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

1. Introduction to Accounting

Fundamental Accounting Equation

Financial Accounting

1. Introduction to Accounting

Fundamental Accounting Equation

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Multiple Choice

Which of the following statements best describes the effect of expenses on equity according to the fundamental accounting equation?

Expenses decrease equity because they reduce net income.

Expenses have no effect on equity.

Expenses increase both assets and equity.

Expenses increase equity because they are investments in the business.

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Verified step by step guidance

Understand the fundamental accounting equation: Assets = Liabilities + Equity. Equity represents the owner's residual interest in the business after liabilities are subtracted from assets.

Recognize that net income is a component of equity. Net income is calculated as Revenues - Expenses. Therefore, expenses directly impact net income, which in turn affects equity.

Analyze the relationship between expenses and equity: When expenses increase, they reduce net income. A reduction in net income leads to a decrease in equity.

Evaluate the incorrect options: Expenses do not increase equity because they are not investments; they represent costs incurred to generate revenue. Expenses also do not increase both assets and equity, nor do they have no effect on equity.

Conclude that the correct statement is: 'Expenses decrease equity because they reduce net income.' This aligns with the fundamental accounting equation and the relationship between expenses, net income, and equity.