HBS CORE FINAL EXAM PREP
QUESTIONS AND ANSWERS. VERIFIED
2025/2026.
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. - ANS 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. - ANS 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. - ANS 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.
1 @COPYRIGHT 2025/2026 ALLRIGHTS RESERVED.
,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: - ANS 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? - ANS 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.
2 @COPYRIGHT 2025/2026 ALLRIGHTS RESERVED.
,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. - ANS 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? -
ANS 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.
3 @COPYRIGHT 2025/2026 ALLRIGHTS RESERVED.
, Which of the following is an example of a revenue? Select all that apply. - ANS 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. - ANS 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? - ANS 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
4 @COPYRIGHT 2025/2026 ALLRIGHTS RESERVED.
QUESTIONS AND ANSWERS. VERIFIED
2025/2026.
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. - ANS 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. - ANS 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. - ANS 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.
1 @COPYRIGHT 2025/2026 ALLRIGHTS RESERVED.
,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: - ANS 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? - ANS 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.
2 @COPYRIGHT 2025/2026 ALLRIGHTS RESERVED.
,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. - ANS 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? -
ANS 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.
3 @COPYRIGHT 2025/2026 ALLRIGHTS RESERVED.
, Which of the following is an example of a revenue? Select all that apply. - ANS 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. - ANS 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? - ANS 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
4 @COPYRIGHT 2025/2026 ALLRIGHTS RESERVED.
