Accounting Crash Course Exam V4 (Wall
Street Prep) – 2025 Update | 100 Actual
Questions with Verified Correct Answers
& Expert Rationales | A+ Graded
Instructions: Select the best answer for each question. Each question is worth 1 point (80 points
total). Questions cover key accounting concepts, financial statement analysis, and practical
applications from the Wall Street Prep Accounting Crash Course. Answers are in blue, with
detailed rationales and financial explanations.
Question 1
What is the primary purpose of accounting?
A. To maximize a company’s stock price
B. To measure and communicate financial performance
C. To reduce tax liabilities for shareholders
D. To forecast future market trends
Answer: B
Rationale: Accounting is the standardized process of measuring and reporting a company’s
financial performance to stakeholders, including management, investors, and regulators.
Financial Explanation: It provides a common framework (e.g., GAAP or IFRS) for financial
statements like the income statement, balance sheet, and cash flow statement, enabling informed
decision-making.
Question 2
Which of the following best describes the matching principle?
A. Revenues are recorded when cash is received
B. Expenses are recorded in the same period as the revenues they help generate
C. Assets are recorded at their market value
D. Liabilities are recognized only when paid
,Answer: B
Rationale: The matching principle, a cornerstone of accrual accounting, ensures expenses are
recognized in the same period as the revenues they contribute to, aligning financial reporting
with economic activity.
Financial Explanation: This principle ensures accurate profitability reporting, distinguishing
accrual accounting from cash-based accounting.
Question 3
Under US GAAP, which intangible assets are recorded on the balance sheet?
A. Internally developed trademarks
B. Acquired patents and trademarks
C. Employee loyalty and customer relationships
D. Brand value estimated by management
Answer: B
Rationale: US GAAP requires acquired intangible assets, such as patents and trademarks, to be
recorded at their historical cost or fair value at acquisition. Internally developed intangibles and
unquantifiable assets like loyalty are not recognized.
Financial Explanation: This ensures objective measurement, as internally developed intangibles
lack verifiable costs.
Question 4
In 2017, a company earned $2 million in wages but paid none in cash. In 2018, it earned $8
million in wages and paid $7 million in cash, prioritizing 2017 wages. Unpaid wages will be
paid in Q1 2019. What is the change in liabilities in 2018?
A. Increased by $1 million
B. Increased by $3 million
C. Decreased by $5 million
D. Decreased by $7 million
Answer: A
Rationale: In 2017, $2 million in unpaid wages created a $2 million liability. In 2018, $8 million
in wages were earned, totaling $10 million in wages owed ($2M + $8M). Cash payments of $7
million cleared the $2 million from 2017 and $5 million of 2018 wages, leaving a $3 million
liability ($10M - $7M). The liability increased by $1 million ($3M - $2M).
Financial Explanation: Accrued wages are a liability on the balance sheet, reflecting
obligations for earned but unpaid expenses.
, Question 5
A company reports gross profit of $20 million in 2018, with $5 million in sales and
marketing expenses, $2 million in interest income, a $4 million loss from selling equipment
(sold for $5 million, book value $9 million), and a 40% tax rate. What is the net income?
A. $6.8 million
B. $7.8 million
C. $8.8 million
D. $9.8 million
Answer: B
Rationale:
• Gross Profit: $20 million
• Operating Expenses: Subtract $5 million, leaving Operating Income = $15 million.
• Non-Operating Items: Add $2 million interest income, subtract $4 million loss on
equipment sale ($5M - $9M), yielding Pretax Income = $15M + $2M - $4M = $13M.
• Tax Expense: 40% of $13M = $5.2M.
• Net Income: $13M - $5.2M = $7.8M.
Financial Explanation: Net income reflects all revenues, expenses, and taxes, providing
a comprehensive measure of profitability.
Question 6
Which of the following is NOT one of the four underlying principles of accounting?
A. Historical Cost
B. Revenue Recognition
C. Full Disclosure
D. Materiality
Answer: D
Rationale: The four underlying principles are Historical Cost, Revenue Recognition, Matching
Principle, and Full Disclosure. Materiality is a constraint, not a principle.
Financial Explanation: Principles guide the creation of financial statements, while constraints
like materiality ensure practicality in reporting.
Question 7
What does EBITDA represent?
A. Net income plus taxes
B. Gross profit minus operating expenses
Street Prep) – 2025 Update | 100 Actual
Questions with Verified Correct Answers
& Expert Rationales | A+ Graded
Instructions: Select the best answer for each question. Each question is worth 1 point (80 points
total). Questions cover key accounting concepts, financial statement analysis, and practical
applications from the Wall Street Prep Accounting Crash Course. Answers are in blue, with
detailed rationales and financial explanations.
Question 1
What is the primary purpose of accounting?
A. To maximize a company’s stock price
B. To measure and communicate financial performance
C. To reduce tax liabilities for shareholders
D. To forecast future market trends
Answer: B
Rationale: Accounting is the standardized process of measuring and reporting a company’s
financial performance to stakeholders, including management, investors, and regulators.
Financial Explanation: It provides a common framework (e.g., GAAP or IFRS) for financial
statements like the income statement, balance sheet, and cash flow statement, enabling informed
decision-making.
Question 2
Which of the following best describes the matching principle?
A. Revenues are recorded when cash is received
B. Expenses are recorded in the same period as the revenues they help generate
C. Assets are recorded at their market value
D. Liabilities are recognized only when paid
,Answer: B
Rationale: The matching principle, a cornerstone of accrual accounting, ensures expenses are
recognized in the same period as the revenues they contribute to, aligning financial reporting
with economic activity.
Financial Explanation: This principle ensures accurate profitability reporting, distinguishing
accrual accounting from cash-based accounting.
Question 3
Under US GAAP, which intangible assets are recorded on the balance sheet?
A. Internally developed trademarks
B. Acquired patents and trademarks
C. Employee loyalty and customer relationships
D. Brand value estimated by management
Answer: B
Rationale: US GAAP requires acquired intangible assets, such as patents and trademarks, to be
recorded at their historical cost or fair value at acquisition. Internally developed intangibles and
unquantifiable assets like loyalty are not recognized.
Financial Explanation: This ensures objective measurement, as internally developed intangibles
lack verifiable costs.
Question 4
In 2017, a company earned $2 million in wages but paid none in cash. In 2018, it earned $8
million in wages and paid $7 million in cash, prioritizing 2017 wages. Unpaid wages will be
paid in Q1 2019. What is the change in liabilities in 2018?
A. Increased by $1 million
B. Increased by $3 million
C. Decreased by $5 million
D. Decreased by $7 million
Answer: A
Rationale: In 2017, $2 million in unpaid wages created a $2 million liability. In 2018, $8 million
in wages were earned, totaling $10 million in wages owed ($2M + $8M). Cash payments of $7
million cleared the $2 million from 2017 and $5 million of 2018 wages, leaving a $3 million
liability ($10M - $7M). The liability increased by $1 million ($3M - $2M).
Financial Explanation: Accrued wages are a liability on the balance sheet, reflecting
obligations for earned but unpaid expenses.
, Question 5
A company reports gross profit of $20 million in 2018, with $5 million in sales and
marketing expenses, $2 million in interest income, a $4 million loss from selling equipment
(sold for $5 million, book value $9 million), and a 40% tax rate. What is the net income?
A. $6.8 million
B. $7.8 million
C. $8.8 million
D. $9.8 million
Answer: B
Rationale:
• Gross Profit: $20 million
• Operating Expenses: Subtract $5 million, leaving Operating Income = $15 million.
• Non-Operating Items: Add $2 million interest income, subtract $4 million loss on
equipment sale ($5M - $9M), yielding Pretax Income = $15M + $2M - $4M = $13M.
• Tax Expense: 40% of $13M = $5.2M.
• Net Income: $13M - $5.2M = $7.8M.
Financial Explanation: Net income reflects all revenues, expenses, and taxes, providing
a comprehensive measure of profitability.
Question 6
Which of the following is NOT one of the four underlying principles of accounting?
A. Historical Cost
B. Revenue Recognition
C. Full Disclosure
D. Materiality
Answer: D
Rationale: The four underlying principles are Historical Cost, Revenue Recognition, Matching
Principle, and Full Disclosure. Materiality is a constraint, not a principle.
Financial Explanation: Principles guide the creation of financial statements, while constraints
like materiality ensure practicality in reporting.
Question 7
What does EBITDA represent?
A. Net income plus taxes
B. Gross profit minus operating expenses
