106 things a student can do by the end

Meet accounting: who uses it, the accounting equation, and the four reports every business prepares.

By the end of this chapter a student can:

• Say who uses a company's financial information and why - owners, lenders, managers, tax offices - and name who writes the rules and who checks that they are followed.
• Tell apart the three ways a business can be set up: one owner, a partnership, or a company.
• Use the basic words of accounting, and spot when a business breaks a ground rule - for example, showing an asset at today's market price instead of what was paid for it.
• Explain what the accounting equation (Assets = Liabilities + Equity) really means, and work out any missing part of it.
• Decide whether an event is a real transaction, then work out which accounts change, in which direction, and by how much.
• Build and read the main financial statements, and follow how profit moves into the owners' share and then onto the balance sheet.
• Judge how much a business can safely pay out to its owners, and make an honest choice when the easy answer is the wrong one.

See every game in Chapter 1 ›

How a business writes down what it does: debits and credits, journals, ledgers, and the trial balance that checks the work.

By the end of this chapter a student can:

• Explain what debit and credit really mean - left side and right side, not good and bad - and name the normal side of any account.
• Use T-accounts (a simple two-sided page for one account) to place both halves of an entry and work out the account's balance.
• Write a journal entry in the correct format, and build complete entries on your own, including ones that touch more than two accounts.
• Build a trial balance (a list of every account balance) and explain why the two columns must add up to the same total.
• Find the errors a trial balance catches - and the ones it hides - then write the entry that fixes them.
• Work through the whole recording process from first entry to finished trial balance, and connect that trial balance to the financial statements.

Optional extra module — Accounting Theory. An optional module on the thinking behind the rules: why accounting exists and what makes its information useful.

• State why financial reporting exists: to give investors, lenders, and other outsiders information they can use to decide.
• Describe the conceptual framework - the set of connected ideas behind the rules - including the basic assumptions, such as keeping the owner's money separate from the business's money.
• Name the qualities that make information useful: it must matter to the decision (relevance) and picture reality honestly (faithful representation), and be comparable, checkable, timely, and clear.
• Judge whether an item is material (big enough to change someone's decision) - a small amount can still be material.
• Use the formal meaning of each element - asset, liability, equity, revenue, expense - to test a borderline case, such as a contract that is signed but not yet started.
• Apply the main principles: record at cost, count revenue when the work is done, match expenses to the revenue they help earn, and disclose anything that would change a reader's decision.
• Explain the cost constraint (report extra information only when it is worth more than it costs to produce), and say who writes the rules and who enforces them.

See every game in Chapter 2 ›

Fixing the books at the end of the period so income and expenses land in the month they belong to.

By the end of this chapter a student can:

• Explain the difference between accrual accounting (record it when it happens) and cash accounting (record it when the money moves), and work out the profit under each.
• Adjust for money that moved early: rent and insurance paid in advance, supplies used up, and work a customer has paid for but not yet received - and spread the cost of equipment over its useful life (depreciation).
• Adjust for money that has not moved yet: wages owed, interest owed, and work finished but not yet billed to the customer.
• Post the adjustments to the accounts and build an adjusted trial balance, showing that the two columns still match.

See every game in Chapter 3 ›

Closing the books at the end of the year and turning the numbers into finished financial statements.

By the end of this chapter a student can:

• Close the temporary accounts at year-end so revenue, expenses, and dividends start the new year at zero.
• Prepare a post-closing trial balance that lists only the accounts carried forward into the next year.
• Build a classified balance sheet that separates short-term items from long-term ones, then compute working capital and the current ratio and say what they tell you.
• Put the nine steps of the accounting cycle in order, and say which ones happen during the year and which happen at the end.
• Prepare an income statement from the adjusted trial balance, then follow the profit through to retained earnings and on to the balance sheet.

See every game in Chapter 4 ›

How a shop records buying goods, selling them, and reporting the profit it makes on those sales.

By the end of this chapter a student can:

• Tell the difference between a business that buys and resells goods and one that sells a service, and explain why only the first one has a cost of goods sold.
• Record a purchase of goods for resale, including the shipping cost paid by the buyer, goods sent back to the supplier, and a discount for paying early.
• Read the delivery terms on an invoice and say who owns the goods while they are travelling and who pays the shipping.
• Record every sale in two steps: the money earned from the customer, and the cost of the goods that left the shelf.
• Handle customer returns, price reductions given to customers, and discounts for customers who pay early.
• Build a multi-step income statement that shows net sales, gross profit, operating income, and net income in the right order.
• Work out the gross profit margin and the profit margin, and say what it means when either one goes up or down.

See every game in Chapter 5 ›

Which goods really belong to the business, what they cost, and how that cost becomes cost of goods sold.

By the end of this chapter a student can:

• Decide which goods belong to the business at the end of the year, including goods still in transit and goods held on behalf of someone else.
• Work out the cost of goods sold and the value of goods still on hand using FIFO (first-in, first-out, so the oldest goods are treated as sold first), LIFO (last-in, first-out, so the newest goods are treated as sold first), and weighted average.
• Explain how each of these methods changes profit when prices are rising and when prices are falling.
• Report goods at the lower of what they cost and what they can now be sold for, and record the write-down when the value has dropped.
• Follow a counting or costing mistake through cost of goods sold, gross profit, and net income, and show how it corrects itself the next year.
• Work out inventory turnover and days in inventory, and say what a higher or lower figure tells you about the business.

See every game in Chapter 6 ›

How a business protects its cash: control rules, checking the bank statement, and running a small cash fund.

By the end of this chapter a student can:

• Explain what internal control is - the rules and checks a business uses to protect its assets and keep its records honest.
• Name the three things every fraud needs: a reason, a chance, and an excuse.
• Match a business situation to the control rule it follows or breaks, such as keeping record-keeping and cash-handling in different hands.
• Find the weak point in a company's controls and choose the fix for it.
• Prepare a bank reconciliation that brings the company's own cash record and the bank statement to the same true cash balance.
• Record journal entries only for the items the company did not yet know about, and leave the bank's own items alone.
• Run a small petty cash fund: set it up, refill it, and deal with cash that is short or over.
• Decide whether an item counts as cash, a cash equivalent (a safe investment that turns into cash within 90 days), or neither.

See every game in Chapter 7 ›

Money that customers owe the business: recording it, estimating what will never be paid, and earning interest.

By the end of this chapter a student can:

• Tell the difference between an account receivable (ordinary short-term credit given to a customer) and a note receivable (a written promise to pay, usually with interest).
• Estimate how much customer debt will never be collected, either as a percentage of credit sales or from an aging table that groups debts by how old they are.
• Record the year-end estimate for bad debts and work out the amount the business really expects to collect.
• Write off a customer who cannot pay, and show why this does not change profit.
• Record the two steps needed when a customer who was written off pays after all.
• Work out interest on a note from the amount lent, the rate, and the time, and record it as it is earned.
• Record a note that is collected on time, and one that the customer fails to pay on the due date.
• Work out how many times a year the business collects its debts and how many days each collection takes.

See every game in Chapter 8 ›

Buildings, machines, and patents: what they cost, how that cost is spread over the years, and how they are sold.

By the end of this chapter a student can:

• Work out the full cost to record a long-term asset, including delivery, installation, and testing to get it ready for use.
• Decide whether a later cost is added to the asset or treated as an expense straight away, and remember that land is never depreciated.
• Spread the cost of an asset over its useful life three ways: straight-line (the same amount each year), double-declining-balance (more in the early years), and units-of-activity (an amount for each unit the asset produces or each kilometre it travels).
• Work out book value, charge only part of a year when an asset is bought or sold mid-year, and redo the figures from today onward when an estimate changes.
• Record the sale or scrapping of an asset and work out the gain or loss on it.
• Classify intangible assets such as patents, copyrights, trademarks, and goodwill, and spread the cost of the ones with a limited life.
• Explain why goodwill is never written off a little each year, but is instead tested each year to see if its value has fallen.
• Work out fixed asset turnover and say what a higher figure tells you about how well the assets are being used.

See every game in Chapter 9 ›

What a company owes and must pay within one year: short-term loans, sales tax, repair promises and staff pay.

By the end of this chapter a student can:

• Spot a current liability (something the company must pay within one year) and tell it apart from a long-term debt.
• Work out the interest on a short-term loan, and record the loan from the day it starts to the day it is paid back.
• Record sales tax correctly - it is money collected for the government, never a cost of the business.
• Record money received before the work is done, such as a customer deposit or a gift card, and show it as earned later.
• Decide when a possible future cost, such as a lawsuit, must be recorded, only mentioned in a note, or ignored.
• Record the cost of a warranty (a promise to repair a product) at the time of the sale, not when the item breaks.
• Work out an employee's take-home pay from their total pay, and record the extra taxes the employer must pay on top.
• Calculate the current ratio (current assets divided by current liabilities) and say what it tells you about paying short-term bills.

See every game in Chapter 10 ›

How companies borrow for many years: bonds, long-term loans, interest that changes over time, and paying debt off early.

By the end of this chapter a student can:

• Explain what a bond is (a loan a company sells to investors in small pieces) and name its main terms.
• Compare borrowing money with selling shares, and say why a company might choose one way over the other.
• Decide whether a bond sells at face value, below it (a discount) or above it (a premium) by comparing the two interest rates.
• Record the sale of a bond, then spread the discount or premium evenly across the years until the bond is repaid.
• Split each payment on a long-term loan into two parts - interest, and repayment of the amount borrowed - and build the payment schedule.
• Work out interest expense using the effective-interest method, where the amount is recalculated every period.
• Record the end of a bond, both on its due date and when the company buys it back early at a gain or a loss.
• Calculate debt-to-assets and times-interest-earned, two simple checks on how safely a company carries its debt.

See every game in Chapter 11 ›

How a corporation raises money by selling shares, shares profits with its owners, and reports what those owners own.

By the end of this chapter a student can:

• Explain how a corporation works, including limited liability (owners are not personally responsible for the company's debts).
• Record the sale of shares to investors, both at par value (a small legal amount printed on the share) and above it.
• Tell common shares apart from preferred shares, and count shares that are authorized, issued and outstanding.
• Record a cash dividend at each step, from the day it is announced to the day the cash is paid out.
• Work out how much of a dividend goes to preferred owners first, including payments missed in earlier years.
• Explain the difference between a stock dividend and a stock split, and show what each one does to total equity.
• Record treasury stock - shares the company buys back from its own investors - and what happens when it sells them again.
• Build the owners' equity part of the balance sheet in the correct order, and calculate earnings per share and return on equity.

See every game in Chapter 12 ›

Where a company's cash really came from and where it went during the year, sorted into three clear groups.

By the end of this chapter a student can:

• Sort each transaction into operating (running the business), investing (buying or selling long-term items) or financing (owners and lenders).
• Handle the tricky cases, such as interest paid counting as operating while dividends paid count as financing.
• Start from net income and adjust it, step by step, to find the cash the business actually made from operating.
• Apply the golden rules: a change in a current asset moves cash the opposite way, and a current liability the same way.
• Work out the real cash received when a long-term asset is sold, using its book value plus a gain or minus a loss.
• Build the full statement of cash flows and prove that it explains the move from opening cash to closing cash.
• Show deals that used no cash, such as buying land by signing a loan note, in a separate note below the statement.
• Calculate free cash flow (operating cash left after paying for equipment) and simple ratios that test cash against debt.

See every game in Chapter 13 ›

Reading a company's finished financial statements and judging how strong, how profitable and how safe the business really is.

By the end of this chapter a student can:

• Compare a company with itself over several years using horizontal analysis (the percentage change from one year to the next).
• Turn a statement into percentages using vertical analysis, so that companies of very different sizes can be compared fairly.
• Calculate liquidity ratios, including the quick ratio, to judge whether short-term bills can be paid on time.
• Calculate activity ratios that show how quickly inventory sells and how quickly customers pay what they owe.
• Calculate profitability ratios, such as return on assets and return on equity, to see how hard the invested money is working.
• Calculate solvency ratios, such as debt-to-equity, to judge how heavily a company depends on borrowed money.
• Calculate investor ratios - price-earnings, payout, dividend yield and book value per share - and break return on equity into its three drivers.
• Explain why a single ratio means little on its own, and judge earnings quality when accounting choices change the numbers.

See every game in Chapter 14 ›