The three sections; the indirect method; why net income and cash differ; four ratios read without a verdict 5

Where the weight sits. The course plan gives the final its heaviest weight in Objectives 6 to 9, and this form leans that way strongly. Thirty-nine of the 40 questions come from the material of Weeks 9–15, and one comes from Week 3. Weeks 11, 13, and 15 carry the most, 7 questions each, so put the most review time on depreciation and disposals, on bonds, and on the statement of cash flows. Week 9 comes next with 6, then Week 12 with 5, Week 10 with 4, and Week 14 with 3. By difficulty, 11 questions are easy, 19 are medium, and 10 are hard.

The first half still matters. Ten questions check Objectives 1 to 5. One of them comes from Week 3, and the other 9 sit inside later weeks' material, the way those weeks called the early tools back. Week 9 records its entries with Week 3's debits and credits. Weeks 10, 11, and 12 each treat one entry as a Week 4 adjustment or accrual. Weeks 13, 14, and 15 lean on Week 5's statements, and Week 15 returns to Week 6's gross margin. So Weeks 1–8 get a short callback section below, and Weeks 9–15 get the full review.

Topic-by-topic review

Each topic gives the key idea in plain words, the course's own definitions, the running case's pinned figures, and the mistakes students make most often with their cures. The running case is the course's illustrative, unnamed bicycle repair and sales shop, organized as a corporation by two founders. Every figure from it below is the course's own pinned figure. The deeper review for every topic is that week's chapter, lecture page, slide deck, and readings.

Weeks 1–8 in brief — the tools the later weeks use

  • The environment (Week 1): financial accounting reports to people outside the business (investors, lenders, suppliers, regulators); managerial accounting informs the people inside it. The three common forms of business are the sole proprietorship, the partnership, and the corporation, a legal entity of its own whose owners, the shareholders, have limited liability for its debts. The economic entity assumption is the rule that a business's records are kept separate from its owners' personal records, even when the business is a sole proprietorship. The FASB, established in 1973, is a private-sector standard setter, not a government agency. The SEC, created by the Securities Exchange Act of 1934, holds legal authority over public-company reporting. IFRS, set by the IASB, is compared with GAAP without ranking.
  • The equation (Week 2): Assets = Liabilities + Stockholders' Equity after every transaction. Revenues increase retained earnings; expenses and dividends decrease it. A dividend is a distribution to owners, never an expense. After Month 1's twelve transactions, the shop's total assets are $33,200 = liabilities $1,500 + equity $31,700.
  • Debits and credits (Week 3): a debit is the left side of an account and a credit is the right side; neither means increase, decrease, good, or bad on its own. Assets, expenses, and dividends increase with debits. Liabilities, common stock, retained earnings, and revenues increase with credits. A contra account carries the opposite balance of the account it reduces. The trial balance checks that total debits equal total credits, $36,800 on each side for Month 1. A balanced trial balance does not prove the books are right: an omitted entry, a duplicated entry, or a posting to the wrong account of the same type leaves it in balance.
  • Accrual accounting (Week 4): revenues are recorded when earned and expenses when incurred, whatever the timing of the cash, and GAAP requires the accrual basis. In a deferral cash moved first (prepaid expenses, unearned revenues, and depreciation); in an accrual cash moves later (accrued revenues and accrued expenses). Every accrual or deferral adjusting entry pairs one income statement account with one balance sheet account and never touches Cash. The adjusted trial balance reaches $37,650 on each side.
  • The statements and closing (Week 5): prepare them in order: the income statement (net income $1,400), the statement of retained earnings (ending $900), then the balance sheet (total assets $32,500). A classified balance sheet separates current items, due or used within one year or the operating cycle, from long-term ones. Closing entries move the temporary accounts (revenues, expenses, and dividends) to Retained Earnings; Dividends closes directly to Retained Earnings, never through Income Summary.
  • Merchandising and inventory (Weeks 6 and 7): gross profit is sales revenue minus cost of goods sold, and gross margin is gross profit ÷ net sales: the shop's first bicycle sale had a gross margin of 50 percent. FIFO, LIFO, and weighted average are cost flow assumptions compared by their effects, never ranked. IFRS does not allow LIFO, as the SEC stated in 2008.
  • Internal control (Week 8): the 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, sets out five components: the control environment, risk assessment, control activities, information and communication, and monitoring. Internal control gives reasonable, not absolute, assurance.
  • Predictable mistakes → cures (Weeks 1–8): (1) a debit read as "increase" for every account. Cure: ask the account's normal balance first. (2) a dividend read as an expense. Cure: it goes to the owners, so it reduces retained earnings and never appears on the income statement. (3) revenue read as earned when the cash arrives. Cure: ask whether the work is done. (4) an adjusting entry that touches Cash. Cure: an accrual or deferral pairs an income statement account with a balance sheet account. (5) Dividends closed to Income Summary. Cure: Dividends closes straight to Retained Earnings.

Week 9 — Cash and the Bank Reconciliation

The idea in plain words. Cash is the asset every sale and every bill passes through, so a business builds checks into its daily work to protect it. Then, once a month, it proves that its own Cash record and the bank's record describe the same cash.

  • Control activities are the actions a business builds into its policies and daily procedures to meet its control goals, such as limiting access to cash, splitting duties, and reconciling records. The course teaches six of the common categories in the GAO's Green Book, whose list is not all inclusive. The first three are access restrictions to and accountability for resources and records; segregation of duties; and control activities over information processing. The other three are physical control activities over vulnerable assets; control activities over complete, accurate, and timely recording of valid transactions; and management of human capital. The Week 9 chapter pairs each category with one of the shop's own practices (Dataset E); reread that table before the final.
  • Segregation of duties divides the work on an asset among different people so that no one person both handles the asset and keeps its records. Its limit: two employees can collude to defeat it, which is why control gives reasonable, not absolute, assurance. It protects honest employees as well as the cash.
  • A petty cash fund is a small, fixed amount of cash held by one custodian for payments too small for a check, with a receipt for every payment. Setting it up debits Petty Cash and credits Cash. Refilling it debits the expenses the receipts show and credits Cash. The receipts plus the cash left always add back to the fund's set amount.
  • A bank statement is the bank's own record of the account. A bank reconciliation explains every difference between the bank statement's balance and the Cash account's balance, adjusting each side until both reach the same true cash balance.
  • The bank side adds a deposit in transit (recorded and deposited, but not yet added by the bank) and subtracts an outstanding check (written and recorded, but not yet paid by the bank).
  • The book side subtracts a bank service charge and subtracts an NSF check, a customer's check the customer's bank refused to pay for not sufficient funds, so the customer owes the amount again. It adds interest the bank paid, and it corrects the business's own recording errors.
  • A transposition error swaps two digits of a number; the difference between the correct and recorded amounts is always evenly divisible by 9.
  • Only the book-side items need journal entries, because the bank-side items are already in the books. Each of those entries touches Cash, so they are corrections to Cash, not Week 4 adjusting entries.
  • Cash equivalents are short-term, highly liquid investments so near to maturity that their value is unlikely to change, reported with cash on the line cash and cash equivalents.
  • The pinned case: at the end of Month 3 the bank side runs 8,450 + 1,200 − 400 − 750 = $8,500, and the book side runs 8,851 − 25 − 300 + 10 − 36 = $8,500. The $36 error is 95 − 59, and 36 ÷ 9 = 4.
  • Predictable mistakes → cures: (1) an outstanding check placed on the book side. Cure: the books already show the check, so it goes on the bank side. (2) every reconciling item given a journal entry. Cure: only the book-side items are entered. (3) the bank's balance read as "the right one". Cure: neither starting balance is right until both are adjusted.

Week 10 — Receivables

The idea in plain words. A business that sells on account learns that some customers never pay. The question is when to record that loss, and how to show receivables at the amount the business really expects to collect.

  • Accounts receivable are amounts customers owe on account. Notes receivable are written promises a business holds in which a borrower agrees to pay a stated sum by a stated time, often with interest.
  • The direct write-off method records bad debt expense only when a specific account is written off; it is not acceptable under GAAP when bad debts are material. The allowance method estimates the uncollectible accounts at the end of each period and records bad debt expense with a credit to the allowance. The course compares the two by their effects and never ranks them.
  • Allowance for Doubtful Accounts is a contra asset account with a credit balance that holds the estimate without naming which customers will not pay. The net realizable value of receivables is Accounts Receivable minus the allowance: the amount the business expects to collect.
  • An aging schedule groups receivables by how long they are past due and applies a higher estimated uncollectible percentage to older groups. Its total is the balance the allowance should have.
  • Bad debt expense under the allowance method is the amount that brings the allowance to its required balance. Like every Week 4 adjustment, the entry pairs an income statement account with a balance sheet account and never touches Cash. It puts the expense in the period of the credit sales that caused it.
  • A write-off debits the allowance and credits Accounts Receivable, so net realizable value does not change. A recovery first reverses the write-off, then records the cash.
  • Simple interest: Interest = Face × Rate × Time, where Time is the note's term as a fraction of a year. The maturity value is face plus interest.
  • The pinned case: at the end of Year 3 the aging schedule requires $1,460. The allowance already has a $260 credit balance, so bad debt expense is 1,460 − 260 = $1,200, and net realizable value is 40,000 − 1,460 = $38,540. A later $350 write-off leaves it at $38,540. A $6,000, 6 percent, 3-month note earns 6,000 × 0.06 × 3⁄12 = $90.
  • Predictable mistakes → cures: (1) the schedule's total booked as the expense. Cure: subtract the balance already in the allowance. (2) a write-off read as an expense, or as lowering net realizable value. Cure: the expense was recorded with the estimate; the write-off moves an amount between two asset accounts. (3) a 3-month note given a full year's interest. Cure: Time is the fraction of a year.

Week 11 — Long-Lived Assets

The idea in plain words. A van, a machine, or a patent serves a business for years, so its cost is spread over those years instead of landing as expense the day it is bought.

  • Long-lived assets are the assets a business uses in its operations for more than one year and does not hold for sale: property, plant, and equipment; intangible assets; and natural resources.
  • The cost of a long-lived asset is everything a business pays to acquire it and get it ready for use, such as the price, freight, and setup or installation. Recording a cost in an asset account is capitalizing it.
  • Depreciation is cost allocation. It is not a measure of market value, and it is not cash. Residual value is what the business expects to receive when it stops using the asset. Useful life is how long it expects to use it, in years or in units of use. Depreciable cost is cost minus residual value.
  • Straight-line: (cost − residual value) ÷ useful life, the same amount each full year.
  • Units-of-production: (cost − residual value) ÷ total expected units × the units used in the period.
  • Double-declining-balance: book value at the start of each year × twice the straight-line rate, stopping when book value reaches residual value. Residual value is not subtracted at the start; it sets the floor.
  • The methods are compared by their effects, never ranked: a method that records more depreciation early shows lower net income and a lower book value in the early years. Every method moves the same depreciable cost into expense over the asset's life.
  • Book value is cost minus Accumulated Depreciation. The gain or loss on disposal is cash received minus book value on the date of sale.
  • In words: an intangible asset with a finite life is amortized. Under the general GAAP rule, goodwill is not amortized, though a private company or a not-for-profit entity may choose to amortize it. A natural resource's cost is depleted as its units are removed.
  • The pinned case: the van costs 28,000 + 1,500 + 500 = $30,000, with a $3,000 residual value and a 5-year or 90,000-mile life. Straight-line is 27,000 ÷ 5 = $5,400 a year. Units-of-production is $0.30 a mile. Double-declining-balance runs $12,000, $7,200, $4,320, $2,592, and $888. Sold after 3 years for $12,500 at a $13,800 book value, it shows a $1,300 loss.
  • Predictable mistakes → cures: (1) freight or setup recorded as an expense. Cure: anything needed to get the asset ready is part of its cost. (2) depreciation read as market value or as cash. Cure: it allocates cost, and its entry has no Cash in it. (3) double-declining-balance run below residual value. Cure: stop at the floor. (4) the sale price read as the gain. Cure: compare the cash with book value.

Week 12 — Current Liabilities and Payroll

The idea in plain words. A business owes many things it will settle within a year. A paycheck creates several of them at once, because the employer passes some of each employee's pay on to the government and owes taxes of its own.

  • Current liabilities include accounts payable, short-term notes payable, sales taxes payable, unearned revenue, payroll liabilities, and the current portion of long-term debt, the part of a long-term loan due within the next year. Each is a liability, not an expense.
  • Sales taxes payable is a current liability for the sales tax a seller has collected from customers and owes to the state or city. It is never revenue. Real rates are set by each state and city.
  • Gross pay is the total an employee earns for a pay period, regular pay plus any overtime pay, before anything is withheld. The Department of Labor states the Fair Labor Standards Act's overtime rule in these words. "Unless exempt, employees covered by the Act must receive overtime pay for hours worked over 40 in a workweek at a rate not less than time and one-half their regular rates of pay."
  • Withholdings are amounts the employer keeps back from gross pay and sends to others for the employee. For wages paid in 2026, IRS Publication 15 (2026) and the Social Security Administration state the Social Security tax as 6.2 percent on wages up to the $184,500 wage base. They state the Medicare tax as 1.45 percent with no wage base. An Additional Medicare Tax of 0.9 percent is withheld on an employee's wages above $200,000; the course names it in words only. Federal income tax withholding comes from the IRS's tables, which this course does not compute, so every income tax figure in the course is illustrative.
  • Net pay is gross pay minus all withholdings. The employer's Payroll Tax Expense is its own cost on top of gross pay: its matching Social Security and Medicare, plus federal and state unemployment taxes, which the course names in words.
  • A loss contingency is recorded when the loss is probable and reasonably estimable, disclosed in the notes when it is reasonably possible or probable but not estimable, and left out when it is remote.
  • The pinned case: the mechanic's 40 hours at $24 plus 5 overtime hours at $36 give gross pay of $1,140. Social Security withheld is $70.68 and Medicare is $16.53; with an illustrative $95.00 of income tax, net pay is $957.79. The shop's match is $87.21. A second employee with $184,000 of earlier wages owes Social Security on only $500 of a $1,140 paycheck, or $31.00.
  • Predictable mistakes → cures: (1) gross pay read as the paycheck. Cure: net pay is what is left after the withholdings. (2) the employer's match read as taken from the employee. Cure: it is a second cost on top of gross pay. (3) Social Security charged on every dollar. Cure: stop at the wage base; Medicare has none. (4) sales tax read as revenue. Cure: the seller owes it to the government.

Week 13 — Long-Term Liabilities

The idea in plain words. When a business needs to borrow for years from many lenders at once, it issues bonds. Lenders may pay less or more than the amount they will be repaid, depending on what return they require that day.

  • A bond is a long-term note issued to many lenders at once, the bondholders, promising interest every period and the face value at maturity. The borrower records it in Bonds Payable, a long-term liability.
  • The face value, also called par value, is the amount repaid at maturity. The stated rate, also called the contract rate, sets the cash interest. The market rate is the return investors require on bonds of similar risk and term on the day they are sold, and it sets the price. A bond's price is the present value of its cash flows at the market rate.
  • Market rate equals stated rate: issued at face. Market rate higher than stated rate: issued at a discount, below face. Market rate lower than stated rate: issued at a premium, above face.
  • Discount on Bonds Payable is a contra liability with a debit balance, subtracted from Bonds Payable. Premium on Bonds Payable carries a credit balance and is added to Bonds Payable. The carrying value is Bonds Payable minus any unamortized discount or plus any unamortized premium.
  • Straight-line amortization spreads a discount or premium in equal amounts to each interest period, as straight-line depreciation spreads a van's cost. A discount's amortization adds to interest expense; a premium's reduces it.
  • The effective-interest method is the method GAAP calls for, with straight-line acceptable when the results are not materially different. Under it, each period's interest expense is the carrying value at the start of the period times the market rate for one period, so the expense changes a little each period.
  • An installment note is repaid in a series of payments; when the payments are equal, each covers that period's interest and the rest reduces the principal. The part due within a year is a current liability. Bonds are reported in long-term liabilities at their carrying value, and they move to current liabilities when they come within one year of maturity.
  • The pinned case: $100,000 of 5-year, 6 percent bonds pay 100,000 × 6% ÷ 2 = $3,000 a period for 10 periods. Issued at $96,000, the $4,000 discount amortizes at $400 a period, so interest expense is $3,400 a period and $34,000 in total. Issued at $104,000, interest expense is $2,600 a period and $26,000 in total.
  • Predictable mistakes → cures: (1) a discount read as a gain. Cure: it is extra interest the borrower pays at maturity. (2) the stated rate read as what investors earn on a discounted bond. Cure: they also collect the discount, so they earn more. (3) a premium read as extra interest expense. Cure: the borrower received more than it repays, so the premium lowers the expense.

Week 14 — Stockholders' Equity

The idea in plain words. A corporation's owners put money in by buying shares, and the corporation hands money back to them through dividends and buybacks. None of these is revenue or expense.

  • The corporate form gives owners limited liability and transferable shares. A C corporation is taxed separately under the federal corporate income tax; an S corporation's income passes through to its shareholders. These are stated as facts, never as advice.
  • Authorized shares are the most the charter allows. Issued shares are those sold or given to owners so far, including any bought back. Outstanding shares equal issued shares minus treasury shares.
  • Par value is a legal amount per share printed in the charter; it is not market value. On an issue, Common Stock is credited for par, and Additional Paid-in Capital for what owners paid above par.
  • Preferred stock has priority over common stock for dividends and in liquidation, usually without voting rights.
  • A cash dividend has three dates. The declaration date records the dividend and the liability, Dividends Payable. The record date fixes who will be paid and needs no entry. The payment date removes the liability. A dividend is a distribution, never an expense.
  • Stock dividends and stock splits leave total stockholders' equity unchanged, because no asset leaves and no owner pays anything in.
  • Treasury stock is a corporation's own shares that it has reacquired and not retired. Under the cost method it is recorded at cost and reported as a deduction from stockholders' equity. It reduces shares outstanding, not shares issued, and it is never an asset.
  • Basic earnings per share is net income minus preferred dividends, divided by the weighted-average common shares outstanding, each share count weighted by the fraction of the period it was outstanding.
  • The pinned case: in Year 2 the shop issues 5,000 shares at $9, for Common Stock $5,000 and Additional Paid-in Capital $40,000. It pays a $7,000 dividend and buys 1,000 treasury shares for $10,000. Retained earnings ends at 13,000 + 69,000 − 7,000 = $75,000, total stockholders' equity is $140,000, and basic earnings per share is 69,000 ÷ 34,500 = $2.00.
  • Predictable mistakes → cures: (1) par value read as market value. Cure: par is a legal amount in the charter. (2) treasury stock read as an asset. Cure: a corporation cannot own a claim on itself, so it is subtracted from equity. (3) a split read as changing total equity. Cure: only the number of shares and the par per share change. (4) the liability recorded on the record date. Cure: it is recorded on the declaration date.

Week 15 — The Statement of Cash Flows, Analysis, and the Course Synthesis

The idea in plain words. Net income tells you what a business earned. The statement of cash flows tells you where its cash came from and where it went, and the two are rarely the same figure.

  • Operating activities are the cash effects of running the business day to day. Investing activities are cash paid to buy long-lived assets and cash received from selling them. Financing activities are cash from and to the owners and lenders, such as issuing stock, buying treasury stock, paying dividends, and borrowing or repaying a loan.
  • The indirect method starts with net income and adjusts it to cash: add back depreciation, subtract gains and add back losses, subtract increases in current operating assets, and add increases in current operating liabilities. A decrease in a current operating asset is added, and a decrease in a current operating liability is subtracted.
  • Depreciation is added back because it was subtracted to reach net income without any cash leaving. It is not a source of cash. A gain is subtracted because the sale's whole cash amount already sits in investing activities.
  • The three sections total the net increase in cash, which equals the change in the balance sheet's cash from the start to the end of the period.
  • The four ratios, each read in one plain sentence and never as good or bad on its own:
    • the current ratio is current assets ÷ current liabilities, a plain number such as 2.5;
    • debt to total assets is total liabilities ÷ total assets, a percentage;
    • gross margin is gross profit ÷ net sales;
    • profit margin is net income ÷ net sales. A ratio describes the business; it is never a recommendation to buy, sell, or lend.
  • Most U.S. public companies file an annual Form 10‑K with the SEC, and every filed 10‑K is public on the SEC's EDGAR website. The course reads one for the structure of its statements and keys none of its figures.
  • The pinned case and the synthesis: in Year 2 the shop's operating cash is 69,000 + 12,000 − 2,000 − 3,000 − 5,000 + 1,000 + 2,000 = $74,000. Investing is $(33,000) and financing is $8,000, so cash rises by $49,000, from $22,000 to $71,000. Its ratios are a current ratio of 2.5, debt to total assets of 30 percent, gross margin of 40 percent, and profit margin of 10 percent. In Month 1 it earned $1,400 while its operations used $400 of cash.
  • Predictable mistakes → cures: (1) depreciation read as a source of cash. Cure: adding it back only undoes a subtraction that used no cash. (2) net income read as cash from operations. Cure: accrual accounting records revenue and expense when earned and incurred, not when cash moves. (3) a dividend paid placed in operating activities. Cure: it is a financing activity with the owners. (4) a higher current ratio read as always better. Cure: describe it, and give no verdict.

Representative practice

These are fresh variants, not the final'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 figure was worked out in advance, every entry balances, and every statement ties.

Worked example — a pottery studio's bank reconciliation (Week 9)

At the end of Month 6, an illustrative pottery studio's bank statement shows $5,730 and its Cash account shows $6,195. The studio finds these items:

  • a $860 deposit made on the last day, not yet on the statement;
  • check No. 1042 for $215 and check No. 1047 for $390, written and recorded but not yet paid by the bank;
  • an $18 bank service charge and $7 of interest earned, both on the statement;
  • a customer's $145 check returned as NSF;
  • check No. 1039, paid to a clay supplier on account, written for $82 but recorded as $28.
  1. The bank side. Add the deposit in transit and subtract both outstanding checks: 5,730 + 860 − 215 − 390 = $5,985.
  2. The error. The check took 82 − 28 = $54 more out of the bank than the books recorded. And 54 ÷ 9 = 6, a whole number, which fits two swapped digits.
  3. The book side. 6,195 − 18 − 145 + 7 − 54 = $5,985.
  4. The two sides agree at $5,985, so that is the studio's true cash.
  5. The gap explained. The starting gap is 6,195 − 5,730 = $465. The bank side adds a net 860 − 215 − 390 = $255, and the book side removes a net 18 + 145 − 7 + 54 = $210, and 255 + 210 = $465.
  6. The entries, for the four book-side items only:
The pottery studio's four book-side entries from its Month 6 reconciliation, in dollars (illustrative)
Item Account Debit Credit
Service charge Bank Service Charge Expense 18
    Cash 18
NSF check Accounts Receivable 145
    Cash 145
Interest Cash 7
    Interest Revenue 7
Check No. 1039 Accounts Payable 54
    Cash 54

The debits total 18 + 145 + 7 + 54 = $224, and so do the credits. The two outstanding checks and the deposit need no entry, because the books already show them.

Why it matters: only the side that has not yet heard about an item needs to change, and only the book side changes the books.

Worked example — a print shop's receivables (Week 10)

At the end of Year 4, an illustrative print shop's customers owe $45,000. Its aging schedule applies these estimates:

The print shop's aging schedule at the end of Year 4, in dollars and percent (illustrative)
Age group Balance Estimated uncollectible Estimate
Not yet due 31,500 1 percent 315
1 to 30 days past due 8,200 5 percent 410
31 to 60 days past due 3,400 15 percent 510
Over 60 days past due 1,900 40 percent 760
Total 45,000 1,995
  1. The balances foot: 31,500 + 8,200 + 3,400 + 1,900 = $45,000, and 315 + 410 + 510 + 760 = $1,995.
  2. The required allowance is $1,995. The allowance already has a $430 credit balance, so bad debt expense is 1,995 − 430 = $1,565.
  3. The adjusting entry: debit Bad Debt Expense 1,565; credit Allowance for Doubtful Accounts 1,565. No Cash appears in it.
  4. Net realizable value: 45,000 − 1,995 = $43,005, the amount the shop expects to collect.
  5. A later write-off of $620: debit Allowance for Doubtful Accounts 620; credit Accounts Receivable 620. Receivables fall to 45,000 − 620 = $44,380 and the allowance to 1,995 − 620 = $1,375, so net realizable value is 44,380 − 1,375 = $43,005, unchanged.
  6. A note on the side. A customer signs a $9,000, 8 percent, 5-month note. Interest is 9,000 × 0.08 × 5⁄12 = $300, so the maturity value is 9,000 + 300 = $9,300. A full year would be 9,000 × 0.08 = $720, which the note does not earn.

Why it matters: the expense is set by the estimate at year end, so the write-off that follows changes neither the expense nor net realizable value.

Worked example — a moving company's truck, three ways (Week 11)

An illustrative moving company buys a truck for a price of $71,200, pays $2,600 to have it delivered, and pays $1,200 to fit its cargo racks. It expects a $5,000 residual value and a life of 4 years or 140,000 miles.

  1. Cost: 71,200 + 2,600 + 1,200 = $75,000, all capitalized. Depreciable cost is 75,000 − 5,000 = $70,000.
  2. Straight-line: 70,000 ÷ 4 = $17,500 a year, a rate of 1 ÷ 4 = 25 percent.
  3. Units-of-production: 70,000 ÷ 140,000 = $0.50 a mile. In a 32,000-mile first year, 32,000 × 0.50 = $16,000.
  4. Double-declining-balance: the rate is 2 × 25 percent = 50 percent of book value, and residual value sets the floor.
The moving truck's depreciation by straight-line and double-declining-balance, with book value at each year's end, in dollars (illustrative)
Year Straight-line Book value Double-declining-balance Book value
1 17,500 57,500 37,500 37,500
2 17,500 40,000 18,750 18,750
3 17,500 22,500 9,375 9,375
4 17,500 5,000 4,375 5,000
Total 70,000 70,000
  1. The floor in Year 4. Half of $9,375 would be $4,687.50 and would leave book value below $5,000, so Year 4 takes only 9,375 − 5,000 = $4,375. Both methods total 37,500 + 18,750 + 9,375 + 4,375 = $70,000.
  2. The effects. In Year 1, double-declining-balance records 37,500 − 17,500 = $20,000 more expense than straight-line, so it reports lower Year 1 net income and a lower book value. Neither method is better; they put the same cost in different years.
  3. A sale after 2 years for $41,000. Under straight-line, Accumulated Depreciation is 17,500 × 2 = $35,000 and book value is 75,000 − 35,000 = $40,000, so the sale shows a gain of 41,000 − 40,000 = $1,000. The entry debits Cash 41,000 and Accumulated Depreciation 35,000, and credits Moving Truck 75,000 and Gain on Sale of Truck 1,000. Debits 76,000 equal credits 76,000.
  4. The same sale under double-declining-balance. Book value is 75,000 − 56,250 = $18,750, so the gain is 41,000 − 18,750 = $22,250. Over the two years, depreciation less the gain is 35,000 − 1,000 = $34,000 under straight-line and 56,250 − 22,250 = $34,000 under double-declining-balance. Both equal 75,000 − 41,000 = $34,000.

Why it matters: the methods move the same cost into different years, and the gain or loss on a sale settles the difference.

Worked example — a veterinary clinic's paycheck (Week 12)

An illustrative veterinary clinic pays a technician $25 an hour. In one workweek in 2026 the technician, who is covered by the Act and not exempt, works 48 hours.

  1. Regular pay: 40 × 25 = $1,000.
  2. Overtime: the rate is 25 × 1.5 = $37.50 an hour, for 48 − 40 = 8 hours, so 8 × 37.50 = $300.
  3. Gross pay: 1,000 + 300 = $1,300. The technician's wages are far below the wage base.
  4. Social Security withheld: 1,300 × 0.062 = $80.60. Medicare withheld: 1,300 × 0.0145 = $18.85. Federal income tax withheld: $110.00, an illustrative amount, never computed from the IRS tables.
  5. Net pay: 1,300 − 80.60 − 18.85 − 110.00 = $1,090.55. Check it: 80.60 + 18.85 + 110.00 + 1,090.55 = $1,300.00.
The veterinary clinic's payroll entry and its own payroll tax entry for one week, in dollars (illustrative)
Entry Account Debit Credit
Payroll Wages Expense 1,300.00
    Social Security Tax Payable 80.60
    Medicare Tax Payable 18.85
    Federal Income Tax Payable 110.00
    Wages Payable 1,090.55
Employer's taxes Payroll Tax Expense 99.45
    Social Security Tax Payable 80.60
    Medicare Tax Payable 18.85
  1. The week's cost to the clinic: 1,300.00 + 99.45 = $1,399.45. The technician receives $1,090.55, and the clinic sends 161.20 + 37.70 + 110.00 = $308.90 to the government, and 1,090.55 + 308.90 = $1,399.45.
  2. The wage base. A second employee, a practice manager, has $184,100 of wages before a $2,000 paycheck. Only 184,500 − 184,100 = $400 is below the base, so Social Security withheld is 400 × 0.062 = $24.80. Medicare is withheld on the whole paycheck, 2,000 × 0.0145 = $29.00. Wages reach $186,100, still below $200,000.
  3. Two more current liabilities. An illustrative florist sells $1,500 of flowers at an illustrative 7 percent sales tax rate, so it collects 1,500 × 0.07 = $105 of tax and $1,605 in all. It credits Sales Revenue 1,500 and Sales Taxes Payable 105. The clinic also owes $42,000 on a loan it repays at $7,000 a year, so $7,000 is a current liability and 42,000 − 7,000 = $35,000 stays long-term.

Why it matters: gross pay is what the work costs, the paycheck is what is left, and the employer's own taxes are a second cost on top.

Worked example — a ferry company's bonds, three prices (Week 13)

An illustrative ferry company issues $500,000 of 4-year, 8 percent bonds that pay interest semiannually. Cash interest is 500,000 × 8% ÷ 2 = $20,000 a period, for 4 × 2 = 8 periods.

  1. At face, $500,000: interest expense is $20,000 a period, 8 × 20,000 = $160,000 in all.
  2. At a discount, $484,000, because the market rate on the day was above 8 percent. The discount is 500,000 − 484,000 = $16,000, amortized at 16,000 ÷ 8 = $2,000 a period. Interest expense is 20,000 + 2,000 = $22,000 a period, and 8 × 22,000 = $176,000 in all.
  3. At a premium, $512,000, because the market rate was below 8 percent. The premium is $12,000, amortized at 12,000 ÷ 8 = $1,500 a period. Interest expense is 20,000 − 1,500 = $18,500 a period, and 8 × 18,500 = $148,000 in all.
  4. The totals check. The company pays 8 × 20,000 + 500,000 = $660,000 over the life of every issue. Interest expense is what it pays minus what it received: 660,000 − 484,000 = $176,000 and 660,000 − 512,000 = $148,000.
The ferry company's issue entry and first-period interest entry for its bonds issued at a discount, in dollars (illustrative)
Entry Account Debit Credit
Issue Cash 484,000
Discount on Bonds Payable 16,000
    Bonds Payable 500,000
Each period Interest Expense 22,000
    Discount on Bonds Payable 2,000
    Cash 20,000
  1. The balance sheet after one period. The discount left is 16,000 − 2,000 = $14,000, so the bonds sit in long-term liabilities at 500,000 − 14,000 = $486,000, the same as 484,000 + 2,000.

Why it matters: the same face and the same cash interest cost the company $160,000, $176,000, or $148,000, depending only on what lenders paid on the first day.

Worked example — a robotics startup's equity (Week 14)

An illustrative robotics startup, organized as a corporation, has 200,000 shares of $0.50-par common stock authorized and no preferred stock. It begins its first year with no shares issued and no retained earnings.

  1. The issue. On the first day of the year it sells 40,000 shares at $12, for 40,000 × 12 = $480,000. Common Stock gets 40,000 × 0.50 = $20,000, and Additional Paid-in Capital gets 480,000 − 20,000 = $460,000.
  2. The dividend. In Month 3 the board declares $0.25 a share on the 40,000 outstanding shares, 40,000 × 0.25 = $10,000, paid in Month 4. On the declaration date: debit Dividends 10,000; credit Dividends Payable 10,000. The record date needs no entry. On the payment date: debit Dividends Payable 10,000; credit Cash 10,000.
  3. The buyback. At the end of Month 6 it reacquires 2,000 shares at $15: debit Treasury Stock 30,000; credit Cash 30,000. Issued shares stay at 40,000, and outstanding shares fall to 40,000 − 2,000 = 38,000.
  4. Retained earnings. Net income is $97,500, so retained earnings ends at 0 + 97,500 − 10,000 = $87,500.
The robotics startup's stockholders' equity section at the end of its first year, in dollars (illustrative)
Stockholders' equity
Common Stock, $0.50 par; 200,000 shares authorized; 40,000 issued; 38,000 outstanding 20,000
Additional Paid-in Capital 460,000
Retained Earnings 87,500
Less: Treasury Stock (2,000 shares at cost) (30,000)
Total stockholders' equity 537,500
  1. The total foots: 20,000 + 460,000 + 87,500 − 30,000 = $537,500.
  2. Earnings per share. Weighted-average shares are 40,000 × 6⁄12 + 38,000 × 6⁄12 = 20,000 + 19,000 = 39,000. With no preferred dividends, basic earnings per share is 97,500 ÷ 39,000 = $2.50.

Why it matters: money the owners put in or take out moves equity without touching net income, and the buyback lowers both equity and the share count.

Worked example — a furniture maker's year of cash (Week 15)

An illustrative furniture maker reports net income of $46,000 for the year. Its records show depreciation expense of $11,500 and a $2,000 gain on selling an old saw for $9,000 in cash. Accounts receivable rose $6,000, inventory fell $3,500, and prepaid expenses rose $1,000. Accounts payable fell $2,500, and wages payable rose $1,500.

  1. Operating activities, indirect method: 46,000 + 11,500 − 2,000 − 6,000 + 3,500 − 1,000 − 2,500 + 1,500 = $51,000. The gain comes out of net income so the sale is not counted twice, since its $9,000 of cash appears under investing. The saw's book value was 9,000 − 2,000 = $7,000.
  2. Investing activities: a new planer for (38,000) and the saw's 9,000, so (38,000) + 9,000 = $(29,000).
  3. Financing activities: a stock issue of 20,000, dividends paid of (7,500), and a loan repayment of (15,000), so 20,000 − 7,500 − 15,000 = $(2,500).
  4. Tie to cash: 51,000 − 29,000 − 2,500 = $19,500, so cash moves from $18,000 to 18,000 + 19,500 = $37,500.
  5. Four ratios from its year-end figures, with current assets $126,000, current liabilities $45,000, total liabilities $84,000, total assets $240,000, net sales $575,000, and gross profit $218,500:
    • current ratio: 126,000 ÷ 45,000 = 2.8, so it holds $2.80 of current assets for each dollar of current liabilities;
    • debt to total assets: 84,000 ÷ 240,000 = 0.35, or 35 percent of its assets claimed by creditors;
    • gross margin: 218,500 ÷ 575,000 = 0.38, or 38 cents of gross profit per sales dollar, so cost of goods sold was 575,000 − 218,500 = $356,500;
    • profit margin: 46,000 ÷ 575,000 = 0.08, or 8 cents of net income per sales dollar.

Why it matters: the maker earned $46,000, its operations brought in $51,000, and its cash grew by $19,500: three figures, three stories, and no ratio is a verdict.

Worked example — early tools, one more time (Weeks 4, 5, and 6)

  1. Two deferrals and an accrual. An illustrative yoga studio paid $3,600 in advance for 6 months of rent, so one month's adjustment debits Rent Expense 600 and credits Prepaid Rent 600, leaving $3,000 prepaid. Members paid $2,800 for 4 months of classes, so one month earned debits Unearned Revenue 700 and credits Service Revenue 700, leaving $2,100 owed. Instructors earned $350 not yet paid, so the studio debits Wages Expense 350 and credits Wages Payable 350. None of the three touches Cash.
  2. The order of the statements. The studio prepares its income statement first, because net income feeds the statement of retained earnings, whose ending balance feeds the balance sheet.
  3. Closing. Rent Expense, Wages Expense, Service Revenue, and Dividends are temporary and are closed; Prepaid Rent, Unearned Revenue, and Wages Payable are permanent and carry forward.
  4. Gross margin. An illustrative garden center sells soil for $1,400 that cost it $840, so gross profit is 1,400 − 840 = $560 and gross margin is 560 ÷ 1,400 = 0.40, or 40 percent.

Why it matters: the later weeks' entries are built from these moves, and the final calls them back inside Weeks 9 to 15.

Self-check questions

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

  1. A bookkeeper finds that Cash is off by $45 after one check was recorded. Could two swapped digits explain it? Check: yes, possibly: 45 ÷ 9 = 5, and a check for $72 recorded as $27 differs by 72 − 27 = $45. Why: a transposition always leaves a difference divisible by 9, but divisibility is only a clue.
  2. An illustrative escape-room business has a $200 petty cash fund. Its receipts total $163.40 and the box holds $36.60. Is anything missing? Check: no: 163.40 + 36.60 = $200.00. Why: the receipts plus the cash left always add back to the fund's set amount.
  3. An illustrative tailoring shop wrote off a customer's $280 balance, and then the customer pays it. What two entries follow? Check: debit Accounts Receivable 280 and credit Allowance for Doubtful Accounts 280; then debit Cash 280 and credit Accounts Receivable 280. Why: the shop reverses the write-off first, then records the cash.
  4. A $4,500, 10 percent, 2-month note: what interest does it earn? Check: 4,500 × 0.10 × 2⁄12 = $75, for a maturity value of $4,575. Why: Time is the fraction of a year.
  5. An illustrative embroidery machine costs $35,000, has a $3,000 residual value, and is expected to run 40,000 hours. What is its depreciation in an 8,000-hour year? Check: (35,000 − 3,000) ÷ 40,000 = $0.80 an hour, and 8,000 × 0.80 = $6,400. Why: units-of-production follows use.
  6. What book value does the moving truck above show at the end of Year 3 under straight-line, and what does it mean? Check: 75,000 − 3 × 17,500 = $22,500. Why: it is the part of the cost not yet allocated to expense, not what the truck would sell for.
  7. An illustrative car wash's lawyer judges that losing a customer's lawsuit is probable, and the loss can be reasonably estimated. What does the business do? Check: it records the loss contingency. Why: probable and reasonably estimable is the rule for recording.
  8. An illustrative hotel's housekeeper earns $18 an hour and works 44 hours in a workweek. What is gross pay? Check: 40 × 18 = $720, plus 4 × (18 × 1.5) = 4 × 27 = $108, for $828. Why: only the hours over 40 earn time and one-half.
  9. An illustrative water utility sells $600,000 of bonds at 97 percent of face. What is the discount, and how will it change interest expense? Check: 600,000 × 0.97 = $582,000, so the discount is 600,000 − 582,000 = $18,000. Why: the discount is amortized into interest expense, so each period's expense is more than the cash interest.
  10. What is the normal balance of Discount on Bonds Payable? Check: debit. Why: a contra account carries the opposite balance of the account it reduces, and Bonds Payable has a credit balance.
  11. An illustrative design firm has 30,000 shares of $2-par stock and makes a 2-for-1 split. What changes? Check: it now has 30,000 × 2 = 60,000 shares at $1 par; total par stays 60,000 × 1 = $60,000, and total equity does not change. Why: no asset leaves and no owner pays anything in.
  12. Net income is $66,300, preferred dividends are $4,800, and weighted-average common shares are 25,000. What is basic earnings per share? Check: (66,300 − 4,800) ÷ 25,000 = $2.46. Why: the preferred shareholders' dividend is not available to common shares.
  13. Sort three cash flows for an illustrative solar installer: collecting from customers, buying a work van, and repaying a bank loan. Check: operating, investing, and financing. Why: day-to-day running, long-lived assets, and lenders.
  14. Total liabilities are $63,000 and total assets are $210,000. Read debt to total assets in one sentence. Check: 63,000 ÷ 210,000 = 0.30, so creditors have a claim on 30 percent of the assets. Why: the sentence describes the business and gives no verdict.
  15. The bank-reconciliation entry for interest earned touches Cash. Does that break Week 4's rule that adjusting entries never touch Cash? Check: no. Why: the reconciliation's book-side entries correct Cash; they are not accrual or deferral adjustments.

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

  • (a) Explain why the course compares depreciation methods, and inventory methods, by their effects and never says one is better.
  • (b) Explain, with one figure from the running case, why net income and the cash from operations are different numbers.

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

Watch before the exam

These ten videos come from the course's vetted Week 16 pool, and every one has captions. Use them to review and to connect weeks, not to learn anything new. Their dollar figures are the videos' own, never the course's.

Study plan

A short countdown, sized to two class meetings a week. Count back from the day you plan to sit the final.

  • Week 14, after the second class: start a one-page list of the second half's swapped pairs. Begin with the book side and the bank side, the allowance and direct write-off, depreciation and market value, gross pay and net pay, and a discount and a premium. Add par value and market value, and treasury stock and an asset.
  • Week 15, after the first class: reread the Week 11 and Week 13 topic reviews and redo their worked examples. Each holds 7 of the final's 40 questions, and the practice exam has only 2 from each.
  • Week 15, after the second class: reread the Week 15 review and redo the furniture maker's statement of cash flows without looking. Week 15 also holds 7 questions.
  • At the start of Week 16: take the practice exam once, cold and closed-note. Note which objectives cost you the most, and remember that it leans far more on Weeks 1–7 than the final does.
  • Three or four days before you sit it: reread the topic reviews for your two weakest objectives, and redo the matching worked examples from scratch. Give Week 9's reconciliation a second pass, since it holds 6 questions.
  • 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 skim the Weeks 1–8 callback section once, so the early tools are fresh when they appear inside a later week.
  • Right before: skim the "predictable mistakes → cures" lines for Weeks 9 to 15. 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 40 questions counts the same, and the final 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 the book side and the bank side, or a discount and a premium. Say which pair is in play first.
  • Walk every transaction the same way. Say what happened, which accounts change and in which direction, the debit and the credit, and the effect on the statements.
  • Check the balance. Any entry you picture must have equal debits and credits. An option whose entry does not balance has slipped.
  • Ask about Cash. An accrual or deferral adjustment never touches Cash; a reconciliation's book-side entry always does.
  • Find the floor and the base. Double-declining-balance stops at residual value, and Social Security stops at the wage base. Medicare has no base.
  • Compare with book value. A gain or a loss is cash received minus book value, never the sale price itself.
  • Watch the sign in the indirect method. An increase in a current operating asset is subtracted; an increase in a current operating liability is added.
  • Read a ratio as a description. No question keys a ratio as good or bad, and no method is keyed as better.
  • Work on scratch paper. Write each step on its own line, foot every total, then say the result in words.

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