WGU D196: PRINCIPLES OF
FINANCIAL & MANAGERIAL
ACCOUNTING – COMPLETE OA &
PRE-ASSESSMENT REVIEW (Q&A
WITH RATIONALES)
Topic: The Accounting Equation & Financial Statements
Q: What is the fundamental accounting equation?
A: Assets = Liabilities + Equity.
Rationale: This equation is the foundation of double-entry accounting. It
shows that a company's resources (assets) are financed by either creditors
(liabilities) or owners (equity). It must always balance.
Q: If a company has total assets of $500,000 and total liabilities of
$200,000, what is the total equity?
A: $300,000.
Rationale: Using the accounting equation (Assets = Liabilities + Equity), we
solve for Equity: Equity = Assets - Liabilities. $500,000 - $200,000 =
$300,000.
Q: Which financial statement reports a company's financial position at
a specific point in time?
A: The Balance Sheet.
Rationale: The balance sheet is a snapshot of a company's assets, liabilities,
,and equity on a specific date (e.g., December 31, 20XX). The income
statement, statement of cash flows, and statement of changes in equity
cover a period of time.
Q: Which financial statement reports revenues and expenses over a
period of time?
A: The Income Statement.
Rationale: The income statement, also known as the statement of
operations or profit and loss (P&L) statement, summarizes the results of
operations (revenues, expenses, gains, losses) over a period (e.g., a month,
quarter, or year) to arrive at net income or net loss.
Q: What is the primary purpose of the Statement of Cash Flows?
A: To show the inflows and outflows of cash and cash equivalents from
operating, investing, and financing activities.
Rationale: This statement categorizes cash transactions into three activities:
operating (day-to-day operations), investing (purchase/sale of long-term
assets), and financing (transactions with owners and creditors). It explains
the change in cash balance from one period to the next.
Q: How is net income calculated?
A: Net Income = Revenues - Expenses.
Rationale: This is the basic formula for the income statement. When
revenues exceed expenses, the result is net income (profit). When expenses
exceed revenues, the result is a net loss.
Q: Which account is increased by a credit?
A: Liabilities, Equity, and Revenue accounts.
Rationale: According to the rules of debit and credit, the right side (credit)
increases liability, equity, and revenue accounts, while the left side (debit)
increases asset, expense, and dividend/drawing accounts.
,Q: Which account is decreased by a credit?
A: Asset, Expense, and Dividend/Drawing accounts.
Rationale: Credits decrease the normal debit balance of asset, expense, and
dividend/drawing accounts.
Q: What does a "debit" generally do to an asset account?
A: Increases it.
Rationale: Assets have a normal debit balance. Therefore, a debit (entry on
the left side) increases the balance of an asset account, while a credit
decreases it.
Q: What does a "credit" generally do to a liability account?
A: Increases it.
Rationale: Liabilities have a normal credit balance. Therefore, a credit (entry
on the right side) increases the balance of a liability account, while a debit
decreases it.
**Q: A company receives $10,000 from a bank loan. What is the effect on
the accounting equation?**
A: Assets increase by $10,000, and Liabilities increase by $10,000.
Rationale: The company gains cash (an asset) and also incurs a loan payable
(a liability). Both sides of the equation increase by the same amount,
maintaining balance.
**Q: A company pays $5,000 in cash for rent. What is the effect on the
accounting equation?**
A: Assets decrease by $5,000, and Equity decreases by $5,000.
Rationale: Paying cash decreases an asset. Rent is an expense, which
decreases retained earnings (part of equity). Therefore, both assets and
equity decrease.
**Q: A company makes a sale on account for $2,000. How does this affect
the accounting equation?**
, A: Assets increase by $2,000 (Accounts Receivable), and Equity increases by
$2,000 (Revenue).
Rationale: Recording revenue increases retained earnings (equity). The
corresponding debit is to Accounts Receivable (an asset), which increases.
The company earns revenue and creates a right to collect cash in the future.
Q: What is the normal balance for a revenue account?
A: Credit.
Rationale: Revenue increases equity, and equity has a normal credit
balance. Therefore, to increase revenue, you credit the account.
Q: What is the normal balance for a dividends/distributions account?
A: Debit.
Rationale: Dividends (or owner's drawings) decrease retained earnings
(equity). Since equity has a normal credit balance, a decrease to equity is a
debit.
Topic: The Accounting Cycle & Journal Entries
Q: What is the first step in the accounting cycle?
A: Analyze and record transactions in the journal.
Rationale: While some textbooks start with "Identify and analyze
transactions," the first procedural step is to analyze the transaction and
record it as a journal entry in the general journal.
Q: What is the process of recording a transaction in the journal called?
A: Journalizing.
Rationale: Journalizing is the process of entering a transaction's debits and
credits into the general journal, providing a chronological record of all
economic events.
FINANCIAL & MANAGERIAL
ACCOUNTING – COMPLETE OA &
PRE-ASSESSMENT REVIEW (Q&A
WITH RATIONALES)
Topic: The Accounting Equation & Financial Statements
Q: What is the fundamental accounting equation?
A: Assets = Liabilities + Equity.
Rationale: This equation is the foundation of double-entry accounting. It
shows that a company's resources (assets) are financed by either creditors
(liabilities) or owners (equity). It must always balance.
Q: If a company has total assets of $500,000 and total liabilities of
$200,000, what is the total equity?
A: $300,000.
Rationale: Using the accounting equation (Assets = Liabilities + Equity), we
solve for Equity: Equity = Assets - Liabilities. $500,000 - $200,000 =
$300,000.
Q: Which financial statement reports a company's financial position at
a specific point in time?
A: The Balance Sheet.
Rationale: The balance sheet is a snapshot of a company's assets, liabilities,
,and equity on a specific date (e.g., December 31, 20XX). The income
statement, statement of cash flows, and statement of changes in equity
cover a period of time.
Q: Which financial statement reports revenues and expenses over a
period of time?
A: The Income Statement.
Rationale: The income statement, also known as the statement of
operations or profit and loss (P&L) statement, summarizes the results of
operations (revenues, expenses, gains, losses) over a period (e.g., a month,
quarter, or year) to arrive at net income or net loss.
Q: What is the primary purpose of the Statement of Cash Flows?
A: To show the inflows and outflows of cash and cash equivalents from
operating, investing, and financing activities.
Rationale: This statement categorizes cash transactions into three activities:
operating (day-to-day operations), investing (purchase/sale of long-term
assets), and financing (transactions with owners and creditors). It explains
the change in cash balance from one period to the next.
Q: How is net income calculated?
A: Net Income = Revenues - Expenses.
Rationale: This is the basic formula for the income statement. When
revenues exceed expenses, the result is net income (profit). When expenses
exceed revenues, the result is a net loss.
Q: Which account is increased by a credit?
A: Liabilities, Equity, and Revenue accounts.
Rationale: According to the rules of debit and credit, the right side (credit)
increases liability, equity, and revenue accounts, while the left side (debit)
increases asset, expense, and dividend/drawing accounts.
,Q: Which account is decreased by a credit?
A: Asset, Expense, and Dividend/Drawing accounts.
Rationale: Credits decrease the normal debit balance of asset, expense, and
dividend/drawing accounts.
Q: What does a "debit" generally do to an asset account?
A: Increases it.
Rationale: Assets have a normal debit balance. Therefore, a debit (entry on
the left side) increases the balance of an asset account, while a credit
decreases it.
Q: What does a "credit" generally do to a liability account?
A: Increases it.
Rationale: Liabilities have a normal credit balance. Therefore, a credit (entry
on the right side) increases the balance of a liability account, while a debit
decreases it.
**Q: A company receives $10,000 from a bank loan. What is the effect on
the accounting equation?**
A: Assets increase by $10,000, and Liabilities increase by $10,000.
Rationale: The company gains cash (an asset) and also incurs a loan payable
(a liability). Both sides of the equation increase by the same amount,
maintaining balance.
**Q: A company pays $5,000 in cash for rent. What is the effect on the
accounting equation?**
A: Assets decrease by $5,000, and Equity decreases by $5,000.
Rationale: Paying cash decreases an asset. Rent is an expense, which
decreases retained earnings (part of equity). Therefore, both assets and
equity decrease.
**Q: A company makes a sale on account for $2,000. How does this affect
the accounting equation?**
, A: Assets increase by $2,000 (Accounts Receivable), and Equity increases by
$2,000 (Revenue).
Rationale: Recording revenue increases retained earnings (equity). The
corresponding debit is to Accounts Receivable (an asset), which increases.
The company earns revenue and creates a right to collect cash in the future.
Q: What is the normal balance for a revenue account?
A: Credit.
Rationale: Revenue increases equity, and equity has a normal credit
balance. Therefore, to increase revenue, you credit the account.
Q: What is the normal balance for a dividends/distributions account?
A: Debit.
Rationale: Dividends (or owner's drawings) decrease retained earnings
(equity). Since equity has a normal credit balance, a decrease to equity is a
debit.
Topic: The Accounting Cycle & Journal Entries
Q: What is the first step in the accounting cycle?
A: Analyze and record transactions in the journal.
Rationale: While some textbooks start with "Identify and analyze
transactions," the first procedural step is to analyze the transaction and
record it as a journal entry in the general journal.
Q: What is the process of recording a transaction in the journal called?
A: Journalizing.
Rationale: Journalizing is the process of entering a transaction's debits and
credits into the general journal, providing a chronological record of all
economic events.
