WGU C213 Accounting Final Exam (Verified
Answers)
Comprehensive Practice Examination
1. The accounting equation is:
A) Assets = Liabilities + Owner's Equity
B) Assets + Liabilities = Owner's Equity
C) Assets = Liabilities - Owner's Equity
D) Assets + Owner's Equity = Liabilities
Answer: A) Assets = Liabilities + Owner's Equity
Rationale: The accounting equation is the foundation of double-entry bookkeeping. It states that
a company's assets are financed by either liabilities (creditors' claims) or owner's equity
(owners' claims). This equation must always balance. B, C, and D are incorrect representations
of the relationship.
2. Which financial statement reports a company's revenues and expenses over a period of
time?
A) Balance Sheet
B) Income Statement
C) Statement of Cash Flows
D) Statement of Retained Earnings
Answer: B) Income Statement
Rationale: The income statement (also called the statement of operations) reports revenues,
expenses, gains, and losses over a specific period, resulting in net income or net loss. The
balance sheet reports financial position at a point in time. The statement of cash flows reports
cash inflows and outflows.
3. The accrual basis of accounting recognizes revenue when:
A) Cash is received
B) The revenue is earned, regardless of when cash is received
C) The customer places an order
D) The invoice is sent
,Answer: B) The revenue is earned, regardless of when cash is received
Rationale: Under the accrual basis, revenue is recognized when it is earned (when the
performance obligation is satisfied), not when cash is received. This is the revenue recognition
principle. The cash basis recognizes revenue when cash is received.
4. Which of the following is a current asset?
A) Accounts Receivable
B) Equipment
C) Buildings
D) Land
Answer: A) Accounts Receivable
Rationale: Current assets are assets expected to be converted to cash or used within one year or
the operating cycle. Accounts receivable, inventory, and cash are current assets. Equipment,
buildings, and land are non-current (fixed) assets that are expected to provide benefit for more
than one year.
5. The double-entry accounting system requires:
A) Each transaction affects at least two accounts
B) Each transaction affects only one account
C) Debits must equal credits for each transaction
D) A and C
Answer: D) A and C
Rationale: The double-entry system requires that each transaction affects at least two accounts
(debits and credits) and that total debits equal total credits. This maintains the accounting
equation. Option A alone is correct but incomplete. Option C alone is also correct but
incomplete. Together, they represent the full requirement.
6. A company purchases inventory on credit. This transaction will:
A) Increase assets and increase liabilities
B) Increase assets and increase owner's equity
C) Decrease assets and decrease liabilities
D) Increase assets and decrease owner's equity
Answer: A) Increase assets and increase liabilities
Rationale: Purchasing inventory on credit increases inventory (an asset) and increases accounts
payable (a liability). The accounting equation remains balanced because both sides increase
equally. The purchase does not affect owner's equity.
,7. The cost of goods sold (COGS) is reported on which financial statement?
A) Balance Sheet
B) Income Statement
C) Statement of Cash Flows
D) Statement of Retained Earnings
Answer: B) Income Statement
Rationale: Cost of goods sold is an expense reported on the income statement. It represents the
cost of inventory sold during the period. COGS is subtracted from revenue to calculate gross
profit. COGS is not reported on the balance sheet (inventory is) or the statement of cash flows.
8. Which of the following is NOT a characteristic of a corporation?
A) Limited liability for shareholders
B) Unlimited life
C) Double taxation of profits
D) Personal liability for owners
Answer: D) Personal liability for owners
Rationale: A corporation provides limited liability, meaning shareholders are not personally
liable for corporate debts. Corporations have unlimited life and are subject to double taxation
(corporate profits are taxed at the corporate level and again at the shareholder level). Personal
liability is a characteristic of sole proprietorships and partnerships.
9. The statement of cash flows is divided into which three sections?
A) Operating, Investing, and Financing activities
B) Operating, Investing, and Financial activities
C) Revenue, Expense, and Net Income
D) Assets, Liabilities, and Equity
Answer: A) Operating, Investing, and Financing activities
Rationale: The statement of cash flows is divided into operating activities (day-to-day
operations), investing activities (buying/selling long-term assets), and financing activities
(issuing debt, equity, paying dividends). These three sections show how cash is generated and
used.
10. The matching principle requires that:
A) Expenses be recorded in the same period as the revenues they help generate
B) Revenues be recorded when cash is received
, C) Expenses be recorded when cash is paid
D) Assets be matched with liabilities
Answer: A) Expenses be recorded in the same period as the revenues they help generate
Rationale: The matching principle is a fundamental accounting concept that requires expenses
to be recognized in the same accounting period as the revenues they help to generate. This is a
key component of accrual accounting and ensures that net income is accurately measured.
11. A company's net income is calculated as:
A) Revenues minus Expenses
B) Assets minus Liabilities
C) Cash inflows minus Cash outflows
D) Revenues minus Cost of Goods Sold
Answer: A) Revenues minus Expenses
Rationale: Net income is calculated by subtracting total expenses from total revenues on the
income statement. This is the "bottom line" measure of profitability. Assets minus liabilities
gives owner's equity. Cash inflows minus outflows gives net cash flow.
12. The normal balance of an asset account is:
A) Debit
B) Credit
C) Either debit or credit
D) Zero
Answer: A) Debit
Rationale: Asset accounts have a normal debit balance, meaning increases are recorded as
debits and decreases are recorded as credits. Liability and owner's equity accounts have a
normal credit balance. Debits increase asset, expense, and dividend accounts. Credits increase
liability, revenue, and owner's equity accounts.
13. Which of the following is a liability account?
A) Accounts Receivable
B) Accounts Payable
C) Inventory
D) Retained Earnings
Answer: B) Accounts Payable
Rationale: Accounts payable is a liability account representing amounts owed to suppliers for
Answers)
Comprehensive Practice Examination
1. The accounting equation is:
A) Assets = Liabilities + Owner's Equity
B) Assets + Liabilities = Owner's Equity
C) Assets = Liabilities - Owner's Equity
D) Assets + Owner's Equity = Liabilities
Answer: A) Assets = Liabilities + Owner's Equity
Rationale: The accounting equation is the foundation of double-entry bookkeeping. It states that
a company's assets are financed by either liabilities (creditors' claims) or owner's equity
(owners' claims). This equation must always balance. B, C, and D are incorrect representations
of the relationship.
2. Which financial statement reports a company's revenues and expenses over a period of
time?
A) Balance Sheet
B) Income Statement
C) Statement of Cash Flows
D) Statement of Retained Earnings
Answer: B) Income Statement
Rationale: The income statement (also called the statement of operations) reports revenues,
expenses, gains, and losses over a specific period, resulting in net income or net loss. The
balance sheet reports financial position at a point in time. The statement of cash flows reports
cash inflows and outflows.
3. The accrual basis of accounting recognizes revenue when:
A) Cash is received
B) The revenue is earned, regardless of when cash is received
C) The customer places an order
D) The invoice is sent
,Answer: B) The revenue is earned, regardless of when cash is received
Rationale: Under the accrual basis, revenue is recognized when it is earned (when the
performance obligation is satisfied), not when cash is received. This is the revenue recognition
principle. The cash basis recognizes revenue when cash is received.
4. Which of the following is a current asset?
A) Accounts Receivable
B) Equipment
C) Buildings
D) Land
Answer: A) Accounts Receivable
Rationale: Current assets are assets expected to be converted to cash or used within one year or
the operating cycle. Accounts receivable, inventory, and cash are current assets. Equipment,
buildings, and land are non-current (fixed) assets that are expected to provide benefit for more
than one year.
5. The double-entry accounting system requires:
A) Each transaction affects at least two accounts
B) Each transaction affects only one account
C) Debits must equal credits for each transaction
D) A and C
Answer: D) A and C
Rationale: The double-entry system requires that each transaction affects at least two accounts
(debits and credits) and that total debits equal total credits. This maintains the accounting
equation. Option A alone is correct but incomplete. Option C alone is also correct but
incomplete. Together, they represent the full requirement.
6. A company purchases inventory on credit. This transaction will:
A) Increase assets and increase liabilities
B) Increase assets and increase owner's equity
C) Decrease assets and decrease liabilities
D) Increase assets and decrease owner's equity
Answer: A) Increase assets and increase liabilities
Rationale: Purchasing inventory on credit increases inventory (an asset) and increases accounts
payable (a liability). The accounting equation remains balanced because both sides increase
equally. The purchase does not affect owner's equity.
,7. The cost of goods sold (COGS) is reported on which financial statement?
A) Balance Sheet
B) Income Statement
C) Statement of Cash Flows
D) Statement of Retained Earnings
Answer: B) Income Statement
Rationale: Cost of goods sold is an expense reported on the income statement. It represents the
cost of inventory sold during the period. COGS is subtracted from revenue to calculate gross
profit. COGS is not reported on the balance sheet (inventory is) or the statement of cash flows.
8. Which of the following is NOT a characteristic of a corporation?
A) Limited liability for shareholders
B) Unlimited life
C) Double taxation of profits
D) Personal liability for owners
Answer: D) Personal liability for owners
Rationale: A corporation provides limited liability, meaning shareholders are not personally
liable for corporate debts. Corporations have unlimited life and are subject to double taxation
(corporate profits are taxed at the corporate level and again at the shareholder level). Personal
liability is a characteristic of sole proprietorships and partnerships.
9. The statement of cash flows is divided into which three sections?
A) Operating, Investing, and Financing activities
B) Operating, Investing, and Financial activities
C) Revenue, Expense, and Net Income
D) Assets, Liabilities, and Equity
Answer: A) Operating, Investing, and Financing activities
Rationale: The statement of cash flows is divided into operating activities (day-to-day
operations), investing activities (buying/selling long-term assets), and financing activities
(issuing debt, equity, paying dividends). These three sections show how cash is generated and
used.
10. The matching principle requires that:
A) Expenses be recorded in the same period as the revenues they help generate
B) Revenues be recorded when cash is received
, C) Expenses be recorded when cash is paid
D) Assets be matched with liabilities
Answer: A) Expenses be recorded in the same period as the revenues they help generate
Rationale: The matching principle is a fundamental accounting concept that requires expenses
to be recognized in the same accounting period as the revenues they help to generate. This is a
key component of accrual accounting and ensures that net income is accurately measured.
11. A company's net income is calculated as:
A) Revenues minus Expenses
B) Assets minus Liabilities
C) Cash inflows minus Cash outflows
D) Revenues minus Cost of Goods Sold
Answer: A) Revenues minus Expenses
Rationale: Net income is calculated by subtracting total expenses from total revenues on the
income statement. This is the "bottom line" measure of profitability. Assets minus liabilities
gives owner's equity. Cash inflows minus outflows gives net cash flow.
12. The normal balance of an asset account is:
A) Debit
B) Credit
C) Either debit or credit
D) Zero
Answer: A) Debit
Rationale: Asset accounts have a normal debit balance, meaning increases are recorded as
debits and decreases are recorded as credits. Liability and owner's equity accounts have a
normal credit balance. Debits increase asset, expense, and dividend accounts. Credits increase
liability, revenue, and owner's equity accounts.
13. Which of the following is a liability account?
A) Accounts Receivable
B) Accounts Payable
C) Inventory
D) Retained Earnings
Answer: B) Accounts Payable
Rationale: Accounts payable is a liability account representing amounts owed to suppliers for
