WGU C213 ACCOUNTING FOR
DECISION MAKERS PRACTICE EXAM
QUESTIONS AND ANSWERS
1. If a company understates its ending inventory in Year 1, what is the effect on Year 2’s
financial statements?
A. Net income for Year 2 will be understated.
B. Net income for Year 2 will be overstated.
C. Cost of goods sold for Year 2 will be understated.
D. Ending inventory for Year 2 will be understated.
Answer: B
Conceptual Explanation: An understatement of Year 1 ending inventory becomes an
understatement of Year 2 beginning inventory. Understating beginning inventory
decreases the Cost of Goods Sold for Year 2, which in turn overstates Net Income for Year 2.
2. Under the indirect method of preparing the Statement of Cash Flows, which of the
following is added back to Net Income?
A. Depreciation expense.
,B. A gain on the sale of plant assets.
C. An increase in Accounts Receivable.
D. A decrease in Accounts Payable.
Answer: A
Conceptual Explanation: Depreciation is a non-cash expense that was subtracted to reach
Net Income; therefore, it must be added back to reconcile Net Income to Cash Provided by
Operating Activities.
3. Which organization is primarily responsible for establishing Generally Accepted Accounting
Principles (GAAP) in the United States?
A. IASB
B. FASB
C. SEC
D. AICPA
Answer: B
Conceptual Explanation: The Financial Accounting Standards Board (FASB) is the private,
non-profit body delegated the responsibility to create and update GAAP.
4. A company has a contribution margin ratio of 40%. If it wants to increase its net income by
$20,000, how much must its sales increase?
A. $50,000
, B. $8,000
C. $33,333
D. $12,000
Answer: A
Conceptual Explanation: Change in Net Income = Change in Sales * Contribution Margin
Ratio. Thus, $20,.40 = $50,000 increase in sales.
5. Section 404 of the Sarbanes-Oxley Act (SOX) requires which of the following?
A. External auditors to prepare the financial statements.
B. Management to assess the effectiveness of internal controls over financial reporting.
C. Companies to switch auditors every three years.
D. CEO and CFO to personally guarantee the stock price.
Answer: B
Conceptual Explanation: Section 404 requires management to produce an internal
control report acknowledging responsibility for maintaining adequate internal control and
assessing its effectiveness.
6. In a period of rising prices, which inventory valuation method results in the highest Net
Income?
A. LIFO
B. FIFO
DECISION MAKERS PRACTICE EXAM
QUESTIONS AND ANSWERS
1. If a company understates its ending inventory in Year 1, what is the effect on Year 2’s
financial statements?
A. Net income for Year 2 will be understated.
B. Net income for Year 2 will be overstated.
C. Cost of goods sold for Year 2 will be understated.
D. Ending inventory for Year 2 will be understated.
Answer: B
Conceptual Explanation: An understatement of Year 1 ending inventory becomes an
understatement of Year 2 beginning inventory. Understating beginning inventory
decreases the Cost of Goods Sold for Year 2, which in turn overstates Net Income for Year 2.
2. Under the indirect method of preparing the Statement of Cash Flows, which of the
following is added back to Net Income?
A. Depreciation expense.
,B. A gain on the sale of plant assets.
C. An increase in Accounts Receivable.
D. A decrease in Accounts Payable.
Answer: A
Conceptual Explanation: Depreciation is a non-cash expense that was subtracted to reach
Net Income; therefore, it must be added back to reconcile Net Income to Cash Provided by
Operating Activities.
3. Which organization is primarily responsible for establishing Generally Accepted Accounting
Principles (GAAP) in the United States?
A. IASB
B. FASB
C. SEC
D. AICPA
Answer: B
Conceptual Explanation: The Financial Accounting Standards Board (FASB) is the private,
non-profit body delegated the responsibility to create and update GAAP.
4. A company has a contribution margin ratio of 40%. If it wants to increase its net income by
$20,000, how much must its sales increase?
A. $50,000
, B. $8,000
C. $33,333
D. $12,000
Answer: A
Conceptual Explanation: Change in Net Income = Change in Sales * Contribution Margin
Ratio. Thus, $20,.40 = $50,000 increase in sales.
5. Section 404 of the Sarbanes-Oxley Act (SOX) requires which of the following?
A. External auditors to prepare the financial statements.
B. Management to assess the effectiveness of internal controls over financial reporting.
C. Companies to switch auditors every three years.
D. CEO and CFO to personally guarantee the stock price.
Answer: B
Conceptual Explanation: Section 404 requires management to produce an internal
control report acknowledging responsibility for maintaining adequate internal control and
assessing its effectiveness.
6. In a period of rising prices, which inventory valuation method results in the highest Net
Income?
A. LIFO
B. FIFO
