WGU- C213
WGU C213 Accounting for Decision Makers
Practice Questions, Study
Guide, and Verified Solutions with Answers
and Rationale
Section 1: Financial Accounting Fundamentals (Questions 1-25)
Question 1: What is the fundamental purpose of the balance sheet in financial reporting?
A) To show revenues and expenses over a period
B) To report the company's financial position at a specific point in time
C) To detail cash inflows and outflows
D) To allocate costs to products
Correct answer: B
Rationale: The balance sheet presents assets, liabilities, and equity, reflecting the accounting
equation (Assets = Liabilities + Equity). This snapshot aids stakeholders in assessing solvency and
liquidity. The income statement reports revenues and expenses over a period, while the statement
of cash flows details cash inflows and outflows .
Question 2: Under accrual accounting, when are revenues recognized?
A) When cash is received from the customer
B) When the revenue is earned and realizable
C) At the end of the fiscal year
D) When the product is shipped
Correct answer: B
Rationale: The revenue recognition principle requires that revenue be recognized when it is earned
and realizable, regardless of when cash is received. Cash receipt is the basis for cash-basis
accounting, not accrual accounting . This ensures proper matching with expenses and provides an
accurate picture of period performance .
Question 3: The matching principle requires that expenses be matched with:
A) The period in which they are paid
B) The revenues they help generate
C) Fixed assets only
D) Inventory costs only
, WGU- C213
Correct answer: B
Rationale: The matching principle requires that expenses be recognized in the same period as the
revenues they helped generate. For example, cost of goods sold is matched with sales revenue in
the same period. This principle ensures accurate profitability measurement and compliance with
GAAP .
Question 4: The accounting equation is:
A) Assets = Liabilities - Equity
B) Assets + Liabilities = Equity
C) Assets = Liabilities + Equity
D) Assets + Equity = Liabilities
Correct answer: C
Rationale: The fundamental accounting equation is Assets = Liabilities + Stockholders' Equity. This
equation is the foundation of double-entry accounting and must always remain in balance. Every
transaction affects at least two accounts to maintain this equality .
Question 5: A company buys equipment for $50,000 cash. What is the effect on the accounting
equation?
A) Assets decrease, equity decreases
B) Assets increase, assets decrease (no net change)
C) Liabilities increase, assets increase
D) Equity increases, assets increase
Correct answer: B
Rationale: One asset (equipment) increases by $50,000 while another asset (cash) decreases by
$50,000. Total assets remain unchanged, with no effect on liabilities or equity. This is an example
of an asset exchange transaction .
Question 6: Which financial statement reports assets, liabilities, and equity at a specific point in
time?
A) Income statement
B) Statement of cash flows
C) Balance sheet
D) Statement of retained earnings
Correct answer: C
Rationale: The balance sheet reports assets, liabilities, and shareholders' equity at a particular
date, reflecting the accounting equation. The income statement covers a period of time reporting
, WGU- C213
profitability, the statement of cash flows details cash movements over a period, and the
statement of retained earnings tracks changes in equity over time .
Question 7: What is the role of adjusting entries in the accounting cycle?
A) To record daily transactions
B) To update accounts for accruals, deferrals, and estimates at period-end
C) To close temporary accounts to equity
D) To prepare tax schedules
Correct answer: B
Rationale: Adjusting entries ensure accrual basis accuracy, such as accruing wages or depreciating
assets, transforming the unadjusted trial balance into adjusted for statement preparation .
Question 8: The trial balance serves to:
A) Calculate net income
B) Verify that total debits equal total credits
C) Adjust for inventory shrinkage
D) Compute tax liabilities
Correct answer: B
Rationale: As a list of account balances, it detects arithmetic errors in posting; an unbalanced trial
indicates mistakes before financial statements .
Question 9: Under the historical cost principle, assets are recorded at:
A) Their current market value
B) The cost at acquisition
C) Estimated future value
D) Replacement cost
Correct answer: B
Rationale: Historical cost ensures objectivity, though adjusted for depreciation or impairment,
providing verifiable basis for audits and comparisons .
Question 10: The income statement reports:
A) Financial position at a point in time
B) Performance over a period of time
C) Cash flows by category
D) Changes in equity
, WGU- C213
Correct answer: B
Rationale: It summarizes revenues, expenses, and net income, enabling profitability analysis
through margins and trends for investor decisions .
Question 11: Retained earnings on the balance sheet represent:
A) Cash available for dividends
B) Cumulative net income less dividends distributed
C) Total assets minus liabilities
D) Stockholders' contributions
Correct answer: B
Rationale: Retained earnings represent the accumulated profits of a company that have not been
distributed as dividends to shareholders.
Question 12: Which accounting assumption assumes a business will continue operating
indefinitely?
A) Monetary unit assumption
B) Economic entity assumption
C) Going concern assumption
D) Periodicity assumption
Correct answer: C
Rationale: The going concern assumption presumes that a business will continue to operate
indefinitely and will not be liquidated in the near future. The periodicity assumption divides the
business's life into artificial time periods, the economic entity assumption separates the owner
from the business, and the monetary unit assumption assumes a stable currency .
Question 13: Which of the following is NOT one of the three primary financial statements?
A) Balance Sheet
B) Income Statement
C) Statement of Cash Flows
D) Statement of Retained Earnings
Correct answer: D
Rationale: The three primary financial statements are the Balance Sheet, Income Statement, and
Statement of Cash Flows. The Statement of Retained Earnings is supplementary, reconciling equity
changes .
Question 14: A company receives $5,000 in advance from a customer for services to be performed
next month. How is this recorded at the time of receipt?
WGU C213 Accounting for Decision Makers
Practice Questions, Study
Guide, and Verified Solutions with Answers
and Rationale
Section 1: Financial Accounting Fundamentals (Questions 1-25)
Question 1: What is the fundamental purpose of the balance sheet in financial reporting?
A) To show revenues and expenses over a period
B) To report the company's financial position at a specific point in time
C) To detail cash inflows and outflows
D) To allocate costs to products
Correct answer: B
Rationale: The balance sheet presents assets, liabilities, and equity, reflecting the accounting
equation (Assets = Liabilities + Equity). This snapshot aids stakeholders in assessing solvency and
liquidity. The income statement reports revenues and expenses over a period, while the statement
of cash flows details cash inflows and outflows .
Question 2: Under accrual accounting, when are revenues recognized?
A) When cash is received from the customer
B) When the revenue is earned and realizable
C) At the end of the fiscal year
D) When the product is shipped
Correct answer: B
Rationale: The revenue recognition principle requires that revenue be recognized when it is earned
and realizable, regardless of when cash is received. Cash receipt is the basis for cash-basis
accounting, not accrual accounting . This ensures proper matching with expenses and provides an
accurate picture of period performance .
Question 3: The matching principle requires that expenses be matched with:
A) The period in which they are paid
B) The revenues they help generate
C) Fixed assets only
D) Inventory costs only
, WGU- C213
Correct answer: B
Rationale: The matching principle requires that expenses be recognized in the same period as the
revenues they helped generate. For example, cost of goods sold is matched with sales revenue in
the same period. This principle ensures accurate profitability measurement and compliance with
GAAP .
Question 4: The accounting equation is:
A) Assets = Liabilities - Equity
B) Assets + Liabilities = Equity
C) Assets = Liabilities + Equity
D) Assets + Equity = Liabilities
Correct answer: C
Rationale: The fundamental accounting equation is Assets = Liabilities + Stockholders' Equity. This
equation is the foundation of double-entry accounting and must always remain in balance. Every
transaction affects at least two accounts to maintain this equality .
Question 5: A company buys equipment for $50,000 cash. What is the effect on the accounting
equation?
A) Assets decrease, equity decreases
B) Assets increase, assets decrease (no net change)
C) Liabilities increase, assets increase
D) Equity increases, assets increase
Correct answer: B
Rationale: One asset (equipment) increases by $50,000 while another asset (cash) decreases by
$50,000. Total assets remain unchanged, with no effect on liabilities or equity. This is an example
of an asset exchange transaction .
Question 6: Which financial statement reports assets, liabilities, and equity at a specific point in
time?
A) Income statement
B) Statement of cash flows
C) Balance sheet
D) Statement of retained earnings
Correct answer: C
Rationale: The balance sheet reports assets, liabilities, and shareholders' equity at a particular
date, reflecting the accounting equation. The income statement covers a period of time reporting
, WGU- C213
profitability, the statement of cash flows details cash movements over a period, and the
statement of retained earnings tracks changes in equity over time .
Question 7: What is the role of adjusting entries in the accounting cycle?
A) To record daily transactions
B) To update accounts for accruals, deferrals, and estimates at period-end
C) To close temporary accounts to equity
D) To prepare tax schedules
Correct answer: B
Rationale: Adjusting entries ensure accrual basis accuracy, such as accruing wages or depreciating
assets, transforming the unadjusted trial balance into adjusted for statement preparation .
Question 8: The trial balance serves to:
A) Calculate net income
B) Verify that total debits equal total credits
C) Adjust for inventory shrinkage
D) Compute tax liabilities
Correct answer: B
Rationale: As a list of account balances, it detects arithmetic errors in posting; an unbalanced trial
indicates mistakes before financial statements .
Question 9: Under the historical cost principle, assets are recorded at:
A) Their current market value
B) The cost at acquisition
C) Estimated future value
D) Replacement cost
Correct answer: B
Rationale: Historical cost ensures objectivity, though adjusted for depreciation or impairment,
providing verifiable basis for audits and comparisons .
Question 10: The income statement reports:
A) Financial position at a point in time
B) Performance over a period of time
C) Cash flows by category
D) Changes in equity
, WGU- C213
Correct answer: B
Rationale: It summarizes revenues, expenses, and net income, enabling profitability analysis
through margins and trends for investor decisions .
Question 11: Retained earnings on the balance sheet represent:
A) Cash available for dividends
B) Cumulative net income less dividends distributed
C) Total assets minus liabilities
D) Stockholders' contributions
Correct answer: B
Rationale: Retained earnings represent the accumulated profits of a company that have not been
distributed as dividends to shareholders.
Question 12: Which accounting assumption assumes a business will continue operating
indefinitely?
A) Monetary unit assumption
B) Economic entity assumption
C) Going concern assumption
D) Periodicity assumption
Correct answer: C
Rationale: The going concern assumption presumes that a business will continue to operate
indefinitely and will not be liquidated in the near future. The periodicity assumption divides the
business's life into artificial time periods, the economic entity assumption separates the owner
from the business, and the monetary unit assumption assumes a stable currency .
Question 13: Which of the following is NOT one of the three primary financial statements?
A) Balance Sheet
B) Income Statement
C) Statement of Cash Flows
D) Statement of Retained Earnings
Correct answer: D
Rationale: The three primary financial statements are the Balance Sheet, Income Statement, and
Statement of Cash Flows. The Statement of Retained Earnings is supplementary, reconciling equity
changes .
Question 14: A company receives $5,000 in advance from a customer for services to be performed
next month. How is this recorded at the time of receipt?
