WGU) D196: Principles of Financial and
Managerial Accounting course | QUESTIONS
AND ANSWERS | LATEST UPDATE
Part 1: Financial Accounting Foundations (Questions 1–50)
1. Which accounting concept states that a business is a separate legal and
economic entity from its owners?
A) Going Concern Assumption
B) Economic Entity Assumption
C) Monetary Unit Assumption
D) Time Period Assumption
Answer: B) Economic Entity Assumption (Correct Answer)
Rationale: The economic entity assumption requires that the activities of the
business be kept separate and distinct from the activities of its owner and all
other economic entities.
2. What is the foundational accounting equation?
A) Assets = Liabilities - Equity
B) Assets + Liabilities = Equity
C) Assets = Liabilities + Equity
D) Revenue - Expenses = Net Income
Answer: C) Assets = Liabilities + Equity (Correct Answer)
Rationale: The fundamental accounting equation establishes that all economic
resources owned by a business (Assets) are financed by either creditors
(Liabilities) or owners (Equity).
3. Which of the following is classified as a current asset?
A) Equipment
B) Accounts Payable
C) Inventory
D) Land
Answer: C) Inventory (Correct Answer)
Rationale: Current assets are assets that a company expects to convert into
cash, sell, or consume within one year or its operating cycle. Inventory is held
specifically to be sold within the year.
4. Under accrual-basis accounting, when is revenue recognized?
A) When cash is collected from the customer
B) When the service is performed or the goods are delivered
C) When the contract is signed by both parties
D) At the end of the fiscal year
Answer: B) When the service is performed or the goods are delivered
(Correct Answer)
Rationale: The revenue recognition principle dictates that revenue is recognized
in the accounting period in which the performance obligation is satisfied,
regardless of when cash changes hands.
,5. Which financial statement reports a company’s financial position at a specific
point in time?
A) Income Statement
B) Balance Sheet
C) Statement of Cash Flows
D) Statement of Retained Earnings
Answer: B) Balance Sheet (Correct Answer)
Rationale: The Balance Sheet is a snapshot of the business, listing assets,
liabilities, and equity at a single specific date, unlike the other statements which
cover a period of time.
6. What type of account is Accumulated Depreciation?
A) Asset
B) Liability
C) Contra-Asset
D) Expense
Answer: C) Contra-Asset (Correct Answer)
Rationale: Accumulated Depreciation is a contra-asset account. It has a normal
credit balance and is deducted from its related asset account on the Balance
Sheet.
7. A company purchases supplies on account. How does this transaction impact the
accounting equation?
A) Assets increase, Liabilities decrease
B) Assets increase, Liabilities increase
C) Assets decrease, Equity decreases
D) Liabilities increase, Equity decreases
Answer: B) Assets increase, Liabilities increase (Correct Answer)
Rationale: Supplies (an asset) increase because the company received goods.
Accounts Payable (a liability) increases because the company will pay for them
later.
8. Which of the following accounts is closed at the end of the fiscal year?
A) Retained Earnings
B) Accounts Receivable
C) Prepaid Rent
D) Salaries Expense
Answer: D) Salaries Expense (Correct Answer)
Rationale: Temporary accounts—revenues, expenses, and dividends—are
closed at the end of each period to reset their balances to zero. Salaries
Expense is a temporary account.
9. What is the normal balance of an expense account and a liability account?
A) Debit / Credit
B) Credit / Debit
C) Debit / Debit
D) Credit / Credit
Answer: A) Debit / Credit (Correct Answer)
Rationale: Expenses increase with a debit, giving them a normal debit balance.
Liabilities increase with a credit, giving them a normal credit balance.
, 10. If a company pays $12,000 cash for a 12-month insurance policy on January 1,
what adjusting entry is required on January 31?
A) Debit Insurance Expense $1,000; Credit Prepaid Insurance $1,000
B) Debit Prepaid Insurance $1,000; Credit Cash $1,000
C) Debit Insurance Expense $12,000; Credit Prepaid Insurance $12,000
D) Debit Prepaid Insurance $12,000; Credit Cash $12,000
Answer: A) Debit Insurance Expense $1,000; Credit Prepaid Insurance
$1,000 (Correct Answer)
Rationale: One month of insurance has expired ($12, months = $1,000).
The adjusting entry moves $1,000 from the asset account (Prepaid Insurance) to
an expense account.
11. Which inventory costing method assigns the cost of the most recent purchases to
Ending Inventory?
A) FIFO (First-In, First-Out)
B) LIFO (Last-In, First-Out)
C) Weighted-Average Cost
D) Specific Identification
Answer: A) FIFO (First-In, First-Out) (Correct Answer)
Rationale: FIFO assumes that the earliest goods purchased are the first ones
sold. Therefore, the goods remaining in Ending Inventory are the ones most
recently purchased.
12. In a period of steadily rising prices, which inventory method yields the lowest Net
Income?
A) FIFO
B) LIFO
C) Weighted-Average Cost
D) Specific Identification
Answer: B) LIFO (Last-In, First-Out) (Correct Answer)
Rationale: During inflation, LIFO assigns the higher, more recent inventory costs
to Cost of Goods Sold (COGS). A higher COGS leads to lower gross profit and
lower net income.
13. What does the current ratio measure?
A) A company's profitability
B) A company's long-term solvency
C) A company's short-term liquidity
D) A company's asset efficiency
Answer: C) A company's short-term liquidity (Correct Answer)
Rationale: The current ratio (Current Assets / Current Liabilities) evaluates a
company's capacity to pay off its short-term obligations due within one year.
14. How is Gross Profit calculated?
A) Net Income - Operating Expenses
B) Net Sales - Cost of Goods Sold
C) Revenue - Total Expenses
D) Current Assets - Current Liabilities
Answer: B) Net Sales - Cost of Goods Sold (Correct Answer)
Managerial Accounting course | QUESTIONS
AND ANSWERS | LATEST UPDATE
Part 1: Financial Accounting Foundations (Questions 1–50)
1. Which accounting concept states that a business is a separate legal and
economic entity from its owners?
A) Going Concern Assumption
B) Economic Entity Assumption
C) Monetary Unit Assumption
D) Time Period Assumption
Answer: B) Economic Entity Assumption (Correct Answer)
Rationale: The economic entity assumption requires that the activities of the
business be kept separate and distinct from the activities of its owner and all
other economic entities.
2. What is the foundational accounting equation?
A) Assets = Liabilities - Equity
B) Assets + Liabilities = Equity
C) Assets = Liabilities + Equity
D) Revenue - Expenses = Net Income
Answer: C) Assets = Liabilities + Equity (Correct Answer)
Rationale: The fundamental accounting equation establishes that all economic
resources owned by a business (Assets) are financed by either creditors
(Liabilities) or owners (Equity).
3. Which of the following is classified as a current asset?
A) Equipment
B) Accounts Payable
C) Inventory
D) Land
Answer: C) Inventory (Correct Answer)
Rationale: Current assets are assets that a company expects to convert into
cash, sell, or consume within one year or its operating cycle. Inventory is held
specifically to be sold within the year.
4. Under accrual-basis accounting, when is revenue recognized?
A) When cash is collected from the customer
B) When the service is performed or the goods are delivered
C) When the contract is signed by both parties
D) At the end of the fiscal year
Answer: B) When the service is performed or the goods are delivered
(Correct Answer)
Rationale: The revenue recognition principle dictates that revenue is recognized
in the accounting period in which the performance obligation is satisfied,
regardless of when cash changes hands.
,5. Which financial statement reports a company’s financial position at a specific
point in time?
A) Income Statement
B) Balance Sheet
C) Statement of Cash Flows
D) Statement of Retained Earnings
Answer: B) Balance Sheet (Correct Answer)
Rationale: The Balance Sheet is a snapshot of the business, listing assets,
liabilities, and equity at a single specific date, unlike the other statements which
cover a period of time.
6. What type of account is Accumulated Depreciation?
A) Asset
B) Liability
C) Contra-Asset
D) Expense
Answer: C) Contra-Asset (Correct Answer)
Rationale: Accumulated Depreciation is a contra-asset account. It has a normal
credit balance and is deducted from its related asset account on the Balance
Sheet.
7. A company purchases supplies on account. How does this transaction impact the
accounting equation?
A) Assets increase, Liabilities decrease
B) Assets increase, Liabilities increase
C) Assets decrease, Equity decreases
D) Liabilities increase, Equity decreases
Answer: B) Assets increase, Liabilities increase (Correct Answer)
Rationale: Supplies (an asset) increase because the company received goods.
Accounts Payable (a liability) increases because the company will pay for them
later.
8. Which of the following accounts is closed at the end of the fiscal year?
A) Retained Earnings
B) Accounts Receivable
C) Prepaid Rent
D) Salaries Expense
Answer: D) Salaries Expense (Correct Answer)
Rationale: Temporary accounts—revenues, expenses, and dividends—are
closed at the end of each period to reset their balances to zero. Salaries
Expense is a temporary account.
9. What is the normal balance of an expense account and a liability account?
A) Debit / Credit
B) Credit / Debit
C) Debit / Debit
D) Credit / Credit
Answer: A) Debit / Credit (Correct Answer)
Rationale: Expenses increase with a debit, giving them a normal debit balance.
Liabilities increase with a credit, giving them a normal credit balance.
, 10. If a company pays $12,000 cash for a 12-month insurance policy on January 1,
what adjusting entry is required on January 31?
A) Debit Insurance Expense $1,000; Credit Prepaid Insurance $1,000
B) Debit Prepaid Insurance $1,000; Credit Cash $1,000
C) Debit Insurance Expense $12,000; Credit Prepaid Insurance $12,000
D) Debit Prepaid Insurance $12,000; Credit Cash $12,000
Answer: A) Debit Insurance Expense $1,000; Credit Prepaid Insurance
$1,000 (Correct Answer)
Rationale: One month of insurance has expired ($12, months = $1,000).
The adjusting entry moves $1,000 from the asset account (Prepaid Insurance) to
an expense account.
11. Which inventory costing method assigns the cost of the most recent purchases to
Ending Inventory?
A) FIFO (First-In, First-Out)
B) LIFO (Last-In, First-Out)
C) Weighted-Average Cost
D) Specific Identification
Answer: A) FIFO (First-In, First-Out) (Correct Answer)
Rationale: FIFO assumes that the earliest goods purchased are the first ones
sold. Therefore, the goods remaining in Ending Inventory are the ones most
recently purchased.
12. In a period of steadily rising prices, which inventory method yields the lowest Net
Income?
A) FIFO
B) LIFO
C) Weighted-Average Cost
D) Specific Identification
Answer: B) LIFO (Last-In, First-Out) (Correct Answer)
Rationale: During inflation, LIFO assigns the higher, more recent inventory costs
to Cost of Goods Sold (COGS). A higher COGS leads to lower gross profit and
lower net income.
13. What does the current ratio measure?
A) A company's profitability
B) A company's long-term solvency
C) A company's short-term liquidity
D) A company's asset efficiency
Answer: C) A company's short-term liquidity (Correct Answer)
Rationale: The current ratio (Current Assets / Current Liabilities) evaluates a
company's capacity to pay off its short-term obligations due within one year.
14. How is Gross Profit calculated?
A) Net Income - Operating Expenses
B) Net Sales - Cost of Goods Sold
C) Revenue - Total Expenses
D) Current Assets - Current Liabilities
Answer: B) Net Sales - Cost of Goods Sold (Correct Answer)
