HBS Financial Accounting Exam Help
- For assets, debits are entered on the left; for liabilities, credits are entered on the left
- For assets, credits are entered on the left; for liabilities, debits are entered on the left
- Debits on the left; credits on the right
- Credits on the left; debits on the right
Q2. Jon Sports’ inventory account increased from $25,000 on December 31, 2013, to $30,000 on December 31, 2014. Which one of the following items would be included in the operating section of its 2014 indirect method statement of cash flows?
- Add increase in inventory $5,000
- Subtract increase in inventory ($5,000)
- Add inventory balance $20,000
- Subtract inventory balance ($20,000)
Q3. To be recorded as a liability, an item must meet three specific conditions. Two of them are: it must involve probable future sacrifice of economic resources by the entity, and it must be a present obligation that arose as a result of a past transaction. Which one of the following is the third condition?
- The item must reduce the market value of the recording entity.
- It must involve a transfer of resources to another entity.
- It must involve the expenditure of cash now or in the future.
- It must not cause total liabilities to exceed total assets.
Q4. On March 31, 2015, Cars, Inc. owes Preston Devices, one of its suppliers, $25,000 for previous purchases. During April 2015, Preston sells Cars devices with a sales price of $10,000 and a cost to Preston of $8,000. During April, Cars pays Preston $12,000 against the amount owed to Preston. What is the effect of these April transactions on Preston’s balance sheet?
- Cash increased by $12,000; accounts receivable decreased by $2,000; inventory decreased by $8,000; retained earnings increased by $2,000
- Accounts receivable increased by $2,000; inventory decreased by $8,000; cash increased by $12,000; retained earnings increased by $12,000
- Cash increased by $12,000; retained earnings decreased by $2,000; inventory decreased by $10,000; accounts receivable decreased by $12,000
- Cash increased by $2,000; accounts receivable decreased by $2,000; inventory decreased by $8,000; retained earnings decreased by $12,000
Q5. Baxtra, Inc. pays $20,000 in cash as interest to its lenders during 2015. According to U.S. GAAP, in which section of the statement of cash flows would this payment be included?
- The operating section
- The financing section
- The investing section
- Depends on whether cash flow statement is direct or indirect method.
Q6. Juan Foods pays off a long-term debt in full. Which one of the following statements best describes the appropriate book-keeping for this transaction?
- Debit cash; credit long-term debt
- Debit long-term debt; credit owners’ equity
- Debit owners’ equity; credit long-term debt
- Debit long-term debt; credit cash
Q7. Sardi Company estimates its 2015 tax expense to be $80,000. It makes a cash payment of $20,000 to the tax authorities on December 31, 2015. How should this transaction be recorded by Sardi?
- Debit tax expense $80,000; credit cash $60,000; credit taxes payable $20,000
- Debit tax expense $80,000; credit cash $20,000; credit taxes payable $60,000
- Debit tax expense $80,000; credit cash $20,000
- Debit tax expense $80,000; credit cash $20,000; credit accounts payable $60,000
Q8. On April 30, 2015, Zono Electronics, Inc. made a payment of $3,500 to Imperial Distributors, a supplier. Choose the statement that best describes the recording of this financial transaction by Imperial Distributors.
- Debit cash $3,500; credit accounts payable $3,500
- Debit accounts receivable $3,500; credit cash $3,500
- Debit accounts payable $3,500; credit cash $3,500
- Debit cash $3,500; credit accounts receivable $3,500
Q9. During 2015, Patnode had a cash outflow of $15,000 for investing activities and a cash inflow of $7,000 from financing activities. Its 2015 cash flow from operations was an _______.
- outflow of $15,000
- inflow of $15,000
- outflow of $8,000
- inflow of $8,000
Q10. Kirby, Inc. records a sale with a gross margin of $1,400. Which one of the following statements correctly describes the effect of such a sale on its balance sheet?
- Common stock increases by $1,400
- The sales revenue account increases by $1,400
- The gross margin account increases by $1,400
- The retained earnings account increases by $1,400
Q11. Which one of the following statements is not true about statements of cash flows prepared according to U.S. GAAP?
- The operating section of the indirect method starts with the net income of the period.
- In the indirect method statement, the period’s depreciation is added to net income because it is a source of cash.
- Interest payments are included in the operating section of the direct method statement.
- The investing section of the direct method statement for a period is identical to the investing section of the indirect method statement for the same period.
Q12. Juan Foods makes a cash sale with a positive gross margin. Which one of the following statements describes the effect of the sale on Juan Foods?
- Current ratio increases
- Current ratio decreases
- No change to Juan Foods’ current ratio
- Insufficient information to judge effect on current ratio
Q13. The fundamental accounting equation is a reflection of the _______ concept.
- money measurement
- historical cost
Q14. Annie’s Fitness sells a set of free weights to a customer for which Annie’s had paid $750. Which one of the following statements describes the most appropriate accounting for the transaction?
- Debit cost of goods sold expense $750; credit cash $750
- Debit inventory $750; credit cost of goods sold expense $750
- Debit cost of goods sold expense $750; credit inventory $750
- Debit inventory $750; credit accounts payable $750
Q15. Planet Music buys all of its inventory on credit. During 2015, Planet Music’s inventory account increased by $10,000. Which of the following statements must be true for Planet Music during 2015?
- It made payments of less than $10,000 to suppliers.
- It made cash payments of $10,000 to suppliers.
- It made more cash payments to its suppliers than it recorded as cost of goods sold.
- It paid less cash to suppliers than it recorded as cost of goods sold.
Q16. In periods with rising prices and increasing quantities of inventories, which of the following relationships among inventory valuation methods is generally correct?
- FIFO has a higher inventory balance and a lower net income than LIFO.
- FIFO has a higher inventory balance and a higher net income than LIFO.
- LIFO has a higher inventory balance and a higher net income than FIFO.
- LIFO has a higher inventory balance and a lower net income than FIFO
Q17. In December, a Global Grocer customer pays in time and receives a 2% discounts for prompt payment. The customer had purchased goods worth $500. Which of the possible answers below correctly states the journal entries to record the payment and the discount taken. Previously, Global Grocer had established an allowance for prompt payment discounts.
- Debit Accounts receivable ($500); Credit Cash ($490); credit allowance for discounts ($10)
- Debit Cash ($500); Credit Accounts receivable ($500)
- Debit Cash ($490); Debit Allowance for sales discounts ($10); Credit Accounts receivable ($500)
- None of the above
Q18. ABC expenses stock options as required by GAAP. On January 1, 2015, ABC granted 50 key executives 100 options each. Each option entitled the option holder to purchase 1 share of ABC common stock at $60 per share. The options will vest on January 1st 2018.
On the grant date, January 1st, 2015, the stock was quoted on the stock exchange at $63 per share. The fair value of the options on the grant date was estimated at $15 per option. The amounts of compensation expense ABC should recognize with respect to the options during 2015, 2016, and 2017 are:
Q19. On January 1, 2013, Dana Corporation purchased equipment for $450,000. Installation costs were an additional $50,000. The equipment’s useful life was estimated at 5 years, with a salvage value of $25,000. The company planned to depreciate the equipment over five years using the straight-line method for reporting purposes and the double declining balance method for tax purposes. Dana Corporation’s accumulated depreciation at December 31, 2014 for reporting purposes and for tax purposes, respectively, will be:
- $190,000 and $304,000
- $180,000 and $320,000
- $190,000 and $320,000
- $200,000 and $304,000
Q20. On June 30, 2011, Cole Inc., exchanged 3,000 shares of Stone Corp. $30 par value common stock for a patent owned by Gore Co. The Stone stock was acquired in 2009 at a cost of $80,000. At the exchange date, Stone common stock had a fair value of $45 per share, and the patent had a net carrying value of $160,000 on Gore’s books. Cole should record the patent at:
Q21. What is the major accounting difference between interest incurred during a period and cash dividends declared during the same period?
- Interest decreases retained earnings while dividend declared increases retained earnings
- Interest reduces net income while dividends declared do not affect net income
- Interest does not affect net income while dividends reduce net income
- There is no major difference. Both are treated identically for accounting purposes.
Q22. Downey Company bought a delivery truck for $62,000 on January 1, 2015. They installed a rear hydraulic lift for $8,000 and paid sales tax of $3,000. In addition, Downey paid $2,400 for a one-year insurance policy. They estimate the useful life of the truck to be 10 years and its residual value to be $8,000.
If Downey uses the double declining-balance method, how much is the truck’s depreciation expense for 2016?
Q23. Goodwill should
- be written off as soon as possible against retained earnings.
- absent impairment, not be written off because it has an indefinite life.
- written off as soon as possible as an expense.
- amortized over a maximum of forty years
Q24. Which of the following situations will not cause a deferred income tax amount to be recorded?
- An expense that is recognized in 2015 for income tax purposes and in 2016 for financial statement purposes.
- Interest income from municipal bonds that is recognized in 2015 for financial statement purposes but is tax exempt for income tax purposes.
- A revenue is recognized in 2015 for income tax purposes and in 2016 for financial statement purposes.
- None of the above situations would cause a deferred income tax amount.
Q25. The Hasting Company began operations on January 1, 2013 and uses the FIFO method in costing its raw material inventory. An analyst is wondering what net income would have been if the company had consistently followed LIFO (instead of FIFO) from the beginning, 1/1/2013. He has the following information available to him:
What would net income have been in 2014 if Hastings had used LIFO since 1/1/2013?
- $ 110,000
- $ 150,000
- $ 170,000
- $ 230,000
Q26. Which of the following is/are criteria for recognizing revenue from a sale?
- Title and risks of ownership have been exchanged.
- The company is reasonably assured of collecting the receivable.
- The customer has, in turn, sold the product to its own customer.
- Both title and risks of ownership have been exchanged and the company is reasonably assured of collecting the receivable.
Q27. International, Inc. established an allowance for bad debts at the end of October. In November, International wrote off a $500 account receivable because payment was considered to be remote. What would be the effect of the $500 account receivable write-off on International’s November financial statements?
- Assets would decrease, liabilities would remain constant and retained earning would decrease.
- Assets would remain constant; liabilities would increase and retained earnings would decrease.
- No change would be made in total assets, liabilities or shareholder’s equity.
- Assets would decrease, liabilities would decrease and retained earnings would remain constant.
Q28. Carlita began 2014 with a retained earnings account balance of $132,000. During 2014, it declared and paid dividends of $5,000. Its December 31, 2014, retained earnings account balance _______.
- is $132,000
- is $120,000
- is $139,000
- cannot be calculated
Q29. Turnadot & Sons is a small wholesaler of decorative cast iron objects. The following events, related to a special customer order, occur as described below:
- August 5, 2015: Turnadot receives the special order for 200 outdoor planters at a selling price of $50 each, including delivery at a future convenient time and location. The customer, with whom Turnadot has had a long-term, trouble-free relationship, pays $3,000 as a deposit and agrees to pay the rest on delivery. Turnadot immediately orders $4,000 worth of planters from its supplier and pays a $1,000 deposit for them.
- August 27, 2015: Turnadot pays $3,000 balance due to the supplier upon delivery of the planters to its warehouse.
- September 5, 2015: The customer calls for delivery of the planters, and pays the balance of $7,000 when they arrive at the customer site.
On August 5, 2015, which one of the following accounting entries, related to the $10,000 special order, should be recorded in Turnadot’s financial accounting system?
- Debit accounts receivable $10,000; credit revenues $10,000
- Debit cash $3,000; credit revenues $3,000
- Debit cash $3,000; credit a liability ‘advances from customers’ $3,000
- Debit cash $3,000; debit accounts receivable $7,000; credit revenues $10,000
Q30. Lucky Lee, a video-game store in New York city, purchases a game machine directly from Taiwan for $30,000. In the U.S., the same machine will probably cost at least $36,000. Pick the most appropriate accounting action for Lucky Lee.
- Record the machine at $36,000
- Record the machine at $30,000
- Record the machine for [($30,000+$36,000)/2] = $33,000
- Have the machine examined by an independent appraiser and record it at the appraised value
Q31. Carlita began 2014 with a taxes payable account balance of $3,000. On December 31, 2014, its taxes payable account balance is $7,000. How much did Carlita pay to the tax authorities during the year?
- Cannot be calculated
Q32. Panjim’s 2015 cash flow from operations is
- a net outflow of $90,000.
- a net inflow of $90,000.
- a net inflow of $85,000.
- a net outflow of $85,000.
Q33. Panjim’s 2015 cash flow from investing activities is
- a net outflow of $7,000.
- a net inflow of $3,000.
- a net inflow of $7,000.
- a net outflow of $3,000
Q34. Panjim’s 2015 cash flow from financing activities is
- a net outflow of $91,000.
- a net inflow of $86,000.
- a net outflow of $86,000.
- a net inflow of $91,000.
Q35. Quentin Company’s year-end 2014 total assets equals its year-end 2014 total liabilities and owners’ equity. This is most likely the result of the company following the:
- Historical Cost concept
- Dual-aspect concept
- Materiality concept
- Money measurement concept
Q36. Neura Pharma, Inc. has purchased a drug patent with a remaining useful life of 13 years. How should this new asset be classified?
- A current tangible asset
- A non-current tangible asset
- A non-current intangible asset
- A current intangible asset
Q37. Quentin’s current ratio on December 31, 2014, is _______.
Q38. Panjim began 2015 with salaries payable balance of $75,000. It had 2015 salary expense of $80,000. Its 2015 ending salaries payable balance must be _______.
Q39. To be recorded as an asset, an item must meet four specific conditions. Three of them are: it must have been acquired at measurable cost, it must be obtained or controlled by the entity, and it must have been obtained or controlled in a past transaction. Which one of the following is the fourth condition?
- The item must have a measurable resale value
- It must be expected to have future economic benefits
- It must have been fully paid for
- The entity must have a legal document confirming ownership of the item
Q40. Juan Foods purchases a computer system in 2015 for $20,000. Its expected useful life is 5 years. At the end of 2015, it has to record depreciation on the computer system of $2,000. What is the correct journal entry to record the depreciation?
- Debit computer system $2,000; credit depreciation expense $2,000
- Debit accumulated depreciation $2,000; credit computer system $2,000
- Debit depreciation expense $2,000; credit accumulated depreciation $2,000
- Debit computer system $2,000; credit accumulated depreciation $2,000
Q41. Complete the following sentence: The Conservatism Concept directs an entity to consider recognizing a liability when it is __________________.
- absolutely certain economic resources may be sacrificed in the future
- remotely possible economic resources may be sacrificed in the future
- reasonably possible economic resources may be sacrificed in the future
- reasonably certain economic resources may be sacrificed in the future
Q42. During 2014, Carlita’s competitor Farside had double the sales of Carlita, but it also earned a gross margin of $30,000. What was Farside’s 2014 gross margin percentage?
- Insufficient information; cannot be calculated
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