HBS CORE – Fin ACC Mod1 Exam
Questions & Answers.
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? - CORRECT ANSWER 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.
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. - CORRECT ANSWER 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.
Jarvard University Bookstore paid $67,000 for books purchased on credit in the previous month. How
would this payment impact the accounting equation? - CORRECT ANSWER 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.
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. - CORRECT ANSWER 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.
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
