Accounting

This is from an earlier version of the course. A quiz like this was handed out every day until you passed. It is a drill and kill approach but it works. You can use it to learn some of the basic accounting relationships. Be sure to look at the links to the past quizzes and the videos at the bottom of the page.

What makes this skill easy is that there are only a few different kinds of transactions. The video below explains the format and how you should mark your essential question quiz. You must correctly answer six out of the eight questions.

There are only a few transactions and we will commonly have a few duplicates on a single quiz. Here is a sample of the common ones:

  1. Increase in Revenue: Increase in operating revenue, which increases net income (Income Statement), which increases cash from operations and net cash flow (Cash Flow Statement).
  2. Decrease in Revenue: Decrease in operating revenue, which decreases net income (Income Statement), which decreases cash from operations and net cash flow (Cash Flow Statement).
  3. Increase in Expenses: Increase in operating expenses, which decreases net income (Income Statement), which decreases cash from operations and net cash flow (Cash Flow Statement).
  4. Decrease in Expenses: Decrease in operating expenses, which increases net income (Income Statement), which increases cash from operations and net cash flow (Cash Flow Statement).
  5. Delivery: Increase in current assets (the delivery), and a decrease in cash (Balance Sheet), which decreases cash from investments (Cash Flow Statement). Note that it really is a change in cash from operations but we make some simplifications in this class.
  6. Delivery With Invoice: Increase in current assets (the delivery) and an increase in liabilities (the invoice), which decreases cash from investments and increases cash from finance (Cash Flow Statement). Note that it really is a change in cash from operations but we make some simplifications in this class.
  7. Buy an Asset: Increase in non-cash assets and a decrease in cash (Balance Sheet), which decreases cash from investments and decreases net cash flow (Cash Flow Statement)
  8. Sell an Asset: Increase in cash assets and a decrease in fixed assets (Balance Sheet), which increases cash from investments (Cash Flow Statement).
  9. Equity Increase: Increase in Owner Equity and assets (Balance Sheet), which increases cash from finance (Cash Flow Statement).
  10. Equity Decrease: Decrease in Owner Equity and assets (Balance Sheet), which decreases cash from finance (Cash Flow Statement).
  11. Get a Loan: Increase in assets and liabilities (Balance Sheet), which increases cash from finance (Cash Flow Statement).
  12. Pay a Loan: Decrease in assets and liabilities (Balance Sheet), which decreases cash from finance (Cash Flow Statement). Be aware that in the real world there is probably an interest expense too.
  13. Client Paid Invoice: Decrease in current assets (accounts receivable) and an increase in current assets (the cash) on the balance sheet. This increases cash from finance (Cash Flow Statement).

Hints and Common Mistakes

There are just a few things that people consistently miss that cause most of the problems. The gloss on the left of the page has a few things we circle when we grade to indicate the problem

  1. Mistaking new revenue for an asset or Stock/Flow Confusion. This is a general phrase for mistaking a stock for a flow or a flow for a stock. Yes, it is true that new revenue will eventually turn into an asset, cash, but that is not the immediate effect. Stick the connection between the income statement and the cash flow statement.
  2. Definitions You seem to have a problem classifying the example. You need to look at the basic definitions and listen to the videos on basic-accounting.
  3. Forgetting that the balance sheet must balance. If you see an increase in one kind of asset there must either be a decrease in another kind of asset or an increase in either liabilities or owner equity. Assets must always equal the sum of liabilities and owner equity.
  4. Sign Conventions Accounting has some sign conventions that you may not be used to. The general rule is that the usual direction on the income statement is positive and on the cash flow statement inflows are positive. The most common problem is that thinking that buying an asset means an increase in investments on the cash flow statement. There is actually a decrease in cash from investments.
  5. Forgetting the 'echo' into the cash flow statement. You must remember that changes in the income statement show up in cash from operations because Net Income, the thing on the bottom of the income statement is in cash from operations. Buying or selling an asset for cash means there will be a change in cash from investment. Taking out or paying off a loan means there will be cash from finance.

Suggestions for how to pass

If you look at the list above, you may notice that a few of the transactions are the same as another put of opposite sign. For example, increase in expense vs decrease in expense. If you consolidate those, there are only eight transactions. It is easy enough to make a set of flashcards and quiz yourself with them for 15 minutes a day for three days. Once you do that, as long as you can tell what kind of transaction you are looking at, you will get the question right.

You need six of eight correct to pass. We do give 'make up calls', when things are close enough, and make a note so that we don't give you more than one.

Examples

The Youtube feed for the course will also have a few videos explaining the answers.
Past Examples

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