WGU D196 PRINCIPLES OF FINANCIAL ACCOUNTING OBJECTIVE ASSESSMENT – QUESTIONS AND
ANSWERS | VERIFIED AND WELL DETAILED ANSWERS | PLUS RATIONALES | GUARANTEED PASS |
LATEST EXAM UPDATE
Core Domains
Financial Statement Analysis
The Accounting Cycle
Internal Controls and Cash Management
Inventory and Cost of Goods Sold
Operating and Investing Activities
Financing Activities and Debt
Financial Reporting Standards and Ethics
Transaction Analysis and Journal Entries
Introduction
The purpose of this comprehensive assessment is to evaluate a candidate's proficiency in the foundational
principles of financial accounting. This exam assesses the ability to record business transactions, prepare financial
statements, and analyze organizational performance using standardized accounting metrics. Through a combination
of multiple-choice conceptual questions and complex, scenario-based problems, students must demonstrate their
understanding of the accounting cycle and regulatory compliance. The assessment emphasizes real-world
application, requiring learners to make informed business decisions based on financial data while adhering to ethical
standards and Generally Accepted Accounting Principles (GAAP) to ensure transparency and accuracy in reporting.
SECTION ONE: QUESTIONS 1–100
1. Which financial statement reports a company’s financial position at a specific point in time?
A. Income Statement
B. Statement of Retained Earnings
C. Balance Sheet
D. Statement of Cash Flows
,🟢 C. Balance Sheet
🔴 Explanation: The Balance Sheet provides a snapshot of a company's assets, liabilities, and equity at a specific
date, whereas the other statements cover a period of time.
2. A company purchases equipment for $10,000 cash. How does this transaction affect the accounting equation?
A. Total assets increase by $10,000
B. Total assets remain unchanged
C. Total liabilities increase by $10,000
D. Equity decreases by $10,000
🟢 B. Total assets remain unchanged
🔴 Explanation: This is an asset exchange. Cash (an asset) decreases by $10,000 and Equipment (an asset)
increases by $10,000, resulting in no net change to total assets.
3. Under the accrual basis of accounting, when is revenue typically recognized?
A. When cash is received from the customer
B. When the performance obligation is satisfied
C. At the end of the fiscal year
D. When the invoice is mailed to the client
🟢 B. When the performance obligation is satisfied
🔴 Explanation: Accrual accounting recognizes revenue when it is earned (the service or good is provided),
regardless of when the cash is actually collected.
4. Which of the following accounts is considered a contra-asset?
A. Accounts Payable
B. Unearned Revenue
,C. Accumulated Depreciation
D. Sales Returns and Allowances
🟢 C. Accumulated Depreciation
🔴 Explanation: Accumulated Depreciation is a contra-asset account that reduces the carrying value of fixed assets
on the balance sheet.
5. A business pays $12,000 for a one-year insurance policy on July 1. What is the appropriate adjusting entry on
December 31?
A. Debit Insurance Expense $6,000; Credit Prepaid Insurance $6,000
B. Debit Prepaid Insurance $6,000; Credit Insurance Expense $6,000
C. Debit Insurance Expense $12,000; Credit Cash $12,000
D. Debit Prepaid Insurance $12,000; Credit Cash $12,000
🟢 A. Debit Insurance Expense $6,000; Credit Prepaid Insurance $6,000
🔴 Explanation: Six months of the policy have expired ($12, months * 6 months = $6,000). The expense
must be recognized and the asset (Prepaid Insurance) reduced.
6. Which group is primarily responsible for establishing Generally Accepted Accounting Principles (GAAP) in the
United States?
A. International Accounting Standards Board (IASB)
B. Securities and Exchange Commission (SEC)
C. Financial Accounting Standards Board (FASB)
D. Internal Revenue Service (IRS)
🟢 C. Financial Accounting Standards Board (FASB)
🔴 Explanation: While the SEC has the legal authority to set standards, it generally delegates the standard-setting
process for GAAP to the FASB.
7. What is the primary purpose of the Trial Balance?
, A. To report the net income for the period
B. To ensure that total debits equal total credits
C. To list all transactions in chronological order
D. To determine the market value of the company
🟢 B. To ensure that total debits equal total credits
🔴 Explanation: The Trial Balance is an internal document used to verify the mathematical accuracy of the ledger
by ensuring debits and credits are balanced.
8. Which of the following is a permanent (real) account?
A. Dividends
B. Service Revenue
C. Retained Earnings
D. Utilities Expense
🟢 C. Retained Earnings
🔴 Explanation: Retained Earnings is a balance sheet account and is not closed at the end of the period. Dividends,
Revenue, and Expenses are temporary accounts.
9. An analyst notices a company's Current Ratio is 0.8. What does this likely indicate?
A. The company has high profitability
B. The company may have difficulty paying short-term obligations
C. The company is over-invested in inventory
D. The company has no long-term debt
🟢 B. The company may have difficulty paying short-term obligations
🔴 Explanation: A current ratio below 1.0 indicates that current liabilities exceed current assets, suggesting potential
liquidity issues.
10. A company performs a service for a customer on account. Which of the following is the correct journal entry?
ANSWERS | VERIFIED AND WELL DETAILED ANSWERS | PLUS RATIONALES | GUARANTEED PASS |
LATEST EXAM UPDATE
Core Domains
Financial Statement Analysis
The Accounting Cycle
Internal Controls and Cash Management
Inventory and Cost of Goods Sold
Operating and Investing Activities
Financing Activities and Debt
Financial Reporting Standards and Ethics
Transaction Analysis and Journal Entries
Introduction
The purpose of this comprehensive assessment is to evaluate a candidate's proficiency in the foundational
principles of financial accounting. This exam assesses the ability to record business transactions, prepare financial
statements, and analyze organizational performance using standardized accounting metrics. Through a combination
of multiple-choice conceptual questions and complex, scenario-based problems, students must demonstrate their
understanding of the accounting cycle and regulatory compliance. The assessment emphasizes real-world
application, requiring learners to make informed business decisions based on financial data while adhering to ethical
standards and Generally Accepted Accounting Principles (GAAP) to ensure transparency and accuracy in reporting.
SECTION ONE: QUESTIONS 1–100
1. Which financial statement reports a company’s financial position at a specific point in time?
A. Income Statement
B. Statement of Retained Earnings
C. Balance Sheet
D. Statement of Cash Flows
,🟢 C. Balance Sheet
🔴 Explanation: The Balance Sheet provides a snapshot of a company's assets, liabilities, and equity at a specific
date, whereas the other statements cover a period of time.
2. A company purchases equipment for $10,000 cash. How does this transaction affect the accounting equation?
A. Total assets increase by $10,000
B. Total assets remain unchanged
C. Total liabilities increase by $10,000
D. Equity decreases by $10,000
🟢 B. Total assets remain unchanged
🔴 Explanation: This is an asset exchange. Cash (an asset) decreases by $10,000 and Equipment (an asset)
increases by $10,000, resulting in no net change to total assets.
3. Under the accrual basis of accounting, when is revenue typically recognized?
A. When cash is received from the customer
B. When the performance obligation is satisfied
C. At the end of the fiscal year
D. When the invoice is mailed to the client
🟢 B. When the performance obligation is satisfied
🔴 Explanation: Accrual accounting recognizes revenue when it is earned (the service or good is provided),
regardless of when the cash is actually collected.
4. Which of the following accounts is considered a contra-asset?
A. Accounts Payable
B. Unearned Revenue
,C. Accumulated Depreciation
D. Sales Returns and Allowances
🟢 C. Accumulated Depreciation
🔴 Explanation: Accumulated Depreciation is a contra-asset account that reduces the carrying value of fixed assets
on the balance sheet.
5. A business pays $12,000 for a one-year insurance policy on July 1. What is the appropriate adjusting entry on
December 31?
A. Debit Insurance Expense $6,000; Credit Prepaid Insurance $6,000
B. Debit Prepaid Insurance $6,000; Credit Insurance Expense $6,000
C. Debit Insurance Expense $12,000; Credit Cash $12,000
D. Debit Prepaid Insurance $12,000; Credit Cash $12,000
🟢 A. Debit Insurance Expense $6,000; Credit Prepaid Insurance $6,000
🔴 Explanation: Six months of the policy have expired ($12, months * 6 months = $6,000). The expense
must be recognized and the asset (Prepaid Insurance) reduced.
6. Which group is primarily responsible for establishing Generally Accepted Accounting Principles (GAAP) in the
United States?
A. International Accounting Standards Board (IASB)
B. Securities and Exchange Commission (SEC)
C. Financial Accounting Standards Board (FASB)
D. Internal Revenue Service (IRS)
🟢 C. Financial Accounting Standards Board (FASB)
🔴 Explanation: While the SEC has the legal authority to set standards, it generally delegates the standard-setting
process for GAAP to the FASB.
7. What is the primary purpose of the Trial Balance?
, A. To report the net income for the period
B. To ensure that total debits equal total credits
C. To list all transactions in chronological order
D. To determine the market value of the company
🟢 B. To ensure that total debits equal total credits
🔴 Explanation: The Trial Balance is an internal document used to verify the mathematical accuracy of the ledger
by ensuring debits and credits are balanced.
8. Which of the following is a permanent (real) account?
A. Dividends
B. Service Revenue
C. Retained Earnings
D. Utilities Expense
🟢 C. Retained Earnings
🔴 Explanation: Retained Earnings is a balance sheet account and is not closed at the end of the period. Dividends,
Revenue, and Expenses are temporary accounts.
9. An analyst notices a company's Current Ratio is 0.8. What does this likely indicate?
A. The company has high profitability
B. The company may have difficulty paying short-term obligations
C. The company is over-invested in inventory
D. The company has no long-term debt
🟢 B. The company may have difficulty paying short-term obligations
🔴 Explanation: A current ratio below 1.0 indicates that current liabilities exceed current assets, suggesting potential
liquidity issues.
10. A company performs a service for a customer on account. Which of the following is the correct journal entry?
