WGU C214 FINANCIAL MANAGEMENT
OBJECTIVE ASSESSMENT PREP TEST BANK 2 |
250 QUESTIONS AND CORRECT VERIFIED ANSWERS|
C214 LATEST OA AND PA PREP TEST BANK 2026-2027
SECTION 1: CORPORATE GOALS AND FINANCIAL MARKETS (Questions 1-20)
1. The goal of the corporation is to:
1. Maximize profits
2. Maximize the stock price
3. Maximize market share
4. Minimize risk
Answer: 2. Maximize the stock price
Rationale: The primary objective of financial management is to maximize shareholder
wealth, which is best measured by the stock price. Unlike profit maximization, stock price
maximization considers the timing, magnitude, and risk of future cash flows. Market share
and risk minimization are secondary objectives that support the primary goal of increasing
shareholder value over the long term.
2. Which of the following is not a requirement for an efficient market?
1. Competitive market
2. Well-managed firms
3. Transparency
4. Liquidity
Answer: 2. Well-managed firms
Rationale: Efficient markets require competitive conditions, transparency of information,
and sufficient liquidity for trading. The quality of firm management is not a market
,structure requirement; rather, it is a firm-specific characteristic. In an efficient market, all
relevant information is quickly reflected in security prices regardless of how well
individual firms are managed.
3. What is the relationship between risk and required return?
1. The two are independent
2. Higher required return causes lower risk
3. Higher risk causes higher required return
4. None of the above
Answer: 3. Higher risk causes higher required return
Rationale: There is a direct positive relationship between risk and required return.
Investors demand higher returns as compensation for taking on greater risk. This
fundamental principle forms the basis of the risk-return trade-off in finance. The higher the
perceived risk of an investment, the higher the return investors will require to commit
their capital.
4. The value of money depends upon:
1. The timing of the receipt
2. The certainty of receipt
3. Riskiness of receipt
4. All of the above
Answer: 4. All of the above
Rationale: The value of money is determined by multiple factors including when it is
received (time value of money), how certain the receipt is (probability of payment), and the
riskiness associated with the receipt (risk premium). All three factors must be considered
when determining the present value of future cash flows in financial decision-making.
5. What is the purpose of the SEC 10-K filing requirement?
1. Prevent insider trading
2. Promote transparency and market efficiency
, 3. Regulate securities sales practices
4. Prevent monopolies
Answer: 2. Promote transparency and market efficiency
Rationale: The SEC requires publicly traded companies to file annual 10-K reports to
ensure that investors have access to material financial information. This promotes market
transparency and efficiency by reducing information asymmetry between company
insiders and outside investors. The 10-K is designed to help investors make informed
decisions rather than directly preventing insider trading or regulating sales practices.
6. Which line item is not part of net working capital?
1. Inventory
2. Bonds
3. Accounts Payable
4. Accrued expenses
Answer: 2. Bonds
Rationale: Net working capital is calculated as current assets minus current liabilities.
Inventory is a current asset, while accounts payable and accrued expenses are current
liabilities. Bonds are long-term debt instruments and are classified as non-current
liabilities, making them not part of net working capital calculations.
7. Which action causes a cash outflow?
1. Increase in accounts payable
2. Decrease in accounts receivable
3. Increase in inventory
4. None of the above
Answer: 3. Increase in inventory
Rationale: An increase in inventory represents cash spent to purchase additional goods for
sale, resulting in a cash outflow. In contrast, an increase in accounts payable means the
company has delayed payment (cash inflow effect), and a decrease in accounts receivable
means the company has collected cash from customers (cash inflow effect).
, 8. Which of the following is correct?
1. Gross PPE equals Net PPE plus depreciation expense
2. Gross PPE equals Net PPE plus accumulated depreciation
3. Net PPE equals Gross PPE plus depreciation expense
4. None of the above
Answer: 2. Gross PPE equals Net PPE plus accumulated depreciation
Rationale: Gross PPE represents the original cost of property, plant, and equipment before
any depreciation. Net PPE (book value) equals Gross PPE minus Accumulated Depreciation.
Therefore, Gross PPE = Net PPE + Accumulated Depreciation. Depreciation expense is the
current period's charge, while accumulated depreciation is the total depreciation taken to
date.
9. Net Margin is defined as:
1. EBIT divided by sales
2. Net Income divided by sales
3. Dividends divided by net income
4. Retained earnings divided by sales
Answer: 2. Net Income divided by sales
Rationale: Net profit margin measures how much of each dollar of sales translates into net
income after all expenses, including taxes and interest, have been deducted. EBIT divided
by sales would be operating margin. Dividends divided by net income is the payout ratio,
and retained earnings divided by sales is not a standard profitability metric.
10. Which item is transferred from the income statement to the balance sheet?
1. Depreciation expense
2. Dividends paid
3. Addition to retained earnings
4. Both a and c
OBJECTIVE ASSESSMENT PREP TEST BANK 2 |
250 QUESTIONS AND CORRECT VERIFIED ANSWERS|
C214 LATEST OA AND PA PREP TEST BANK 2026-2027
SECTION 1: CORPORATE GOALS AND FINANCIAL MARKETS (Questions 1-20)
1. The goal of the corporation is to:
1. Maximize profits
2. Maximize the stock price
3. Maximize market share
4. Minimize risk
Answer: 2. Maximize the stock price
Rationale: The primary objective of financial management is to maximize shareholder
wealth, which is best measured by the stock price. Unlike profit maximization, stock price
maximization considers the timing, magnitude, and risk of future cash flows. Market share
and risk minimization are secondary objectives that support the primary goal of increasing
shareholder value over the long term.
2. Which of the following is not a requirement for an efficient market?
1. Competitive market
2. Well-managed firms
3. Transparency
4. Liquidity
Answer: 2. Well-managed firms
Rationale: Efficient markets require competitive conditions, transparency of information,
and sufficient liquidity for trading. The quality of firm management is not a market
,structure requirement; rather, it is a firm-specific characteristic. In an efficient market, all
relevant information is quickly reflected in security prices regardless of how well
individual firms are managed.
3. What is the relationship between risk and required return?
1. The two are independent
2. Higher required return causes lower risk
3. Higher risk causes higher required return
4. None of the above
Answer: 3. Higher risk causes higher required return
Rationale: There is a direct positive relationship between risk and required return.
Investors demand higher returns as compensation for taking on greater risk. This
fundamental principle forms the basis of the risk-return trade-off in finance. The higher the
perceived risk of an investment, the higher the return investors will require to commit
their capital.
4. The value of money depends upon:
1. The timing of the receipt
2. The certainty of receipt
3. Riskiness of receipt
4. All of the above
Answer: 4. All of the above
Rationale: The value of money is determined by multiple factors including when it is
received (time value of money), how certain the receipt is (probability of payment), and the
riskiness associated with the receipt (risk premium). All three factors must be considered
when determining the present value of future cash flows in financial decision-making.
5. What is the purpose of the SEC 10-K filing requirement?
1. Prevent insider trading
2. Promote transparency and market efficiency
, 3. Regulate securities sales practices
4. Prevent monopolies
Answer: 2. Promote transparency and market efficiency
Rationale: The SEC requires publicly traded companies to file annual 10-K reports to
ensure that investors have access to material financial information. This promotes market
transparency and efficiency by reducing information asymmetry between company
insiders and outside investors. The 10-K is designed to help investors make informed
decisions rather than directly preventing insider trading or regulating sales practices.
6. Which line item is not part of net working capital?
1. Inventory
2. Bonds
3. Accounts Payable
4. Accrued expenses
Answer: 2. Bonds
Rationale: Net working capital is calculated as current assets minus current liabilities.
Inventory is a current asset, while accounts payable and accrued expenses are current
liabilities. Bonds are long-term debt instruments and are classified as non-current
liabilities, making them not part of net working capital calculations.
7. Which action causes a cash outflow?
1. Increase in accounts payable
2. Decrease in accounts receivable
3. Increase in inventory
4. None of the above
Answer: 3. Increase in inventory
Rationale: An increase in inventory represents cash spent to purchase additional goods for
sale, resulting in a cash outflow. In contrast, an increase in accounts payable means the
company has delayed payment (cash inflow effect), and a decrease in accounts receivable
means the company has collected cash from customers (cash inflow effect).
, 8. Which of the following is correct?
1. Gross PPE equals Net PPE plus depreciation expense
2. Gross PPE equals Net PPE plus accumulated depreciation
3. Net PPE equals Gross PPE plus depreciation expense
4. None of the above
Answer: 2. Gross PPE equals Net PPE plus accumulated depreciation
Rationale: Gross PPE represents the original cost of property, plant, and equipment before
any depreciation. Net PPE (book value) equals Gross PPE minus Accumulated Depreciation.
Therefore, Gross PPE = Net PPE + Accumulated Depreciation. Depreciation expense is the
current period's charge, while accumulated depreciation is the total depreciation taken to
date.
9. Net Margin is defined as:
1. EBIT divided by sales
2. Net Income divided by sales
3. Dividends divided by net income
4. Retained earnings divided by sales
Answer: 2. Net Income divided by sales
Rationale: Net profit margin measures how much of each dollar of sales translates into net
income after all expenses, including taxes and interest, have been deducted. EBIT divided
by sales would be operating margin. Dividends divided by net income is the payout ratio,
and retained earnings divided by sales is not a standard profitability metric.
10. Which item is transferred from the income statement to the balance sheet?
1. Depreciation expense
2. Dividends paid
3. Addition to retained earnings
4. Both a and c
