WGU D196 Principles of Financial and Managerial
Accounting Practice Questions and Answers Updated
2026 | Complete WGU Accounting Study Guide with
Verified Questions, Detailed Rationales, Financial
Statements, Balance Sheet, Income Statement, Cash
Flow Analysis, Cost Accounting, Budgeting, Managerial
Decision-Making, Accounting Principles & Objective
Assessment Exam Prep
Question 1: Which of the following best describes the fundamental accounting
equation?
A. Assets = Liabilities - Stockholders' Equity
B. Assets + Liabilities = Stockholders' Equity
C. Assets = Liabilities + Stockholders' Equity
D. Liabilities = Assets + Stockholders' Equity
CORRECT ANSWER: C. Assets = Liabilities + Stockholders' Equity
Rationale: The fundamental accounting equation forms the foundation of the double-
entry accounting system. It states that a company's total assets must always equal the
sum of its liabilities and stockholders' equity, reflecting that all assets are financed
either by creditors (liabilities) or owners (equity). This equation must remain in balance
after every transaction.
Question 2: When a company provides services to a customer on account, which
account is debited?
A. Service Revenue
B. Cash
C. Accounts Receivable
D. Accounts Payable
CORRECT ANSWER: C. Accounts Receivable
Rationale: When services are provided on account (credit), the company has earned
revenue but has not yet received cash. Under accrual accounting, Accounts Receivable
(an asset) is debited to recognize the customer's obligation to pay, while Service
Revenue is credited to recognize the earned revenue. This follows the revenue
recognition principle.
Question 3: Which financial statement reports a company's financial position at a
specific point in time?
A. Income Statement
B. Statement of Cash Flows
C. Balance Sheet
D. Statement of Retained Earnings
,CORRECT ANSWER: C. Balance Sheet
Rationale: The balance sheet presents a snapshot of a company's assets, liabilities, and
stockholders' equity at a specific date, reflecting the accounting equation. In contrast,
the income statement, statement of cash flows, and statement of retained earnings
report activities over a period of time.
Question 4: Under the accrual basis of accounting, when should revenue be
recognized?
A. When cash is received from the customer
B. When the performance obligation is satisfied
C. When the invoice is sent to the customer
D. When the fiscal year ends
CORRECT ANSWER: B. When the performance obligation is satisfied
Rationale: The revenue recognition principle under accrual accounting requires that
revenue be recognized when it is earned and realizable, which occurs when the
company satisfies its performance obligation by transferring goods or services to the
customer, regardless of when cash is received.
Question 5: Which of the following is classified as a current asset on the balance
sheet?
A. Land
B. Patent
C. Inventory
D. Bonds Payable
CORRECT ANSWER: C. Inventory
Rationale: Current assets are resources expected to be converted to cash, sold, or
consumed within one year or the operating cycle, whichever is longer. Inventory meets
this criterion as it is held for sale in the ordinary course of business. Land and patents
are long-term assets, while bonds payable is a liability.
Question 6: What is the primary purpose of adjusting entries in the accounting
cycle?
A. To close temporary accounts at period end
B. To record transactions that have not yet been documented
C. To ensure revenues and expenses are recorded in the proper period
D. To correct errors in previously recorded transactions
CORRECT ANSWER: C. To ensure revenues and expenses are recorded in the proper
period
Rationale: Adjusting entries are made at the end of an accounting period to apply the
matching principle and revenue recognition principle. They ensure that revenues earned
,and expenses incurred during the period are properly recorded, even if cash has not yet
changed hands, thereby producing accurate financial statements.
Question 7: Which inventory costing method assumes that the most recently
purchased items are sold first?
A. FIFO
B. LIFO
C. Weighted Average
D. Specific Identification
CORRECT ANSWER: B. LIFO
Rationale: LIFO (Last-In, First-Out) assumes that the most recently acquired inventory
items are the first to be sold. This method can result in lower taxable income during
periods of rising prices because cost of goods sold reflects higher, more recent costs,
while ending inventory reflects older, lower costs.
Question 8: Depreciation expense is recorded to:
A. Reflect the decline in market value of an asset
B. Allocate the cost of a tangible asset over its useful life
C. Set aside cash for asset replacement
D. Adjust the asset's book value to its fair value
CORRECT ANSWER: B. Allocate the cost of a tangible asset over its useful life
Rationale: Depreciation is a systematic allocation of a tangible asset's cost over its
estimated useful life, matching the expense with the revenue the asset helps generate.
It does not measure market value changes, accumulate cash, or adjust to fair value; it is
an application of the matching principle.
Question 9: Which of the following would increase stockholders' equity?
A. Declaration of cash dividends
B. Purchase of treasury stock
C. Issuance of common stock
D. Payment of accounts payable
CORRECT ANSWER: C. Issuance of common stock
Rationale: Issuing common stock increases stockholders' equity because the company
receives assets (usually cash) in exchange for ownership shares. Dividends and
treasury stock purchases decrease equity, while paying accounts payable affects only
assets and liabilities, not equity.
Question 10: In a classified balance sheet, liabilities are separated into:
A. Operating and non-operating
B. Current and long-term
, C. Fixed and variable
D. Contingent and estimated
CORRECT ANSWER: B. Current and long-term
Rationale: A classified balance sheet organizes liabilities into current liabilities (due
within one year or the operating cycle) and long-term liabilities (due beyond that period).
This classification helps users assess a company's liquidity and long-term solvency.
Question 11: Which statement of cash flows section reports cash receipts and
payments related to the primary operations of a business?
A. Investing activities
B. Financing activities
C. Operating activities
D. Non-cash investing and financing activities
CORRECT ANSWER: C. Operating activities
Rationale: The operating activities section of the statement of cash flows reports cash
effects of transactions that enter into the determination of net income, such as cash
received from customers and cash paid to suppliers and employees. This section
indicates whether a company can generate sufficient cash from operations to sustain
itself.
Question 12: When using the indirect method to prepare the statement of cash
flows, depreciation expense is:
A. Subtracted from net income in operating activities
B. Added back to net income in operating activities
C. Reported as an investing activity
D. Ignored because it is a non-cash item
CORRECT ANSWER: B. Added back to net income in operating activities
Rationale: Depreciation is a non-cash expense that reduces net income but does not
involve an outflow of cash. Under the indirect method, it is added back to net income in
the operating activities section to reconcile accrual-based net income to cash provided
by operations.
Question 13: Which of the following best describes a prepaid expense?
A. An expense that has been incurred but not yet paid
B. An asset that will become an expense as it is used
C. A liability representing cash received in advance
D. Revenue that has been earned but not yet received
CORRECT ANSWER: B. An asset that will become an expense as it is used
Accounting Practice Questions and Answers Updated
2026 | Complete WGU Accounting Study Guide with
Verified Questions, Detailed Rationales, Financial
Statements, Balance Sheet, Income Statement, Cash
Flow Analysis, Cost Accounting, Budgeting, Managerial
Decision-Making, Accounting Principles & Objective
Assessment Exam Prep
Question 1: Which of the following best describes the fundamental accounting
equation?
A. Assets = Liabilities - Stockholders' Equity
B. Assets + Liabilities = Stockholders' Equity
C. Assets = Liabilities + Stockholders' Equity
D. Liabilities = Assets + Stockholders' Equity
CORRECT ANSWER: C. Assets = Liabilities + Stockholders' Equity
Rationale: The fundamental accounting equation forms the foundation of the double-
entry accounting system. It states that a company's total assets must always equal the
sum of its liabilities and stockholders' equity, reflecting that all assets are financed
either by creditors (liabilities) or owners (equity). This equation must remain in balance
after every transaction.
Question 2: When a company provides services to a customer on account, which
account is debited?
A. Service Revenue
B. Cash
C. Accounts Receivable
D. Accounts Payable
CORRECT ANSWER: C. Accounts Receivable
Rationale: When services are provided on account (credit), the company has earned
revenue but has not yet received cash. Under accrual accounting, Accounts Receivable
(an asset) is debited to recognize the customer's obligation to pay, while Service
Revenue is credited to recognize the earned revenue. This follows the revenue
recognition principle.
Question 3: Which financial statement reports a company's financial position at a
specific point in time?
A. Income Statement
B. Statement of Cash Flows
C. Balance Sheet
D. Statement of Retained Earnings
,CORRECT ANSWER: C. Balance Sheet
Rationale: The balance sheet presents a snapshot of a company's assets, liabilities, and
stockholders' equity at a specific date, reflecting the accounting equation. In contrast,
the income statement, statement of cash flows, and statement of retained earnings
report activities over a period of time.
Question 4: Under the accrual basis of accounting, when should revenue be
recognized?
A. When cash is received from the customer
B. When the performance obligation is satisfied
C. When the invoice is sent to the customer
D. When the fiscal year ends
CORRECT ANSWER: B. When the performance obligation is satisfied
Rationale: The revenue recognition principle under accrual accounting requires that
revenue be recognized when it is earned and realizable, which occurs when the
company satisfies its performance obligation by transferring goods or services to the
customer, regardless of when cash is received.
Question 5: Which of the following is classified as a current asset on the balance
sheet?
A. Land
B. Patent
C. Inventory
D. Bonds Payable
CORRECT ANSWER: C. Inventory
Rationale: Current assets are resources expected to be converted to cash, sold, or
consumed within one year or the operating cycle, whichever is longer. Inventory meets
this criterion as it is held for sale in the ordinary course of business. Land and patents
are long-term assets, while bonds payable is a liability.
Question 6: What is the primary purpose of adjusting entries in the accounting
cycle?
A. To close temporary accounts at period end
B. To record transactions that have not yet been documented
C. To ensure revenues and expenses are recorded in the proper period
D. To correct errors in previously recorded transactions
CORRECT ANSWER: C. To ensure revenues and expenses are recorded in the proper
period
Rationale: Adjusting entries are made at the end of an accounting period to apply the
matching principle and revenue recognition principle. They ensure that revenues earned
,and expenses incurred during the period are properly recorded, even if cash has not yet
changed hands, thereby producing accurate financial statements.
Question 7: Which inventory costing method assumes that the most recently
purchased items are sold first?
A. FIFO
B. LIFO
C. Weighted Average
D. Specific Identification
CORRECT ANSWER: B. LIFO
Rationale: LIFO (Last-In, First-Out) assumes that the most recently acquired inventory
items are the first to be sold. This method can result in lower taxable income during
periods of rising prices because cost of goods sold reflects higher, more recent costs,
while ending inventory reflects older, lower costs.
Question 8: Depreciation expense is recorded to:
A. Reflect the decline in market value of an asset
B. Allocate the cost of a tangible asset over its useful life
C. Set aside cash for asset replacement
D. Adjust the asset's book value to its fair value
CORRECT ANSWER: B. Allocate the cost of a tangible asset over its useful life
Rationale: Depreciation is a systematic allocation of a tangible asset's cost over its
estimated useful life, matching the expense with the revenue the asset helps generate.
It does not measure market value changes, accumulate cash, or adjust to fair value; it is
an application of the matching principle.
Question 9: Which of the following would increase stockholders' equity?
A. Declaration of cash dividends
B. Purchase of treasury stock
C. Issuance of common stock
D. Payment of accounts payable
CORRECT ANSWER: C. Issuance of common stock
Rationale: Issuing common stock increases stockholders' equity because the company
receives assets (usually cash) in exchange for ownership shares. Dividends and
treasury stock purchases decrease equity, while paying accounts payable affects only
assets and liabilities, not equity.
Question 10: In a classified balance sheet, liabilities are separated into:
A. Operating and non-operating
B. Current and long-term
, C. Fixed and variable
D. Contingent and estimated
CORRECT ANSWER: B. Current and long-term
Rationale: A classified balance sheet organizes liabilities into current liabilities (due
within one year or the operating cycle) and long-term liabilities (due beyond that period).
This classification helps users assess a company's liquidity and long-term solvency.
Question 11: Which statement of cash flows section reports cash receipts and
payments related to the primary operations of a business?
A. Investing activities
B. Financing activities
C. Operating activities
D. Non-cash investing and financing activities
CORRECT ANSWER: C. Operating activities
Rationale: The operating activities section of the statement of cash flows reports cash
effects of transactions that enter into the determination of net income, such as cash
received from customers and cash paid to suppliers and employees. This section
indicates whether a company can generate sufficient cash from operations to sustain
itself.
Question 12: When using the indirect method to prepare the statement of cash
flows, depreciation expense is:
A. Subtracted from net income in operating activities
B. Added back to net income in operating activities
C. Reported as an investing activity
D. Ignored because it is a non-cash item
CORRECT ANSWER: B. Added back to net income in operating activities
Rationale: Depreciation is a non-cash expense that reduces net income but does not
involve an outflow of cash. Under the indirect method, it is added back to net income in
the operating activities section to reconcile accrual-based net income to cash provided
by operations.
Question 13: Which of the following best describes a prepaid expense?
A. An expense that has been incurred but not yet paid
B. An asset that will become an expense as it is used
C. A liability representing cash received in advance
D. Revenue that has been earned but not yet received
CORRECT ANSWER: B. An asset that will become an expense as it is used
