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WGU C214: Financial Management –
Comprehensive Objective Assessment (OA)
Study Guide
Summarized Exam Coverage
This comprehensive exam covers the essential financial management concepts required for the
WGU C214 Objective Assessment, including financial statement analysis, time value of money
calculations, capital budgeting techniques, risk and return evaluation using CAPM, cost of
capital determination, capital structure decisions, working capital management, valuation
methodologies for stocks and bonds, and understanding the interrelationships among financial
statements and cash flow analysis.
Question 1
A firm shows an increase in accounts receivable of $100,000 during the period while sales
remained constant. Considered in isolation, this change will have which effect on cash flows
from operations? Correct Answer: Decrease CFO by $100,000
A) Increase CFO by $100,000
B) No effect on CFO
C) Decrease CFO by $100,000
D) Decrease CFO by $50,000
Question 2
Which characteristic distinguishes preferred stock from common stock in terms of claims during
bankruptcy proceedings? Correct Answer: Preferred stockholders have a higher payoff claim in
bankruptcy
A) Preferred stockholders have voting rights in bankruptcy decisions
B) Preferred stockholders have a higher payoff claim in bankruptcy
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C) Preferred stockholders receive variable dividend payments
D) Preferred stockholders have priority over all creditors
Question 3
When calculating free cash flow to the firm, depreciation expense is added back to EBIT because
it represents which type of expense on the income statement? Correct Answer: A non-cash
expense that reduces accounting income
A) A cash expense that reduces taxable income
B) A non-cash expense that reduces accounting income
C) An operating expense that requires cash outlay
D) A financing expense that affects cash flows
Question 4
Which of the following represents the correct treatment of interest expense on the income
statement for purposes of calculating operating income? Correct Answer: Interest expense is not
considered an operating expense
A) Interest expense is included in operating expenses
B) Interest expense is not considered an operating expense
C) Interest expense is added back to net income
D) Interest expense is treated as a revenue item
Question 5
A company issues bonds with a coupon rate of 8% when the market rate for similar bonds is 6%.
The bonds will most likely sell at which price relative to par value? Correct Answer: A premium
above par value
A) A discount below par value
B) A premium above par value
C) Exactly at par value
D) Cannot be determined from information given
Question 6
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According to the capital asset pricing model, if a firm has idiosyncratic risk that could be
diversified away, the required return by shareholders will be affected in which manner? Correct
Answer: Unaffected because idiosyncratic risk is diversified away
A) Higher due to the additional risk premium
B) Unaffected because idiosyncratic risk is diversified away
C) Lower because risk is reduced through diversification
D) Higher only if the firm has positive earnings
Question 7
What is the primary purpose of establishing debt covenants and restrictions in bond
indentures? Correct Answer: To ensure management meets bond and shareholder expectations
A) To increase the coupon rate on outstanding bonds
B) To ensure management meets bond and shareholder expectations
C) To eliminate all risk for bondholders
D) To guarantee dividend payments to shareholders
Question 8
The matching principle in accounting requires that expenses be recorded in the same period as
the revenues they helped generate. This principle is most directly associated with which
accounting concept? Correct Answer: Accrual accounting recognition of revenues and expenses
A) Cash basis accounting recognition of transactions
B) Accrual accounting recognition of revenues and expenses
C) Historical cost measurement of assets
D) Conservatism principle in financial reporting
Question 9
Which of the following represents a spontaneous account that varies directly with changes in
sales levels? Correct Answer: Accounts payable increases as inventory purchases increase with
sales
A) Long-term debt remains constant regardless of sales changes
B) Accounts payable increases as inventory purchases increase with sales
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C) Common stock is issued only during financing activities
D) Fixed assets require long-term planning for expansion
Question 10
When a bond has a duration of 5 years and yields increase by 1%, what is the approximate
percentage change in the bond's price? Correct Answer: A decrease of approximately 5% in bond
price
A) An increase of approximately 5% in bond price
B) A decrease of approximately 5% in bond price
C) No change in bond price
D) A decrease of approximately 1% in bond price
Question 11
Which statement regarding the statement of cash flows and its usefulness in evaluating financial
health is accurate? Correct Answer: The statement of cash flows is useful due to its focus on
actual cash movements
A) The statement of cash flows is not useful due to accrual accounting distortions
B) The statement of cash flows is useful due to its focus on actual cash movements
C) The statement of cash flows only shows financing activities
D) The statement of cash flows replaces the income statement
Question 12
What is the correct calculation for the change in retained earnings during a fiscal period? Correct
Answer: Net income minus dividends paid during the period
A) Net income plus dividends paid during the period
B) Net income minus dividends paid during the period
C) Total revenues minus total expenses
D) Beginning retained earnings plus total assets
Question 13
A firm with a positive cash flow from operations should be considered financially healthy based
solely on this measure. Is this statement accurate? Correct Answer: False, because positive CFO
WGU C214: Financial Management –
Comprehensive Objective Assessment (OA)
Study Guide
Summarized Exam Coverage
This comprehensive exam covers the essential financial management concepts required for the
WGU C214 Objective Assessment, including financial statement analysis, time value of money
calculations, capital budgeting techniques, risk and return evaluation using CAPM, cost of
capital determination, capital structure decisions, working capital management, valuation
methodologies for stocks and bonds, and understanding the interrelationships among financial
statements and cash flow analysis.
Question 1
A firm shows an increase in accounts receivable of $100,000 during the period while sales
remained constant. Considered in isolation, this change will have which effect on cash flows
from operations? Correct Answer: Decrease CFO by $100,000
A) Increase CFO by $100,000
B) No effect on CFO
C) Decrease CFO by $100,000
D) Decrease CFO by $50,000
Question 2
Which characteristic distinguishes preferred stock from common stock in terms of claims during
bankruptcy proceedings? Correct Answer: Preferred stockholders have a higher payoff claim in
bankruptcy
A) Preferred stockholders have voting rights in bankruptcy decisions
B) Preferred stockholders have a higher payoff claim in bankruptcy
,2 | Page
C) Preferred stockholders receive variable dividend payments
D) Preferred stockholders have priority over all creditors
Question 3
When calculating free cash flow to the firm, depreciation expense is added back to EBIT because
it represents which type of expense on the income statement? Correct Answer: A non-cash
expense that reduces accounting income
A) A cash expense that reduces taxable income
B) A non-cash expense that reduces accounting income
C) An operating expense that requires cash outlay
D) A financing expense that affects cash flows
Question 4
Which of the following represents the correct treatment of interest expense on the income
statement for purposes of calculating operating income? Correct Answer: Interest expense is not
considered an operating expense
A) Interest expense is included in operating expenses
B) Interest expense is not considered an operating expense
C) Interest expense is added back to net income
D) Interest expense is treated as a revenue item
Question 5
A company issues bonds with a coupon rate of 8% when the market rate for similar bonds is 6%.
The bonds will most likely sell at which price relative to par value? Correct Answer: A premium
above par value
A) A discount below par value
B) A premium above par value
C) Exactly at par value
D) Cannot be determined from information given
Question 6
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According to the capital asset pricing model, if a firm has idiosyncratic risk that could be
diversified away, the required return by shareholders will be affected in which manner? Correct
Answer: Unaffected because idiosyncratic risk is diversified away
A) Higher due to the additional risk premium
B) Unaffected because idiosyncratic risk is diversified away
C) Lower because risk is reduced through diversification
D) Higher only if the firm has positive earnings
Question 7
What is the primary purpose of establishing debt covenants and restrictions in bond
indentures? Correct Answer: To ensure management meets bond and shareholder expectations
A) To increase the coupon rate on outstanding bonds
B) To ensure management meets bond and shareholder expectations
C) To eliminate all risk for bondholders
D) To guarantee dividend payments to shareholders
Question 8
The matching principle in accounting requires that expenses be recorded in the same period as
the revenues they helped generate. This principle is most directly associated with which
accounting concept? Correct Answer: Accrual accounting recognition of revenues and expenses
A) Cash basis accounting recognition of transactions
B) Accrual accounting recognition of revenues and expenses
C) Historical cost measurement of assets
D) Conservatism principle in financial reporting
Question 9
Which of the following represents a spontaneous account that varies directly with changes in
sales levels? Correct Answer: Accounts payable increases as inventory purchases increase with
sales
A) Long-term debt remains constant regardless of sales changes
B) Accounts payable increases as inventory purchases increase with sales
, 4 | Page
C) Common stock is issued only during financing activities
D) Fixed assets require long-term planning for expansion
Question 10
When a bond has a duration of 5 years and yields increase by 1%, what is the approximate
percentage change in the bond's price? Correct Answer: A decrease of approximately 5% in bond
price
A) An increase of approximately 5% in bond price
B) A decrease of approximately 5% in bond price
C) No change in bond price
D) A decrease of approximately 1% in bond price
Question 11
Which statement regarding the statement of cash flows and its usefulness in evaluating financial
health is accurate? Correct Answer: The statement of cash flows is useful due to its focus on
actual cash movements
A) The statement of cash flows is not useful due to accrual accounting distortions
B) The statement of cash flows is useful due to its focus on actual cash movements
C) The statement of cash flows only shows financing activities
D) The statement of cash flows replaces the income statement
Question 12
What is the correct calculation for the change in retained earnings during a fiscal period? Correct
Answer: Net income minus dividends paid during the period
A) Net income plus dividends paid during the period
B) Net income minus dividends paid during the period
C) Total revenues minus total expenses
D) Beginning retained earnings plus total assets
Question 13
A firm with a positive cash flow from operations should be considered financially healthy based
solely on this measure. Is this statement accurate? Correct Answer: False, because positive CFO
