Free ACCOUNTING-FOR-DECISION-MAKERS Practice Test Questions and Answers (2026) Practice Questions

A cost driver is a factor that causes a change in the cost of an activity. For a call center, the primary activity is handling customer interactions. Therefore, the number of customer contacts has the most direct cause-and-effect relationship with the overhead costs incurred, such as salaries for customer service representatives, telephone expenses, and depreciation of call center equipment. This makes it the most appropriate cost driver for allocating the center's overhead.

A. Total material cost is irrelevant for a service-based operation like a call center, which has minimal or no direct materials.

C. Total sales dollars is an outcome of business activity, not a driver of call center costs. A lengthy call may result in no sale.

D. While related, the number of labor hours is an input. The number of customer contacts is the activity that drives the need for those labor hours.

1. Horngren, C. T., Datar, S. M., & Rajan, M. V. (2021). Cost Accounting: A Managerial Emphasis (17th ed.). Pearson. Chapter 5, "Activity-Based Costing and Activity-Based Management," discusses the selection of cost drivers based on a cause-and-effect relationship.

2. Kaplan, R. S., & Cooper, R. (1998). Cost & Effect: Using Integrated Cost Systems to Drive Profitability and Performance. Harvard Business School Press. Chapter 4 explains how to identify appropriate cost drivers for service organizations.

3. University of North Georgia. (n.d.). Managerial Accounting, Chapter 3: Job Order Costing and Analysis. Retrieved from https://oer.ung.edu/cgi/viewcontent.cgi?article=1002&context=accounting-textbooks (Section on "Activity-Based Costing" discusses choosing drivers that cause the cost).

Under the accrual basis of accounting, the revenue recognition principle dictates that revenue should be recognized when it is earned, regardless of when cash is received. In this scenario, the airline earns the revenue when it provides the flight service to the customer. Since the service consists of two distinct flights—one in October and one in November—the total revenue of $1,500 should be allocated and recognized across those two months. The cash received in September is recorded as unearned revenue (a liability) until the service is performed.

A. Revenue is not recognized in September because no service was provided; only cash was received, creating a liability (unearned revenue).

B. Recognizing revenue only in November ignores the portion of the service that was completed (and thus earned) in October.

D. Recognizing all revenue in September violates the revenue recognition principle, as this is when cash was received, not when the service was rendered.

1. Franklin, M., Graybeal, P., & Cooper, D. (2020). Principles of Accounting, Volume 1: Financial Accounting. OpenStax. Chapter 3.1, "Describe the Accrual Basis of Accounting and the Revenue and Expense Recognition Principles."

2. MIT OpenCourseWare. (2004). 15.511 Financial Accounting, Fall 2004. Session 4: Revenue Recognition and Accounts Receivable, Lecture Notes, pp. 2-4. Retrieved from https://ocw.mit.edu/courses/15-511-financial-accounting-fall-2004/

In the United States, the Financial Accounting Standards Board (FASB) is the independent, private-sector organization responsible for establishing financial accounting and reporting standards for public and private companies and not-for-profit organizations. These standards are collectively known as Generally Accepted Accounting Principles (GAAP). While the U.S. Securities and Exchange Commission (SEC) has the legal authority to set these standards for public companies, it officially recognizes the FASB as the designated standard-setting body.

A. The Accounting Principles Board (APB) was the predecessor to the FASB and was replaced in 1973.

B. The Securities and Exchange Commission (SEC) has legal authority but delegates standard-setting to the FASB, focusing instead on enforcement.

D. The Internal Revenue Service (IRS) establishes rules for computing taxes, which often differ from the GAAP rules used for financial reporting.

1. Financial Accounting Standards Board. (n.d.). About the FASB. FASB.org. Retrieved from https://www.fasb.org/page/aboutus. The website states, "Since 1973, the Financial Accounting Standards Board (FASB) has been the designated organization in the private sector for establishing standards of financial accounting and reporting."

2. U.S. Securities and Exchange Commission. (2011, January 31). The Role of the FASB in Establishing Generally Accepted Accounting Principles. SEC.gov. The SEC states it has "statutory authority to establish financial accounting and reporting standards for publicly held companies," but "has relied on the private sector to accomplish this task." It formally recognized the FASB for this purpose.

3. Spiceland, J. D., Nelson, M. W., & Thomas, W. B. (2019). Intermediate Accounting (10th ed.). McGraw-Hill Education. Chapter 1, p. 10. The text clearly identifies the FASB as the current private sector body responsible for setting accounting standards in the U.S.

Under U.S. GAAP, operating activities include the cash effects of transactions that create revenues and expenses and thus enter into the determination of net income. Cash payments for administration expenses, such as salaries, rent, and utilities, are core operational outflows necessary for running the business. These expenses are directly related to the company's principal revenue-producing activities. Therefore, cash payments for administration expenses are classified as an operating activity on the statement of cash flows.

A. Cash receipts from the sale of a business segment are classified as an investing activity, as it involves the disposal of long-term assets.

C. Cash payments for the purchase of plant assets are a classic example of an investing activity (acquisition of long-term assets).

D. Cash receipts from the sale of plant assets are classified as an investing activity (disposal of long-term assets).

1. Financial Accounting Standards Board (FASB). Accounting Standards Codification (ASC) Topic 230, Statement of Cash Flows. Section 230-10-45-16, "Classification of Cash Receipts and Cash Payments."

2. Kieso, D. E., Weygandt, J. J., & Warfield, T. D. (2019). Intermediate Accounting (17th ed.). Chapter 23, "Statement of Cash Flows," Section on "Operating Activities" (p. 1356). John Wiley & Sons.

3. OpenStax. (2019). Principles of Accounting, Volume 1: Financial Accounting. Section 13.2, "Prepare the Statement of Cash Flows Using the Direct Method." Rice University. Retrieved from https://openstax.org/books/principles-financial-accounting/pages/13-2-prepare-the-statement-of-cash-flows-using-the-direct-method

A multi-step income statement provides a detailed breakdown of a company's profitability by presenting several subtotals. The first major subtotal is Gross Profit, calculated as Net Sales minus the Cost of Goods Sold. After subtracting operating expenses from Gross Profit, the next key subtotal is Income from Operations (or Operating Income). These subtotals help users analyze the core operational profitability of the business separately from non-operating items and taxes. The statement continues with other subtotals like income before taxes and finally, net income.

C. Current liabilities are reported on the balance sheet, which shows a company's financial position at a specific point in time.

D. Total assets are also reported on the balance sheet, representing the economic resources owned by the company.

1. Franklin, M., Graybeal, P., & Cooper, D. (2020). Principles of Accounting, Volume 1: Financial Accounting. OpenStax. Chapter 4.3, "Prepare Financial Statements Using the Adjusted Trial Balance," Figure 4.13.

2. MIT OpenCourseWare. (2004). 15.511 Financial Accounting, Fall 2004. Session 2: The Balance Sheet and Income Statement, Lecture Notes, p. 10. Retrieved from https://ocw.mit.edu/courses/15-511-financial-accounting-fall-2004/

Conservatism: This qualitative principle or convention guides accountants to select the alternative that is least likely to overstate assets and income under conditions of uncertainty. This specifically manifests as recognizing potential expenses and losses immediately when they are probable, while delaying the recognition of revenues and gains until they are realized.

Reliable: In traditional accounting conceptual frameworks, reliability means that financial information is dependable, free from significant error and bias, and faithfully represents what it purports to represent. A core component of reliability is verifiability, meaning independent observers using the same measurement methods would reach similar conclusions.

Material: Materiality is a user-oriented threshold. Information is considered material if its omission or misstatement could influence the economic decisions of users taken on the basis of the financial statements. Thus, it is data important enough to alter or make a difference in a decision.

Relevant: Relevance requires that financial information be capable of making a difference in user decisions by helping them form predictions about the outcomes of past, present, or future events, or confirming or correcting past evaluations. It must directly pertain to or have to do with the specific economic matter at hand.

Financial Accounting Standards Board (FASB): Statement of Financial Accounting Concepts No. 8 (SFAC 8), Chapter 3: Qualitative Characteristics of Useful Financial Information.

Section on Relevance: Outlines how financial information must relate directly to decision-making needs (the matter at hand).

Section on Materiality: Identifies materiality as an entity-specific aspect of relevance based on nature or magnitude, determining if it makes a difference to users.

FASB Statement of Financial Accounting Concepts No. 2 (SFAC 2): Qualitative Characteristics of Accounting Information.

Section on Reliability and Verifiability: Defines verifiability as a primary quality under reliability, ensuring the results can be replicated.

Section on Conservatism: Clarifies conservatism as a prudent reaction to try to ensure that uncertainties and risks inherent in business situations are adequately considered (such as recognizing losses).

The budgeted cash disbursements for May are calculated by summing the payments made in May for purchases from May, April, and March, based on the company's payment policy. The policy states payments are 40% in the month of purchase, 35% in the following month, and 25% in the second month following.

- Payment for May purchases: $27,000 40% = $10,800

- Payment for April purchases: $22,000 35% = $7,700

- Payment for March purchases: $25,000 25% = $6,250

Total May cash disbursements = $10,800 + $7,700 + $6,250 = $24,750.

A. This amount is not derivable from the provided data and payment policy using a correct application of the percentages.

C. This incorrect answer ($25,050) is the result of misapplying the payment percentages, likely by swapping the percentages for the prior two months' purchases.

D. This amount is not derivable from the provided data and payment policy using a correct application of the percentages.

1. Heisinger, K., & Hoyle, J. B. (n.d.). Managerial Accounting. University of Minnesota Libraries Publishing. Chapter 8.3, "Preparing the Master Budget". Retrieved from https://open.lib.umn.edu/managerialaccounting/chapter/8-3-preparing-the-master-budget/. (This section provides examples of creating a schedule of cash payments for purchases across multiple periods).

2. Walther, L. M. & Skousen, C.J. (2009). Managerial and Cost Accounting. Bookboon.com. Chapter 8, "The Master Budget", pp. 83-84. (This source provides a step-by-step guide for creating a cash budget, including the schedule of payments for inventory).

Financial statement errors are unintentional misstatements. Option A, a miscalculation of payroll tax, is a mathematical mistake and therefore an error. Option C describes an unintentional misapplication of the revenue recognition principle, where revenue is recorded before it is earned. Because the action is specified as "unintentional," it qualifies as an error. In contrast, fraud involves intent to deceive, and disagreements over estimates are matters of professional judgment, not necessarily errors.

B. An employee receiving a kickback is an intentional act of deception for personal gain, which constitutes fraud (misappropriation of assets), not an error.

D. A disagreement over an accounting estimate, like the allowance for uncollectible accounts, reflects a difference in professional judgment, not a factual error.

1. American Institute of Certified Public Accountants (AICPA). AU-C Section 240, Consideration of Fraud in a Financial Statement Audit. Paragraph .11 distinguishes between misstatements arising from fraudulent financial reporting (intentional) and misstatements arising from misappropriation of assets (fraud) versus errors (unintentional).

2. Whittington, O. R., & Pany, K. (2018). Principles of Auditing & Other Assurance Services (21st ed.). McGraw-Hill Education. Chapter 6 discusses the auditor's responsibility for detecting illegal acts, distinguishing between errors (unintentional) and fraud (intentional).

3. Financial Accounting Standards Board (FASB). Accounting Standards Codification (ASC) Topic 250, Accounting Changes and Error Corrections. Section 250-10-20 defines an error in previously issued financial statements as a misstatement resulting from mathematical mistakes or mistakes in the application of accounting principles.

Activity-based costing (ABC) is a methodology for allocating overhead costs more precisely than traditional methods. The process begins after direct materials (DM) and direct labor (DL) are determined. The very first step in the ABC process itself is to identify the key activities that consume resources and cause overhead costs to be incurred. Examples include machine setups, purchasing, and quality inspections. After identifying activities, costs are pooled by activity, and then cost drivers are selected to assign these costs to products.

A. Calculating G&A (General & Administrative) costs is a separate accounting function; these are period costs, not product costs allocated via ABC.

B. Assigning overhead costs to products is a later step in the ABC process, performed after activities and cost drivers have been identified.

C. Double-checking DM & DL calculations is a general best practice for accuracy but is not the first procedural step of implementing ABC for overhead.

1. Heisinger, K., & Hoyle, J. B. (n.d.). Managerial Accounting. University of Minnesota Libraries Publishing. Chapter 3, Section 3.2, "Activity-Based Costing." The text outlines the first step as "Identify costly activities required to complete products."

2. Garrison, R. H., Noreen, E. W., & Brewer, P. C. (2021). Managerial Accounting (17th ed.). McGraw-Hill. Chapter 7, p. 299, "The first step in implementing activity-based costing is to identify the activities that will form the foundation for the system."

3. MIT Sloan School of Management. (2004). 15.963 Management Accounting and Control, Fall 2004. MIT OpenCourseWare. Lecture Notes, Session 10: Activity-Based Costing. The notes describe the first step as identifying major activities.

Inventory overhead, also called manufacturing overhead or factory overhead, includes all indirect costs incurred within the factory to produce a product. These costs are considered product costs and are capitalized as part of inventory until the product is sold. Factory electricity is an indirect utility cost necessary for production. Production employee benefits, for both direct and indirect labor (e.g., supervisors, maintenance staff), are also part of the labor-related overhead. Costs incurred outside the factory, such as administrative expenses, are treated as period costs and are not included in inventory.

B. Administrative office electricity is a period cost associated with running the business, not a product cost included in manufacturing overhead.

D. Administrative employee benefits are a period cost, as they support the overall business operations rather than the production process itself.

1. Heisinger, K., & Hoyle, J. B. (n.d.). Managerial Accounting. University of Minnesota Libraries Publishing. Chapter 1, Section 1.5, "How Are Costs Classified?". This section defines manufacturing overhead as including indirect materials, indirect labor, and other factory-related costs like factory utilities and rent.

2. Walther, L. M., & Skousen, C. J. (2009). Managerial and Cost Accounting. Bookboon. Chapter 2, p. 18, "Manufacturing Overhead." This source lists examples including "factory utilities, rent on factory building, depreciation on factory equipment, and indirect employee salaries/benefits."