WGU D102 FINANCIAL ACCOUNTING
MIDTERM EXAM PREPARATION
QUESTIONS AND ANSWERS 100%
VERIFIED 2026/2027
1. A company purchases equipment for $25,000 by paying $5,000 in cash and signing a note
payable for the remaining $20,000. How does this transaction affect the accounting
equation?
A. Assets increase by $25,000; Liabilities increase by $20,000; Equity increases by $5,000
B. Assets decrease by $5,000; Liabilities increase by $20,000; Equity decreases by $25,000
C. Assets increase by $25,000; Liabilities increase by $25,000; No change in Equity
D. Assets increase by $20,000; Liabilities increase by $20,000; No change in Equity
Answer: D
Conceptual Explanation: The equipment (Asset) increases by $25,000, while Cash (Asset)
decreases by $5,000, resulting in a net asset increase of $20,000. Notes Payable (Liability)
increases by $20,000. The equation remains balanced.
2. Which of the following accounts is considered a ‘temporary’ account and is closed at the
end of the accounting period?
A. Dividends
,B. Accumulated Depreciation
C. Retained Earnings
D. Accounts Receivable
Answer: A
Conceptual Explanation: Temporary accounts include revenues, expenses, and dividends.
These are closed to Retained Earnings at the end of the period. Accumulated Depreciation
and Accounts Receivable are permanent balance sheet accounts.
3. Under the accrual basis of accounting, when is revenue recognized?
A. When the cash is received from the customer
B. When the performance obligation is satisfied
C. When the invoice is sent to the customer
D. At the end of the fiscal year
Answer: B
Conceptual Explanation: The revenue recognition principle states that revenue should be
recognized in the period in which the performance obligation is satisfied, regardless of
when cash is received.
4. A company failed to record an adjusting entry for accrued wages at the end of the year.
What is the effect on the financial statements?
A. Net income is overstated; Liabilities are understated
, B. Net income is understated; Liabilities are overstated
C. Net income is overstated; Assets are understated
D. Net income is understated; Assets are overstated
Answer: A
Conceptual Explanation: Failing to accrue wages means an expense was not recorded
(understating expenses/overstating net income) and a liability was not recorded
(understating liabilities).
5. Which financial statement reports a company’s financial position at a specific point in
time?
A. Income Statement
B. Statement of Retained Earnings
C. Balance Sheet
D. Statement of Cash Flows
Answer: C
Conceptual Explanation: The Balance Sheet provides a ‘snapshot’ of assets, liabilities, and
equity at a specific date, whereas the others cover a period of time.
6. What is the normal balance of the ‘Sales Returns and Allowances’ account?
A. Credit
B. Debit
MIDTERM EXAM PREPARATION
QUESTIONS AND ANSWERS 100%
VERIFIED 2026/2027
1. A company purchases equipment for $25,000 by paying $5,000 in cash and signing a note
payable for the remaining $20,000. How does this transaction affect the accounting
equation?
A. Assets increase by $25,000; Liabilities increase by $20,000; Equity increases by $5,000
B. Assets decrease by $5,000; Liabilities increase by $20,000; Equity decreases by $25,000
C. Assets increase by $25,000; Liabilities increase by $25,000; No change in Equity
D. Assets increase by $20,000; Liabilities increase by $20,000; No change in Equity
Answer: D
Conceptual Explanation: The equipment (Asset) increases by $25,000, while Cash (Asset)
decreases by $5,000, resulting in a net asset increase of $20,000. Notes Payable (Liability)
increases by $20,000. The equation remains balanced.
2. Which of the following accounts is considered a ‘temporary’ account and is closed at the
end of the accounting period?
A. Dividends
,B. Accumulated Depreciation
C. Retained Earnings
D. Accounts Receivable
Answer: A
Conceptual Explanation: Temporary accounts include revenues, expenses, and dividends.
These are closed to Retained Earnings at the end of the period. Accumulated Depreciation
and Accounts Receivable are permanent balance sheet accounts.
3. Under the accrual basis of accounting, when is revenue recognized?
A. When the cash is received from the customer
B. When the performance obligation is satisfied
C. When the invoice is sent to the customer
D. At the end of the fiscal year
Answer: B
Conceptual Explanation: The revenue recognition principle states that revenue should be
recognized in the period in which the performance obligation is satisfied, regardless of
when cash is received.
4. A company failed to record an adjusting entry for accrued wages at the end of the year.
What is the effect on the financial statements?
A. Net income is overstated; Liabilities are understated
, B. Net income is understated; Liabilities are overstated
C. Net income is overstated; Assets are understated
D. Net income is understated; Assets are overstated
Answer: A
Conceptual Explanation: Failing to accrue wages means an expense was not recorded
(understating expenses/overstating net income) and a liability was not recorded
(understating liabilities).
5. Which financial statement reports a company’s financial position at a specific point in
time?
A. Income Statement
B. Statement of Retained Earnings
C. Balance Sheet
D. Statement of Cash Flows
Answer: C
Conceptual Explanation: The Balance Sheet provides a ‘snapshot’ of assets, liabilities, and
equity at a specific date, whereas the others cover a period of time.
6. What is the normal balance of the ‘Sales Returns and Allowances’ account?
A. Credit
B. Debit
