WGU C214 Financial Management
Objective Assessment (OA) Practice Exam
Actual Questions and Answers (Verified)
100 Questions | Comprehensive Coverage | A+ Graded Material
Section 1: Financial Statements and Accounting Principles (Q1-Q20)
Q1: Which of the following financial statements shows a company's financial position at a specific point in
time?
A. Income Statement
B. Statement of Retained Earnings
C. Balance Sheet [CORRECT]
D. Statement of Cash Flows
Correct Answer: C
Rationale: The Balance Sheet provides a snapshot of a company's assets, liabilities, and equity at a single point in time,
following the accounting equation Assets = Liabilities + Equity. The Income Statement shows results over a period, not at a
point in time. The Statement of Cash Flows also covers a period. The Statement of Retained Earnings tracks changes over
time.
Q2: A company reports revenues of $500,000 and expenses of $380,000 for the year. What is the net income?
A. $880,000
B. $120,000 [CORRECT]
C. $500,000
D. $380,000
Correct Answer: B
Rationale: Net Income equals Revenues minus Expenses, so $500,000 - $380,000 = $120,000. This follows the fundamental
Income Statement formula. $880,000 would be the sum (not the difference), $500,000 is only revenue, and $380,000 is only
expenses.
Q3: Which section of the Statement of Cash Flows includes cash generated from a company's core business
operations?
A. Cash Flow from Investing (CFI)
B. Cash Flow from Financing (CFF)
C. Cash Flow from Operations (CFO) [CORRECT]
D. Retained Earnings
Correct Answer: C
Rationale: Cash Flow from Operations (CFO) reflects cash generated from the core business activities of a firm. CFI covers
purchase and sale of long-term assets such as PP&E.; CFF covers borrowing, repaying debt, issuing stock, and paying
dividends. Retained Earnings is a balance sheet equity item, not a cash flow section.
,Q4: The purchase of a new manufacturing facility would be classified under which section of the Statement
of Cash Flows?
A. Cash Flow from Operations (CFO)
B. Cash Flow from Investing (CFI) [CORRECT]
C. Cash Flow from Financing (CFF)
D. Income Statement
Correct Answer: B
Rationale: The purchase of property, plant, and equipment (PP&E;) and other long-term assets is classified as Cash Flow
from Investing (CFI). This section captures capital expenditures and the purchase or sale of long-term assets. CFO relates to
core operations, and CFF relates to debt and equity transactions.
Q5: Under accrual accounting, when is revenue recognized?
A. When cash is received from the customer
B. When the expense is paid
C. When it is earned, regardless of when cash is received [CORRECT]
D. At the end of the fiscal year only
Correct Answer: C
Rationale: Accrual accounting recognizes revenue when it is earned, not necessarily when cash changes hands. This is the
revenue recognition principle. Cash accounting, by contrast, records revenue only when cash is received. Recognizing
revenue only at year-end or when expenses are paid are both incorrect applications of accounting principles.
Q6: The Matching Principle states that expenses should be:
A. Recorded when cash is paid
B. Matched to the revenues they help generate in the same period [CORRECT]
C. Reported only on the Balance Sheet
D. Deferred to the next fiscal year
Correct Answer: B
Rationale: The Matching Principle requires that expenses be recognized in the same period as the revenues they help
generate. This ensures accurate net income measurement. Recording expenses when cash is paid describes cash accounting.
Expenses appear on the Income Statement, not just the Balance Sheet, and deferring unrelated expenses violates the
matching concept.
Q7: How does GAAP accounting differ from IRS (tax) accounting?
A. GAAP and IRS rules are identical
B. GAAP is for internal use only; IRS is for external reporting
C. Actual taxes paid may differ from the income tax expense reported on the GAAP income statement due to
different rules [CORRECT]
D. IRS accounting follows accrual methods while GAAP follows cash methods
Correct Answer: C
Rationale: GAAP and IRS tax accounting follow different sets of rules, which means the income tax expense on the GAAP
income statement can differ from the actual taxes paid to the IRS. Common differences include depreciation methods and
revenue recognition timing. They are not identical, nor is one exclusively internal versus external. Both systems can use
either cash or accrual methods depending on the context.
Q8: A company has net income of $200,000 and pays dividends of $50,000. What is the addition to retained
earnings?
A. $250,000
, B. $200,000
C. $150,000 [CORRECT]
D. $50,000
Correct Answer: C
Rationale: Addition to Retained Earnings equals Net Income minus Dividends: $200,000 - $50,000 = $150,000. This
represents the portion of net income that is reinvested in the company rather than distributed to shareholders. $250,000
incorrectly adds them, $200,000 ignores dividends, and $50,000 only reflects the dividend payment.
Q9: Depreciation is best described as:
A. A cash expense that reduces the cash balance directly
B. A non-cash expense associated with the acquisition of long-term assets that creates a difference between
net income and CFO [CORRECT]
C. An expense only relevant for tax purposes
D. A direct reduction of retained earnings
Correct Answer: B
Rationale: Depreciation is a non-cash expense that allocates the cost of a long-term asset over its useful life. Since no actual
cash changes hands, depreciation is added back to net income when computing CFO, creating a difference between net
income and operating cash flow. It is relevant for both GAAP and tax purposes and indirectly affects retained earnings
through net income.
Q10: What is the formula for Net Working Capital?
A. Total Assets - Total Liabilities
B. Current Assets - Current Liabilities [CORRECT]
C. Current Assets / Current Liabilities
D. Long-term Assets - Long-term Liabilities
Correct Answer: B
Rationale: Net Working Capital (NWC) equals Current Assets minus Current Liabilities. This measures a company's
short-term liquidity and ability to cover near-term obligations. Total Assets minus Total Liabilities equals Total Equity, not
NWC. The current ratio is Current Assets divided by Current Liabilities, not subtracted. Long-term components are not part
of the NWC calculation.
Q11: An increase in inventory on the balance sheet indicates what impact on the Statement of Cash Flows?
A. Increase in CFO
B. Reduction in CFO [CORRECT]
C. Increase in CFI
D. No impact on cash flows
Correct Answer: B
Rationale: An increase in inventory means the company has purchased more goods than it has sold, which represents a cash
outflow that reduces Cash Flow from Operations (CFO). Under the indirect method, the increase in inventory is subtracted
from net income. It does not affect CFI (which covers long-term assets) and definitely has an impact on cash flows.
Q12: Which of the following is considered an operating liability?
A. Long-term debt
B. Common stock
C. Accounts Payable [CORRECT]
D. Retained Earnings
Correct Answer: C
Objective Assessment (OA) Practice Exam
Actual Questions and Answers (Verified)
100 Questions | Comprehensive Coverage | A+ Graded Material
Section 1: Financial Statements and Accounting Principles (Q1-Q20)
Q1: Which of the following financial statements shows a company's financial position at a specific point in
time?
A. Income Statement
B. Statement of Retained Earnings
C. Balance Sheet [CORRECT]
D. Statement of Cash Flows
Correct Answer: C
Rationale: The Balance Sheet provides a snapshot of a company's assets, liabilities, and equity at a single point in time,
following the accounting equation Assets = Liabilities + Equity. The Income Statement shows results over a period, not at a
point in time. The Statement of Cash Flows also covers a period. The Statement of Retained Earnings tracks changes over
time.
Q2: A company reports revenues of $500,000 and expenses of $380,000 for the year. What is the net income?
A. $880,000
B. $120,000 [CORRECT]
C. $500,000
D. $380,000
Correct Answer: B
Rationale: Net Income equals Revenues minus Expenses, so $500,000 - $380,000 = $120,000. This follows the fundamental
Income Statement formula. $880,000 would be the sum (not the difference), $500,000 is only revenue, and $380,000 is only
expenses.
Q3: Which section of the Statement of Cash Flows includes cash generated from a company's core business
operations?
A. Cash Flow from Investing (CFI)
B. Cash Flow from Financing (CFF)
C. Cash Flow from Operations (CFO) [CORRECT]
D. Retained Earnings
Correct Answer: C
Rationale: Cash Flow from Operations (CFO) reflects cash generated from the core business activities of a firm. CFI covers
purchase and sale of long-term assets such as PP&E.; CFF covers borrowing, repaying debt, issuing stock, and paying
dividends. Retained Earnings is a balance sheet equity item, not a cash flow section.
,Q4: The purchase of a new manufacturing facility would be classified under which section of the Statement
of Cash Flows?
A. Cash Flow from Operations (CFO)
B. Cash Flow from Investing (CFI) [CORRECT]
C. Cash Flow from Financing (CFF)
D. Income Statement
Correct Answer: B
Rationale: The purchase of property, plant, and equipment (PP&E;) and other long-term assets is classified as Cash Flow
from Investing (CFI). This section captures capital expenditures and the purchase or sale of long-term assets. CFO relates to
core operations, and CFF relates to debt and equity transactions.
Q5: Under accrual accounting, when is revenue recognized?
A. When cash is received from the customer
B. When the expense is paid
C. When it is earned, regardless of when cash is received [CORRECT]
D. At the end of the fiscal year only
Correct Answer: C
Rationale: Accrual accounting recognizes revenue when it is earned, not necessarily when cash changes hands. This is the
revenue recognition principle. Cash accounting, by contrast, records revenue only when cash is received. Recognizing
revenue only at year-end or when expenses are paid are both incorrect applications of accounting principles.
Q6: The Matching Principle states that expenses should be:
A. Recorded when cash is paid
B. Matched to the revenues they help generate in the same period [CORRECT]
C. Reported only on the Balance Sheet
D. Deferred to the next fiscal year
Correct Answer: B
Rationale: The Matching Principle requires that expenses be recognized in the same period as the revenues they help
generate. This ensures accurate net income measurement. Recording expenses when cash is paid describes cash accounting.
Expenses appear on the Income Statement, not just the Balance Sheet, and deferring unrelated expenses violates the
matching concept.
Q7: How does GAAP accounting differ from IRS (tax) accounting?
A. GAAP and IRS rules are identical
B. GAAP is for internal use only; IRS is for external reporting
C. Actual taxes paid may differ from the income tax expense reported on the GAAP income statement due to
different rules [CORRECT]
D. IRS accounting follows accrual methods while GAAP follows cash methods
Correct Answer: C
Rationale: GAAP and IRS tax accounting follow different sets of rules, which means the income tax expense on the GAAP
income statement can differ from the actual taxes paid to the IRS. Common differences include depreciation methods and
revenue recognition timing. They are not identical, nor is one exclusively internal versus external. Both systems can use
either cash or accrual methods depending on the context.
Q8: A company has net income of $200,000 and pays dividends of $50,000. What is the addition to retained
earnings?
A. $250,000
, B. $200,000
C. $150,000 [CORRECT]
D. $50,000
Correct Answer: C
Rationale: Addition to Retained Earnings equals Net Income minus Dividends: $200,000 - $50,000 = $150,000. This
represents the portion of net income that is reinvested in the company rather than distributed to shareholders. $250,000
incorrectly adds them, $200,000 ignores dividends, and $50,000 only reflects the dividend payment.
Q9: Depreciation is best described as:
A. A cash expense that reduces the cash balance directly
B. A non-cash expense associated with the acquisition of long-term assets that creates a difference between
net income and CFO [CORRECT]
C. An expense only relevant for tax purposes
D. A direct reduction of retained earnings
Correct Answer: B
Rationale: Depreciation is a non-cash expense that allocates the cost of a long-term asset over its useful life. Since no actual
cash changes hands, depreciation is added back to net income when computing CFO, creating a difference between net
income and operating cash flow. It is relevant for both GAAP and tax purposes and indirectly affects retained earnings
through net income.
Q10: What is the formula for Net Working Capital?
A. Total Assets - Total Liabilities
B. Current Assets - Current Liabilities [CORRECT]
C. Current Assets / Current Liabilities
D. Long-term Assets - Long-term Liabilities
Correct Answer: B
Rationale: Net Working Capital (NWC) equals Current Assets minus Current Liabilities. This measures a company's
short-term liquidity and ability to cover near-term obligations. Total Assets minus Total Liabilities equals Total Equity, not
NWC. The current ratio is Current Assets divided by Current Liabilities, not subtracted. Long-term components are not part
of the NWC calculation.
Q11: An increase in inventory on the balance sheet indicates what impact on the Statement of Cash Flows?
A. Increase in CFO
B. Reduction in CFO [CORRECT]
C. Increase in CFI
D. No impact on cash flows
Correct Answer: B
Rationale: An increase in inventory means the company has purchased more goods than it has sold, which represents a cash
outflow that reduces Cash Flow from Operations (CFO). Under the indirect method, the increase in inventory is subtracted
from net income. It does not affect CFI (which covers long-term assets) and definitely has an impact on cash flows.
Q12: Which of the following is considered an operating liability?
A. Long-term debt
B. Common stock
C. Accounts Payable [CORRECT]
D. Retained Earnings
Correct Answer: C
