ACC 201 Intermediate Accounting I FINAL
EXAM - 2026 PRACTICE QUESTIONS (2026
Edition)
✔✨
1. Which of the following is NOT a primary qualitative characteristic of useful financial information
according to the FASB Conceptual Framework? A) Relevance B) Faithful representation C) Comparability
D) Materiality
Correct ANSWER✔✨D Rationale for A: Relevance IS a primary qualitative characteristic; information
is relevant if it can influence decisions by helping users predict outcomes or confirm prior expectations.
Rationale for B: Faithful representation IS a primary qualitative characteristic; information must be
complete, neutral, and free from error to faithfully represent economic phenomena. Rationale for C:
Comparability IS an enhancing qualitative characteristic (not primary), but the question asks what is NOT
primary, making this a distractor; however, D is more clearly incorrect as a primary characteristic.
Rationale for D: Materiality is NOT a primary qualitative characteristic; it is a component of relevance
and an entity-specific aspect of deciding what information to disclose, but not a standalone primary
characteristic.
✔✨
2. The going concern assumption implies that: A) The entity will be liquidated in the near future B)
Financial statements are prepared on a liquidation basis C) The entity will continue operating for the
foreseeable future D) Assets should be valued at net realizable value
Correct ANSWER✔✨C Rationale for A: Incorrect; liquidation in the near future contradicts the going
concern assumption, which presumes continuity of operations. Rationale for B: Incorrect; liquidation
basis accounting is used ONLY when going concern is not appropriate; going concern assumes normal
operations continue. Rationale for C: Correct; the going concern assumption presumes the entity will
remain in operation long enough to fulfill its objectives and commitments, affecting asset valuation and
liability classification. Rationale for D: Incorrect; net realizable value is used in specific contexts (like
,inventory lower of cost or market), but going concern generally supports historical cost measurement,
not liquidation values.
✔✨
3. Under U.S. GAAP, which financial statement element is defined as "inflows or other enhancements
of assets of an entity or settlements of its liabilities during a period from delivering or producing
goods, rendering services, or other activities that constitute the entity's ongoing major or central
operations"? A) Gains B) Revenues C) Comprehensive income D) Equity
Correct ANSWER✔✨B Rationale for A: Gains are increases in equity from peripheral or incidental
transactions, not from ongoing major operations; revenues specifically relate to central operations.
Rationale for B: Correct; this is the precise FASB definition of revenues, distinguishing them from gains
which arise from incidental activities. Rationale for C: Comprehensive income includes all changes in
equity except owner transactions, encompassing both net income and other comprehensive income
items; it is broader than the definition given. Rationale for D: Equity represents residual interest in
assets after deducting liabilities; it is not defined as inflows from operations.
✔✨
4. When a company uses the accrual basis of accounting, revenues are recognized when: A) Cash is
received B) The performance obligation is satisfied C) The invoice is sent to the customer D) The product
is manufactured
Correct ANSWER✔✨B Rationale for A: Cash basis recognizes revenue when cash is received; accrual
basis focuses on economic events, not cash flows. Rationale for B: Correct; under ASC 606 (Revenue
from Contracts with Customers), revenue is recognized when (or as) the entity satisfies a performance
obligation by transferring control of a promised good or service. Rationale for C: Sending an invoice is an
administrative event that does not necessarily coincide with satisfaction of performance obligations or
transfer of control. Rationale for D: Manufacturing completion may not align with transfer of control to
the customer; revenue recognition depends on when control transfers, not production completion.
✔✨
5. Which of the following best describes the expense recognition principle? A) Expenses should be
recognized in the same period as the related revenues B) Expenses should be recognized when cash is
paid C) Expenses should be recognized when incurred regardless of revenue recognition D) Expenses
should be deferred until future periods benefit
Correct ANSWER✔✨A Rationale for A: Correct; this describes the matching principle, a key aspect of
expense recognition, where costs are matched with the revenues they help generate. Rationale for B:
This describes cash basis accounting, not accrual accounting expense recognition under GAAP. Rationale
for C: While expenses are recognized when incurred, the principle emphasizes matching with related
revenues when a direct relationship exists; this option is too broad and misses the matching concept.
Rationale for D: Deferral is appropriate only when future economic benefits exist; the principle does not
universally require deferral but rather systematic allocation based on benefit periods.
✔✨
,6. A company receives $12,000 on December 1, 2026, for services to be performed evenly over the
next 12 months. Under accrual accounting, how much revenue should be recognized in 2026? A) $0 B)
$1,000 C) $12,000 D) $6,000
Correct ANSWER✔✨B Rationale for A: Incorrect; one month of service (December) was performed in
2026, so some revenue should be recognized. Rationale for B: Correct; $12,000 ÷ 12 months = $1,000
per month; one month (December) was earned in 2026, so $1,000 is recognized as revenue, with
$11,000 remaining as deferred revenue (liability). Rationale for C: Incorrect; recognizing the full $12,000
would violate the revenue recognition principle since services for 11 months extend into 2027.
Rationale for D: Incorrect; $6,000 would imply 6 months of service, but only 1 month (December)
occurred in 2026.
✔✨
7. The primary purpose of the statement of cash flows is to: A) Report a company's profitability over a
period B) Show changes in equity during a period C) Provide information about cash receipts and cash
payments D) Reconcile net income to retained earnings
Correct ANSWER✔✨C Rationale for A: Profitability is reported on the income statement, not the
statement of cash flows. Rationale for B: Changes in equity are shown in the statement of stockholders'
equity. Rationale for C: Correct; the statement of cash flows specifically reports cash inflows and
outflows from operating, investing, and financing activities to help users assess liquidity and cash
management. Rationale for D: Reconciliation of net income to retained earnings occurs in the statement
of stockholders' equity; the cash flow statement reconciles net income to net cash from operations but
not to retained earnings.
✔✨
8. Which of the following is classified as a cash equivalent on the statement of cash flows? A) Accounts
receivable due in 30 days B) Treasury bills with 3-month maturity at purchase C) Inventory held for sale
D) Equipment expected to be sold next year
Correct ANSWER✔✨B Rationale for A: Accounts receivable are operating assets, not cash
equivalents; they represent credit sales, not highly liquid short-term investments. Rationale for B:
Correct; cash equivalents are short-term, highly liquid investments readily convertible to known cash
amounts with original maturities of three months or less (e.g., Treasury bills, commercial paper).
Rationale for C: Inventory is a current asset but not liquid enough to be a cash equivalent; it must be
sold and collected, involving more risk and time. Rationale for D: Equipment is a long-term asset; even if
held for sale, it does not meet the liquidity and maturity criteria for cash equivalents.
✔✨
9. Under the indirect method of preparing the statement of cash flows, an increase in accounts
receivable would be: A) Added to net income in the operating activities section B) Subtracted from net
income in the operating activities section C) Reported as an investing activity D) Ignored because it does
not affect cash
, Correct ANSWER✔✨B Rationale for A: Incorrect; an increase in accounts receivable means revenue
was recognized but cash was not collected, so it must be subtracted to reconcile net income to cash
from operations. Rationale for B: Correct; under the indirect method, increases in current assets (like
accounts receivable) are subtracted from net income because they represent earnings not yet collected
in cash. Rationale for C: Incorrect; changes in accounts receivable relate to operating activities, not
investing activities which involve long-term assets. Rationale for D: Incorrect; while accounts receivable
itself is non-cash, its change affects the reconciliation of net income to operating cash flows and must be
adjusted.
✔✨
10. A company purchases equipment for $50,000 cash. How is this transaction reported on the
statement of cash flows? A) Operating activity: $50,000 outflow B) Investing activity: $50,000 outflow C)
Financing activity: $50,000 outflow D) Non-cash investing and financing activity
Correct ANSWER✔✨B Rationale for A: Operating activities relate to core business operations (e.g.,
receipts from customers, payments to suppliers); equipment purchases are capital expenditures, not
operating. Rationale for B: Correct; purchases of property, plant, and equipment are classified as
investing activities because they involve acquisition of long-term assets used in operations. Rationale for
C: Financing activities involve transactions with owners and creditors (e.g., issuing stock, borrowing);
equipment purchase is not a financing transaction. Rationale for D: Incorrect; this transaction involves
cash ($50,000 cash paid), so it is reported as a cash outflow, not a non-cash activity.
✔✨
11. Which inventory costing method assumes that the most recently purchased items are sold first? A)
FIFO B) LIFO C) Weighted average D) Specific identification
Correct ANSWER✔✨B Rationale for A: FIFO (First-In, First-Out) assumes the oldest items are sold
first, not the most recent. Rationale for B: Correct; LIFO (Last-In, First-Out) assumes the most recently
purchased or produced items are sold first, leaving older costs in ending inventory. Rationale for C:
Weighted average assigns the same average cost to all units, without regard to purchase sequence.
Rationale for D: Specific identification tracks the actual cost of each specific item sold; it does not
assume any flow of costs.
✔✨
12. In a period of rising prices, which inventory method will result in the highest ending inventory
value on the balance sheet? A) LIFO B) FIFO C) Weighted average D) All methods produce the same
ending inventory
Correct ANSWER✔✨B Rationale for A: LIFO results in the lowest ending inventory value during rising
prices because older, lower costs remain in inventory. Rationale for B: Correct; FIFO assigns the most
recent (higher) costs to ending inventory during rising prices, resulting in the highest balance sheet value
for inventory. Rationale for C: Weighted average produces an ending inventory value between FIFO and
LIFO during price changes, not the highest. Rationale for D: Incorrect; different cost flow assumptions
produce different inventory values when prices change.
EXAM - 2026 PRACTICE QUESTIONS (2026
Edition)
✔✨
1. Which of the following is NOT a primary qualitative characteristic of useful financial information
according to the FASB Conceptual Framework? A) Relevance B) Faithful representation C) Comparability
D) Materiality
Correct ANSWER✔✨D Rationale for A: Relevance IS a primary qualitative characteristic; information
is relevant if it can influence decisions by helping users predict outcomes or confirm prior expectations.
Rationale for B: Faithful representation IS a primary qualitative characteristic; information must be
complete, neutral, and free from error to faithfully represent economic phenomena. Rationale for C:
Comparability IS an enhancing qualitative characteristic (not primary), but the question asks what is NOT
primary, making this a distractor; however, D is more clearly incorrect as a primary characteristic.
Rationale for D: Materiality is NOT a primary qualitative characteristic; it is a component of relevance
and an entity-specific aspect of deciding what information to disclose, but not a standalone primary
characteristic.
✔✨
2. The going concern assumption implies that: A) The entity will be liquidated in the near future B)
Financial statements are prepared on a liquidation basis C) The entity will continue operating for the
foreseeable future D) Assets should be valued at net realizable value
Correct ANSWER✔✨C Rationale for A: Incorrect; liquidation in the near future contradicts the going
concern assumption, which presumes continuity of operations. Rationale for B: Incorrect; liquidation
basis accounting is used ONLY when going concern is not appropriate; going concern assumes normal
operations continue. Rationale for C: Correct; the going concern assumption presumes the entity will
remain in operation long enough to fulfill its objectives and commitments, affecting asset valuation and
liability classification. Rationale for D: Incorrect; net realizable value is used in specific contexts (like
,inventory lower of cost or market), but going concern generally supports historical cost measurement,
not liquidation values.
✔✨
3. Under U.S. GAAP, which financial statement element is defined as "inflows or other enhancements
of assets of an entity or settlements of its liabilities during a period from delivering or producing
goods, rendering services, or other activities that constitute the entity's ongoing major or central
operations"? A) Gains B) Revenues C) Comprehensive income D) Equity
Correct ANSWER✔✨B Rationale for A: Gains are increases in equity from peripheral or incidental
transactions, not from ongoing major operations; revenues specifically relate to central operations.
Rationale for B: Correct; this is the precise FASB definition of revenues, distinguishing them from gains
which arise from incidental activities. Rationale for C: Comprehensive income includes all changes in
equity except owner transactions, encompassing both net income and other comprehensive income
items; it is broader than the definition given. Rationale for D: Equity represents residual interest in
assets after deducting liabilities; it is not defined as inflows from operations.
✔✨
4. When a company uses the accrual basis of accounting, revenues are recognized when: A) Cash is
received B) The performance obligation is satisfied C) The invoice is sent to the customer D) The product
is manufactured
Correct ANSWER✔✨B Rationale for A: Cash basis recognizes revenue when cash is received; accrual
basis focuses on economic events, not cash flows. Rationale for B: Correct; under ASC 606 (Revenue
from Contracts with Customers), revenue is recognized when (or as) the entity satisfies a performance
obligation by transferring control of a promised good or service. Rationale for C: Sending an invoice is an
administrative event that does not necessarily coincide with satisfaction of performance obligations or
transfer of control. Rationale for D: Manufacturing completion may not align with transfer of control to
the customer; revenue recognition depends on when control transfers, not production completion.
✔✨
5. Which of the following best describes the expense recognition principle? A) Expenses should be
recognized in the same period as the related revenues B) Expenses should be recognized when cash is
paid C) Expenses should be recognized when incurred regardless of revenue recognition D) Expenses
should be deferred until future periods benefit
Correct ANSWER✔✨A Rationale for A: Correct; this describes the matching principle, a key aspect of
expense recognition, where costs are matched with the revenues they help generate. Rationale for B:
This describes cash basis accounting, not accrual accounting expense recognition under GAAP. Rationale
for C: While expenses are recognized when incurred, the principle emphasizes matching with related
revenues when a direct relationship exists; this option is too broad and misses the matching concept.
Rationale for D: Deferral is appropriate only when future economic benefits exist; the principle does not
universally require deferral but rather systematic allocation based on benefit periods.
✔✨
,6. A company receives $12,000 on December 1, 2026, for services to be performed evenly over the
next 12 months. Under accrual accounting, how much revenue should be recognized in 2026? A) $0 B)
$1,000 C) $12,000 D) $6,000
Correct ANSWER✔✨B Rationale for A: Incorrect; one month of service (December) was performed in
2026, so some revenue should be recognized. Rationale for B: Correct; $12,000 ÷ 12 months = $1,000
per month; one month (December) was earned in 2026, so $1,000 is recognized as revenue, with
$11,000 remaining as deferred revenue (liability). Rationale for C: Incorrect; recognizing the full $12,000
would violate the revenue recognition principle since services for 11 months extend into 2027.
Rationale for D: Incorrect; $6,000 would imply 6 months of service, but only 1 month (December)
occurred in 2026.
✔✨
7. The primary purpose of the statement of cash flows is to: A) Report a company's profitability over a
period B) Show changes in equity during a period C) Provide information about cash receipts and cash
payments D) Reconcile net income to retained earnings
Correct ANSWER✔✨C Rationale for A: Profitability is reported on the income statement, not the
statement of cash flows. Rationale for B: Changes in equity are shown in the statement of stockholders'
equity. Rationale for C: Correct; the statement of cash flows specifically reports cash inflows and
outflows from operating, investing, and financing activities to help users assess liquidity and cash
management. Rationale for D: Reconciliation of net income to retained earnings occurs in the statement
of stockholders' equity; the cash flow statement reconciles net income to net cash from operations but
not to retained earnings.
✔✨
8. Which of the following is classified as a cash equivalent on the statement of cash flows? A) Accounts
receivable due in 30 days B) Treasury bills with 3-month maturity at purchase C) Inventory held for sale
D) Equipment expected to be sold next year
Correct ANSWER✔✨B Rationale for A: Accounts receivable are operating assets, not cash
equivalents; they represent credit sales, not highly liquid short-term investments. Rationale for B:
Correct; cash equivalents are short-term, highly liquid investments readily convertible to known cash
amounts with original maturities of three months or less (e.g., Treasury bills, commercial paper).
Rationale for C: Inventory is a current asset but not liquid enough to be a cash equivalent; it must be
sold and collected, involving more risk and time. Rationale for D: Equipment is a long-term asset; even if
held for sale, it does not meet the liquidity and maturity criteria for cash equivalents.
✔✨
9. Under the indirect method of preparing the statement of cash flows, an increase in accounts
receivable would be: A) Added to net income in the operating activities section B) Subtracted from net
income in the operating activities section C) Reported as an investing activity D) Ignored because it does
not affect cash
, Correct ANSWER✔✨B Rationale for A: Incorrect; an increase in accounts receivable means revenue
was recognized but cash was not collected, so it must be subtracted to reconcile net income to cash
from operations. Rationale for B: Correct; under the indirect method, increases in current assets (like
accounts receivable) are subtracted from net income because they represent earnings not yet collected
in cash. Rationale for C: Incorrect; changes in accounts receivable relate to operating activities, not
investing activities which involve long-term assets. Rationale for D: Incorrect; while accounts receivable
itself is non-cash, its change affects the reconciliation of net income to operating cash flows and must be
adjusted.
✔✨
10. A company purchases equipment for $50,000 cash. How is this transaction reported on the
statement of cash flows? A) Operating activity: $50,000 outflow B) Investing activity: $50,000 outflow C)
Financing activity: $50,000 outflow D) Non-cash investing and financing activity
Correct ANSWER✔✨B Rationale for A: Operating activities relate to core business operations (e.g.,
receipts from customers, payments to suppliers); equipment purchases are capital expenditures, not
operating. Rationale for B: Correct; purchases of property, plant, and equipment are classified as
investing activities because they involve acquisition of long-term assets used in operations. Rationale for
C: Financing activities involve transactions with owners and creditors (e.g., issuing stock, borrowing);
equipment purchase is not a financing transaction. Rationale for D: Incorrect; this transaction involves
cash ($50,000 cash paid), so it is reported as a cash outflow, not a non-cash activity.
✔✨
11. Which inventory costing method assumes that the most recently purchased items are sold first? A)
FIFO B) LIFO C) Weighted average D) Specific identification
Correct ANSWER✔✨B Rationale for A: FIFO (First-In, First-Out) assumes the oldest items are sold
first, not the most recent. Rationale for B: Correct; LIFO (Last-In, First-Out) assumes the most recently
purchased or produced items are sold first, leaving older costs in ending inventory. Rationale for C:
Weighted average assigns the same average cost to all units, without regard to purchase sequence.
Rationale for D: Specific identification tracks the actual cost of each specific item sold; it does not
assume any flow of costs.
✔✨
12. In a period of rising prices, which inventory method will result in the highest ending inventory
value on the balance sheet? A) LIFO B) FIFO C) Weighted average D) All methods produce the same
ending inventory
Correct ANSWER✔✨B Rationale for A: LIFO results in the lowest ending inventory value during rising
prices because older, lower costs remain in inventory. Rationale for B: Correct; FIFO assigns the most
recent (higher) costs to ending inventory during rising prices, resulting in the highest balance sheet value
for inventory. Rationale for C: Weighted average produces an ending inventory value between FIFO and
LIFO during price changes, not the highest. Rationale for D: Incorrect; different cost flow assumptions
produce different inventory values when prices change.
