HBS CORE FINAL EXAM PREP
QUESTIONS AND ANSWERS 100%
ACCURATE
Wanting to raise more capital for the business, Suslik Designs decided to allow 2
new equity investors into the business. Each new investor paid $10,000. How will
their investment impact the accounting equation? Select all that apply. - ANSWER-
The assets of the business are increased by the amount of cash received ($10,000
from each investor), and because the source of those resources is the new owners,
owners' equity is also increased.
Which of the following is an example of owners' equity? Select all that apply. -
ANSWER-Net income for the first four months of the fiscal year.
All revenues and expenses, and therefore Net Income, are part of the owners' equity
of the business.
Which of the following is an example of an expense? Select all that apply. -
ANSWER-The cost of a home store's inventory of glassware that is thrown away
because they were broken. This is an expense related to the ongoing operations of a
home store.
Fuel used for a company's delivery trucks last month. This is an expense related to
an ongoing activity of the business.
A cold-weather clothing store has always had a generous return policy on all jackets
and coats. Jackets can be returned for a full refund up to a year from the date of
purchase. Historical data has shown that 8% of customers will return their jackets
and the company maintains a reserve for returns to account for this. The CEO is
looking for ways to boost its bottom line and would like to get rid of this reserve in the
current year.
The most important accounting principle to consider in this case is: - ANSWER-
Consistency.
The principle of Consistency requires that the accounting methods be consistently
applied by the company over time in recording and reporting unless there is a sound
reason to change them.
Since it sounds like the motivation is related to increasing net income and is not to
utilize a more accurate accounting, the company should probably choose to stay
consistent with the accounting practices they have been using.
Mandini's Steakhouse purchased 100 T-bone steaks for a total of $1,000 from a
supplier. The restaurant bought the steaks on credit, and they will not pay until 30
days after delivery.
,First, how will the accounting equation be affected at the time of the purchase?
Select all that apply.
Suppose 30 days after the purchase, Mandini's paid cash to the vendor. How will the
accounting equation be affected when the payment is made? - ANSWER-First step:
Assets and Liabilities increase.
Second step: Assets and Liabilities decrease.
At the time of the purchase, inventory is an asset, so assets increase by $1,000. The
obligation to pay within 30 days is a liability, so liabilities increase by $1,000.
30 days later, at the time of the payment, cash is an asset, so the payment in cash
decreases assets by $1,000. The obligation to pay was a liability, so the payment in
cash decreases liabilities by $1,000.
Which of the following is an example of an asset? Select all that apply. - ANSWER-A
customer's promise to pay for a new computer delivered last month.
The promise represents future cash inflow and the delivery of the computer occurred
in the past.
Gold Zone Inc., a jewelry designer and manufacturer, sold watches to Jill's Jewelry
Shop for $1,500. Gold Zone spent $800 manufacturing the watches and Jill's Jewelry
Shop has 30 days to pay for this order after they receive it.
First, how will the recognition of the receivable and revenue for the transaction
impact the accounting equation at the time of the sale? Please enter the amounts in
the boxes below.
Next, Gold Zone needs to show that the inventory was sold and recognize an
expense for the cost of goods sold for $800. How will such a recognition impact the
accounting equation?
Lastly, Gold Zone received payment from Jill's Jewelry Shop 30 days after the initial
purchase.How would the accounting equation be impacted when the payment is
received? - ANSWER-First, the sale increases assets (accounts receivable) by
$1,500. The sale also increases revenue, which increases owners' equity by $1,500.
At the same time, the sale decreases assets (inventory) by $800. The cost of goods
sold is an expense, so it decreases owners' equity by $800.
Finally, the receipt of payment increases assets (cash) by $1,500. The receipt of
payment also decreases assets (accounts receivable) by $1,500.
Which of the following is an example of a revenue? Select all that apply. - ANSWER-
Gopher Co. is a designer and manufacturer of promotional clothing and accessories.
Gopher delivered T-shirts to a customer and sent an invoice to the customer for
$2,000. The revenue has been earned because the goods were delivered.
, Lauren owns a coffee shop. A customer came to the shop and purchased a
cappuccino and a bag of coffee beans. The customer paid $40 at the time of
purchase. The revenue has been both earned (because the cappuccino and a bag of
coffee beans were provided) and realized (because the cash was received).
Glodar Corp., an oil rig parts manufacturer, received an advance payment of
$150,000 on Aug 1 for an order of a replacement drill bit for an oil rig. Glodar Corp.
delivered the drill bit on Nov 1. How will the accounting equation be impacted when
this advance payment was recorded on Aug 1? Select all that apply. - ANSWER-
Cash, an asset, increases by $150,000. Because Glodar Corp. has not earned the
$150,000 and they are obligated to deliver the drill bit, liabilities are increased.
Many companies keep a small amount of cash on hand to reimburse employees for
small expenses that arise in the course of business. This account is called Petty
Cash and is accounted for at the end of a period, with expenses grouped together by
accounts such as Office Supplies, Meals, Travel, and Other Expenses, rather than
record each individual expense that is reimbursed.
The reasoning behind recording the transactions in this manner relates to which of
the following accounting principles? - ANSWER-Materiality. The decision about the
level of detail in grouping transactions into financial accounts is related to how
significant, or material, the transactions are.
Companies may include a footnote in their financial statements regarding key market
and industry risks that affect their business because users of the financial statements
would likely consider such information to be: - ANSWER-Relevant. Information that
may affect a reasonable user's decision-making is considered relevant.
For 2015, suppose Field Enterprises had Gross Profit of $1,150,000 and the
following expenses:
Salaries and Wages Expense $400,000
Building and Utilities Expense $90,000
Other Operating Expenses $50,000
Interest Expense $25,000
Income Tax Expense $32,000
Cost of Goods Sold (COGS) $890,000
What would be Field's Operating Income for 2015? - ANSWER-$610,000.
Operating Income is the profit before taxes and interest. In this example it is the
Gross Profit minus the Salaries and Wages and the Building and Utilities Expenses
and the Other Operating Expenses.
Suppose Pied Piper had Net Income of $1,600,000 for the year 2011. They also had
the following income and expenses:
COGS $7,000,000
SG&A Expense $2,100,000
Other Non-Operating Income $100,000
QUESTIONS AND ANSWERS 100%
ACCURATE
Wanting to raise more capital for the business, Suslik Designs decided to allow 2
new equity investors into the business. Each new investor paid $10,000. How will
their investment impact the accounting equation? Select all that apply. - ANSWER-
The assets of the business are increased by the amount of cash received ($10,000
from each investor), and because the source of those resources is the new owners,
owners' equity is also increased.
Which of the following is an example of owners' equity? Select all that apply. -
ANSWER-Net income for the first four months of the fiscal year.
All revenues and expenses, and therefore Net Income, are part of the owners' equity
of the business.
Which of the following is an example of an expense? Select all that apply. -
ANSWER-The cost of a home store's inventory of glassware that is thrown away
because they were broken. This is an expense related to the ongoing operations of a
home store.
Fuel used for a company's delivery trucks last month. This is an expense related to
an ongoing activity of the business.
A cold-weather clothing store has always had a generous return policy on all jackets
and coats. Jackets can be returned for a full refund up to a year from the date of
purchase. Historical data has shown that 8% of customers will return their jackets
and the company maintains a reserve for returns to account for this. The CEO is
looking for ways to boost its bottom line and would like to get rid of this reserve in the
current year.
The most important accounting principle to consider in this case is: - ANSWER-
Consistency.
The principle of Consistency requires that the accounting methods be consistently
applied by the company over time in recording and reporting unless there is a sound
reason to change them.
Since it sounds like the motivation is related to increasing net income and is not to
utilize a more accurate accounting, the company should probably choose to stay
consistent with the accounting practices they have been using.
Mandini's Steakhouse purchased 100 T-bone steaks for a total of $1,000 from a
supplier. The restaurant bought the steaks on credit, and they will not pay until 30
days after delivery.
,First, how will the accounting equation be affected at the time of the purchase?
Select all that apply.
Suppose 30 days after the purchase, Mandini's paid cash to the vendor. How will the
accounting equation be affected when the payment is made? - ANSWER-First step:
Assets and Liabilities increase.
Second step: Assets and Liabilities decrease.
At the time of the purchase, inventory is an asset, so assets increase by $1,000. The
obligation to pay within 30 days is a liability, so liabilities increase by $1,000.
30 days later, at the time of the payment, cash is an asset, so the payment in cash
decreases assets by $1,000. The obligation to pay was a liability, so the payment in
cash decreases liabilities by $1,000.
Which of the following is an example of an asset? Select all that apply. - ANSWER-A
customer's promise to pay for a new computer delivered last month.
The promise represents future cash inflow and the delivery of the computer occurred
in the past.
Gold Zone Inc., a jewelry designer and manufacturer, sold watches to Jill's Jewelry
Shop for $1,500. Gold Zone spent $800 manufacturing the watches and Jill's Jewelry
Shop has 30 days to pay for this order after they receive it.
First, how will the recognition of the receivable and revenue for the transaction
impact the accounting equation at the time of the sale? Please enter the amounts in
the boxes below.
Next, Gold Zone needs to show that the inventory was sold and recognize an
expense for the cost of goods sold for $800. How will such a recognition impact the
accounting equation?
Lastly, Gold Zone received payment from Jill's Jewelry Shop 30 days after the initial
purchase.How would the accounting equation be impacted when the payment is
received? - ANSWER-First, the sale increases assets (accounts receivable) by
$1,500. The sale also increases revenue, which increases owners' equity by $1,500.
At the same time, the sale decreases assets (inventory) by $800. The cost of goods
sold is an expense, so it decreases owners' equity by $800.
Finally, the receipt of payment increases assets (cash) by $1,500. The receipt of
payment also decreases assets (accounts receivable) by $1,500.
Which of the following is an example of a revenue? Select all that apply. - ANSWER-
Gopher Co. is a designer and manufacturer of promotional clothing and accessories.
Gopher delivered T-shirts to a customer and sent an invoice to the customer for
$2,000. The revenue has been earned because the goods were delivered.
, Lauren owns a coffee shop. A customer came to the shop and purchased a
cappuccino and a bag of coffee beans. The customer paid $40 at the time of
purchase. The revenue has been both earned (because the cappuccino and a bag of
coffee beans were provided) and realized (because the cash was received).
Glodar Corp., an oil rig parts manufacturer, received an advance payment of
$150,000 on Aug 1 for an order of a replacement drill bit for an oil rig. Glodar Corp.
delivered the drill bit on Nov 1. How will the accounting equation be impacted when
this advance payment was recorded on Aug 1? Select all that apply. - ANSWER-
Cash, an asset, increases by $150,000. Because Glodar Corp. has not earned the
$150,000 and they are obligated to deliver the drill bit, liabilities are increased.
Many companies keep a small amount of cash on hand to reimburse employees for
small expenses that arise in the course of business. This account is called Petty
Cash and is accounted for at the end of a period, with expenses grouped together by
accounts such as Office Supplies, Meals, Travel, and Other Expenses, rather than
record each individual expense that is reimbursed.
The reasoning behind recording the transactions in this manner relates to which of
the following accounting principles? - ANSWER-Materiality. The decision about the
level of detail in grouping transactions into financial accounts is related to how
significant, or material, the transactions are.
Companies may include a footnote in their financial statements regarding key market
and industry risks that affect their business because users of the financial statements
would likely consider such information to be: - ANSWER-Relevant. Information that
may affect a reasonable user's decision-making is considered relevant.
For 2015, suppose Field Enterprises had Gross Profit of $1,150,000 and the
following expenses:
Salaries and Wages Expense $400,000
Building and Utilities Expense $90,000
Other Operating Expenses $50,000
Interest Expense $25,000
Income Tax Expense $32,000
Cost of Goods Sold (COGS) $890,000
What would be Field's Operating Income for 2015? - ANSWER-$610,000.
Operating Income is the profit before taxes and interest. In this example it is the
Gross Profit minus the Salaries and Wages and the Building and Utilities Expenses
and the Other Operating Expenses.
Suppose Pied Piper had Net Income of $1,600,000 for the year 2011. They also had
the following income and expenses:
COGS $7,000,000
SG&A Expense $2,100,000
Other Non-Operating Income $100,000
