HBS CORe - FinAcc Mod1 Quiz
Suppose that before 2012 Apple recognized revenue on domestic sales when the goods were shipped and recognized revenue on international sales when the goods were delivered to the customer. Let's also suppose that in 2012 Apple began recognizing revenue on all sales, domestic and international, when they were shipped. Which of the following is true? (A) Apple's accounting prior to 2012 violated the consistency principle. (B) Apple's accounting in 2012 violated the consistency principle. (C) Neither Apple's accounting before or during 2012 violated the consistency principle. (D) Both Apple's accounting before and during 2012 violate the consistency principle.
ANSWER: (B) Apple's accounting in 2012 violated the consistency principle. Apple's accounting IN 2012 violated the consistency principle because it started using different revenue recognition policies than it had used in the previous year. NOTE: The consistency principle deals with being consistent over time, not in methodology!!
Which of the following demonstrates the historical cost principle? (A) John is wondering which method of accounting for inventory in his bike shop would be most appropriate. He decides that he should use the same method that he has been using for the last few years, since his business has been operating essentially the same way. (B) Real Estate prices in Orderville have increased dramatically over the last five years. Although the land under Chad's office building is currently believed to be worth $500,000, it is recorded at $250,000 because that is the price he paid for it. (C) Shelley's Automotive received a large order from a customer, who prepaid the entire amount. Shelley recorded the prepayment as revenue at the time she received the cash. Shelley delivered the parts 30 days after the payment was received.
ANSWER: (B) Real Estate prices in Orderville have increased dramatically over the last five years. Although the land under Chad's office building is currently believed to be worth $500,000, it is recorded at $250,000 because that is the price he paid for it. The idea that assets are recorded at their original cost underlies the historical cost principle, so the land under Chad's office being recorded at the price he paid for it is an example of the historical cost principle. INCORRECT: (A) John is wondering which method of accounting for inventory in his bike shop would be most appropriate. He decides that he should use the same method that he has been using for the last few years, since his business has been operating essentially the same way. This is an example of consistency, not historical cost. (C) Shelley's Automotive received a large order from a customer, who prepaid the entire amount. Shelley recorded the prepayment as revenue at the time she received the cash. Shelley delivered the parts 30 days after the payment was received. This is an example of the cash method of accounting, not historical cost.
Which of the following is an example of a proper application of materiality? (A) Suppose Starbucks had a legal dispute with Kraft related to a delivery agreement they had signed years ago. Starbucks decides not to disclose information because they don't want a long trial and they are making internal efforts to solicit a mediator. (B) International Investments has been pursuing an aggressive profit strategy and invested in many developing countries. However, they are highly exposed to exchange rate risks and they do not disclose its diversifying instruments. (C) A microfinance institution has been relying on government collateral subsidies to finance start-ups in rural areas. However, the government has cut the program recently. The company reports this situation in its financial statements as this might affect the decisions of stakeholders.
ANSWER: (C) A microfinance institution has been relying on government collateral subsidies to finance start-ups in rural areas. However, the government has cut the program recently. The company reports this situation in its financial statements as this might affect the decisions of stakeholders. --> The idea that certain information may affect the decisions of users of the financial statements underlies the concept of materiality, so this description of a microfinance institution is an example of a proper application of materiality. INCORRECT: (A) Suppose Starbucks had a legal dispute with Kraft related to a delivery agreement they had signed years ago. Starbucks decides not to disclose information because they don't want a long trial and they are making internal efforts to solicit a mediator. --> This is not a proper application of materiality because Starbucks would have to disclose information to its stakeholders. (B) International Investments has been pursuing an aggressive profit strategy and invested in many developing countries. However, they are highly exposed to exchange rate risks and they do not disclose its diversifying instruments. --> This is not a proper application of materiality because the investment company has not addressed all the relevant information to its shareholders.
Which of the following is an example of a liability? (A) Cash owed to you by a customer This is a likely future cash inflow, so it is an asset, not a liability. (B) Inventory to be sold to customers This is an asset because the inventory will be sold to customers for cash. (C) A note payable for a bank loan This is an example of a liability because it is an obligation to pay.
ANSWER: (C) A note payable for a bank loan --> This is an example of a liability because it is an obligation to pay. INCORRECT: (A) Cash owed to you by a customer --> This is a likely future cash inflow, so it is an asset, not a liability. (B) Inventory to be sold to customers --> This is an asset because the inventory will be sold to customers for cash.
Which of the following demonstrates the going concern concept? (A) AQG Industries sold $20,000 of product on credit to SSA Manufacturing. SSA did not pay on time. AQG decides that it is fruitless to pursue collection so they write off the receivable from SSA. (B) Gail's Garments has been in business for 20 years and during that period the company has gained a good reputation. Gail would like the Controller to acknowledge the value of that reputation by including it as an asset worth $100,000 but the controller says she cannot do it. (C) AQG Industries purchases $20,000 of product on credit from RSI Manufacturing. AQG records the purchase as an increase in inventory and an increase in accounts payable. AQG feels that they will be able to realize the value from the inventory and settle the obligation to RSI in the weeks to come.
ANSWER: (C) AQG Industries purchases $20,000 of product on credit from RSI Manufacturing. AQG records the purchase as an increase in inventory and an increase in accounts payable. AQG feels that they will be able to realize the value from the inventory and settle the obligation to RSI in the weeks to come. The idea that a company will be able to realize the benefits from its assets and settle any obligations from its liabilities underlies the going concern concept, so this description of AQG recording the transaction with RSI is an example of the going concern concept. INCORRECT: (A) AQG Industries sold $20,000 of product on credit to SSA Manufacturing. SSA did not pay on time. AQG decides that it is fruitless to pursue collection so they write off the receivable from SSA. This is not an example of the going concern. The going concern concept relates to the accounting for your own business, not to the business of others. (B) Gail's Garments has been in business for 20 years and during that period the company has gained a good reputation. Gail would like the Controller to acknowledge the value of that reputation by including it as an asset worth $100,000 but the controller says she cannot do it. This is an example of the money measurement not the going concern concept.
The principle of Conservatism, says that a company should choose measurement methods that anticipate and record _____________ but don't anticipate and record _____________. (A) past losses; future gains (B) future gains; future losses (C) future losses; future gains (D) past gains; future losses
ANSWER: (C) future losses; future gains Conservatism says that we should anticipate and record future losses but not future gains.
Which of the following demonstrates the Money Measurement principle? Select all that apply. (A) The catch-phrase for Carl's Consulting Company (CCC) is "Our employees are our biggest asset." However, if you look at the Balance Sheet of CCC, there is no such asset. (B) Upon successful completion of extensive flight tests for a new aircraft model, Boeing Aircraft sends an invoice to the customer per the terms of the contract and recognizes a portion of the revenue related to the order. (C) The HR Director at AQG Industries proposes a change to the employee benefits plan. The CEO rejects the proposal because it would change the relative cost of the benefits plans in AQG. (D) After winning a prestigious supplier of the year award, Mack Manufacturing saw an increase in their stock price. This increase does not appear on the company's financial statements.
ANSWER: A & D (A) The catch-phrase for Carl's Consulting Company (CCC) is "Our employees are our biggest asset." However, if you look at the Balance Sheet of CCC, there is no such asset. --> The value of good employees cannot be accurately represented in monetary terms on the company's books. (D) After winning a prestigious supplier of the year award, Mack Manufacturing saw an increase in their stock price. This increase does not appear on the company's financial statements. --> The increase in stock price cannot be accurately represented in monetary terms on the company's books. INCORRECT: (B) Upon successful completion of extensive flight tests for a new aircraft model, Boeing Aircraft sends an invoice to the customer per the terms of the contract and recognizes a portion of the revenue related to the order. --> This is an example of revenue recognition. (C) The HR Director at AQG Industries proposes a change to the employee benefits plan. The CEO rejects the proposal because it would change the relative cost of the benefits plans in AQG. --> This is just a business decision.
Which of the following would cause a decrease to liabilities? Select all that apply. (A) A company pays $550, which is the current portion due on a long term bank loan This event would cause a decrease in cash and a decrease in notes payable, which is a liability account. (B) A company sells $1,000 worth of gift cards This event would cause an increase in cash and an increase in deferred revenue. (C) A company prepays for 12 months of landscaping services This event does not impact liabilities. It would cause a decrease in cash and an increase in prepaid expense. (D) A company pays off the remaining amount of their mortgage loan This event would cause a decrease in cash and a decrease in mortgage loan payable, which is a liability account. (E) After one month, a company recognizes revenue equal to 1/12 of an annual magazine subscription they sold to a customer This event would cause a decrease in deferred revenue, a liability account, and an increase in subscription revenue.
ANSWER: A, D, E (A) A company pays $550, which is the current portion due on a long term bank loan --> This event would cause a decrease in cash and a decrease in notes payable, which is a liability account. (D) A company pays off the remaining amount of their mortgage loan --> This event would cause a decrease in cash and a decrease in mortgage loan payable, which is a liability account. (E) After one month, a company recognizes revenue equal to 1/12 of an annual magazine subscription they sold to a customer --> This event would cause a decrease in deferred revenue, a liability account, and an increase in subscription revenue. INCORRECT: (B) A company sells $1,000 worth of gift cards --> This event would cause an increase in cash and an increase in deferred revenue. (C) A company prepays for 12 months of landscaping services --> This event does not impact liabilities. It would cause a decrease in cash and an increase in prepaid expense.
Bianca's Bicycles is a small shop that sells bicycles and offers repair services. Which of the following would be considered an asset on the balance sheet of Bianca's Bicycles? Select all that apply. (A) Amounts owed to a supplier in 30 days for bike parts This is an example of accounts payable, which belongs in the liabilities section of the balance sheet. (B) Bicycles in the store showroom This is an example of inventory, which belongs in the asset section of the balance sheet. (C) Amounts owed by customers for repair services previously provided This is an example of an account receivable, which belongs in the asset section of the balance sheet. (D) Amounts prepaid for next year's subscription to Bicycles Weekly, a cycling magazine This is an example of a prepaid expense, which belongs in the asset section of the balance sheet. (E) Amounts owed to the bank for mortgage This is an example of a payable, which belongs in the liabilities section of the balance sheet.
ANSWER: B, C, D (B) Bicycles in the store showroom --> This is an example of inventory, which belongs in the asset section of the balance sheet. (C) Amounts owed by customers for repair services previously provided --> This is an example of an account receivable, which belongs in the asset section of the balance sheet. (D) Amounts prepaid for next year's subscription to Bicycles Weekly, a cycling magazine --> This is an example of a prepaid expense, which belongs in the asset section of the balance sheet. INCORRECT: (A) Amounts owed to a supplier in 30 days for bike parts --> This is an example of accounts payable, which belongs in the liabilities section of the balance sheet. (E) Amounts owed to the bank for mortgage --> This is an example of a payable, which belongs in the liabilities section of the balance sheet.
Jarvard University Bookstore paid $67,000 for books purchased on credit in the previous month. How would this payment impact the accounting equation?
Assets decrease by $67,000 as cash is paid, and liabilities decrease by $67,000 as Jarvard no longer has the obligation to pay for the books.
Gilligan and Skipper's Tour Boat Co. (GSTBC) receives $150,000 in advance payments for an upcoming 3-hour tour. How will the accounting equation of GSTBC be impacted when these advance payments are received?
Assets increase by $150,000 because the company now has that amount of cash, and liabilities increase by $150,000 because the company now has the obligation to provide services on the upcoming cruise.
Perfect Printers is able to obtain 30 days credit terms to purchase a heavy duty printing machine for $200,000. How will this purchase impact the accounting equation of Perfect Printers at the time of the purchase?
Assets increase by $200,000 because the company now has a machine, and liabilities increase by $200,000 because the company now has the obligation to pay for the machine within 30 days.
Qingji Corp., an oil separator manufacturer, rented a warehouse on January 1st and paid $30,000 for the rent for the next two years. How would this transaction impact the accounting equation of Qingji Corp.?
Assets increase by $30,000 as the company now has a right to receive the benefits of prepaid rent for two years. In addition, assets also decrease by $30,000 as the company no longer has the cash they paid out.
Dongfeng, an automobile manufacturer, purchased raw materials for $600,000 on credit on January 1st. Dongfeng promised to pay for the raw materials in three equal monthly installments beginning from February 1st. How will this purchase impact the accounting equation on the books of Dongfeng?
Assets increase by $600,000 because the company now has raw materials it will use in the manufacturing process, and liabilities increase by $600,000 because the company now has an obligation to pay for these materials.
Breeze Inc. receives payment of $800,000 for 4 wind turbines that were delivered and invoiced on credit in the previous month. How would this receipt impact the accounting equation of Breeze Inc.?
Assets increase by $800,000 because the company receives cash, and assets also decrease by $800,000 because the company no longer has a right to receive the cash (the receivable previously recorded at the time of the sale).
We Like to Rock (WLR), a granite countertop manufacturer, delivered 5 countertops at $2,000 each to their client. The cost of producing the countertops was $500 each. The client paid cash for the countertops. First, how would the revenue from this transaction impact the accounting equation for WLR? At the same time, how will the related expense from this transaction impact the accounting equation of WLR? answers.
First, assets increase by $10,000 (5 countertops at $2,000 each) as the company now has a receivable, or right to receive cash, and owners' equity increases by $10,000 to recognize the revenue associated with the sale. At the same time, assets decrease by $2,500 (5 countertops at $500 each) as the company no longer has the inventory, and owners' equity decreases by $2,500 to recognize the expense associated with the sale.
Leak Geeks, a plumbing supply company, sold $25,000 of plumbing supplies to one of their larger customers. The supplies had an inventory value of $12,000. First, how will the revenue and cash inflow from this transaction impact the accounting equation of Leak Geeks? At the same time, how will the related expense from this transaction impact the accounting equation of Leak Geeks?
First, assets increase by $25,000 because the company now has that amount of cash, and owners' equity increases by $25,000 to recognize the revenue associated with the sale. At the same time, assets decrease by $12,000 because the company no longer has the supplies, and owners' equity decreases by $12,000 to recognize the expense associated with the sale.
Address You, a fancy dress manufacturer, sold a dress for $8,000 on credit. The cost of producing this dress was $1,000. First, how would the revenue and receivable from this transaction impact the accounting equation of Address You? At the same time, how will the related expense from this transaction impact the accounting equation of Address You?
First, assets increase by $8,000 because the company now has a receivable, or right to receive cash, and owners' equity increases by $8,000 to recognize the revenue gained from the sale. At the same time, assets decrease by $1,000 because the company no longer has the inventory, and owners' equity decreases by $1,000 to recognize the expense associated with the sale.
Below are some of the accounts that Company F has on their books. What is the correct total of liabilities? $2,450, $800, $1,650, or $2,700 Cash and Cash Equivalents $2,000 Insurance Expense $250 Accounts Payable $800 Prepaid Rent $400 Accounts Receivable $750 Deferred Revenue $1,650 Inventory $925
The correct answer is $2,450 in liabilities, which includes: Accounts Payable $800 Deferred Revenue $1,650
Below are some of the accounts that Company F has on their books. What is the correct total of assets? $2,400, $3,675, $4,075, or $3,325 Cash and Cash Equivalents $2,000 Insurance Expense $250 Accounts Payable $800 Prepaid Rent $400 Accounts Receivable $750 Deferred Revenue $1,650 Inventory $925
The correct answer is $4,075 in assets, which includes: Cash and Cash Equivalents $2,000 Prepaid Rent $400 Accounts Receivable $750 Inventory $925
