WGU D776 Finance Skills for Managers Exam Review
and Study Guide for Western Governors University
Students | Financial Statement Analysis, Budgeting,
Cost Management, Cash Flow Analysis, Decision-
Making Tools, ROI and Break-Even Calculations,
Managerial Accounting Principles, and Practice
Questions with Detailed Rationales | Updated 2026
Assessment Prep
,QUESTION 1
Which financial statement reports a company's financial position at a specific point in
time?
A) Income Statement
B) Statement of Cash Flows
C) Balance Sheet
D) Statement of Retained Earnings
Correct Answer: C
RATIONALE:The balance sheet (also called the statement of financial position) shows
assets, liabilities, and equity as of a specific date, providing a snapshot of financial
position. The income statement and cash flow statement report activities over a period
of time, while the statement of retained earnings is a component of equity reporting.
QUESTION 2
What does a current ratio of 2.5 indicate about a company's liquidity?
A) The company has $2.50 in long-term assets for every $1 of long-term debt
B) The company has negative working capital
C) The company has $2.50 in current assets for every $1 of current liabilities
D) The company is insolvent
Correct Answer: C
RATIONALE:The current ratio = Current Assets ÷ Current Liabilities. A ratio of 2.5 means
the company has $2.50 of current assets available to cover each $1 of current liabilities,
indicating strong short-term liquidity. Higher ratios generally suggest better ability to
meet short-term obligations.
QUESTION 3
Which capital budgeting method considers the time value of money and provides
results in percentage form?
A) Payback Period
B) Accounting Rate of Return
C) Internal Rate of Return (IRR)
D) Net Present Value (NPV)
Correct Answer: C
RATIONALE:IRR calculates the discount rate that makes a project's NPV equal to zero,
expressing return as a percentage while accounting for time value of money. NPV also
considers time value but yields a dollar amount. Payback period and ARR ignore time
value of money.
QUESTION 4
Depreciation expense appears on which financial statement?
A) Balance Sheet only
B) Income Statement
C) Statement of Cash Flows (operating section)
D) Both B and C
, Correct Answer: D
RATIONALE:Depreciation is recorded as an expense on the income statement,
reducing net income. On the cash flow statement (indirect method), it is added back to
net income in operating activities since it's a non-cash expense. It also reduces the
book value of assets on the balance sheet over time.
QUESTION 5
A manager analyzing a project finds its NPV is negative at the company's required rate of
return. What should the manager recommend?
A) Accept the project because it will increase market share
B) Accept the project if its IRR exceeds the payback period
C) Reject the project because it destroys value
D) Accept the project if it has strategic importance regardless of NPV
Correct Answer: C
RATIONALE:A negative NPV indicates the project's expected returns are less than the
required rate of return (cost of capital), meaning it would decrease firm value. While
strategic considerations may sometimes influence decisions, financially, negative NPV
projects should generally be rejected as they fail to meet minimum return thresholds.
QUESTION 6
Which cost behavior pattern remains constant in total regardless of changes in activity
level?
A) Variable cost
B) Fixed cost
C) Mixed cost
D) Step cost
Correct Answer: B
RATIONALE:Fixed costs remain constant in total within the relevant range (e.g., rent,
salaries). Variable costs change in direct proportion to activity level. Mixed costs
contain both fixed and variable components, while step costs remain fixed over ranges
but jump at certain activity thresholds.
QUESTION 7
What is the primary purpose of a cash budget?
A) To calculate depreciation expense
B) To determine the company's tax liability
C) To forecast cash inflows and outflows for liquidity management
D) To establish product pricing strategies
Correct Answer: C
RATIONALE:A cash budget projects expected cash receipts and disbursements over a
future period, helping managers anticipate cash shortages or surpluses and arrange
financing or investments accordingly. It is essential for short-term liquidity planning and
avoiding insolvency.
and Study Guide for Western Governors University
Students | Financial Statement Analysis, Budgeting,
Cost Management, Cash Flow Analysis, Decision-
Making Tools, ROI and Break-Even Calculations,
Managerial Accounting Principles, and Practice
Questions with Detailed Rationales | Updated 2026
Assessment Prep
,QUESTION 1
Which financial statement reports a company's financial position at a specific point in
time?
A) Income Statement
B) Statement of Cash Flows
C) Balance Sheet
D) Statement of Retained Earnings
Correct Answer: C
RATIONALE:The balance sheet (also called the statement of financial position) shows
assets, liabilities, and equity as of a specific date, providing a snapshot of financial
position. The income statement and cash flow statement report activities over a period
of time, while the statement of retained earnings is a component of equity reporting.
QUESTION 2
What does a current ratio of 2.5 indicate about a company's liquidity?
A) The company has $2.50 in long-term assets for every $1 of long-term debt
B) The company has negative working capital
C) The company has $2.50 in current assets for every $1 of current liabilities
D) The company is insolvent
Correct Answer: C
RATIONALE:The current ratio = Current Assets ÷ Current Liabilities. A ratio of 2.5 means
the company has $2.50 of current assets available to cover each $1 of current liabilities,
indicating strong short-term liquidity. Higher ratios generally suggest better ability to
meet short-term obligations.
QUESTION 3
Which capital budgeting method considers the time value of money and provides
results in percentage form?
A) Payback Period
B) Accounting Rate of Return
C) Internal Rate of Return (IRR)
D) Net Present Value (NPV)
Correct Answer: C
RATIONALE:IRR calculates the discount rate that makes a project's NPV equal to zero,
expressing return as a percentage while accounting for time value of money. NPV also
considers time value but yields a dollar amount. Payback period and ARR ignore time
value of money.
QUESTION 4
Depreciation expense appears on which financial statement?
A) Balance Sheet only
B) Income Statement
C) Statement of Cash Flows (operating section)
D) Both B and C
, Correct Answer: D
RATIONALE:Depreciation is recorded as an expense on the income statement,
reducing net income. On the cash flow statement (indirect method), it is added back to
net income in operating activities since it's a non-cash expense. It also reduces the
book value of assets on the balance sheet over time.
QUESTION 5
A manager analyzing a project finds its NPV is negative at the company's required rate of
return. What should the manager recommend?
A) Accept the project because it will increase market share
B) Accept the project if its IRR exceeds the payback period
C) Reject the project because it destroys value
D) Accept the project if it has strategic importance regardless of NPV
Correct Answer: C
RATIONALE:A negative NPV indicates the project's expected returns are less than the
required rate of return (cost of capital), meaning it would decrease firm value. While
strategic considerations may sometimes influence decisions, financially, negative NPV
projects should generally be rejected as they fail to meet minimum return thresholds.
QUESTION 6
Which cost behavior pattern remains constant in total regardless of changes in activity
level?
A) Variable cost
B) Fixed cost
C) Mixed cost
D) Step cost
Correct Answer: B
RATIONALE:Fixed costs remain constant in total within the relevant range (e.g., rent,
salaries). Variable costs change in direct proportion to activity level. Mixed costs
contain both fixed and variable components, while step costs remain fixed over ranges
but jump at certain activity thresholds.
QUESTION 7
What is the primary purpose of a cash budget?
A) To calculate depreciation expense
B) To determine the company's tax liability
C) To forecast cash inflows and outflows for liquidity management
D) To establish product pricing strategies
Correct Answer: C
RATIONALE:A cash budget projects expected cash receipts and disbursements over a
future period, helping managers anticipate cash shortages or surpluses and arrange
financing or investments accordingly. It is essential for short-term liquidity planning and
avoiding insolvency.
