Table of contents

1. Introduction to Accounting1h 21m
2. Transaction Analysis1h 13m
3. Accrual Accounting Concepts2h 38m
4. Merchandising Operations2h 30m
5. Inventory1h 55m
6. Internal Controls and Reporting Cash1h 16m
7. Receivables and Investments3h 8m
8. Long Lived Assets5h 1m
9. Current Liabilities2h 19m
10. Time Value of Money1h 23m
- Time Value of Money Equations
  35m
- Using Time Value of Money Tables
  47m
11. Long Term Liabilities2h 45m
12. Stockholders' Equity2h 15m
13. Statement of Cash Flows2h 24m
14. Financial Statement Analysis5h 25m
15. GAAP vs IFRS56m

4. Merchandising Operations

Net Sales

Financial Accounting

4. Merchandising Operations

Net Sales

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Multiple Choice

Which of the following best describes the difference between simple interest and compound interest?

Simple interest is calculated on the principal and accumulated interest, while compound interest is calculated only on the principal.

Both simple and compound interest are calculated only on the accumulated interest.

Simple interest and compound interest always result in the same total interest over time.

Simple interest is calculated only on the principal, while compound interest is calculated on the principal plus any accumulated interest.

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Verified step by step guidance

Understand the key concepts: Simple interest is calculated only on the principal amount, while compound interest is calculated on the principal plus any accumulated interest from previous periods.

Break down the formula for simple interest: \( SI = P \times r \times t \), where \( P \) is the principal, \( r \) is the annual interest rate, and \( t \) is the time in years.

Break down the formula for compound interest: \( CI = P \times (1 + r)^t - P \), where \( P \) is the principal, \( r \) is the annual interest rate, and \( t \) is the time in years. Note that compound interest includes the effect of interest on interest.

Compare the two methods: Simple interest grows linearly over time because it is based only on the principal, while compound interest grows exponentially because it includes interest on accumulated interest.

Conclude that the correct answer is: 'Simple interest is calculated only on the principal, while compound interest is calculated on the principal plus any accumulated interest.' This distinction highlights the fundamental difference between the two types of interest calculations.