O B J E C T I V E A S S E S S M E N T P R E P A R AT I O N
WGU C214 Financial
Management Exam
Comprehensive multiple-choice examination covering financial
statements, ratio analysis, time value of money, capital budgeting,
working capital management, corporate governance, and global finance.
Aligned with 2026-2027 WGU C214 competencies.
Academic Year
VER I F I ED AN SW ER S — 120 Q UESTI O N S — C O N C EPTUAL F O C US
,Section 1: Financial Statements, Accounting Principles, and Cash Flow
(Q1-Q25)
Q1: Which financial statement provides a snapshot of a company's financial position at a specific point in
time?
A. Income Statement
B. Statement of Retained Earnings
C. Balance Sheet (Statement of Financial Position) [CORRECT]
D. Statement of Cash Flows
Correct Answer: C
Rationale: The Balance Sheet, also called the Statement of Financial Position, reports assets, liabilities, and equity at a
single point in time, following the fundamental accounting equation Assets = Liabilities + Equity. The Income Statement
covers a period of time, not a point in time. The Statement of Cash Flows also covers a period. The Statement of Retained
Earnings shows changes over a period.
Q2: Under accrual accounting, when is revenue recognized?
A. When cash is received from the customer
B. When the product or service is delivered to the customer [CORRECT]
C. When the invoice is mailed to the customer
D. When the order is placed by the customer
Correct Answer: B
Rationale: Accrual accounting follows the revenue recognition principle, which states that revenue should be recognized
when it is earned, regardless of when cash is received. This means revenue is recorded when the product is delivered or the
service is performed. Cash accounting, in contrast, records revenue only when payment is received, which does not comply
with GAAP.
Q3: Which section of the Statement of Cash Flows includes adjustments for non-cash items such as
depreciation?
A. Investing Activities
B. Financing Activities
C. Operating Activities [CORRECT]
D. Supplementary Information
Correct Answer: C
Rationale: The Operating Activities section of the Statement of Cash Flows begins with net income and adds back
non-cash expenses like depreciation and amortization. Depreciation reduces net income on the income statement but does
not involve an actual outflow of cash, so it is added back when computing cash flow from operations. Investing activities
relate to purchase and sale of long-term assets, and financing activities relate to debt and equity transactions.
Q4: What is the primary purpose of the matching principle in accrual accounting?
, A. To ensure all cash receipts are recorded in the period received
B. To match expenses with the revenues they help generate in the same accounting period [CORRECT]
C. To match assets with their corresponding liabilities on the balance sheet
D. To ensure the balance sheet always balances
Correct Answer: B
Rationale: The matching principle requires that expenses be recognized in the same period as the revenues they helped to
generate. This is a core concept of accrual accounting that ensures financial statements accurately reflect the economic
reality of business transactions. It does not deal with cash receipts, balance sheet balancing, or asset-liability matching.
Q5: How does an increase in accounts receivable affect the Statement of Cash Flows?
A. It is added to net income in the Operating Activities section
B. It is deducted from net income in the Operating Activities section [CORRECT]
C. It appears as a cash inflow in the Investing Activities section
D. It has no effect on the Statement of Cash Flows
Correct Answer: B
Rationale: An increase in accounts receivable means the company recorded revenue (increasing net income) but has not
yet collected the cash. Therefore, the increase in AR must be deducted from net income in the Operating Activities section to
convert accrual net income to actual cash flow. A decrease in AR would be added back as a cash inflow.
Q6: Which of the following best describes the difference between GAAP depreciation and IRS depreciation?
A. There is no difference; both use the same methods and rules
B. GAAP depreciation is for financial reporting; IRS depreciation is for tax purposes, creating temporary
timing differences [CORRECT]
C. GAAP depreciation is for tax purposes; IRS depreciation is for financial reporting
D. IRS depreciation is not permitted under any circumstances
Correct Answer: B
Rationale: GAAP depreciation follows accounting standards for financial reporting to provide a fair representation of
asset consumption, while IRS depreciation follows tax code rules (e.g., MACRS, Section 179) designed to incentivize
investment. This creates temporary timing differences between book income and taxable income, which reverse over the
asset's life.
Q7: What effect does depreciation have on a company's cash balance?
A. It decreases cash by the amount of the depreciation expense
B. It increases cash by the amount of the depreciation expense
C. It has no direct effect on cash [CORRECT]
D. It only affects cash when the asset is sold
Correct Answer: C
Rationale: Depreciation is a non-cash expense. When depreciation is recorded, the journal entry debits Depreciation
Expense and credits Accumulated Depreciation, with no cash involved. Cash was already spent when the asset was
originally purchased. Depreciation reduces net income but does not reduce cash, which is why it is added back in the
Operating Activities section of the Statement of Cash Flows.
, Q8: A company issues common stock for $500,000 in cash. Where does this transaction appear on the
Statement of Cash Flows?
A. Operating Activities as a cash inflow
B. Investing Activities as a cash inflow
C. Financing Activities as a cash inflow [CORRECT]
D. It does not appear on the Statement of Cash Flows
Correct Answer: C
Rationale: Issuing common stock is a financing transaction because it involves raising capital from equity investors. The
cash received from stock issuance is reported as a cash inflow under Financing Activities. Operating Activities relate to
core business operations, and Investing Activities relate to purchase and sale of long-term assets.
Q9: Which of the following best describes retained earnings?
A. Cash that the company has set aside for future investments
B. The total amount of dividends paid to shareholders since incorporation
C. Cumulative net income retained in the business after dividend payments [CORRECT]
D. The par value of all outstanding shares of common stock
Correct Answer: C
Rationale: Retained earnings represents the cumulative total of net income that has been retained in the business (not
distributed as dividends) since the company's inception. It increases with net income and decreases with dividend
declarations. It is not a pool of cash; rather, it reflects how retained earnings have been invested in assets. It is distinct
from common stock par value.
Q10: What is Net Working Capital (NWC)?
A. Total assets minus total liabilities
B. Current assets minus current liabilities [CORRECT]
C. Total equity minus retained earnings
D. Long-term assets minus long-term liabilities
Correct Answer: B
Rationale: Net Working Capital is defined as Current Assets minus Current Liabilities and measures a company's
short-term liquidity and ability to meet near-term obligations. It is not the same as total assets minus total liabilities (which
equals equity), nor does it involve long-term assets or liabilities. Positive NWC indicates the company can cover its
short-term debts.
Q11: A decrease in inventory is reported on the Statement of Cash Flows as which of the following?
A. A cash outflow in the Operating Activities section
B. A deduction from net income in the Operating Activities section
C. A cash inflow (addition to net income) in the Operating Activities section [CORRECT]
D. A cash inflow in the Investing Activities section
Correct Answer: C
WGU C214 Financial
Management Exam
Comprehensive multiple-choice examination covering financial
statements, ratio analysis, time value of money, capital budgeting,
working capital management, corporate governance, and global finance.
Aligned with 2026-2027 WGU C214 competencies.
Academic Year
VER I F I ED AN SW ER S — 120 Q UESTI O N S — C O N C EPTUAL F O C US
,Section 1: Financial Statements, Accounting Principles, and Cash Flow
(Q1-Q25)
Q1: Which financial statement provides a snapshot of a company's financial position at a specific point in
time?
A. Income Statement
B. Statement of Retained Earnings
C. Balance Sheet (Statement of Financial Position) [CORRECT]
D. Statement of Cash Flows
Correct Answer: C
Rationale: The Balance Sheet, also called the Statement of Financial Position, reports assets, liabilities, and equity at a
single point in time, following the fundamental accounting equation Assets = Liabilities + Equity. The Income Statement
covers a period of time, not a point in time. The Statement of Cash Flows also covers a period. The Statement of Retained
Earnings shows changes over a period.
Q2: Under accrual accounting, when is revenue recognized?
A. When cash is received from the customer
B. When the product or service is delivered to the customer [CORRECT]
C. When the invoice is mailed to the customer
D. When the order is placed by the customer
Correct Answer: B
Rationale: Accrual accounting follows the revenue recognition principle, which states that revenue should be recognized
when it is earned, regardless of when cash is received. This means revenue is recorded when the product is delivered or the
service is performed. Cash accounting, in contrast, records revenue only when payment is received, which does not comply
with GAAP.
Q3: Which section of the Statement of Cash Flows includes adjustments for non-cash items such as
depreciation?
A. Investing Activities
B. Financing Activities
C. Operating Activities [CORRECT]
D. Supplementary Information
Correct Answer: C
Rationale: The Operating Activities section of the Statement of Cash Flows begins with net income and adds back
non-cash expenses like depreciation and amortization. Depreciation reduces net income on the income statement but does
not involve an actual outflow of cash, so it is added back when computing cash flow from operations. Investing activities
relate to purchase and sale of long-term assets, and financing activities relate to debt and equity transactions.
Q4: What is the primary purpose of the matching principle in accrual accounting?
, A. To ensure all cash receipts are recorded in the period received
B. To match expenses with the revenues they help generate in the same accounting period [CORRECT]
C. To match assets with their corresponding liabilities on the balance sheet
D. To ensure the balance sheet always balances
Correct Answer: B
Rationale: The matching principle requires that expenses be recognized in the same period as the revenues they helped to
generate. This is a core concept of accrual accounting that ensures financial statements accurately reflect the economic
reality of business transactions. It does not deal with cash receipts, balance sheet balancing, or asset-liability matching.
Q5: How does an increase in accounts receivable affect the Statement of Cash Flows?
A. It is added to net income in the Operating Activities section
B. It is deducted from net income in the Operating Activities section [CORRECT]
C. It appears as a cash inflow in the Investing Activities section
D. It has no effect on the Statement of Cash Flows
Correct Answer: B
Rationale: An increase in accounts receivable means the company recorded revenue (increasing net income) but has not
yet collected the cash. Therefore, the increase in AR must be deducted from net income in the Operating Activities section to
convert accrual net income to actual cash flow. A decrease in AR would be added back as a cash inflow.
Q6: Which of the following best describes the difference between GAAP depreciation and IRS depreciation?
A. There is no difference; both use the same methods and rules
B. GAAP depreciation is for financial reporting; IRS depreciation is for tax purposes, creating temporary
timing differences [CORRECT]
C. GAAP depreciation is for tax purposes; IRS depreciation is for financial reporting
D. IRS depreciation is not permitted under any circumstances
Correct Answer: B
Rationale: GAAP depreciation follows accounting standards for financial reporting to provide a fair representation of
asset consumption, while IRS depreciation follows tax code rules (e.g., MACRS, Section 179) designed to incentivize
investment. This creates temporary timing differences between book income and taxable income, which reverse over the
asset's life.
Q7: What effect does depreciation have on a company's cash balance?
A. It decreases cash by the amount of the depreciation expense
B. It increases cash by the amount of the depreciation expense
C. It has no direct effect on cash [CORRECT]
D. It only affects cash when the asset is sold
Correct Answer: C
Rationale: Depreciation is a non-cash expense. When depreciation is recorded, the journal entry debits Depreciation
Expense and credits Accumulated Depreciation, with no cash involved. Cash was already spent when the asset was
originally purchased. Depreciation reduces net income but does not reduce cash, which is why it is added back in the
Operating Activities section of the Statement of Cash Flows.
, Q8: A company issues common stock for $500,000 in cash. Where does this transaction appear on the
Statement of Cash Flows?
A. Operating Activities as a cash inflow
B. Investing Activities as a cash inflow
C. Financing Activities as a cash inflow [CORRECT]
D. It does not appear on the Statement of Cash Flows
Correct Answer: C
Rationale: Issuing common stock is a financing transaction because it involves raising capital from equity investors. The
cash received from stock issuance is reported as a cash inflow under Financing Activities. Operating Activities relate to
core business operations, and Investing Activities relate to purchase and sale of long-term assets.
Q9: Which of the following best describes retained earnings?
A. Cash that the company has set aside for future investments
B. The total amount of dividends paid to shareholders since incorporation
C. Cumulative net income retained in the business after dividend payments [CORRECT]
D. The par value of all outstanding shares of common stock
Correct Answer: C
Rationale: Retained earnings represents the cumulative total of net income that has been retained in the business (not
distributed as dividends) since the company's inception. It increases with net income and decreases with dividend
declarations. It is not a pool of cash; rather, it reflects how retained earnings have been invested in assets. It is distinct
from common stock par value.
Q10: What is Net Working Capital (NWC)?
A. Total assets minus total liabilities
B. Current assets minus current liabilities [CORRECT]
C. Total equity minus retained earnings
D. Long-term assets minus long-term liabilities
Correct Answer: B
Rationale: Net Working Capital is defined as Current Assets minus Current Liabilities and measures a company's
short-term liquidity and ability to meet near-term obligations. It is not the same as total assets minus total liabilities (which
equals equity), nor does it involve long-term assets or liabilities. Positive NWC indicates the company can cover its
short-term debts.
Q11: A decrease in inventory is reported on the Statement of Cash Flows as which of the following?
A. A cash outflow in the Operating Activities section
B. A deduction from net income in the Operating Activities section
C. A cash inflow (addition to net income) in the Operating Activities section [CORRECT]
D. A cash inflow in the Investing Activities section
Correct Answer: C
