Finance Practice Exam - HBS Core

In Dec. of 2013, a company signed a promissory note and recorded a note payable of $150,000. This note is payable in three equal annual installments beginning Dec. of 2014. How should the company report the note payable on its Dec. 31, 2013 balance sheet? $150,000 in current liability $150,000 in noncurrent liability $50,000 in current liability and $100,000 in noncurrent liability $50,000 in noncurrent liability and $100,000 in current liability

$50,000 in current liability and $100,000 in noncurrent liability $50k x 3 = $150k. Three installments, so one of the $50k's needs to be a current liability in order to be paid on the balance sheet, with $100,000 left over as noncurrent as it will be paid off over the next 2 years.

Company A is a large passenger airline. As part of their annual internal budget process, they do a sensitivity analysis of their revenue forecast over their existing routes and schedules. The analysis evaluates the impact of a three percent decline in passenger revenue compared to a three percent increase. Which of the following expenses would show the largest change in the analysis? Aircraft maintenance expense Salary expense for the flight crew Depreciation and amortization expense Income tax expense

Income tax expense

On July 1st, a company paid $12,000 for an annual insurance policy covering the month of July through the following June. Which of the following statements reflects how this payment would be recorded on July 1st under the accrual method? Cash would be debited for $12,000, and accrued insurance would be credited for $12,000 Insurance expense would be debited for $12,000, and cash would be credited for $12,000 Prepaid insurance would be debited for $12,000, and cash would be credited for $12,000 Prepaid insurance would be debited for $12,000, and accrued insurance would be credited for $12,000

Prepaid insurance would be debited for $12,000, and cash would be credited for $12,000

Which of the following options is an example of an explicit transaction? Recording depreciation expense for long-term assets Accruing interest expense that will be payable in the future Recording bad debt expense for uncollectible accounts Recording prepaid expense when cash is paid for insurance

Recording prepaid expense when cash is paid for insurance Recall that an explicit transaction is one that is a direct cost of trading. Since you paid cash for something in return, you want to record that as an explicit transaction.

Which of the following will cause assets and owner's equity to decrease? Declare dividends on outstanding shares Repurchase common shares for cash Sell used plant equipment and realize a gain Pay off the principle and interest of a long-term debt

Repurchase common shares for cash

A company under IFRS standards decides to include interest paid in the Financing Section of their Statement of Cash Flows. How will this company's Statement of Cash Flows differ from how it would appear if the company was abiding by US GAAP standards? There will be no difference in the statements. The company under IFRS will have lower cash flow in the financing section and higher cash flow in the operating section than the company under US GAAP. The company under IFRS will have lower cash flow in the financing section and lower cash flow in the operating section than the company under US GAAP. The company under IFRS will have higher cash flow in the financing section and lower cash flow in the operating section than the company under US GAAP. The company under IFRS will have higher cash flow in the financing section and higher cash flow in the operating section than the company under US GAAP.

The company under IFRS will have lower cash flow in the financing section and higher cash flow in the operating section than the company under US GAAP.

What denominator amounts does an analyst use to calculate the common size balance sheet and income statement? Current assets and net income, respectively Total assets and operating income, respectively Total assets and sales, respectively Owner's equity and sales, respectively

Total assets and sales, respectively

If an analyst looks at a start-up's statement of cash flows, it is MOST likely that the analyst will find: a significant positive operating cash flow, because the start-up may achieve a large market share a positive investment cash flow, because the start-up has just enough equipment to operate a large positive financing cash flow, because the start-up has been funded by investors or other third parties a significant positive operating cash flow because of the effect of depreciation

a large positive financing cash flow, because the start-up has been funded by investors or other third parties

A company had sales revenue of $500,000 for 2013. During 2013, the company incurred operating expenses of $40,000 and interest expenses of $60,000. The income before taxes was $220,000. What was Cost of Goods Sold (COGS) for the year 2013? $180,000 $200,000 $220,000 $240,000

$180,000 $500k - $220k - $40k - $60k = $180,000.

Below are some of the accounts that Company F has on their books: Cash/Cash Equiv: $2000 Insurance Expense: $250 Accounts Payable: $800 Prepaid Rent: $400 Accounts Receivable: $750 Deferred Rev: $1,650 Inventory: $925 Which of the amounts below is the correct total of liabilities? $2,450 $800 $1,650 $2,700

$2,450 Deferred Revenue + Accounts Payable

Which of the following options is an example of revenue? $20,000 received as a down payment from a customer when they placed their order $10,000 received from a customer for goods purchased a month ago An order for $3,000 received from a customer $300 received from a customer when they purchased and received an item

$300 received from a customer when they purchased and received an item

A company's retained earnings on Dec. 31st, 2009 to 2013 is as follows: 2009: $15000 2010: $18000 2011: $16000 2012: $21000 2013: $25000 On the Pro-forma income statement for 2014, the net income is $10,000. The expected dividends to be paid in 2014 is $3,500. What is the projected retained earnings on Dec. 31st, 2014? $15,000 $18,500 $31,500 $35,000

$31500 Add the net income ($10,000) to the 2013 total ($25,000) for a total of $35,000. Subtract the dividends to be paid ($3500). You end up with $31500.

Suppose for the year 2015, Speedy Chef, a fast food restaurant, had a Gross Profit of $1,281,648. Speedy Chef had the following expenses: Cost of Goods Sold $1,251,167 Selling Expense $70,578 Rent Expense $156,941 Utilities Expense $73,994 Insurance Expense $35,148 Wages $505,245 General & Administrative $24,358 Miscellaneous $32,968 Interest Expense $4,059 Income Tax Expense $60,596 What would Speedy Chef's Income Before Taxes be for 2015? $347,876 $378,357 $317,357 $287,280

$378,357 Take the total gross profit and subtract everything from it EXCEPT cost of goods sold and income tax expense.

Quench, a bottled water supplier, has 5,496 bottles of water in their warehouse at the end of April. One-third of the bottles were purchased in February at a cost of $1.00 per bottle. Another third were purchased in the month of March at a cost of $1.25 per bottle. The remaining third were purchased in April at a cost of $1.75 per bottle. The warehouse sold and shipped 4,925 bottles during May. Quench uses FIFO to value their inventory. What was the Cost of Sales related to the bottles shipped in May? $7,328.00 $6,328.75 $6,756.00 $6,870.00

$6,328.75 First, 1/3 of 5496 is 1832. You will add up (1832 x$1 = 1832 bottles) + (1832 x $1.25 = 2290 bottles). Before you move onto the last 1/3, remember that the total sold was only 4925 bottles. You will take 4925 - (1832+1832) = 1261 bottles. Then, you will take 1261 x $1.75 = 2206.75. Add up 2206.75, 2290, and 1832, and you will get your answer of $6328.75.

Chrissie's Cooking Supply Company has 5,000 skillets in their warehouse at the end of July. One-quarter of these skillets were held over from the month of June at a cost of $12 per skillet. The remaining skillets were purchased in July at a cost of $15 per skillet. At the beginning of August, they received another 2,000 skillets at a cost of $17 per skillet. The warehouse sold and shipped 2,198 skillets during August. Chrissie's Cooking Supply Company uses LIFO to value their inventory. What would be the remaining balance of skillets in the inventory account at the end of August? $68,280 $76,030 $29,220 $36,970

$68,280

Company B sold a service contract that covers a two-year period for $10,000. The service period commenced on July 1, Year 1. Service revenue is recognized evenly throughout the contract period. What amount should Company B report as deferred revenue from this service contract on its balance sheet on December 31, Year 1? $2,500 $5,000 $7,500 $10,000

$7,500

As of Dec. 31, 2013, a company had current assets of $600,000 and current liabilities of $300,000. Sales of the company are expected to increase by 10 percent for each of the next two years. If all current assets and current liability accounts increase proportionately with sales, what would be the projected current ratio of the company on Dec. 31, 2015? 1.65 2.00 2.20 2.40

2.00 Current Assets/Current Liabilities = Answer

Company X reported the following information on its 2015 income statement: Interest Expense: $10,000 Income Tax: $50,000 Net Income: $140,000 What is Company X's Interest Coverage Ratio for 2015? 8.5 17.5 21.0 20.0

20.0 Add all values together ($200,000). Divide by interest expense ($10,000). You will get 20.0.

The Peach Pit, a restaurant, has Net Income of $25,000, Sales of $55,000, Assets of $115,000, and no debt. What is their ROE? 21.7% 4.29% 2.17% 42.9%

21.7% Net income/Assets = $25,000/$115,000= 0.217 x100 = 21.7%.

A project has an initial cost of $18,000. The estimated net cash flows of the project are as follows: Year 1: $4000 Year 2: $4000 Year 3: $6000 Year 4: $8000 Year 5: $8000 What's the payback period? 3.0 Years 3.5 Years 3.75 Years 4.0 Years

3.5 Years In between years 3 and 4 will the total amount put in "even out" the amount gained back (net zero).

A company purchased a piece of equipment for $150,000 on July 1, 2015. The estimated useful life is 10 years with a salvage value of $12,000 at the end of the 10 year period. The company uses the straight-line depreciation method. What would the journal entry to record depreciation expense for the month of September 2015? Debit Depreciation Expense for $1,250 and Credit Accumulated Depreciation for $1,250 Debit Depreciation Expense for $1,150 and Credit Accumulated Depreciation for $1,150 Debit Depreciation Expense for $1,150 and Credit Property, Plant & Equipment for $1,150 Debit Accumulated Depreciation for $1,250 and Credit Property, Plant & Equipment for $1,250

Debit Depreciation Expense for $1,150 and Credit Accumulated Depreciation for $1,150

In which stage would you typically expect to see large positive Investment Cash Flows? Startup Profitable/Growing Mature/Steady Decline

Decline You need money to continue to operate as a whole. You would look into investors to put money into the company.

The profit margin for East Corp. for each year from 2011 to 2013 is listed below. 2011: 7.13% 2012: 7.68% 2013: 8.14% Which of the following is NOT a reasonable explanation for the trend in the ratio? The variable costs decreased due to an improvement in technology. An increase in the sales price due to higher demand resulting from a successful marketing campaign. East Corp. declared a cash dividend to shareholders.

East Corp. declared a cash dividend to shareholders. If you declare a dividend, the percentage shown would be decreasing, not increasing.

Which transaction is presented in the below journal entry? Debit Rent Expense, $10,000 Credit Prepaid Rent, $10,000 Payment of rent in advance Expense recognized for prepaid rent Rent paid in installments Accrual for rent outstanding

Expense recognized for prepaid rent

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. This scenario best demonstrates which of the following: Historical Cost Principle Relevance Going Concern Principle Materiality

Going Concern Principle The going concern concept is a fundamental principle of accounting. It assumes that during and beyond the next fiscal period a company will complete its current plans, use its existing assets and continue to meet its financial obligations.

What is the set of accounting standards most commonly used by companies outside the US? International Financial Reporting Standards (IFRS) US Generally Accepted Accounting Principles (US GAAP) Global Financial Accounting Standards Convergence of International Financial Reporting Standards (IFRS) and US Global Financial Accounting Standards (US GAAP)

International Financial Reporting Standards (IFRS)

What is free cash flow? It is "free" money, which means it is available at a 0% interest rate. It is the amount of cash that a business could be expected to generate from its normal operations. Free Cash Flow is another name for Net Income. It is the total amount of money being transferred into and out of a business.

It is the amount of cash that a business could be expected to generate from its normal operations.

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. This scenario best demonstrates which of the following: Money Measurement Principle Revenue Recognition Materiality Conservatism

Money Measurement Principle The money measurement concept states that a business should only record an accounting transaction if it can be expressed in terms of money.

US GAAP: Put either into financing, operating, or investing activities: Purchase of a building for cash $300,000 Sale of used plant equipment for cash $10,000 Sale of inventory for cash $18,000 Payment of wages to employees $25,000 Purchase of inventory for cash $10,000 Sale of land for cash $140,000 Repayment of a bank loan (principal) $15,000 Payment of utilities $5,000

Operating: Sale of inventory for cash (SOURCE) Payment of wages to employees (USE) Purchase of inventory for cash (USE) Payment of Utilities (USE) Financing: Repayment of a bank loan (USE) Purchase of a building for cash (USE) Sale of land for cash (SOURCE) Sale of used plant equipment for cash (SOURCE) Investing: Nothing?

Which of the following options is an example of a liability? The private mortgage of a CEO Outstanding preferred stock A bond purchased at a premium Payment received in advance from a customer

Payment received in advance from a customer They are giving you money in advance, meaning you have yet to do the service or deliver the good for them, making the payment a liability.

What are the components of the DuPont Framework? (select all that apply.) Profitability Liquidity Leverage Efficiency Productivity

Profitability Leverage Efficiency

Which of the following options impact the investing section of the statement of cash flows? (Select all that apply) Sale of investment securities Proceeds from issuance of common stock Payments made in connection with business acquisitions Stock-based compensation expense Financing working capital

Sale of investment securities Payments made in connection with business acquisitions

Which of the following accounts is decreased by a debit? Select all that apply. Sales Revenue Rent Expense Deferred Revenue Interest Expense

Sales revenue Deferred revenue ALWAYS revenue decreases by a debit.

In which stages would you typically expect to see large negative Investment Cash Flows? Select all that apply. Startup Profitable/Growing Mature/Steady Decline

Startup Profitable/growing

Which of the following cash flows should be used in an NPV calculation to determine which project to pursue? (Select all that apply.) The cash inflows expected as a result of the project Recurring cash flows from ongoing current operations Investment needed to be made by the company to undertake the project Capital expenditures related to upkeep of existing equipment

The cash inflows expected as a result of the project Investment needed to be made by the company to undertake the project

Which of the following options represent implicit transactions? (Select all that apply.) An inter-company sale of goods under a short-term agreement The recognition of revenue over time-related to payment received in advance for a multi-year contract Recording a loss on the sale of a piece of plant equipment Interest expense accrued at the end of the fiscal year The repurchase of shares of the company's stock

The recognition of revenue over time-related to payment received in advance for a multi-year contract Interest expense accrued at the end of the fiscal year This question really circles around time, and things in the future. These transactions are explicity recorded at the time of the sale, instead, they are added in the future (such as, the end of the year).

A company purchased a piece of equipment for $100,000 on Jan. 1, 2012. The estimated useful life is 10 years with no salvage value at the end of the 10-year period. The company used the straight-line method to depreciate this equipment in 2012. However, in 2013, the company decided to change the depreciation method to the double-declining method. What effect did this change in depreciation methods have on the income statement for 2013 and the balance sheet as of Dec. 31, 2013? The total assets increased, and the net income increased The total assets increased, and the net income decreased The total assets decreased, and the net income increased The total assets decreased, and the net income decreased

The total assets decreased, and the net income decreased

The Generally Accepted Accounting Principles (GAAP) establish that companies should depreciate a long-lived physical asset, because: costs should be matched with the benefits that are realized over multiple periods not all assets are paid in cash at the time they are purchased it is an explicit transaction beyond the current period assets lose value in the long term

costs should be matched with the benefits that are realized over multiple periods

An accountant pays $30,000 for inventory purchased on credit last month. This payment will impact the accounting equation by decreasing assets and: decreasing liabilities decreasing owner's equity increasing assets increasing owners' equity

decreasing liabilities Paid off something on credit, which would have been a liability to the company.

A company reported pretax financial statement income of $420,000 for Year 1. Taxable income for Year 1 was $300,000 due to a temporary timing difference in depreciation expenses. The income tax rate is 30 percent. In its Year 1 balance sheet, the company should record a deferred tax: asset of $36,000 asset of $120,000 liability of $36,000 liability of $120,000

liability of $36,000 Subtract pretax ($420,000) by the taxable income ($300,000) to get $120,000. Multiply THIS amount by the tax rate (30%), and you will get $36,000. This is a liability since it's deferred tax you OWE.

For valuation purposes, the opportunity cost and inflation are two main concepts that explain the: time value of money real rates of interest economic value added riskiness of a project

time value of money TVM arises in conversations of opportunity cost (e.g. going to college vs working for 5 years), and inflation (e.g. a dollar's value today will not be the same as tomorrow)