WGU D774 Introduction to Business Accounting - Objective
Assessment Practice Exam questions with Correct Answers and
Explanations - 142 Questions
Section 1: The Accounting Equation and Financial Statements (Questions 1-14)
1 A company issues $100,000 of common stock for cash. Which of the following correctly describes the effect on
the accounting equation?
A) Assets increase $100,000; liabilities increase $100,000; equity unchanged.
B) Assets increase $100,000; liabilities unchanged; equity increases $100,000.
C) Assets increase $100,000; liabilities unchanged; equity unchanged.
D) Assets increase $100,000; liabilities decrease $100,000; equity increases $200,000.
Answer: B
Rationale: Issuing common stock increases cash (asset) and increases common stock (equity). Liabilities are not
affected. Option A is incorrect because liabilities do not increase. Option C is incorrect because equity increases.
Option D incorrectly suggests a decrease in liabilities and a double increase in equity.
2 A company purchases equipment for $50,000 by signing a note payable. How does this transaction affect the
accounting equation?
A) Assets increase $50,000; liabilities increase $50,000; equity unchanged.
B) Assets increase $50,000; liabilities unchanged; equity increases $50,000.
C) Assets unchanged; liabilities increase $50,000; equity decreases $50,000.
D) Assets decrease $50,000; liabilities increase $50,000; equity unchanged.
Answer: A
Rationale: Purchasing equipment increases equipment (asset) and signing a note payable increases liabilities. Equity
is unchanged. Option B incorrectly increases equity. Option C incorrectly decreases equity and leaves assets
unchanged. Option D incorrectly decreases assets.
3 A company provides services on account for $10,000. What is the immediate effect on the accounting equation?
A) Assets increase $10,000; liabilities increase $10,000; equity unchanged.
B) Assets increase $10,000; liabilities unchanged; equity increases $10,000.
C) Assets increase $10,000; liabilities unchanged; equity unchanged.
D) Assets unchanged; liabilities increase $10,000; equity decreases $10,000.
Answer: B
Rationale: Providing services on account increases accounts receivable (asset) and increases revenue (equity).
Liabilities are not affected. Option A incorrectly increases liabilities. Option C incorrectly leaves equity unchanged.
Option D incorrectly decreases equity and increases liabilities.
4 A company collects $5,000 cash from a customer who was previously billed on account. What is the effect on
the accounting equation?
A) Assets increase $5,000; liabilities increase $5,000; equity unchanged.
B) Assets increase $5,000; liabilities unchanged; equity increases $5,000.
C) Assets unchanged; liabilities decrease $5,000; equity increases $5,000.
D) Assets unchanged; liabilities unchanged; equity unchanged.
,Answer: D
Rationale: Collecting cash on account increases cash (asset) and decreases accounts receivable (asset) by the same
amount, so total assets are unchanged. Liabilities and equity are not affected. Options A, B, and C incorrectly
change liabilities or equity.
5 A company pays $3,000 for rent expense. How does this transaction affect the accounting equation?
A) Assets decrease $3,000; liabilities unchanged; equity decreases $3,000.
B) Assets decrease $3,000; liabilities increase $3,000; equity unchanged.
C) Assets unchanged; liabilities increase $3,000; equity decreases $3,000.
D) Assets decrease $3,000; liabilities unchanged; equity increases $3,000.
Answer: A
Rationale: Paying rent reduces cash (asset) and increases rent expense, which reduces equity (retained earnings).
Liabilities are not affected. Option B incorrectly increases liabilities. Option C incorrectly leaves assets unchanged.
Option D incorrectly increases equity.
6 A company declares and pays a cash dividend of $2,000. What is the effect on the accounting equation?
A) Assets decrease $2,000; liabilities unchanged; equity decreases $2,000.
B) Assets decrease $2,000; liabilities increase $2,000; equity unchanged.
C) Assets unchanged; liabilities increase $2,000; equity decreases $2,000.
D) Assets decrease $2,000; liabilities decrease $2,000; equity unchanged.
Answer: A
Rationale: Paying a cash dividend reduces cash (asset) and reduces retained earnings (equity). Liabilities are not
affected. Option B incorrectly increases liabilities. Option C incorrectly leaves assets unchanged. Option D
incorrectly decreases liabilities.
7 At the beginning of the year, a company's total assets were $200,000 and total liabilities were $80,000. During
the year, the company issued additional stock of $30,000, earned net income of $50,000, and paid dividends of
$10,000. What are total assets at year-end?
A) $250,000
B) $270,000
C) $290,000
D) $310,000
Answer: C
Rationale: Beginning equity = $200,000 - $80,000 = $120,000. Changes in equity: +$30,000 (stock) + $50,000 (net
income) - $10,000 (dividends) = $70,000 increase. Ending equity = $120,000 + $70,000 = $190,000. Liabilities are
unchanged at $80,000. Ending assets = $190,000 + $80,000 = $270,000. Wait, recalc: Actually, net income
increases assets and equity, but the question asks for assets. Alternatively, use the accounting equation: Assets =
Liabilities + Equity. Beginning A = 200, L = 80, E = 120. During year, net income increases assets and equity by
50 (assuming no other asset changes from net income). Stock issuance increases assets by 30 and equity by 30.
Dividends decrease assets by 10 and equity by 10. So assets change: +50 +30 -10 = +70. Ending assets = 200 + 70
= 270. Correction: Option B is $270,000, not C. Let me correct: correct answer is B. Explanation: Beginning equity
= $120,000. Net income increases equity and assets by $50,000; stock issuance increases assets and equity by
$30,000; dividends decrease assets and equity by $10,000. Net change in assets = $50,000 + $30,000 - $10,000 =
$70,000 increase. Ending assets = $200,000 + $70,000 = $270,000. Option C is incorrect because it adds liabilities
incorrectly.
,8 A company's income statement shows revenues of $100,000 and expenses of $70,000. The statement of retained
earnings shows beginning retained earnings of $20,000 and dividends of $5,000. What is the ending balance of
retained earnings?
A) $25,000
B) $35,000
C) $45,000
D) $50,000
Answer: C
Rationale: Net income = $100,000 - $70,000 = $30,000. Ending retained earnings = Beginning retained earnings +
Net income - Dividends = $20,000 + $30,000 - $5,000 = $45,000. Option A ignores net income. Option B subtracts
dividends incorrectly. Option D adds dividends instead of subtracting.
9 Which of the following transactions would cause a company's debt-to-equity ratio to increase?
A) Issuing common stock for cash.
B) Paying off a long-term note payable with cash.
C) Borrowing cash from a bank by signing a note payable.
D) Purchasing equipment with cash.
Answer: C
Rationale: Borrowing cash increases liabilities (debt) and increases assets, with no change to equity, thus increasing
the debt-to-equity ratio. Option A increases equity, decreasing the ratio. Option B decreases both debt and assets,
decreasing the ratio. Option D swaps one asset for another, no effect on debt or equity.
10 A company has total assets of $500,000, total liabilities of $300,000, and common stock of $100,000. If the
company's net income for the year is $50,000 and no dividends are paid, what is the amount of retained
earnings?
A) $50,000
B) $100,000
C) $150,000
D) $200,000
Answer: B
Rationale: Using the accounting equation: Assets = Liabilities + Equity. Equity = Common Stock + Retained
Earnings. So $500,000 = $300,000 + ($100,000 + Retained Earnings). Therefore, Retained Earnings = $500,000 -
$300,000 - $100,000 = $100,000. Net income is already included in retained earnings; if beginning retained
earnings were zero, net income would be ending retained earnings, but here we solve for the balance. Option A is
net income, not the balance. Options C and D are miscalculations.
11 A company's total assets increased by $50,000, and total liabilities decreased by $20,000 during the same
period. If no additional investments or withdrawals were made by owners, what is the change in owner's
equity?
A) Increase of $70,000
B) Increase of $30,000
C) Decrease of $30,000
D) Decrease of $70,000
Answer: A
Rationale: The accounting equation is Assets = Liabilities + Owner's Equity. An increase in assets of $50,000 and a
decrease in liabilities of $20,000 means owner's equity must increase by $70,000 to balance ($50,000 - (-$20,000)
= $70,000). No other option satisfies the equation.
, 12 Which of the following transactions would cause the accounting equation to remain in balance but change the
composition of assets and liabilities?
A) Purchasing equipment on account
B) Paying a previously recorded account payable
C) Receiving cash from a customer for services to be performed next month
D) Owner contributing additional cash to the business
Answer: B
Rationale: Paying an account payable decreases both assets (cash) and liabilities (accounts payable) by the same
amount, keeping the equation balanced while altering the composition. Option A increases both assets and
liabilities. Option C increases assets (cash) and liabilities (unearned revenue). Option D increases assets and
owner's equity.
13 A company has the following balances: Cash $10,000, Accounts Receivable $5,000, Equipment $20,000,
Accounts Payable $8,000, Notes Payable $7,000, and Owner's Capital $20,000. If the company purchases
additional equipment for $6,000 cash, what is the new total of owner's equity?
A) $14,000
B) $20,000
C) $26,000
D) $32,000
Answer: B
Rationale: The purchase of equipment for cash is an exchange of assets (cash decreases, equipment increases) with
no effect on liabilities or owner's equity. Thus, owner's equity remains $20,000. Initial total assets = $35,000,
liabilities = $15,000, equity = $20,000. After transaction, assets still $35,000, liabilities $15,000, equity $20,000.
14 On the income statement, which of the following items would NOT be included in the calculation of net
income?
A) Interest revenue
B) Cost of goods sold
C) Dividends paid to shareholders
D) Loss on sale of equipment
Answer: C
Rationale: Dividends are distributions of earnings to shareholders and are not an expense; they are reported on the
statement of retained earnings, not on the income statement. Interest revenue, cost of goods sold, and loss on sale of
equipment are all part of net income calculation.
Section 2: Recording Transactions and the Accounting Cycle (Questions 15-28)
15 A company purchases a one-year insurance policy on June 1 for $12,000, paying cash. The company records
the purchase as a debit to Prepaid Insurance and credit to Cash. On December 31, the company's fiscal
year-end, what adjusting entry is required?
A) Debit Insurance Expense $7,000; Credit Prepaid Insurance $7,000
B) Debit Insurance Expense $5,000; Credit Prepaid Insurance $5,000
C) Debit Prepaid Insurance $7,000; Credit Insurance Expense $7,000
D) Debit Prepaid Insurance $5,000; Credit Insurance Expense $5,000
Answer: A
Rationale: From June 1 to December 31 is 7 months. The monthly expense is $1,000 ($12,000/12). Thus, $7,000 of
Assessment Practice Exam questions with Correct Answers and
Explanations - 142 Questions
Section 1: The Accounting Equation and Financial Statements (Questions 1-14)
1 A company issues $100,000 of common stock for cash. Which of the following correctly describes the effect on
the accounting equation?
A) Assets increase $100,000; liabilities increase $100,000; equity unchanged.
B) Assets increase $100,000; liabilities unchanged; equity increases $100,000.
C) Assets increase $100,000; liabilities unchanged; equity unchanged.
D) Assets increase $100,000; liabilities decrease $100,000; equity increases $200,000.
Answer: B
Rationale: Issuing common stock increases cash (asset) and increases common stock (equity). Liabilities are not
affected. Option A is incorrect because liabilities do not increase. Option C is incorrect because equity increases.
Option D incorrectly suggests a decrease in liabilities and a double increase in equity.
2 A company purchases equipment for $50,000 by signing a note payable. How does this transaction affect the
accounting equation?
A) Assets increase $50,000; liabilities increase $50,000; equity unchanged.
B) Assets increase $50,000; liabilities unchanged; equity increases $50,000.
C) Assets unchanged; liabilities increase $50,000; equity decreases $50,000.
D) Assets decrease $50,000; liabilities increase $50,000; equity unchanged.
Answer: A
Rationale: Purchasing equipment increases equipment (asset) and signing a note payable increases liabilities. Equity
is unchanged. Option B incorrectly increases equity. Option C incorrectly decreases equity and leaves assets
unchanged. Option D incorrectly decreases assets.
3 A company provides services on account for $10,000. What is the immediate effect on the accounting equation?
A) Assets increase $10,000; liabilities increase $10,000; equity unchanged.
B) Assets increase $10,000; liabilities unchanged; equity increases $10,000.
C) Assets increase $10,000; liabilities unchanged; equity unchanged.
D) Assets unchanged; liabilities increase $10,000; equity decreases $10,000.
Answer: B
Rationale: Providing services on account increases accounts receivable (asset) and increases revenue (equity).
Liabilities are not affected. Option A incorrectly increases liabilities. Option C incorrectly leaves equity unchanged.
Option D incorrectly decreases equity and increases liabilities.
4 A company collects $5,000 cash from a customer who was previously billed on account. What is the effect on
the accounting equation?
A) Assets increase $5,000; liabilities increase $5,000; equity unchanged.
B) Assets increase $5,000; liabilities unchanged; equity increases $5,000.
C) Assets unchanged; liabilities decrease $5,000; equity increases $5,000.
D) Assets unchanged; liabilities unchanged; equity unchanged.
,Answer: D
Rationale: Collecting cash on account increases cash (asset) and decreases accounts receivable (asset) by the same
amount, so total assets are unchanged. Liabilities and equity are not affected. Options A, B, and C incorrectly
change liabilities or equity.
5 A company pays $3,000 for rent expense. How does this transaction affect the accounting equation?
A) Assets decrease $3,000; liabilities unchanged; equity decreases $3,000.
B) Assets decrease $3,000; liabilities increase $3,000; equity unchanged.
C) Assets unchanged; liabilities increase $3,000; equity decreases $3,000.
D) Assets decrease $3,000; liabilities unchanged; equity increases $3,000.
Answer: A
Rationale: Paying rent reduces cash (asset) and increases rent expense, which reduces equity (retained earnings).
Liabilities are not affected. Option B incorrectly increases liabilities. Option C incorrectly leaves assets unchanged.
Option D incorrectly increases equity.
6 A company declares and pays a cash dividend of $2,000. What is the effect on the accounting equation?
A) Assets decrease $2,000; liabilities unchanged; equity decreases $2,000.
B) Assets decrease $2,000; liabilities increase $2,000; equity unchanged.
C) Assets unchanged; liabilities increase $2,000; equity decreases $2,000.
D) Assets decrease $2,000; liabilities decrease $2,000; equity unchanged.
Answer: A
Rationale: Paying a cash dividend reduces cash (asset) and reduces retained earnings (equity). Liabilities are not
affected. Option B incorrectly increases liabilities. Option C incorrectly leaves assets unchanged. Option D
incorrectly decreases liabilities.
7 At the beginning of the year, a company's total assets were $200,000 and total liabilities were $80,000. During
the year, the company issued additional stock of $30,000, earned net income of $50,000, and paid dividends of
$10,000. What are total assets at year-end?
A) $250,000
B) $270,000
C) $290,000
D) $310,000
Answer: C
Rationale: Beginning equity = $200,000 - $80,000 = $120,000. Changes in equity: +$30,000 (stock) + $50,000 (net
income) - $10,000 (dividends) = $70,000 increase. Ending equity = $120,000 + $70,000 = $190,000. Liabilities are
unchanged at $80,000. Ending assets = $190,000 + $80,000 = $270,000. Wait, recalc: Actually, net income
increases assets and equity, but the question asks for assets. Alternatively, use the accounting equation: Assets =
Liabilities + Equity. Beginning A = 200, L = 80, E = 120. During year, net income increases assets and equity by
50 (assuming no other asset changes from net income). Stock issuance increases assets by 30 and equity by 30.
Dividends decrease assets by 10 and equity by 10. So assets change: +50 +30 -10 = +70. Ending assets = 200 + 70
= 270. Correction: Option B is $270,000, not C. Let me correct: correct answer is B. Explanation: Beginning equity
= $120,000. Net income increases equity and assets by $50,000; stock issuance increases assets and equity by
$30,000; dividends decrease assets and equity by $10,000. Net change in assets = $50,000 + $30,000 - $10,000 =
$70,000 increase. Ending assets = $200,000 + $70,000 = $270,000. Option C is incorrect because it adds liabilities
incorrectly.
,8 A company's income statement shows revenues of $100,000 and expenses of $70,000. The statement of retained
earnings shows beginning retained earnings of $20,000 and dividends of $5,000. What is the ending balance of
retained earnings?
A) $25,000
B) $35,000
C) $45,000
D) $50,000
Answer: C
Rationale: Net income = $100,000 - $70,000 = $30,000. Ending retained earnings = Beginning retained earnings +
Net income - Dividends = $20,000 + $30,000 - $5,000 = $45,000. Option A ignores net income. Option B subtracts
dividends incorrectly. Option D adds dividends instead of subtracting.
9 Which of the following transactions would cause a company's debt-to-equity ratio to increase?
A) Issuing common stock for cash.
B) Paying off a long-term note payable with cash.
C) Borrowing cash from a bank by signing a note payable.
D) Purchasing equipment with cash.
Answer: C
Rationale: Borrowing cash increases liabilities (debt) and increases assets, with no change to equity, thus increasing
the debt-to-equity ratio. Option A increases equity, decreasing the ratio. Option B decreases both debt and assets,
decreasing the ratio. Option D swaps one asset for another, no effect on debt or equity.
10 A company has total assets of $500,000, total liabilities of $300,000, and common stock of $100,000. If the
company's net income for the year is $50,000 and no dividends are paid, what is the amount of retained
earnings?
A) $50,000
B) $100,000
C) $150,000
D) $200,000
Answer: B
Rationale: Using the accounting equation: Assets = Liabilities + Equity. Equity = Common Stock + Retained
Earnings. So $500,000 = $300,000 + ($100,000 + Retained Earnings). Therefore, Retained Earnings = $500,000 -
$300,000 - $100,000 = $100,000. Net income is already included in retained earnings; if beginning retained
earnings were zero, net income would be ending retained earnings, but here we solve for the balance. Option A is
net income, not the balance. Options C and D are miscalculations.
11 A company's total assets increased by $50,000, and total liabilities decreased by $20,000 during the same
period. If no additional investments or withdrawals were made by owners, what is the change in owner's
equity?
A) Increase of $70,000
B) Increase of $30,000
C) Decrease of $30,000
D) Decrease of $70,000
Answer: A
Rationale: The accounting equation is Assets = Liabilities + Owner's Equity. An increase in assets of $50,000 and a
decrease in liabilities of $20,000 means owner's equity must increase by $70,000 to balance ($50,000 - (-$20,000)
= $70,000). No other option satisfies the equation.
, 12 Which of the following transactions would cause the accounting equation to remain in balance but change the
composition of assets and liabilities?
A) Purchasing equipment on account
B) Paying a previously recorded account payable
C) Receiving cash from a customer for services to be performed next month
D) Owner contributing additional cash to the business
Answer: B
Rationale: Paying an account payable decreases both assets (cash) and liabilities (accounts payable) by the same
amount, keeping the equation balanced while altering the composition. Option A increases both assets and
liabilities. Option C increases assets (cash) and liabilities (unearned revenue). Option D increases assets and
owner's equity.
13 A company has the following balances: Cash $10,000, Accounts Receivable $5,000, Equipment $20,000,
Accounts Payable $8,000, Notes Payable $7,000, and Owner's Capital $20,000. If the company purchases
additional equipment for $6,000 cash, what is the new total of owner's equity?
A) $14,000
B) $20,000
C) $26,000
D) $32,000
Answer: B
Rationale: The purchase of equipment for cash is an exchange of assets (cash decreases, equipment increases) with
no effect on liabilities or owner's equity. Thus, owner's equity remains $20,000. Initial total assets = $35,000,
liabilities = $15,000, equity = $20,000. After transaction, assets still $35,000, liabilities $15,000, equity $20,000.
14 On the income statement, which of the following items would NOT be included in the calculation of net
income?
A) Interest revenue
B) Cost of goods sold
C) Dividends paid to shareholders
D) Loss on sale of equipment
Answer: C
Rationale: Dividends are distributions of earnings to shareholders and are not an expense; they are reported on the
statement of retained earnings, not on the income statement. Interest revenue, cost of goods sold, and loss on sale of
equipment are all part of net income calculation.
Section 2: Recording Transactions and the Accounting Cycle (Questions 15-28)
15 A company purchases a one-year insurance policy on June 1 for $12,000, paying cash. The company records
the purchase as a debit to Prepaid Insurance and credit to Cash. On December 31, the company's fiscal
year-end, what adjusting entry is required?
A) Debit Insurance Expense $7,000; Credit Prepaid Insurance $7,000
B) Debit Insurance Expense $5,000; Credit Prepaid Insurance $5,000
C) Debit Prepaid Insurance $7,000; Credit Insurance Expense $7,000
D) Debit Prepaid Insurance $5,000; Credit Insurance Expense $5,000
Answer: A
Rationale: From June 1 to December 31 is 7 months. The monthly expense is $1,000 ($12,000/12). Thus, $7,000 of
