Financial Management WGU C214
Chapter 2b Question and answers
already passed 2025/2026
Cash accounting offers a superior method of analyzing a company. T/F - correct answer ✔False- While
the cumbersome nature of accrual accounting may cause cash accounting to look attractive, the truth is
that cash accounting is not a good way to track firm operations. The movement of cash in and out of the
firm during a period can lead to a highly biased view of the firm.
What best describes the guiding principle for revenue recognition within the accrual accounting system?
- correct answer ✔Revenue is reported when the earnings process is complete.
A high-quality customer just purchased $500,000 worth of product from your company. The contract
calls for immediate delivery of the product with a cash payment of $300,000 today and $200,000 to be
paid in 60 days. The expense associated with the product is $300,000, of which $100,000 has not been
paid to your supplier. Under an accrual-based accounting system, you will most likely report
__________. - correct answer ✔revenues of $500,000 and expenses of $300,000
According to the matching principle, expenses should be ____________. - correct answer ✔matched
with the revenues they help to generate
What advantage does accrual accounting have over cash accounting? - correct answer ✔It provides a
more accurate portrayal of a company's operations over time.
What does GAAP stand for in the context of financial accounting? - correct answer ✔Generally
accepted accounting principles
The income statement is the most easily interpreted of the basic financial statements. T/F - correct
answer ✔False- The income statement is usually regarded as the most difficult to analyze and interpret.
, What is the basic equation of an income statement? - correct answer ✔Revenues - Expenses = Net
Income
Revenues minus cost of goods sold is equal to __________. - correct answer ✔Gross Profit
Revenues - COGS = Gross Profit - Operating Expenses = EBIT/Operating Profit - Interest Expenses = EBT -
Tax Expenses
= Net Income/Earnings
In financial statements, why is net income considered an opinion? - correct answer ✔It requires
management's judgment in its calculation.
Which type of income provides the best metric for understanding a firm's operations? - correct answer
✔Accounting income
Why must users of financial statements be skeptical? - correct answer ✔Management may use
discretion to "manage" reported results.
On the income statement, Cost of Goods Sold includes _________. - correct answer ✔direct materials
and direct labor associated with production
Gross profit is another name for operating profit. T/F - correct answer ✔False- EBIT is a common
measure of operating profit. Gross profit does not include operating expenses.
Cost of Goods Sold (COGS) is best described as __________. - correct answer ✔the direct materials and
labor associated with revenues recognized
What are direct materials in the context of cost of goods sold (COGS)? - correct answer ✔Raw materials
specifically used to produce a product
Chapter 2b Question and answers
already passed 2025/2026
Cash accounting offers a superior method of analyzing a company. T/F - correct answer ✔False- While
the cumbersome nature of accrual accounting may cause cash accounting to look attractive, the truth is
that cash accounting is not a good way to track firm operations. The movement of cash in and out of the
firm during a period can lead to a highly biased view of the firm.
What best describes the guiding principle for revenue recognition within the accrual accounting system?
- correct answer ✔Revenue is reported when the earnings process is complete.
A high-quality customer just purchased $500,000 worth of product from your company. The contract
calls for immediate delivery of the product with a cash payment of $300,000 today and $200,000 to be
paid in 60 days. The expense associated with the product is $300,000, of which $100,000 has not been
paid to your supplier. Under an accrual-based accounting system, you will most likely report
__________. - correct answer ✔revenues of $500,000 and expenses of $300,000
According to the matching principle, expenses should be ____________. - correct answer ✔matched
with the revenues they help to generate
What advantage does accrual accounting have over cash accounting? - correct answer ✔It provides a
more accurate portrayal of a company's operations over time.
What does GAAP stand for in the context of financial accounting? - correct answer ✔Generally
accepted accounting principles
The income statement is the most easily interpreted of the basic financial statements. T/F - correct
answer ✔False- The income statement is usually regarded as the most difficult to analyze and interpret.
, What is the basic equation of an income statement? - correct answer ✔Revenues - Expenses = Net
Income
Revenues minus cost of goods sold is equal to __________. - correct answer ✔Gross Profit
Revenues - COGS = Gross Profit - Operating Expenses = EBIT/Operating Profit - Interest Expenses = EBT -
Tax Expenses
= Net Income/Earnings
In financial statements, why is net income considered an opinion? - correct answer ✔It requires
management's judgment in its calculation.
Which type of income provides the best metric for understanding a firm's operations? - correct answer
✔Accounting income
Why must users of financial statements be skeptical? - correct answer ✔Management may use
discretion to "manage" reported results.
On the income statement, Cost of Goods Sold includes _________. - correct answer ✔direct materials
and direct labor associated with production
Gross profit is another name for operating profit. T/F - correct answer ✔False- EBIT is a common
measure of operating profit. Gross profit does not include operating expenses.
Cost of Goods Sold (COGS) is best described as __________. - correct answer ✔the direct materials and
labor associated with revenues recognized
What are direct materials in the context of cost of goods sold (COGS)? - correct answer ✔Raw materials
specifically used to produce a product
