ACCOUNTING CRASH COURSE EXAM V4 - WALL
STREET PREP /EXAM QUESTIONS AND CORRECT
ANSWERS LATEST 2026-2027
This extensive -question practice bank provides a comprehensive review of the Wall Street Prep
Accounting Crash Course Exam V4, covering the three financial statements, accounting principles,
journal entries, accrual vs. cash accounting, depreciation methods, inventory valuation, and financial
statement analysis. Each question is carefully constructed to reflect the format, difficulty, and conceptual
depth of the actual certification exam, testing your ability to apply accounting knowledge in real-world
scenarios. By studying these questions and their detailed rationales, you will develop the confidence and
technical precision needed to pass the Accounting Crash Course Exam and excel in financial modeling.
Question 1
What is the correct formula for calculating the change in working capital on the cash
flow statement?
A) Current Assets - Current Liabilities
B) (Current Assets - Prior Current Assets) - (Current Liabilities - Prior Current Liabilities)
C) Current Liabilities - Current Assets
D) Total Assets - Total Liabilities
Correct Answer: B) (Current Assets - Prior Current Assets) - (Current Liabilities -
Prior Current Liabilities)
(Rationale: The change in working capital is calculated as the increase in current assets
minus the increase in current liabilities. This adjustment is made on the cash flow
statement to convert net income from accrual to cash basis.)
Question 2
What is the correct journal entry to record the write-down of inventory to net realizable
value?
A) Debit Inventory Write-down, Credit Inventory
B) Debit Inventory, Credit Inventory Write-down
,C) Debit Cash, Credit Inventory
D) Debit Inventory Write-down, Credit Accounts Payable
Correct Answer: A) Debit Inventory Write-down, Credit Inventory
(Rationale: When inventory is written down to net realizable value, the write-down is
recorded by debiting an inventory write-down expense and crediting the Inventory
account. This reduces the carrying value of inventory.)
Question 3
What is the difference between the FIFO and LIFO inventory methods?
A) FIFO assumes first units purchased are first sold; LIFO assumes last units purchased
are first sold
B) LIFO assumes first units purchased are first sold; FIFO assumes last units purchased
are first sold
C) No difference
D) FIFO is required under GAAP
Correct Answer: A) FIFO assumes first units purchased are first sold; LIFO assumes
last units purchased are first sold
(Rationale: FIFO (First-In, First-Out) assumes the oldest inventory is sold first. LIFO (Last-In,
First-Out) assumes the newest inventory is sold first. In periods of rising prices, LIFO results
in higher COGS and lower net income.)
Question 4
What is the effect of LIFO liquidation on net income?
A) Increases net income
B) Decreases net income
C) No effect on net income
D) Decreases gross profit
Correct Answer: A) Increases net income
(Rationale: LIFO liquidation occurs when older, lower-cost inventory is sold because
current inventory levels have decreased. This results in lower COGS and higher net income,
which can create a misleading picture of profitability.)
,Question 5
What is the correct journal entry to record a capital lease under the older accounting
standard (ASC 840)?
A) Debit Leased Asset, Credit Lease Liability
B) Debit Lease Expense, Credit Cash
C) Debit Cash, Credit Lease Liability
D) Debit Leased Asset, Credit Cash
Correct Answer: A) Debit Leased Asset, Credit Lease Liability
(Rationale: Under ASC 840, a capital lease was recorded by debiting a leased asset and
crediting a lease liability at the present value of the minimum lease payments. This is now
called a finance lease under ASC 842.)
Question 6
What is the effect of capitalizing a lease (finance lease) on the balance sheet?
A) Increases assets and liabilities
B) Increases assets only
C) Increases liabilities only
D) No effect on balance sheet
Correct Answer: A) Increases assets and liabilities
(Rationale: Capitalizing a lease recognizes both an asset (right-of-use asset) and a liability
(lease liability) on the balance sheet. This increases both total assets and total liabilities.)
Question 7
What is the correct journal entry to record an operating lease expense?
A) Debit Lease Expense, Credit Cash
B) Debit Lease Asset, Credit Lease Liability
C) Debit Lease Expense, Credit Lease Liability
D) Debit Lease Liability, Credit Cash
, Correct Answer: A) Debit Lease Expense, Credit Cash
(Rationale: Under the old standard (ASC 840), operating lease payments were recorded by
debiting Lease Expense and crediting Cash. Under ASC 842, operating leases also
recognize a right-of-use asset and lease liability.)
Question 8
What is the difference between a finance lease and an operating lease for the lessee
under ASC 842?
A) Finance lease recognizes interest and amortization; operating lease recognizes
straight-line expense
B) Operating lease recognizes interest and amortization; finance lease recognizes
straight-line expense
C) No difference
D) Finance leases are only for real estate
Correct Answer: A) Finance lease recognizes interest and amortization; operating
lease recognizes straight-line expense
(Rationale: Under ASC 842, finance leases recognize interest expense on the lease liability
and amortization on the right-of-use asset. Operating leases recognize a single straight-
line lease expense.)
Question 9
What is the formula for the right-of-use asset in a lease?
A) Lease Liability + Prepaid Rent - Lease Incentives - Initial Direct Costs
B) Lease Liability - Prepaid Rent + Lease Incentives + Initial Direct Costs
C) Lease Liability + Prepaid Rent + Lease Incentives + Initial Direct Costs
D) Lease Liability - Prepaid Rent - Lease Incentives - Initial Direct Costs
Correct Answer: A) Lease Liability + Prepaid Rent - Lease Incentives - Initial Direct
Costs
(Rationale: The right-of-use asset equals the lease liability, adjusted for prepaid rent
(addition), lease incentives (subtraction), and initial direct costs (addition). This is the initial
measurement under ASC 842.)
STREET PREP /EXAM QUESTIONS AND CORRECT
ANSWERS LATEST 2026-2027
This extensive -question practice bank provides a comprehensive review of the Wall Street Prep
Accounting Crash Course Exam V4, covering the three financial statements, accounting principles,
journal entries, accrual vs. cash accounting, depreciation methods, inventory valuation, and financial
statement analysis. Each question is carefully constructed to reflect the format, difficulty, and conceptual
depth of the actual certification exam, testing your ability to apply accounting knowledge in real-world
scenarios. By studying these questions and their detailed rationales, you will develop the confidence and
technical precision needed to pass the Accounting Crash Course Exam and excel in financial modeling.
Question 1
What is the correct formula for calculating the change in working capital on the cash
flow statement?
A) Current Assets - Current Liabilities
B) (Current Assets - Prior Current Assets) - (Current Liabilities - Prior Current Liabilities)
C) Current Liabilities - Current Assets
D) Total Assets - Total Liabilities
Correct Answer: B) (Current Assets - Prior Current Assets) - (Current Liabilities -
Prior Current Liabilities)
(Rationale: The change in working capital is calculated as the increase in current assets
minus the increase in current liabilities. This adjustment is made on the cash flow
statement to convert net income from accrual to cash basis.)
Question 2
What is the correct journal entry to record the write-down of inventory to net realizable
value?
A) Debit Inventory Write-down, Credit Inventory
B) Debit Inventory, Credit Inventory Write-down
,C) Debit Cash, Credit Inventory
D) Debit Inventory Write-down, Credit Accounts Payable
Correct Answer: A) Debit Inventory Write-down, Credit Inventory
(Rationale: When inventory is written down to net realizable value, the write-down is
recorded by debiting an inventory write-down expense and crediting the Inventory
account. This reduces the carrying value of inventory.)
Question 3
What is the difference between the FIFO and LIFO inventory methods?
A) FIFO assumes first units purchased are first sold; LIFO assumes last units purchased
are first sold
B) LIFO assumes first units purchased are first sold; FIFO assumes last units purchased
are first sold
C) No difference
D) FIFO is required under GAAP
Correct Answer: A) FIFO assumes first units purchased are first sold; LIFO assumes
last units purchased are first sold
(Rationale: FIFO (First-In, First-Out) assumes the oldest inventory is sold first. LIFO (Last-In,
First-Out) assumes the newest inventory is sold first. In periods of rising prices, LIFO results
in higher COGS and lower net income.)
Question 4
What is the effect of LIFO liquidation on net income?
A) Increases net income
B) Decreases net income
C) No effect on net income
D) Decreases gross profit
Correct Answer: A) Increases net income
(Rationale: LIFO liquidation occurs when older, lower-cost inventory is sold because
current inventory levels have decreased. This results in lower COGS and higher net income,
which can create a misleading picture of profitability.)
,Question 5
What is the correct journal entry to record a capital lease under the older accounting
standard (ASC 840)?
A) Debit Leased Asset, Credit Lease Liability
B) Debit Lease Expense, Credit Cash
C) Debit Cash, Credit Lease Liability
D) Debit Leased Asset, Credit Cash
Correct Answer: A) Debit Leased Asset, Credit Lease Liability
(Rationale: Under ASC 840, a capital lease was recorded by debiting a leased asset and
crediting a lease liability at the present value of the minimum lease payments. This is now
called a finance lease under ASC 842.)
Question 6
What is the effect of capitalizing a lease (finance lease) on the balance sheet?
A) Increases assets and liabilities
B) Increases assets only
C) Increases liabilities only
D) No effect on balance sheet
Correct Answer: A) Increases assets and liabilities
(Rationale: Capitalizing a lease recognizes both an asset (right-of-use asset) and a liability
(lease liability) on the balance sheet. This increases both total assets and total liabilities.)
Question 7
What is the correct journal entry to record an operating lease expense?
A) Debit Lease Expense, Credit Cash
B) Debit Lease Asset, Credit Lease Liability
C) Debit Lease Expense, Credit Lease Liability
D) Debit Lease Liability, Credit Cash
, Correct Answer: A) Debit Lease Expense, Credit Cash
(Rationale: Under the old standard (ASC 840), operating lease payments were recorded by
debiting Lease Expense and crediting Cash. Under ASC 842, operating leases also
recognize a right-of-use asset and lease liability.)
Question 8
What is the difference between a finance lease and an operating lease for the lessee
under ASC 842?
A) Finance lease recognizes interest and amortization; operating lease recognizes
straight-line expense
B) Operating lease recognizes interest and amortization; finance lease recognizes
straight-line expense
C) No difference
D) Finance leases are only for real estate
Correct Answer: A) Finance lease recognizes interest and amortization; operating
lease recognizes straight-line expense
(Rationale: Under ASC 842, finance leases recognize interest expense on the lease liability
and amortization on the right-of-use asset. Operating leases recognize a single straight-
line lease expense.)
Question 9
What is the formula for the right-of-use asset in a lease?
A) Lease Liability + Prepaid Rent - Lease Incentives - Initial Direct Costs
B) Lease Liability - Prepaid Rent + Lease Incentives + Initial Direct Costs
C) Lease Liability + Prepaid Rent + Lease Incentives + Initial Direct Costs
D) Lease Liability - Prepaid Rent - Lease Incentives - Initial Direct Costs
Correct Answer: A) Lease Liability + Prepaid Rent - Lease Incentives - Initial Direct
Costs
(Rationale: The right-of-use asset equals the lease liability, adjusted for prepaid rent
(addition), lease incentives (subtraction), and initial direct costs (addition). This is the initial
measurement under ASC 842.)
