WGU C214 Financial Management The Essential Exam Readiness and Study Manual: Complete Test Bank Review, Advanced Practice Questions, Comprehensive Study Guide, and Final Preparation Assessment

A company reports total assets of $9.5 million and total liabilities of $6.2 million. Based on the accounting equation, what is total shareholders’ equity? A. $3.3 million B. $6.2 million C. $9.5 million D. $15.7 million Correct Answer: A. $3.3 million Rationale: The balance-sheet equation is Assets = Liabilities + Equity. Rearranging gives Equity = Assets − Liabilities. Therefore, equity equals $9.5 million minus $6.2 million, or $3.3 million. Question 2 A pharmaceutical company unexpectedly announces regulatory approval for a highly profitable new drug. In an efficient market, what should happen to the company’s stock price? A. It should adjust rapidly to reflect the new information. B. It should remain unchanged until the next financial statement is issued. C. It should respond only after most investors have purchased the stock. D. It should gradually change over several years. Correct Answer: A. It should adjust rapidly to reflect the new information. Rationale: Market efficiency means publicly available information is incorporated into security prices quickly. Approval of a profitable drug changes expected future cash flows and should therefore affect the stock price almost immediately. Question 3 A corporation sells newly issued bonds directly to investors to finance a new manufacturing facility. In which market does this transaction occur? A. Secondary market B. Primary market C. Dealer resale market D. Derivatives market Correct Answer: B. Primary market Rationale: The primary market is where issuers sell newly created securities and receive the proceeds. A secondary-market transaction occurs when investors trade previously issued securities with one another. Question 4 What is the central purpose of the statement of cash flows? A. To replace the balance sheet and income statement B. To explain changes in cash during an accounting period C. To report only the company’s investing transactions D. To calculate the company’s market capitalization Correct Answer: B. To explain changes in cash during an accounting period Rationale: The statement of cash flows reconciles beginning and ending cash by classifying cash movements into operating, investing, and financing activities. It supplements rather than replaces the other financial statements. Question 5 A stock currently has a bid price of $48.90 and an ask price of $49.05. An investor submits a market order to purchase 100 shares. At which price will the order most likely execute? A. $48.90 B. $48.975 C. $49.05 D. The previous day’s closing price Correct Answer: C. $49.05 Rationale: A market purchase order normally executes at the lowest available ask price because the ask is the price at which sellers are willing to sell. Question 6 A company earns net income of $800,000 and declares dividends of $250,000 during the year. What is the increase in retained earnings, assuming no other adjustments? A. $250,000 B. $550,000 C. $800,000 D. $1,050,000 Correct Answer: B. $550,000 Rationale: The change in retained earnings normally equals net income minus dividends. Therefore, the increase is $800,000 − $250,000, or $550,000. Question 7 A beginning investor is comparing different ways to provide capital to a corporation. Which pair represents the two basic categories of financial instruments commonly issued by corporations? A. Stocks and bonds B. Mutual funds and savings accounts C. Options and insurance contracts D. Futures and money market accounts Correct Answer: A. Stocks and bonds Rationale: Stocks represent an ownership interest, while bonds represent a creditor relationship. These are the two fundamental categories of corporate financial instruments: equity and debt. Question 8 A retailer collects cash from customers, pays suppliers, and pays employee salaries. In which section of the statement of cash flows should these transactions generally appear? A. Operating activities B. Investing activities C. Financing activities D. Noncash supplemental activities Correct Answer: A. Operating activities Rationale: Operating activities relate to the company’s main revenue-producing operations, including collections from customers and payments to suppliers and employees. Question 9 A stock has a current ask price of $104.20. An investor places a limit order to buy the stock at $101.55. When can the order be executed? A. Immediately at $104.20 B. Only when the ask price falls to $101.55 or lower C. Only when the bid price rises above $104.20 D. At any price selected by the broker Correct Answer: B. Only when the ask price falls to $101.55 or lower Rationale: A buy limit order sets the maximum price the investor is willing to pay. It can execute only when shares are available at the limit price or below. Question 10 Which statement correctly describes the content and reporting period of an income statement? A. It reports assets, liabilities, and equity at a specific date. B. It reports revenues and expenses over a period of time. C. It reports only cash collections and cash payments. D. It reports changes in shareholders’ equity at one point in time. Correct Answer: B. It reports revenues and expenses over a period of time. Rationale: The income statement measures financial performance by reporting revenues, expenses, gains, and losses for a period. The balance sheet reports assets, liabilities, and equity at a specific date.