WGU C213 Financial Accounting Week 6 Midterm
Exam Verified Solutions Pack
Practice Exam – Version 1
1. Which financial statement reports a company's assets, liabilities, and stockholders' equity at a
specific point in time?
A. Income statement
B. Balance sheet
C. Statement of cash flows
D. Statement of retained earnings
Correct Answer: B
Rationale: The balance sheet (also called the statement of financial position) reports assets,
liabilities, and stockholders' equity at a specific point in time. The income statement reports
revenues and expenses over a period. The statement of cash flows reports cash inflows
and outflows. The statement of retained earnings reconciles beginning and ending retained
earnings.
2. Which of the following is an example of a current asset?
A. Land
B. Equipment
C. Accounts receivable
D. Bonds payable
Correct Answer: C
Rationale: Accounts receivable is a current asset because it is expected to be converted to
cash within one year or one operating cycle. Land and equipment are long-term (non-
current) assets. Bonds payable is a long-term liability.
3. The accounting equation is expressed as:
A. Assets = Liabilities − Stockholders' Equity
B. Assets = Liabilities + Stockholders' Equity
C. Liabilities = Assets + Stockholders' Equity
D. Stockholders' Equity = Assets + Liabilities
,Correct Answer: B
Rationale: The fundamental accounting equation is Assets = Liabilities + Stockholders'
Equity. This equation must always balance and is the foundation of the double-entry
accounting system.
4. Which financial statement reports revenues and expenses over a period of time?
A. Balance sheet
B. Income statement
C. Statement of cash flows
D. Statement of retained earnings
Correct Answer: B
Rationale: The income statement reports revenues and expenses over a period of time
(e.g., a month, quarter, or year) to determine net income or net loss. The balance sheet is a
point-in-time statement. The statement of cash flows reports cash flows. The statement of
retained earnings reconciles retained earnings.
5. Under accrual accounting, revenue is recognized when:
A. Cash is received
B. The performance obligation is satisfied
C. The order is placed
D. The invoice is mailed
Correct Answer: B
Rationale: Under accrual accounting (ASC 606), revenue is recognized when the
performance obligation is satisfied, meaning goods or services have been transferred to the
customer. Cash receipt is not required for revenue recognition under accrual accounting.
6. Which of the following is a contra-asset account?
A. Accounts receivable
B. Accumulated depreciation
C. Prepaid expenses
D. Inventory
Correct Answer: B
,Rationale: Accumulated depreciation is a contra-asset account because it has a credit
balance that reduces the carrying value of the related asset. Accounts receivable, prepaid
expenses, and inventory are all asset accounts with debit balances.
7. A company purchases $5,000 of inventory on account. What is the effect on the accounting
equation?
A. Assets increase, liabilities increase
B. Assets increase, liabilities decrease
C. Assets decrease, liabilities increase
D. No effect
Correct Answer: A
Rationale: Purchasing inventory on account increases inventory (an asset) and increases
accounts payable (a liability). The accounting equation remains balanced: Assets =
Liabilities + Stockholders' Equity.
8. Which of the following is an example of an operating activity on the statement of cash flows?
A. Purchase of equipment
B. Issuance of common stock
C. Payment of dividends
D. Collection of cash from customers
Correct Answer: D
Rationale: Collection of cash from customers is an operating activity. Purchase of
equipment is an investing activity. Issuance of common stock and payment of dividends are
financing activities.
9. The purpose of the statement of cash flows is to:
A. Report revenues and expenses
B. Report assets, liabilities, and equity
C. Report cash inflows and outflows
D. Report changes in retained earnings
Correct Answer: C
, Rationale: The statement of cash flows reports cash inflows and outflows classified into
operating, investing, and financing activities. It explains the change in cash during the
period.
10. Which of the following is a long-term liability?
A. Accounts payable
B. Wages payable
C. Notes payable due in 5 years
D. Unearned revenue
Correct Answer: C
Rationale: Notes payable due in 5 years is a long-term liability because the obligation
extends beyond one year. Accounts payable, wages payable, and unearned revenue are
typically current liabilities.
11. Under the double-entry accounting system, every transaction:
A. Affects only one account
B. Affects at least two accounts
C. Affects only assets
D. Affects only liabilities
Correct Answer: B
Rationale: Under double-entry accounting, every transaction affects at least two accounts
with equal debits and credits. This ensures the accounting equation remains in balance.
12. Which of the following increases stockholders' equity?
A. Payment of dividends
B. Net income
C. Purchase of treasury stock
D. Payment of liabilities
Correct Answer: B
Rationale: Net income increases retained earnings, which is a component of stockholders'
equity. Payment of dividends and purchase of treasury stock decrease stockholders' equity.
Payment of liabilities decreases assets and liabilities but does not affect equity.
Exam Verified Solutions Pack
Practice Exam – Version 1
1. Which financial statement reports a company's assets, liabilities, and stockholders' equity at a
specific point in time?
A. Income statement
B. Balance sheet
C. Statement of cash flows
D. Statement of retained earnings
Correct Answer: B
Rationale: The balance sheet (also called the statement of financial position) reports assets,
liabilities, and stockholders' equity at a specific point in time. The income statement reports
revenues and expenses over a period. The statement of cash flows reports cash inflows
and outflows. The statement of retained earnings reconciles beginning and ending retained
earnings.
2. Which of the following is an example of a current asset?
A. Land
B. Equipment
C. Accounts receivable
D. Bonds payable
Correct Answer: C
Rationale: Accounts receivable is a current asset because it is expected to be converted to
cash within one year or one operating cycle. Land and equipment are long-term (non-
current) assets. Bonds payable is a long-term liability.
3. The accounting equation is expressed as:
A. Assets = Liabilities − Stockholders' Equity
B. Assets = Liabilities + Stockholders' Equity
C. Liabilities = Assets + Stockholders' Equity
D. Stockholders' Equity = Assets + Liabilities
,Correct Answer: B
Rationale: The fundamental accounting equation is Assets = Liabilities + Stockholders'
Equity. This equation must always balance and is the foundation of the double-entry
accounting system.
4. Which financial statement reports revenues and expenses over a period of time?
A. Balance sheet
B. Income statement
C. Statement of cash flows
D. Statement of retained earnings
Correct Answer: B
Rationale: The income statement reports revenues and expenses over a period of time
(e.g., a month, quarter, or year) to determine net income or net loss. The balance sheet is a
point-in-time statement. The statement of cash flows reports cash flows. The statement of
retained earnings reconciles retained earnings.
5. Under accrual accounting, revenue is recognized when:
A. Cash is received
B. The performance obligation is satisfied
C. The order is placed
D. The invoice is mailed
Correct Answer: B
Rationale: Under accrual accounting (ASC 606), revenue is recognized when the
performance obligation is satisfied, meaning goods or services have been transferred to the
customer. Cash receipt is not required for revenue recognition under accrual accounting.
6. Which of the following is a contra-asset account?
A. Accounts receivable
B. Accumulated depreciation
C. Prepaid expenses
D. Inventory
Correct Answer: B
,Rationale: Accumulated depreciation is a contra-asset account because it has a credit
balance that reduces the carrying value of the related asset. Accounts receivable, prepaid
expenses, and inventory are all asset accounts with debit balances.
7. A company purchases $5,000 of inventory on account. What is the effect on the accounting
equation?
A. Assets increase, liabilities increase
B. Assets increase, liabilities decrease
C. Assets decrease, liabilities increase
D. No effect
Correct Answer: A
Rationale: Purchasing inventory on account increases inventory (an asset) and increases
accounts payable (a liability). The accounting equation remains balanced: Assets =
Liabilities + Stockholders' Equity.
8. Which of the following is an example of an operating activity on the statement of cash flows?
A. Purchase of equipment
B. Issuance of common stock
C. Payment of dividends
D. Collection of cash from customers
Correct Answer: D
Rationale: Collection of cash from customers is an operating activity. Purchase of
equipment is an investing activity. Issuance of common stock and payment of dividends are
financing activities.
9. The purpose of the statement of cash flows is to:
A. Report revenues and expenses
B. Report assets, liabilities, and equity
C. Report cash inflows and outflows
D. Report changes in retained earnings
Correct Answer: C
, Rationale: The statement of cash flows reports cash inflows and outflows classified into
operating, investing, and financing activities. It explains the change in cash during the
period.
10. Which of the following is a long-term liability?
A. Accounts payable
B. Wages payable
C. Notes payable due in 5 years
D. Unearned revenue
Correct Answer: C
Rationale: Notes payable due in 5 years is a long-term liability because the obligation
extends beyond one year. Accounts payable, wages payable, and unearned revenue are
typically current liabilities.
11. Under the double-entry accounting system, every transaction:
A. Affects only one account
B. Affects at least two accounts
C. Affects only assets
D. Affects only liabilities
Correct Answer: B
Rationale: Under double-entry accounting, every transaction affects at least two accounts
with equal debits and credits. This ensures the accounting equation remains in balance.
12. Which of the following increases stockholders' equity?
A. Payment of dividends
B. Net income
C. Purchase of treasury stock
D. Payment of liabilities
Correct Answer: B
Rationale: Net income increases retained earnings, which is a component of stockholders'
equity. Payment of dividends and purchase of treasury stock decrease stockholders' equity.
Payment of liabilities decreases assets and liabilities but does not affect equity.
