Accounting Made Simple

Summary
Mike Piper

Scan to Download
Accounting Made Simple Summary
Unlocking the Basics of Accounting with Clarity and
Simplicity
Written by Bookey
Check more about Accounting Made Simple Summary

Scan to Download
About the book
Discover the essentials of accounting effortlessly with
"Accounting Made Simple" by Mike Piper. This concise guide
demystifies crucial accounting concepts without the burden of
complex jargon or extraneous details. Whether you're a small
business owner, a student needing a clearer understanding for
your courses, or simply interested in brushing up on
fundamental accounting principles, Piper’s straightforward
approach simplifies balance sheets, income statements, and
more, equipping you with the knowledge you need to
effectively interpret financial information. Dive into this book
to unlock the power of accounting in making informed
business decisions and nurturing your financial acumen.

Scan to Download
About the author
Mike Piper is a respected author and certified public
accountant known for his ability to simplify complex financial
topics for non-specialists. With a background in accounting
and a deep passion for educating, Piper specializes in writing
accessible and practical guides that empower readers to
confidently manage and make decisions about their finances.
His work, including the best-selling book "Accountoring Made
Simple," reflects his commitment to providing clear, concise,
and actionable advice. Piper's expertise is not only limited to
writing but also extends to advising individuals on tax
planning and financial decision making, making him a trusted
voice in the fields of accounting and finance.

Scan to Download
Summary Content List
Chapter 1 : The Accounting Equation

Chapter 2 : The Balance Sheet

Chapter 3 : The Income Statement

Chapter 4 : The Statement of Retained Earnings

Chapter 5 : The Cash Flow Statement

Chapter 6 : The Cash Flow Statement

Chapter 7 : What is GAAP?

Chapter 8 : Debits and Credits

Chapter 9 : Cash vs. Accrual

Chapter 10 : Other GAAP Concepts and Assumptions

Chapter 11 : Depreciation of Fixed Assets

Chapter 12 : Amortization of Intangible Assets

Chapter 13 : Inventory and Cost of Goods Sold

Scan to Download
Chapter 1 Summary : The Accounting
Equation

Chapter 1 Summary: The Accounting Equation

Fundamental Concept of Accounting

- The Accounting Equation is crucial for creating financial

statements. It is expressed as:

Assets = Liabilities + Owners’ Equity

Scan to Download
Definitions

-
Assets
: All property owned by the company.
-
Liabilities
: All debts currently owed to lenders.
-
Owners’ Equity (a.k.a. Shareholders’ Equity)
: The ownership interest in certain assets after all debts have
been settled.

Example: Homeownership

- For instance, if Lisa owns a $300,000 home with a

$230,000 mortgage:
- Her equity is \(300,000 - 230,000 = 70,000\).

Accounting Equation Application:

| Assets | = | Liabilities | + | Owners’ Equity |

|----------|-------------|-------------|-----------|-----------------|

Scan to Download
 | $300,000 | = | $230,000 | + | $70,000 |
- If Lisa pays off $15,000 of her mortgage one year later:

| Assets | = | Liabilities | + | Owners’ Equity |

|----------|-------------|-------------|-----------|-----------------|
| $300,000 | = | $215,000 | + | $85,000 |

Key Points

- Owners' equity is essentially a residual amount after settling

liabilities.
- The equation can be alternatively viewed as:

Assets - Liabilities = Owners’ Equity

Conceptual Understanding

- A liability for one party is an asset for another. For

example:
- A loan taken by a person is a liability, whereas it is an
asset for the bank.
- The bank's obligation to return your savings reflects as a

Scan to Download
liability to them but an asset to you.

Summary Highlights

- A company's assets include all owned property.

- A company's liabilities consist of all borrowed money and
debts.
- Owners' equity reflects the ownership share in net assets.
- The Accounting Equation always stands as:

Assets = Liabilities + Owners’ Equity

- Alternatively framed as:

Assets - Liabilities = Owners’ Equity

Scan to Download
 Chapter 2 Summary : The Balance Sheet
Section Details

Balance Sheet Snapshot of financial status at a specific moment, based on the Accounting Equation: Assets =
Liabilities + Owners’ Equity

Assets

Cash and Cash Equivalents: Funds in checking/savings accounts and short-term investments
Inventory: Goods held for sale
Accounts Receivable: Money owed by customers
Property, Plant, and Equipment: Long-term assets (machinery, vehicles, etc.)

Liabilities

Accounts Payable: Amounts owed to suppliers

Notes Payable: Obligations to lenders (e.g., bank loans)

Owners’ Equity

Common Stock: Capital invested by owners

Retained Earnings: Accumulated net income not distributed as dividends

Current vs. Long-Term

Current Assets/Liabilities: Expected to be settled within 12 months

Long-Term Assets/Liabilities: Not expected to be settled within 12 months

Multiple-Period Balance Include current and previous periods for financial analysis
Sheets

Summary

Balance sheet presents the company's financial position at a specific time

Current assets convert to cash within 12 months; non-current are long-term
Current liabilities need payment within 12 months; others are long-term

The Balance Sheet

Scan to Download
A company’s balance sheet provides a snapshot of its
financial status at a specific moment, reflecting the
Accounting Equation: Assets = Liabilities + Owners’ Equity.
The balance sheet consists of three primary sections: assets,
liabilities, and owners’ equity.

Assets

-
Cash and Cash Equivalents
: Funds in checking and savings accounts and short-term
investments (maturing within 3 months).
-
Inventory
: Goods held for sale.
-
Accounts Receivable
: Money owed by customers for delivered goods or services.
-
Property, Plant, and Equipment
: Long-term assets such as machinery, vehicles, and office
furniture that cannot quickly be converted to cash.

Liabilities

Scan to Download
-
Accounts Payable
: Amounts owed to suppliers for received goods or services.
-
Notes Payable
: Obligations to lenders (e.g., bank loans).

Owners’ Equity

-
Common Stock
: Capital invested by company owners.
-
Retained Earnings
: Accumulated net income not distributed to owners as
dividends.

Current vs. Long-Term

-
Current Assets/Liabilities
: Expected to convert to cash or be settled within 12 months
(e.g., Cash, Accounts Receivable, Inventory for assets;

Scan to Download
Accounts Payable for liabilities).
-
Long-Term Assets/Liabilities
: Assets not expected to be converted to cash or liabilities due
beyond 12 months.

Multiple-Period Balance Sheets

Balance sheets often include two columns: one for the most
recent period and another for the previous period, allowing
for analysis of financial changes over time. For example,
increases in assets or decreases in liabilities typically signal
improved financial health.

Summary

1. A balance sheet reveals a company's financial position at a

specific time, adhering to the Accounting Equation.
2. Current assets can be converted to cash within 12 months,
while non-current assets are long-term.
3. Current liabilities need payment within 12 months; any
liabilities not categorized as current are long-term by default.

Scan to Download
Example
Key Point:Understanding the Balance Sheet for
Financial Decisions
Example:Imagine you’re considering buying a small
bakery. You pull out their balance sheet and notice that
their cash and inventory levels are healthy, while their
accounts payable are relatively low. This situation
allows you to feel confident in the bakery's ability to
meet its short-term obligations, which is crucial for its
ongoing operations. With a clear view of assets,
liabilities, and owners' equity, you can make an
informed decision on whether investing in the bakery is
financially sound or if it might face cash flow issues in
the near future.

Scan to Download
Chapter 3 Summary : The Income
Statement

The Income Statement

The income statement reflects a company's financial

performance over a period, typically one year, contrasting
with the balance sheet's snapshot of financial position at a
specific time. It details revenues and expenses.

Structure of the Income Statement

The income statement, also known as the profit and loss

(P&L) statement, comprises two main sections:
1.

Scan to Download
Revenue

-
Sales:
$300,000
-
Cost of Goods Sold:
$(100,000)
-
Gross Profit:
$200,000
2.
Expenses

-
Rent:
$30,000
-
Salaries and Wages:
$80,000
-
Install Bookey App to Unlock
Advertising: Full Text and
$15,000 Audio
-

Scan to Download
Chapter 4 Summary : The Statement of
Retained Earnings

The Statement of Retained Earnings

The statement of retained earnings is a concise financial

statement that outlines the changes in a company’s retained
earnings over a specific period. Retained earnings represent
the total of a company’s undistributed profits since its
inception.

Example of Retained Earnings

For instance, if ABC Construction has a beginning retained

earnings balance of $0 at its formation, earns $50,000 in net
income in its first year, and pays $20,000 in dividends, its
retained earnings statement for 2011 would show:
- Retained Earnings, 1/1/2011: $0
- Net Income: $50,000
- Dividends Paid: ($20,000)
- Retained Earnings, 12/31/2011: $30,000
In 2012, with a net income of $70,000 and another $20,000

Scan to Download
dividend, the retained earnings would be:
- Retained Earnings, 1/1/2012: $30,000
- Net Income: $70,000
- Dividends Paid: ($20,000)
- Retained Earnings, 12/31/2012: $80,000

Bridge Between Financial Statements

The statement of retained earnings serves as a link between

the income statement and the balance sheet, integrating net
income and updating retained earnings accordingly.

Dividends: Not an Expense!

Dividends are not expenses, but rather distributions of

profits, which means they do not impact net income or
appear in the income statement. Instead, they are recorded in
the statement of retained earnings.

Retained Earnings: It’s Not the Same as Cash

While retained earnings reflect undistributed profits, they do

not indicate cash availability. Companies often reinvest
retained earnings in growth initiatives, such as inventory and

Scan to Download
equipment purchases.

Chapter 4 Simple Summary

- The statement of retained earnings details the changes in a

company’s retained earnings over a period of time.
- The statement acts as a bridge between the income
statement and the balance sheet.
- Dividend payments are not classified as expenses but as
distributions of profits.
- Retained earnings do not equal cash, as they can be
reinvested for growth.

Scan to Download
 Chapter 5 Summary : The Cash Flow
Statement

Section Summary

The Cash Flow Statement Tracks cash inflows and outflows over a specific accounting period.

Cash Flow Statement vs. Differs mainly in timing; cash flow captures transactions not included in income statements, like
Income Statement loans and dividends.

Categories of Cash Flow Divided into three types: Operating, Investing, and Financing activities.

Cash Flow from Cash generated from normal operations, including sales receipts and payments to suppliers.
Operating Activities

Cash Flow from Cash involved in investments and long-term assets, including purchase/sale of equipment and
Investing Activities stocks.

Cash Flow from Transactions with owners and creditors, including dividend payments and loan activities.
Financing Activities

Chapter 5 Simple Cash flow statement and income statement differ in timing and transaction types; understanding
Summary cash flow classifications is essential for assessing financial health.

The Cash Flow Statement

The cash flow statement tracks a company’s cash inflows and

Scan to Download
outflows over a specific accounting period.

Cash Flow Statement vs. Income Statement

- The cash flow statement differs from the income statement

primarily in timing. For example, a sale might be recorded in
September but the cash received could occur in October,
affecting their appearances on the respective statements.
- Additionally, the cash flow statement includes transactions
not reflected in the income statement, such as loans (inflows)
and dividends (outflows).

Categories of Cash Flow

Cash flows are categorized into three main types:

1.
Cash Flow from Operating Activities

- Reflects cash generated from normal business operations.

- Includes receipts from sales, payments to suppliers,
employee payments, and tax payments.
2.
Cash Flow from Investing Activities

Scan to Download
 - Encompasses cash spent or received related to
investments in financial securities and long-term assets.
- Typical items include the purchase/sale of equipment,
stocks, bonds, and received interest or dividends.
3.
Cash Flow from Financing Activities

- Covers cash transactions with the company’s owners and

creditors.
- Includes dividends paid, loan activities, and cash received
from issuing new shares.

Chapter 5 Simple Summary

- The cash flow statement and income statement differ in

terms of transaction timing and the types of transactions
recorded.
- Cash flow from operating, investing, and financing
activities each represent different areas of a company’s cash
transactions.
- Understanding the classifications and impacts of these cash
flows is essential for evaluating a company’s financial health.

Scan to Download
Example
Key Point:Importance of the Cash Flow Statement
vs. Income Statement
Example:Imagine you run a small coffee shop. In
September, you sell $5,000 worth of coffee, and it
reflects on your income statement for that month.
However, the customer pays you only in October. In
that moment, even though your income statement looks
great, your cash flow statement will show a decrease in
cash for September. If you need to pay your suppliers in
September but don't have that cash on hand, it puts you
in a tough spot. This illustrates how the cash flow
statement provides a clearer picture of your actual cash
situation, helping you manage your operations more
effectively.

Scan to Download
 Chapter 6 Summary : The Cash Flow
Statement
Ratio Type Description Key Ratios

Liquidity Assess a company's ability to meet short-term obligations; higher ratios indicate better Current Ratio,
Ratios liquidity. Quick Ratio

Profitability Measure how efficiently a company generates profits relative to size. Return on Assets
Ratios (ROA), Return on
Equity (ROE)

Financial Reveal the extent of debt versus equity financing; indicates financial risk and potential Debt Ratio,
Leverage returns. Debt-to-Equity
Ratios Ratio

Asset Evaluate how effectively a company utilizes its assets for generating sales. Inventory Turnover,
Turnover Receivables
Ratios Turnover

Chapter Liquidity ratios focus on short-term obligations; profitability ratios measure efficiency;
Summary financial leverage ratios examine debt financing impacts; asset turnover ratios assess
asset efficiency in sales generation.

Financial Ratios

Financial ratios provide valuable insights into a company's

financial health by calculating and comparing various metrics
derived from financial statements.

Liquidity Ratios

- Liquidity ratios assess a company's ability to meet

short-term obligations, with higher ratios indicating better

Scan to Download
liquidity.
- The
current ratio
evaluates a company’s capacity to pay off current liabilities
using current assets.
- The
quick ratio
serves a similar purpose but excludes inventory, offering a
conservative view of liquidity, particularly in low-sales
scenarios.

Profitability Ratios

- Profitability ratios measure how efficiently a company

generates profits relative to size.
- The
return on assets (ROA)
illustrates how effectively assets are used to produce profits.
- The
return on equity (ROE)
compares net income to shareholders' equity, showcasing
howInstall Bookeyutilizes
well a company App to Unlock
investor Full
money to Text and
generate
returns. Audio

Scan to Download
Chapter 7 Summary : What is GAAP?

PART TWO

Generally Accepted Accounting Principles (GAAP)

CHAPTER SEVEN

What is GAAP?

Generally Accepted Accounting Principles (GAAP) is the

framework of accounting rules used in the preparation of
financial statements in the United States, created by the
Financial Accounting Standards Board (FASB). The primary
goal of GAAP is to enable potential investors to compare
financial statements across various companies, ensuring
consistency and reliability in reported financial performance.

Who is Required to Follow GAAP?

Scan to Download
All publicly traded companies must follow GAAP
procedures when preparing their financial statements as
mandated by the Securities and Exchange Commission.
Furthermore, many private companies adhere to GAAP
voluntarily due to its established norms in the accounting
profession. Government entities also adhere to GAAP but
follow a separate set of guidelines tailored for them, leading
to differences in financial statements compared to those of
public companies.

Chapter 7 Simple Summary

- GAAP is the framework used for the preparation of

financial statements.
- The Securities and Exchange Commission mandates
adherence to GAAP for all publicly traded companies.

Scan to Download
Chapter 8 Summary : Debits and Credits

Debits and Credits

Most people unknowingly practice single-entry accounting

through their personal checking or savings accounts, where
transactions involve a single entry affecting cash balances.
However, double-entry accounting, a core principle of
GAAP, uses debits and credits for each transaction, ensuring
the accounting equation (Assets = Liabilities + Owners'
Equity) remains balanced.

Understanding Debits and Credits

Each transaction involves both a debit (increase or decrease

depending on the account type) and a credit. Specifically:
-
Debits
increase asset accounts and decrease liability or owners'
equity accounts.
-
Credits
decrease asset accounts and increase liability or owners'

Scan to Download
equity accounts.
For example, when a company spends $40,000 cash to
purchase equipment, the journal entry would show a debit to
Equipment and a credit to Cash, keeping the accounting
equation balanced.

Example Transactions

1.
Loan Acquisition:

- Cash increases (debit) and Notes Payable increases

(credit) when a loan of $50,000 is taken.
2.
Purchasing Supplies on Credit:

- Debit Building Supplies and credit Accounts Payable for

$10,000.
3.
Paying Off Accounts Payable:

- Debit Accounts Payable and credit Cash for $10,000

when the vendor is paid.

Scan to Download
Revenue and Expense Accounts

Journal entries also apply to income statement transactions,

where:
- Credits typically increase revenue accounts.
- Debits typically increase expense accounts.

Example Revenue Transaction:

- Rent Expense is debited while Cash is credited when

$4,500 for rent is paid.

General Ledger

The general ledger is vital, housing all journal entries and

forming the basis for financial statements. Most
contemporary applications use accounting software rather
than physical records.

T-Accounts

T-Accounts provide a visual representation of account

activity over time, showing debits and credits in a
side-by-side manner for clarity.

Scan to Download
Trial Balance

A trial balance summarizes account balances at a specific

time, ensuring total debits equal total credits. However, it
may not catch all errors in journal entries.

Chapter 8 Summary

- Each transaction requires a journal entry comprising a debit

and a credit.
- Debits increase assets and expenses, while credits increase
liabilities, owners' equity, and revenues.
- The general ledger records journal entries, and T-Accounts
help track account activity.
- A trial balance is prepared to verify that total debits equal
total credits at period-end.

Scan to Download
Chapter 9 Summary : Cash vs. Accrual

Cash vs. Accrual

In accounting, individuals and most small businesses

typically use "cash accounting," while businesses must
comply with GAAP, which requires "accrual accounting."

The Cash Method

-
Overview
: Sales are recorded when cash is received; expenses are
recorded when cash is paid out.
-
Limitations
: This method can distort financial reality, as shown in an
example with Pam, an ice cream store owner, where net
income fluctuates misleadingly based on cash transaction
timing.

The Accrual Method

Scan to Download
-
Overview
: Revenue is recorded once services are provided or goods
are delivered, regardless of cash receipt timing. Similarly,
expenses are recognized when goods/services are received,
using Accounts Receivable and Accounts Payable,
respectively.
-
Objective
: Fixes the cash method's shortcomings by accurately
reflecting economic transactions.
-
Example
: Mario, an electronics store owner, accrues commissions
earned by sales representatives, ensuring expenses reflect
actual earnings within the appropriate periods, thus avoiding
misleading net income fluctuations.

Prepaid Expenses

-
Install Bookey App to Unlock Full Text and
Concept
: Sometimes, expenses mayAudio
be prepaid. For example, Pam
prepays her rent, creating an asset account called "Prepaid

Scan to Download
Chapter 10 Summary : Other GAAP
Concepts and Assumptions

Other GAAP Concepts and Assumptions

The goal of GAAP is to ensure that companies’ financial

statements are consistently prepared for meaningful
comparison. This chapter discusses various assumptions used
in GAAP-compliant financial statements.

Historical Cost

Assets are recorded at their historical cost, which is the

original purchase amount. While it may seem reasonable to
report assets at their current market value, allowing this
would introduce subjectivity. Therefore, GAAP requires the
use of the objective historical cost.

Materiality

Materiality refers to the significance of a transaction's impact

on financial statements. A transaction is considered material

Scan to Download
if a misstatement could lead to a different decision by
stakeholders. For example, large loan amounts are material,
while insignificant expenses like an $80 purchase may be
deemed immaterial.

Monetary Unit Assumption

GAAP assumes that the dollar is a stable measure of value,

despite inflation affecting its real value. Regular adjustments
for inflation would exceed the benefits gained from such
practice.

Entity Assumption

Under GAAP, businesses are regarded as separate entities

from their owners. This requires transactions between the
company and its owners to be documented, as they are still
considered business transactions.

Matching Principle

The matching principle states that expenses must be recorded

in the same period as the revenues they produce. For
instance, utility expenses incurred in March must be recorded

Scan to Download
in that month, aligning expenses with the corresponding
revenues generated.

Chapter 10 Simple Summary

- Historical cost is typically used for asset valuation due to its

objectivity.
- Transactions are considered immaterial if mistakes do not
significantly misstate financial statements.
- The monetary unit assumption simplifies accounting by
assuming a stable currency value.
- The entity assumption differentiates between a business and
its owners in accounting.
- The matching principle ensures expenses are reported
concurrently with the revenues they help create.

Scan to Download
Critical Thinking
Key Point:Historical Cost vs. Current Market Value
Critical Interpretation:The author's argument for
historical cost as a preferred measurement method posits
objectivity, yet this approach can be contested as it
neglects economic realities and market fluctuations.
While it minimizes subjectivity, reliance on historical
values can lead to inaccurate representations of a
company's current financial situation. This becomes
particularly problematic in volatile markets where asset
values can diverge significantly from historical costs,
potentially misleading stakeholders. Alternative views
suggest that fair value accounting, which reflects current
market conditions, might offer a more relevant and
timely perspective for decision-making. Scholars like
Edward Peterls in 'The History of Fair Value
Measurement' have critiqued this adherence to historical
cost as potentially providing a false sense of security in
financial reporting.

Scan to Download
Chapter 11 Summary : Depreciation of
Fixed Assets

Depreciation of Fixed Assets

When a company purchases a long-lasting asset, its cost is

not recorded as an expense immediately. Instead, it is spread
over several years through depreciation.

Straight-Line Depreciation

The simplest form of depreciation is straight-line

depreciation, where the asset's cost is evenly distributed over
its expected life.
-
Example:
Daniel buys equipment for $5,000, expected to last 5 years,
recording $1,000 as depreciation expense each year.
Accumulated Depreciation, a contra-asset account, offset the
Equipment account to show the net book value. After five
years, the equipment would have a net book value of zero.

Scan to Download
Salvage Value

If an asset is expected to have value after its useful life, this

value is called salvage value.
-
Example:
Lydia purchases office furniture for $11,000, expecting a
salvage value of $2,000. She depreciates $900 annually,
leading to a total of $9,000 accumulated depreciation after
ten years.

Gain or Loss on Sale

When selling an asset, if the cash received is greater than the

net book value, a gain is recorded; if less, a loss is recorded.
-
Example:
If Lydia sells the furniture for $3,000, she records a gain. If
sold for $500, a loss is recorded.

Other Depreciation Methods

Besides straight-line, several other methods exist, such as:

-

Scan to Download
Double Declining Balance Method:
Depreciates assets at double the straight-line rate.
-
Units of Production Method:
Depreciation is based on usage instead of time.

Immaterial Asset Purchases

For very small assets (e.g., a $15 wastebasket), the cost is

often expensed immediately due to the negligible impact on
financial statements rather than being depreciated.

Chapter 11 Simple Summary

- Straight-line depreciation records equal amounts over the

asset’s life.
- Accumulated depreciation tracks how much has been
recorded against an asset.
- Net book value equals original cost minus accumulated
depreciation.
- Selling an asset for more than its net book value results in a
gain; selling for less results in a loss.
- Immaterial assets are typically expensed immediately.

Scan to Download
Critical Thinking
Key Point:Depreciation methods can significantly
impact financial statements and business decisions.
Critical Interpretation:Though the chapter effectively
outlines the straight-line depreciation method as
straightforward and simple, it's pivotal to recognize that
this method may not accurately reflect the actual use or
value decline of all assets. Critics may argue that
methods like double declining balance or units of
production could present a more accurate picture,
especially for assets with non-linear usage patterns or
value depreciation. This divergence in methodology
highlights fundamental debates in accounting standards
and practices. Stakeholders should consult sources such
as the FASB Conceptual Framework and studies from
the Journal of Accounting Research to analyze differing
impacts of depreciation strategies on financial reporting
and asset management.

Scan to Download
Chapter 12 Summary : Amortization of
Intangible Assets

Amortization of Intangible Assets

Intangible assets are identifiable real assets that lack physical

substance, such as patents, copyrights, and trademarks.

Amortization

Amortization is similar to depreciation and involves

spreading an intangible asset's cost over its useful life.
Typically, the amortization period is based on the shorter of
the asset's expected useful life or its legal life.

Example:

Kurt, who runs a wireless router component business,

acquires a patent for $60,000 in 2011, set to expire in 2031.
Install
Given Bookey
the rapid App toadvancements,
technological Unlock FullKurt Text and
estimates
the patent's useful life to beAudio
just four years instead of the
legal life of 20 years.

Scan to Download
Chapter 13 Summary : Inventory and
Cost of Goods Sold

Inventory and Cost of Goods Sold

Under GAAP, businesses can track inventory using two

primary methods: the perpetual method and the periodic
method.

Perpetual Method of Inventory

- Used by businesses that maintain real-time inventory data

on an item-by-item basis (e.g., retail stores using barcodes).
-
Advantages
:
- Provides accurate inventory levels at any time.
- Enhances financial statement accuracy by precisely
tracking Cost of Goods Sold (CoGS).
-
Disadvantage
:

Scan to Download
 - Higher implementation costs.

Periodic Method of Inventory

- Involves counting inventory at set intervals (e.g., monthly),

without real-time tracking of inventory levels during the
period.
-
Drawbacks
:
- Cannot track inventory on an item-by-item basis.
- Assumptions must be made about items sold.

Calculating CoGS under the Periodic Method of

Inventory

- CoGS is calculated using the equation:

Beginning Inventory + Inventory Purchases - Ending
Inventory = Cost of Goods Sold
- This formula assumes that if an item is not in ending
inventory, it has been sold.

Assumptions Used in Calculating CoGS under the

Periodic Method

Scan to Download
Calculating CoGS can be complex due to varying inventory
costs. Common methods include:

First-In, First-Out (FIFO)

- Assumes oldest inventory is sold first.

- Example: Selling all $3 shirts before selling any $3.50
shirts.

Last-In, First-Out (LIFO)

- Assumes newest inventory is sold before older inventory.

- Example: Selling all $3.50 shirts before selling any $3
shirts.

Average Cost

- Determines an average cost per unit to calculate both CoGS

and ending inventory.
- Example: Total Cost of Goods Available for Sale divided by
total units available.

Chapter 13 Simple Summary

Scan to Download
- The periodic method calculates CoGS at period end through
inventory counts.
- The perpetual method tracks inventory continuously,
improving accounting but at higher costs.
- FIFO and LIFO affect how CoGS and ending inventory are
calculated based on assumptions about which inventory is
sold.
- The average cost method uses an overall average cost to
determine both CoGS and ending inventory.

Scan to Download
Best Quotes from Accounting Made
Simple by Mike Piper with Page
Numbers
View on Bookey Website and Generate Beautiful Quote Images

Chapter 1 | Quotes From Pages 16-19

1.Assets = Liabilities + Owners’ Equity
2....owners’ equity (the part that often confuses people) is
just a plug figure. It’s simply the leftover amount after
paying off the liabilities/debts.
3.One concept that can trip up accounting novices is the idea
that a liability for one person is, in fact, an asset for
somebody else.
Chapter 2 | Quotes From Pages 20-27
1.A company’s balance sheet shows its financial
situation at a given point in time.
2.Balance sheets are formatted in accordance with the
Accounting Equation: Assets = Liabilities + Owners’
Equity
3.Current assets are those that are expected to be converted

Scan to Download
 into cash within 12 months or less.
4.Current liabilities are those that will need to be paid off
within the next 12 months.
5.What you’ll often see when looking at published financial
statements is a balance sheet that has two columns... so that
a reader can see how the financial position of the company
has changed over time.
6.It appears that things are going well. The company’s assets
are increasing while its debt is being paid down.
Chapter 3 | Quotes From Pages 28-32
1.The income statement shows a company’s
financial performance over a period of time
(usually a year).
2.Gross Profit refers to the sum of a company’s revenues,
minus Cost of Goods Sold.
3.Operating Income is a more meaningful number than Net
Income, as it should offer a better indicator of what the
company’s income is going to look like in future years.
4.The reasoning behind separating Operating Expenses from

Scan to Download
 Non-Operating Expenses is that it allows for the calculation
of Operating Income.
5.As a result of this 'creative accounting,' it’s become a bit of
a debate which income figure is, in fact, the better indicator
of future success.

Scan to Download
Chapter 4 | Quotes From Pages 33-38
1.The statement of retained earnings details the
changes in a company’s retained earnings over a
period of time.
2.The statement of retained earnings acts as a bridge between
the income statement and the balance sheet.
3.Dividend payments are not an expense. They are a
distribution of profits.
4.Retained earnings is not the same as cash.
Chapter 5 | Quotes From Pages 39-46
1.The cash flow statement does exactly what it
sounds like: It reports a company’s cash inflows
and outflows over an accounting period.
2.There are often differences in timing between when an
income or expense item is recorded and when the cash
actually comes in or goes out the door.
3.The cash flow statement also differs from the income
statement in that it shows many transactions that would not
appear on the income statement.

Scan to Download
4.Cash flow from operating activities includes cash
transactions that occur as a result of normal business
operations.
5.Cash flow from investing activities includes cash
transactions relating to a company’s investments in
financial securities and cash transactions relating to
long-term assets.
6.Cash flow from financing activities includes cash
transactions between the company and its owners or
creditors.
Chapter 6 | Quotes From Pages 47-56
1.Liquidity ratios are used to determine how easily a
company will be able to meet its short-term
financial obligations.
2.A company’s quick ratio serves the same purpose as its
current ratio: It seeks to assess the company’s ability to pay
off its current liabilities.
3.Return on assets shows us a company’s profitability in
comparison to the company’s size (as measured by total

Scan to Download
 assets).
4.Return on equity asks, 'How efficiently is this company
using its investors’ money to generate profits?'
5.Being more highly leveraged (i.e., more debt, less
investment from shareholders) allows for a greater return
on the shareholders’ investment.
6.The more highly leveraged a company is, the greater its
return on equity will be for a given amount of net income.
7.Asset turnover ratios seek to show how efficiently a
company uses its assets.

Scan to Download
Chapter 7 | Quotes From Pages 57-61
1.The goal of GAAP is to make it so that potential
investors can compare financial statements of
various companies in order to determine which
one(s) they want to invest in, without having to
worry that one company appears more profitable
on paper simply because it is using a different set
of accounting rules.
2.All publicly traded companies are required by the
Securities and Exchange Commission to follow GAAP
procedures when preparing their financial statements.
3.Many companies follow GAAP even when they are not
required to do so.
4.Governmental entities are required to follow GAAP as
well.
Chapter 8 | Quotes From Pages 62-69
1.For every transaction, a journal entry must be
recorded that includes both a debit and a credit.
2.Debits increase asset accounts and decrease equity and

Scan to Download
 liability accounts.
3.Credits decrease asset accounts and increase equity and
liability accounts.
4.The general ledger is the document in which a company’s
journal entries are recorded.
5.A trial balance shows the balance in each account at a
given point in time. The purpose of a trial balance is to
check that total debits equal total credits.
Chapter 9 | Quotes From Pages 70-76
1.'The goal of the accrual method is to fix the major
shortcoming of the cash method: Distortions of
economic reality due to the frequent time lag
between a service being performed and the service
being paid for.'
2.'Whenever an expense is recorded prior to its being paid
for—such as in the above entry—the journal entry is
referred to as an “accrual,” hence, the “accrual method.”'
3.'The process will start all over again on July 1st when Pam
prepays her rent for the third quarter of the year.'

Scan to Download
4.'The terms of the loan were that, rather than making
payments over the course of the loan, she would repay it all
(along with $180 of interest) on July 1st.'
5.'In order to be in accordance with GAAP, businesses must
use the accrual method of accounting (as opposed to the
cash method).'
6.'The first entry ensures that any financial statements for the
month of August reflect the appropriate amount of
Commissions Expense for sales made during the month.'

Scan to Download
Chapter 10 | Quotes From Pages 77-83
1.The goal of GAAP is to ensure that companies’
financial statements are prepared using a
consistent set of rules and assumptions so that they
can be compared to those of another company in a
meaningful way.
2.Assets are recorded at their historical cost... if GAAP
allowed companies to use any other valuation method... it
would introduce a great deal of subjectivity into the
process.
3.If a mistake in recording a given transaction could cause a
viewer of the company’s financial statements to make a
different decision... the transaction is said to be 'material.'
4.GAAP makes the assumption that the dollar is a stable
measure of value.
5.For GAAP purposes, it’s assumed that a company is an
entirely separate entity from its owners.
6.According to GAAP, the matching principle dictates that
expenses must be matched to the revenues that they help

Scan to Download
 generate.
Chapter 11 | Quotes From Pages 84-90
1.The most basic form of depreciation is known as
straight-line depreciation.
2.Accumulated Depreciation is what’s known as a 'contra
account,' or more specifically, a 'contra-asset account.'
3.Each year, Lydia will record $900 of depreciation as
follows:
4.If the amount of cash received is greater than the asset’s net
book value, a gain must be recorded on the sale.
5.The concept of materiality plays a big role in how some
assets are accounted for.
Chapter 12 | Quotes From Pages 91-93
1.Amortization is the process—very analogous to
depreciation—in which an intangible asset’s cost is
spread out over the asset’s life.
2.The time period used for amortizing an intangible asset is
generally the shorter of the asset’s legal life or expected
useful life.

Scan to Download
Chapter 13 | Quotes From Pages 94-103
1.The perpetual inventory method... improves the
accuracy of the company’s financial statements
because it allows very accurate recordkeeping as
to the Cost of Goods Sold over a given period.
2.The periodic method of inventory is a system in which
inventory is counted at regular intervals... but it won’t
know precisely how much inventory is on hand in the
middle of an accounting period.
3.Under GAAP, a business can use any of the three [valuation
methods].
4.Under the 'First-In, First-Out' method of calculating CoGS,
we assume that the oldest units of inventory are always
sold first.
5.The average cost method is just what it sounds like. It uses
the beginning inventory balance and the purchases over the
period to determine an average cost per unit.

Scan to Download
Accounting Made Simple Questions
View on Bookey Website

Chapter 1 | The Accounting Equation| Q&A

1.Question
What is the Accounting Equation and why is it
fundamental to accounting?
Answer:The Accounting Equation states that 'Assets
= Liabilities + Owners’ Equity'. This equation is
fundamental because it provides a clear framework
for understanding a company's financial position,
showcasing how assets are financed either through
debt (liabilities) or through the owner's investment
(equity). Every financial transaction affects this
equation ensuring a balanced representation of a
company's financials.

2.Question
How can understanding the concept of owners’ equity
help in personal finance?
Answer:Understanding owners’ equity is crucial in personal

Scan to Download
finance as it reflects your ownership interest in assets after
liabilities are deducted. For instance, when buying a home,
it's vital to know how much equity you have, as it signifies
your true ownership stake and can influence decisions on
refinancing or selling your property.

3.Question
In what way can liabilities be seen as assets from the
perspective of another party?
Answer:Liabilities can represent assets for others because
what is a debt for one party is an investment for another. For
example, when you take out a loan from a bank, you incur a
liability, while the bank considers that same loan an asset as
it earns interest on it. This dual perspective highlights
interconnectedness in financial transactions.

4.Question
How does paying down a liability increase owners’
equity?
Answer:Paying down a liability increases owners' equity
because it reduces the company's debts without changing its

Scan to Download
assets. For example, in Lisa’s case, when she paid off part of
her mortgage, her liabilities decreased, and thus her owners'
equity increased, indicating a higher value of ownership in
her home.

5.Question
Can you explain the simplified version of the Accounting
Equation?
Answer:The simplified version of the Accounting Equation,
'Assets – Liabilities = Owners’ Equity', makes it easier to
understand that owners' equity is what's left after all debts are
repaid. This perspective helps individuals grasp the concept
of their net worth, revealing how much they truly own after
accounting for what they owe.
Chapter 2 | The Balance Sheet| Q&A
1.Question
What is the purpose of a balance sheet?
Answer:A balance sheet provides a snapshot of a
company's financial position at a specific point in
time, detailing assets, liabilities, and owners' equity,

Scan to Download
thereby reflecting the company's financial health.

2.Question
What are the three main components of a balance sheet?
Answer:The three main components are Assets, Liabilities,
and Owners' Equity.

3.Question
Can you explain the difference between current and
long-term assets?
Answer:Current assets are expected to be converted into cash
within 12 months, such as cash, accounts receivable, and
inventory. Long-term assets, or non-current assets, are not
expected to be turned into cash within that timeframe and
include property and equipment.

4.Question
How do liabilities work on a balance sheet?
Answer:Liabilities are financial obligations the company
owes. They are categorized into current liabilities (due within
12 months, like accounts payable) and long-term liabilities
(paid off over longer periods, such as a bank loan).

5.Question

Scan to Download
What does an increase in accounts receivable indicate?
Answer:An increase in accounts receivable can signal two
possibilities: it might indicate problems with collecting
payments from customers, or it could reflect an increase in
sales, requiring further analysis to determine the cause.

6.Question
How can comparing multiple-period balance sheets help
assess a company’s performance?
Answer:By comparing multiple-period balance sheets, one
can identify trends, such as growth in assets or decreases in
debt, thus assessing the company’s financial performance
over time.

7.Question
What does owners' equity represent on a balance sheet?
Answer:Owners' equity represents the residual interest in the
assets of the company after deducting liabilities. It includes
investments from owners and retained earnings.

8.Question
Why might a company prioritize paying down liabilities?

Scan to Download
Answer:A company may prioritize paying down liabilities to
reduce interest expenses, improve cash flow, and strengthen
its financial position, contributing to a healthier balance
sheet.

9.Question
What does the accounting equation represent?
Answer:The accounting equation, Assets = Liabilities +
Owners’ Equity, represents the relationship between what a
company owns (assets), what it owes (liabilities), and the
owners' stake in the company (equity). This equation must
always be balanced.

10.Question
Why is it important for a business to have more assets
than liabilities?
Answer:Having more assets than liabilities indicates
financial stability and strength, meaning the business can
cover its obligations and invest in growth opportunities
without compromising its financial health.
Chapter 3 | The Income Statement| Q&A

Scan to Download
1.Question
What is the primary purpose of the income statement?
Answer:The income statement shows a company’s
financial performance over a period of time,
typically one year. It details how much money the
company earned (revenues) and how much it spent
(expenses), ultimately allowing stakeholders to
understand the profitability of the business.

2.Question
How does Gross Profit differ from Net Income?
Answer:Gross Profit is calculated as revenues minus the Cost
of Goods Sold, reflecting the profitability of core business
activities. In contrast, Net Income accounts for all revenues
and expenses, including non-operating expenses, revealing
the total profit available to shareholders after all costs.

3.Question
Why might companies separate Operating Income from
Net Income?
Answer:By separating Operating Income from Net Income,
companies can provide a clearer picture of their core earnings

Scan to Download
from regular business operations. Operating Income is often
viewed as a more reliable indicator of future performance, as
it omits irregular or one-off expenses and focuses on ongoing
business costs.

4.Question
What role does Cost of Goods Sold play in determining
Gross Profit?
Answer:Cost of Goods Sold (CoGS) represents the direct
costs attributable to the production of the goods sold by a
company. It is crucial for calculating Gross Profit since
Gross Profit is derived by subtracting CoGS from total
revenues, thus showing how efficiently a company is
producing its goods.

5.Question
How can the classification of expenses influence
perceptions of a company's profitability?
Answer:Companies may classify certain expenses as
Non-Operating to enhance their Operating Income,
potentially misleading investors about the health of the

Scan to Download
business. This creative accounting can create debates on
which income measure—Operating Income or Net
Income—is a better indicator of true profitability and
sustainability.

6.Question
Can you provide an example of a scenario impacting both
Operating Expenses and Non-Operating Expenses?
Answer:Consider a company facing a lawsuit
(Non-Operating Expense) while simultaneously incurring
regular costs such as rent and employee salaries (Operating
Expenses). This scenario illustrates how the company’s
financial performance is influenced by both regular
operational activities and extraordinary, non-routine costs,
affecting both Operating Income and Net Income.

7.Question
What is the significance of the analogy that compares a
balance sheet to a photograph and the income statement
to a video?
Answer:This analogy highlights the difference in what each
financial statement represents; while the balance sheet offers

Scan to Download
a snapshot of a company's assets and liabilities at one
moment in time (like a photograph), the income statement
provides a dynamic view of a company's financial
performance over a specific period, showing how revenues
and expenses change (like a video).

Scan to Download
Chapter 4 | The Statement of Retained Earnings|
Q&A
1.Question
What is the primary purpose of the statement of retained
earnings?
Answer:The primary purpose of the statement of
retained earnings is to detail the changes in a
company’s retained earnings over a specific period
of time.

2.Question
How do retained earnings differ from profits distributed
to shareholders?
Answer:Retained earnings represent the sum of all the
company's undistributed profits, differentiating them from
profits which are paid out to shareholders as dividends.

3.Question
Why are dividends not considered an expense in
accounting?
Answer:Dividends are not considered an expense because
they are a distribution of profits rather than a cost incurred by

Scan to Download
the company. They do not impact the calculation of net
income and are shown on the statement of retained earnings
instead.

4.Question
How does the statement of retained earnings link the
income statement and balance sheet?
Answer:The statement of retained earnings serves as a bridge
by taking net income from the income statement and using it
to calculate the ending retained earnings balance, which is
then reflected on the balance sheet under owners' equity.

5.Question
Can a company’s retained earnings be equated to cash?
Why or why not?
Answer:No, retained earnings cannot be equated to cash.
They represent accumulated profits that may have been
reinvested into the company rather than held as cash. For
example, a company may use retained earnings to purchase
new equipment or increase inventory instead of keeping that
amount as cash.

Scan to Download
6.Question
What happens when a company generates net income but
does not distribute all of it as dividends?
Answer:If a company generates net income but does not
distribute all of it as dividends, the portion of net income that
remains in the business increases the company’s retained
earnings, which can then be used for reinvestment and
growth.

7.Question
Why might new business owners find dividends confusing
when first learning accounting?
Answer:New business owners might confuse dividends with
expenses because both are cash payments out of the
company. However, unlike expenses that decrease profits,
dividends are distributions of profits to shareholders.

8.Question
In what scenario would retained earnings decrease?
Answer:Retained earnings would decrease if a company
experiences a net loss or if it pays out more in dividends than
the net income it generates during the period.

Scan to Download
9.Question
What does an increase in retained earnings imply for a
company’s future?
Answer:An increase in retained earnings suggests that a
company is successfully retaining profits, which can indicate
financial health and the potential for future growth and
investment in business operations.

10.Question
When are retained earnings particularly important for a
business?
Answer:Retained earnings are particularly important during
times when businesses need to reinvest in growth, as they
provide a source of internal funding without the need for
external financing.
Chapter 5 | The Cash Flow Statement| Q&A
1.Question
What is the primary function of a cash flow statement?
Answer:The primary function of a cash flow
statement is to report a company’s cash inflows and
outflows over a specific accounting period,

Scan to Download
providing insight into how cash is generated and
used.

2.Question
How does a cash flow statement differ from an income
statement?
Answer:The cash flow statement and income statement differ
significantly in timing and content: the cash flow statement
reflects actual cash movement, while the income statement
records revenues and expenses when they are incurred,
regardless of actual cash flow. For example, revenue from a
service performed in September would be recorded on the
income statement then, even if cash is received in October;
this would not appear on the cash flow statement until the
actual cash is received.

3.Question
What are the three main categories of cash flow?
Answer:The three main categories of cash flow are: 1) Cash
flow from operating activities, which pertains to cash
transactions from normal business operations; 2) Cash flow

Scan to Download
from investing activities, which involves cash transactions
related to investments and long-term assets; and 3) Cash flow
from financing activities, which includes cash transactions
with owners and creditors.

4.Question
Can you give an example of cash flow from investing
activities?
Answer:An example of cash flow from investing activities
would be cash spent on purchasing a new piece of machinery
for the company. This transaction involves a long-term asset,
and its cash outflow will be recorded under investing
activities.

5.Question
What major cash flow related event does not appear on
the income statement?
Answer:Transactions such as taking out a loan or paying
dividends to shareholders do not appear on the income
statement because they are neither revenues nor expenses.
Instead, they affect the cash flow statement by reflecting cash

Scan to Download
inflows or outflows.

6.Question
Why is it important for businesses to distinguish between
different types of cash flow?
Answer:Distinguishing between different types of cash flow
is crucial because it helps business owners and stakeholders
understand how well the company is generating cash from its
core operations, how it is investing in its future growth, and
how it is managing its financing and capital structure.
Chapter 6 | The Cash Flow Statement| Q&A
1.Question
What role do liquidity ratios play in assessing a
company's financial health?
Answer:Liquidity ratios, especially the current ratio
and quick ratio, assess how easily a company can
meet its short-term financial obligations. A current
ratio of 1 indicates that current assets can cover
current liabilities, implying financial stability. A
quick ratio below 1, as seen with ABC Toys, suggests

Scan to Download
that the company may struggle if it cannot convert
inventory to cash promptly, demonstrating a critical
need for steady sales.

2.Question
How can profitability ratios offer deeper insights beyond
net income?
Answer:Profitability ratios like return on assets and return on
equity provide a more nuanced view of a company’s
efficiency in using assets or equity to generate profits. For
instance, knowing a large company like Google has high net
income doesn’t give context unless compared through these
ratios to small businesses, enabling valid comparisons
regardless of size.

3.Question
What are the implications of using financial leverage in a
company?
Answer:Financial leverage can magnify returns on equity,
potentially increasing shareholder value. However, it also
brings risk; companies heavily reliant on debt may struggle

Scan to Download
to repay obligations during downturns. Striking a balance
between leveraging for growth and managing risk is crucial
for sustainable operations.

4.Question
How do asset turnover ratios reflect a company's
operational efficiency?
Answer:Asset turnover ratios, including inventory turnover
and accounts receivable turnover, indicate how effectively a
company utilizes its assets to generate sales. High inventory
turnover means the business sells inventory quickly, while a
high receivables turnover shows efficient collection from
customers. Low figures in either can signal operational
inefficiencies needing management focus.

5.Question
What lesson can be learned about managing debt based
on leverage ratios?
Answer:Leverage ratios impart a vital lesson: while
borrowing can increase returns, it poses risks. If a company,
like XYZ Software in the examples, shifts to a higher

Scan to Download
debt-to-equity ratio for increased ROE, it must manage
potential cash flow issues that arise from higher debt
obligations.

6.Question
Why is it important to compare gross profit margins
across the same industry?
Answer:Gross profit margins should be compared within the
same industry because different industries have varying cost
structures. For instance, a grocery store will inherently have
lower margins than a tech firm due to different economic
factors. Such comparisons can highlight operational
effectiveness or cost management strategies relevant to that
specific market.

7.Question
What do increasing average collection periods suggest
about a company’s credit policies?
Answer:An increasing average collection period may indicate
that a company is facing challenges in collecting payment
from customers or is extending credit too generously. This

Scan to Download
could lead to cash flow issues, suggesting that it is time for
management to reassess credit policies to minimize financial
risk and enhance collection efficiency.

Scan to Download
Chapter 7 | What is GAAP?| Q&A
1.Question
What is the primary purpose of GAAP in financial
reporting?
Answer:The primary purpose of GAAP is to ensure
consistency and comparability in financial
statements across different companies, allowing
investors to make informed decisions without
confusion about different accounting practices.

2.Question
Why are publicly traded companies mandated to follow
GAAP?
Answer:Publicly traded companies are required to follow
GAAP by the Securities and Exchange Commission to
maintain transparency and trust in their financial reporting,
thus protecting investors and the integrity of financial
markets.

3.Question
Can companies choose not to follow GAAP, and what are
the implications?

Scan to Download
Answer:While some companies not publicly traded may
choose not to follow GAAP, doing so can lead to less
credibility and trust from investors, as their financial
statements may not be easily comparable to those that adhere
to GAAP.

4.Question
How does GAAP affect the training of accountants?
Answer:Most accounting education is centered around
GAAP, meaning that accountants are trained to apply these
guidelines, which helps ensure that they produce financial
statements that are consistent and understandable across
different industries.

5.Question
Why do government entities have a different set of GAAP
guidelines?
Answer:Government entities have a different set of GAAP
guidelines (developed by a different regulatory body) to
address the unique nature of governmental financial
reporting, which includes different funding sources and

Scan to Download
accountability measures compared to public companies.

6.Question
What could be the consequences for a company that fails
to adhere to GAAP?
Answer:Companies that fail to adhere to GAAP could face
legal penalties, financial restatements, and a loss of investor
confidence, affecting their stock price and market reputation.

7.Question
How does GAAP enhance investor confidence?
Answer:GAAP enhances investor confidence by providing a
standardized framework for financial reporting, ensuring
investors can trust that the numbers they are analyzing are
consistent and comparable, thus enabling them to make
informed investment choices.

8.Question
What are the key takeaways from Chapter 7 regarding
GAAP?
Answer:Key takeaways include understanding that GAAP is
essential for consistent financial reporting, it is legally
required for publicly traded companies, and it guides the

Scan to Download
training of accountants to maintain standardized reporting
practices.
Chapter 8 | Debits and Credits| Q&A
1.Question
What is the main purpose of double-entry accounting?
Answer:The main purpose of double-entry
accounting is to ensure that each financial
transaction is recorded in such a way that the
accounting equation (Assets = Liabilities + Owners'
Equity) remains balanced. Each transaction results
in two entries, maintaining the integrity of financial
records by requiring accountability on both sides of
the equation.

2.Question
How can understanding debits and credits benefit
someone new to accounting?
Answer:Understanding debits and credits is crucial for
grasping the double-entry system, as they are the
foundational building blocks of recording financial

Scan to Download
transactions. For example, knowing that a debit increases
asset accounts while a credit increases liability and owner’s
equity can help someone quickly learn to manage their
financial records accurately.

3.Question
Can you give an example where a debit and credit affect
an asset differently?
Answer:Certainly! If a company sells inventory for cash, it
debits Cash (an asset account) and credits Inventory (also an
asset account). Here, Cash increases, while Inventory
decreases. However, if a company takes out a loan, it debits
Cash (increases an asset) and credits Notes Payable
(increases a liability). This illustrates how debits and credits
can both increase and decrease accounts but depend on the
nature of the transaction.

4.Question
Why is the general ledger significant in accounting?
Answer:The general ledger is significant because it is the
centralized record-keeping document where all journal

Scan to Download
entries for financial transactions are recorded. It serves as the
primary source for generating financial statements, providing
an overview of all financial activities within a company.

5.Question
What is a T-account and why is it useful?
Answer:A T-account is a visual representation of an
individual account's activity over time, shaped like the letter
'T'. This tool helps accountants track debits and credits to a
specific account, making it easier to understand the account's
balance at any point during the accounting period.

6.Question
What role does the trial balance play in the accounting
process?
Answer:The trial balance plays the role of a preliminary
check to ensure that total debits equal total credits at a
specific point in time. This process helps accountants
identify any discrepancies or errors in the journal entries
before preparing the official financial statements.

7.Question
How does knowing the difference between assets,

Scan to Download
liabilities, and owners' equity help in accounting?
Answer:Knowing the difference between assets, liabilities,
and owners' equity helps individuals understand their
financial position and the impact of transactions. For
example, realizing that an increase in liabilities must also
lead to an increase in assets or owners' equity emphasizes the
interconnected nature of financial activities.

8.Question
What can happen if debits do not equal credits during
financial recording?
Answer:If debits do not equal credits after a transaction is
recorded, it indicates an error in the accounting process,
which necessitates a review of the journal entries for possible
mistakes. This imbalance can lead to inaccurate financial
statements, creating misunderstandings about the company’s
financial health.

9.Question
Why is it important for revenues to be recorded as credits
and expenses as debits?

Scan to Download
Answer:It is important for revenues to be recorded as credits
because revenues increase owners’ equity; therefore, they
should be treated similarly to liabilities. Conversely,
expenses decrease owners’ equity, which means they are
recorded as debits. This reflects the true financial operations
of a business and ensures accurate profit calculation.
Chapter 9 | Cash vs. Accrual| Q&A
1.Question
Why is it important for businesses to use accrual
accounting instead of cash accounting?
Answer:Accrual accounting provides a more
accurate picture of a business's financial situation
by recognizing revenues and expenses in the period
they occur, not just when cash changes hands. This
is crucial for stakeholders, like investors and
lenders, who need to assess a company’s profitability
and financial health over time, rather than
experiencing misleading fluctuations due to timing
mismatches.

Scan to Download
2.Question
Can you explain how the cash method might misrepresent
a business's profitability with an example?
Answer:Sure! Consider Pam, who runs an ice cream store. In
April, she pays rent for April, May, and June all at once,
leading to a significant expense that severely lowers her net
income for April. However, her sales remain steady. If a
creditor sees only her April financials, they might believe
Pam’s business is struggling due to the drop in profits,
missing the reality that her profit is consistent across months.

3.Question
What is the primary objective of the accrual method of
accounting?
Answer:The main goal of the accrual method is to ensure that
financial statements reflect the true economic reality of
transactions by recognizing revenues when earned and
expenses when incurred, rather than when cash is exchanged.

4.Question
How does the accrual method handle unearned revenue?
Answer:Under the accrual method, when a business receives

Scan to Download
payment for services or goods that have not yet been
delivered, they record it as 'Unearned Revenue' (a liability).
As the service is provided over time, the business gradually
recognizes this revenue, reflecting a proper and timely
representation of its income.

5.Question
In what way does the treatment of prepaid expenses
change under accrual accounting?
Answer:Prepaid expenses are recorded as assets upon
payment. As time passes or as the services are consumed,
these prepaid expenses are then recognized as expenses in the
relevant period, aligning costs with the benefits received.

6.Question
What can be the impact on stakeholders when businesses
use only cash accounting?
Answer:Stakeholders may receive misleading information
regarding a business's financial performance, resulting in
poor decision-making. For instance, potential investors might
believe a company has low profitability or is financially

Scan to Download
unstable if they do not see the full picture reflected in the
cash-based reports, which may not reveal underlying steady
sales or healthy operations.

7.Question
How does accrual accounting ensure that expenses align
with revenues?
Answer:Accrual accounting matches expenses with related
revenues in the same accounting period, regardless of cash
payments. This approach ensures that financial results
provide a clearer reflection of operational performance,
facilitating better financial analysis and decision-making.

8.Question
Why might a business owner prefer cash accounting
despite its drawbacks?
Answer:A business owner might choose cash accounting due
to its simplicity and ease of understanding. It allows them to
track cash flow directly, which can make short-term financial
management easier, especially for small businesses not
required by GAAP to use accrual accounting.

Scan to Download
9.Question
How can the choice of accounting method affect a small
business in terms of growth and creditworthiness?
Answer:Using cash accounting may limit a small business’s
ability to demonstrate consistent profitability and financial
health to creditors or investors, which can impede growth
opportunities. Conversely, employing accrual accounting
gives a more robust financial picture that can enhance
creditworthiness by showing a steady revenue stream and
better aligning expenses against revenues.

10.Question
How can understanding these two methods of accounting
help an entrepreneur make better business decisions?
Answer:By understanding cash vs. accrual accounting, an
entrepreneur can choose the method that best aligns with
their business model and financial goals. This knowledge
enables informed decisions on managing cash flow,
budgeting, and financial reporting, all of which are critical
for sustainable business operations and growth.

Scan to Download
Chapter 10 | Other GAAP Concepts and
Assumptions| Q&A
1.Question
Why is historical cost important in GAAP reporting?
Answer:Historical cost is crucial because it provides
an objective measure of an asset's value, ensuring
consistency in financial reporting. While current
market values can vary significantly and introduce
subjectivity, historical cost remains constant,
allowing for reliable comparison between
companies. For instance, if Company A bought land
for $100,000 thirty years ago, it will report that
amount, even if the market value has risen to
$1,000,000 today. This practice helps prevent bias
that could arise from fluctuating market conditions.

2.Question
What does materiality refer to in accounting?
Answer:Materiality relates to the significance of an item or
transaction in influencing decision-making based on financial
statements. A transaction is considered material if its

Scan to Download
misstatement could lead to a different decision by
stakeholders. For example, if Carly's graphic design business
forgot to record an $80 office supply purchase, it wouldn't
significantly alter a creditor's perception of her company's
financial health. However, the omission of a $75,000 loan
would be deemed material due to its potential impact on
investment decisions.

3.Question
Why does GAAP assume the dollar has a stable value
despite inflation?
Answer:GAAP operates under the assumption of a stable
dollar to simplify accounting practices. Adjusting every
financial statement for inflation would be costly and
impractical for companies, disrupting the consistency and
comparability that GAAP aims to ensure. Though inflation
affects real value, the benefits of maintaining a stable
reporting currency outweigh the complexities of frequent
adjustments.

4.Question

Scan to Download
What is the entity assumption and its impact on
accounting?
Answer:The entity assumption posits that a business is a
separate legal entity from its owners. This clarity is vital for
accurate financial reporting, as it requires documenting all
transactions clearly, even intra-owner transfers. For example,
if a business owner takes money from the business for
personal use, this transaction must be recorded. This
separation helps protect both the business’s and owner’s
finances and facilitates clearer audit trails.

5.Question
How does the matching principle affect expense
reporting?
Answer:The matching principle mandates that expenses
associated with generating revenues must be recorded in the
same accounting period as those revenues. This principle
ensures that the financial statements accurately reflect a
company’s performance within a specific timeframe. If a
company incurs utility costs in March, those costs should be

Scan to Download
recorded in March, not when paid in April, aligning expenses
with the revenues produced during that month.
Chapter 11 | Depreciation of Fixed Assets| Q&A
1.Question
Why is depreciation important in accounting?
Answer:Depreciation allows businesses to spread the
cost of an asset over its useful life, accurately
reflecting its consumption and wear over time. This
practice ensures that expenses are matched with
revenues, providing a clearer picture of financial
performance and preventing large spikes in
expenses when an asset is purchased.

2.Question
How does straight-line depreciation work? Can you give
an example?
Answer:Straight-line depreciation spreads the cost of an asset
evenly over its useful life. For example, if Daniel buys
equipment for $5,000 that lasts for 5 years, he would record
$1,000 as a depreciation expense each year. This systematic

Scan to Download
approach simplifies tracking expenses and asset value.

3.Question
What is salvage value, and why is it significant in
depreciation?
Answer:Salvage value is the estimated value an asset will
have at the end of its useful life. It is significant because it
determines the depreciable cost of the asset. For Lydia's
office furniture, the original cost is $11,000, and with a
salvage value of $2,000, her depreciable cost is $9,000,
calculated over ten years.

4.Question
Explain how to record a gain or loss on the sale of an
asset.
Answer:When selling an asset, if the cash received exceeds
the net book value of the asset, a gain is recorded; otherwise,
a loss is recorded. For instance, if Lydia sells her furniture
for $3,000, greater than its net book value of $2,000 (after
accounting for depreciation), she records a gain of $1,000.
Conversely, selling for $500 would show a loss of $1,500.

Scan to Download
5.Question
What are some alternative methods for calculating
depreciation, and how do they differ from straight-line?
Answer:Alternative methods include the double declining
balance method and the units of production method. The
double declining balance method accelerates depreciation,
with higher expenses in earlier years, while the units of
production method ties depreciation to actual usage rather
than time, utilizing metrics like production units to determine
costs.

6.Question
Why are immaterial asset purchases treated differently in
accounting?
Answer:Immaterial asset purchases, like a $15 wastebasket,
are expensed immediately because their financial impact is
negligible compared to the effort required to track and
depreciate them over time. This practice streamlines
accounting while maintaining financial accuracy.

7.Question
What is the impact of accumulated depreciation on a

Scan to Download
company's financial statements?
Answer:Accumulated depreciation reduces the book value of
fixed assets on the balance sheet, accurately reflecting their
declining value over time. It helps investors and stakeholders
understand how much the company has invested in its assets
and how much of that investment remains.

8.Question
How does depreciation contribute to tax deductions for a
business?
Answer:Depreciation reduces taxable income by allowing
businesses to deduct the cost of their assets over time, thus
lowering tax liabilities. For example, if Daniel's equipment
depreciates $1,000 annually, it reduces his taxable income by
the same amount, creating potential tax savings.

9.Question
How can understanding asset depreciation influence
investment decisions?
Answer:Understanding asset depreciation helps investors
assess the true value of a company's assets over time,

Scan to Download
revealing how well a company manages its resources. This
insight can inform decisions about investing in or lending to
a business based on its ability to generate returns against
asset costs.

10.Question
Can companies use more than one depreciation method
for their assets?
Answer:Yes, companies can use different depreciation
methods for different assets, depending on their specific
circumstances. For instance, they might use straight-line
depreciation for long-term held equipment while employing
units of production for machinery that sees variable usage.
Chapter 12 | Amortization of Intangible Assets|
Q&A
1.Question
What is the significance of amortization in accounting for
intangible assets?
Answer:Amortization plays a crucial role in
accurately reflecting the expense associated with
intangible assets on a company’s financial

Scan to Download
statements. By spreading the cost of intangible assets
like patents, copyrights, and trademarks over their
useful life, businesses ensure that their financial
statements provide a true and fair view of assets and
profitability. This alignment of expenses with
revenues generated creates a clearer picture of
financial performance.

2.Question
How does the expected useful life of an intangible asset
impact its amortization?
Answer:The expected useful life is vital because it often
determines the amortization period. For example, if a
company acquires a patent expected to be useful for 4 years
but with a legal life of 20 years, the company will amortize
the patent over the shorter useful life of 4 years, reflecting a
realistic view of when the asset will contribute to revenue.

3.Question
Can the legal life of an intangible asset exceed its useful
life? How does that affect amortization?

Scan to Download
Answer:Yes, the legal life of an intangible asset can exceed
its useful life, as seen in many patents. However, for
amortization purposes, the asset must be amortized over the
shorter period. This principle ensures that the financial
reporting remains relevant and that expenses reflect the
actual decline in value or utility of the asset during its service
period.

4.Question
Provide a vivid example of amortization and its
implications using the information from the chapter.
Answer:Consider Kurt, who invests $60,000 in a patent
expected to last only 4 years, despite its legal protection
lasting for 20 years. By amortizing the patent over 4 years,
Kurt recognizes an annual expense of $15,000. This not only
allows him to match the expense to the time frame in which
he benefits from the patent, but also prepares the financial
statements for a more realistic position concerning future
investments and potential revenues. If he had amortized over
20 years, it could have masked the true economic realities of

Scan to Download
his asset’s decreasing value.

5.Question
What mistakes might a business make if it fails to
properly amortize intangible assets?
Answer:If a business does not properly amortize intangible
assets, it could either overstate its assets by reflecting values
that do not align with their actual utility or understate
expenses by ignoring necessary amortization, leading to
inflated profits on financial statements. Such inaccuracies can
mislead stakeholders, affect decision-making, and result in
regulatory repercussions.

6.Question
How can understanding amortization benefit someone in
business management?
Answer:Understanding amortization equips business
managers with insights into managing financial resources,
budgeting for asset acquisitions, and preparing for future
cash flow needs. It allows them to anticipate the timing and
effects of asset depreciation on financial performance,

Scan to Download
guiding strategic planning and investment decisions.

7.Question
Why is the straight-line method commonly used for
amortizing intangible assets?
Answer:The straight-line method is often preferred for
amortizing intangible assets because it allows for a consistent
and predictable allocation of the asset's cost over its useful
life. This uniform approach simplifies accounting processes,
aids in budgeting, and helps stakeholders understand the
financial impact evenly over the years.

8.Question
What are the key takeaways from the chapter regarding
intangible assets and their amortization?
Answer:The key takeaways from Chapter 12 are that
amortization is essential for reflecting the cost of intangible
assets accurately, it should be done over the shorter of the
asset's expected useful life or legal life, and improper
handling of amortization can lead to significant
misstatements in financial reporting. Understanding these

Scan to Download
principles is vital for financial accuracy and
decision-making.

Scan to Download
Chapter 13 | Inventory and Cost of Goods Sold|
Q&A
1.Question
What is the primary advantage of using the perpetual
inventory method?
Answer:The primary advantage is that businesses
can see exactly how much inventory they have on
hand at any moment, allowing for timely reordering
and improving the accuracy of financial statements.

2.Question
How does the periodic inventory method differ from the
perpetual method?
Answer:The periodic method counts inventory at regular
intervals and does not track inventory on an item-by-item
basis, leading to assumptions about sold items and less
real-time accuracy.

3.Question
What is the key equation to calculate Cost of Goods Sold
using the periodic method?
Answer:The key equation is: Beginning Inventory +

Scan to Download
Inventory Purchases - Ending Inventory = Cost of Goods
Sold.

4.Question
Can you provide an example of how to calculate CoGS
using the periodic method?
Answer:If Corina has a beginning inventory of $800,
purchases of $2,400, and an ending inventory of $600, her
CoGS would be $2,600, calculated as follows: 800 + 2400 -
600 = 2600.

5.Question
What assumptions are made under the periodic method
regarding sold inventory?
Answer:Assumptions are made about which items were sold
during the period since individual tracking is not possible.
This leads to possible inaccuracies regarding CoGS.

6.Question
What are the three inventory valuation methods allowed
under GAAP?
Answer:The three methods are FIFO (First-In, First-Out),
LIFO (Last-In, First-Out), and Average Cost.

Scan to Download
7.Question
How does FIFO method affect CoGS and ending
inventory?
Answer:Under FIFO, it's assumed that the oldest inventory
sells first. This usually results in lower CoGS (if costs are
rising) and higher ending inventory compared to LIFO.

8.Question
What advantage does the Average Cost method provide
when calculating CoGS?
Answer:The Average Cost method allows for a simple
calculation of CoGS and ending inventory using an average
price per unit, providing a balanced representation of
inventory costs.

9.Question
How might changing per-unit inventory costs complicate
CoGS calculations?
Answer:When costs fluctuate, businesses must determine
which specific costs are attributed to sold items, impacting
reported profits and tax liabilities.

10.Question

Scan to Download
Why is it important for businesses to choose the right
inventory method?
Answer:Choosing the right inventory method affects
financial reporting, taxable income, cash flow management,
and overall financial strategy, which can impact business
decisions and growth.

Scan to Download
Accounting Made Simple Quiz and Test
Check the Correct Answer on Bookey Website

Chapter 1 | The Accounting Equation| Quiz and Test

1.The Accounting Equation is expressed as Assets =
Owners’ Equity + Liabilities.
2.Owners' equity represents the ownership interest in the
assets after all debts have been settled.
3.A liability for one party is an asset for the same party.
Chapter 2 | The Balance Sheet| Quiz and Test
1.A balance sheet reveals a company's financial
position at a specific time, adhering to the
Accounting Equation.
2.Current assets can be converted to cash within 6 months,
while non-current assets are long-term.
3.Current liabilities are those that need payment within 12
months; any liabilities not categorized as current are
long-term by default.
Chapter 3 | The Income Statement| Quiz and Test
1.The income statement reflects a company's

Scan to Download
 financial performance over a period, typically one
year.
2.Gross Profit is calculated as revenues plus Cost of Goods
Sold (CoGS).
3.Net Income equals Operating Income plus Non-Operating
Expenses.

Scan to Download
Chapter 4 | The Statement of Retained Earnings|
Quiz and Test
1.The statement of retained earnings shows the
changes in a company's retained earnings over a
specific period.
2.Dividends are classified as expenses in the income
statement.
3.Retained earnings represent a company's available cash for
distribution to shareholders.
Chapter 5 | The Cash Flow Statement| Quiz and Test
1.The cash flow statement tracks a company’s cash
inflows and outflows over a specific accounting
period.
2.The cash flow statement and the income statement are
fundamentally the same in terms of timing of transactions.
3.Cash flow from investing activities includes cash received
from operating the business.
Chapter 6 | The Cash Flow Statement| Quiz and Test
1.Liquidity ratios assess a company's ability to meet

Scan to Download
 long-term obligations, with higher ratios
indicating better liquidity.
2.The return on equity (ROE) showcases how well a
company utilizes its assets to generate returns.
3.Asset turnover ratios evaluate how effectively a company
utilizes its assets to generate sales.

Scan to Download
Chapter 7 | What is GAAP?| Quiz and Test
1.GAAP is the framework used for the preparation
of financial statements.
2.Only publicly traded companies are required to follow
GAAP.
3.The Securities and Exchange Commission is responsible
for creating GAAP.
Chapter 8 | Debits and Credits| Quiz and Test
1.Each transaction in double-entry accounting
requires only one journal entry.
2.Debits increase asset accounts and decrease liability
accounts.
3.A trial balance summarizes account balances but
guarantees the accuracy of journal entries.
Chapter 9 | Cash vs. Accrual| Quiz and Test
1.Individuals and most small businesses typically use
accrual accounting.
2.The accrual method aims to recognize revenue and
expenses in the period when the services are provided,

Scan to Download
 regardless of cash exchange timing.
3.Prepaid expenses are recorded as liabilities until they are
used up.

Scan to Download
Chapter 10 | Other GAAP Concepts and
Assumptions| Quiz and Test
1.The goal of GAAP is to ensure that companies’
financial statements are consistently prepared for
meaningful comparison.
2.Under GAAP, businesses are not regarded as separate
entities from their owners.
3.The matching principle states that expenses must be
recorded in a different period from the revenues they
produce.
Chapter 11 | Depreciation of Fixed Assets| Quiz and
Test
1.Straight-line depreciation spreads the cost of an
asset evenly over its expected life.
2.Accumulated depreciation increases the net book value of
an asset over time.
3.Selling an asset for more than its net book value results in a
loss for the company.
Chapter 12 | Amortization of Intangible Assets| Quiz
and Test

Scan to Download
1.Intangible assets lack physical substance and
include items such as patents and copyrights.
2.Amortization is applied to tangible assets in the same way
depreciation is applied.
3.The amortization period for an intangible asset is always
based on its legal life.

Scan to Download
Chapter 13 | Inventory and Cost of Goods Sold|
Quiz and Test
1.Businesses can only use the perpetual method of
inventory tracking under GAAP.
2.The perpetual method of inventory provides real-time data
and enhances financial statement accuracy.
3.The periodic method of inventory allows for item-by-item
tracking of inventory levels.

Scan to Download