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

3. Accrual Accounting Concepts

Revenue Recognition and Expense Recognition

Financial Accounting

3. Accrual Accounting Concepts

Revenue Recognition and Expense Recognition

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Multiple Choice

Which of the following statements correctly describes how expenses affect equity?

Expenses increase assets and therefore increase equity.

Expenses increase equity by generating revenue.

Expenses have no effect on equity.

Expenses decrease equity by reducing net income.

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Verified step by step guidance

Understand the relationship between expenses and equity: Equity represents the owner's claim on the assets of the business, and it is affected by net income. Net income is calculated as revenues minus expenses.

Recognize that expenses reduce net income: When a business incurs expenses, it decreases the amount of net income available. Lower net income directly impacts equity because net income contributes to retained earnings, which is a component of equity.

Analyze the incorrect statements: The first statement is incorrect because expenses do not increase assets or equity; they reduce net income. The second statement is incorrect because expenses do not increase equity; they reduce it. The third statement is incorrect because expenses do have an effect on equity by reducing it.

Identify the correct statement: The correct statement is 'Expenses decrease equity by reducing net income.' This is because expenses lower the profitability of the business, which in turn reduces the retained earnings portion of equity.

Summarize the concept: Expenses are subtracted from revenues to calculate net income. A decrease in net income leads to a decrease in retained earnings, which ultimately reduces equity.