WGU D775 INTRODUCTION TO BUSINESS
FINANCE | EXAM PREP, VERIFIED QUESTIONS
& ANSWERS, STUDY GUIDE
WGU D775 — INTRODUCTION TO BUSINESS FINANCE
EXAM PREP | VERIFIED QUESTIONS & ANSWERS | STUDY GUIDE
400 Multiple Choice Questions
SECTION 1: FINANCIAL STATEMENTS & ANALYSIS
Q1. Which financial statement reports a company's revenues and expenses over
a specific period of time?
A. Balance Sheet B. Statement of Cash Flows C. Statement of Retained Earnings D.
Income Statement E. Statement of Stockholders' Equity
CORRECT ANSWER: D. Income Statement RATIONALE: The income
statement (also called the profit and loss statement) summarizes revenues, expenses,
and net income or loss over a defined accounting period such as a quarter or fiscal
year.
Q2. Which of the following is classified as a current asset on the balance sheet?
A. Equipment B. Goodwill C. Accounts Receivable D. Long-term Investments E. Land
CORRECT ANSWER: C. Accounts Receivable RATIONALE: Current assets
are assets expected to be converted to cash within one year. Accounts receivable
represents money owed to the company by customers and is typically collected within
30–90 days.
Q3. What does the accounting equation state?
A. Assets = Liabilities + Revenue B. Assets = Equity − Liabilities C. Assets = Liabilities +
Stockholders' Equity D. Assets + Equity = Liabilities E. Revenue − Expenses = Assets
CORRECT ANSWER: C. Assets = Liabilities + Stockholders' Equity
RATIONALE: The fundamental accounting equation forms the basis of double-entry
bookkeeping. It states that everything a company owns (assets) is financed either by
borrowing (liabilities) or by owner investment (equity).
,Q4. Depreciation is best described as:
A. A cash outflow for asset replacement B. A non-cash expense that allocates the cost
of a tangible asset over its useful life C. The market value decline of an asset D. The
interest paid on borrowed funds E. A reduction in stockholders' equity due to losses
CORRECT ANSWER: B. A non-cash expense that allocates the cost of a
tangible asset over its useful life RATIONALE: Depreciation is a non-cash
charge that reduces the book value of an asset over time. It appears on the income
statement as an expense but does not involve an actual cash outflow in the period it is
recorded.
Q5. Which of the following best describes the purpose of the balance sheet?
A. To show cash inflows and outflows during the year B. To report a company's financial
position at a specific point in time C. To summarize the revenues earned during a period
D. To explain changes in retained earnings E. To compare current year performance
with prior year
CORRECT ANSWER: B. To report a company's financial position at a specific
point in time RATIONALE: The balance sheet is a snapshot of what a company
owns (assets), owes (liabilities), and the residual interest of shareholders (equity) on a
given date, unlike the income statement which covers a period.
Q6. Which section of the cash flow statement reports the purchase of long-term
assets?
A. Operating Activities B. Financing Activities C. Supplemental Disclosures D. Investing
Activities E. Non-Cash Activities
CORRECT ANSWER: D. Investing Activities RATIONALE: The investing
activities section of the cash flow statement includes cash transactions related to the
purchase and sale of long-term assets such as property, plant, equipment, and
investment securities.
Q7. Retained earnings on the balance sheet represent:
,A. Cash reserved for future dividends B. The total amount of equity raised through stock
issuances C. Cumulative net income not distributed to shareholders as dividends D.
The market value of outstanding shares E. The difference between current assets and
current liabilities
CORRECT ANSWER: C. Cumulative net income not distributed to
shareholders as dividends RATIONALE: Retained earnings are the
accumulated profits kept in the business after dividends have been paid. They represent
reinvested earnings used to fund operations and growth.
Q8. Which ratio measures a company's ability to meet its short-term obligations?
A. Debt-to-Equity Ratio B. Return on Assets C. Current Ratio D. Price-to-Earnings Ratio
E. Asset Turnover Ratio
CORRECT ANSWER: C. Current Ratio RATIONALE: The current ratio
(Current Assets ÷ Current Liabilities) is a liquidity ratio that measures a firm's ability to
pay its short-term obligations using its short-term assets. A ratio above 1.0 generally
indicates adequate short-term liquidity.
Q9. If a company has current assets of $500,000 and current liabilities of
$250,000, what is the current ratio?
A. 0.5 B. 1.5 C. 2.5 D. 2.0 E. 3.0
CORRECT ANSWER: D. 2.0 RATIONALE: Current Ratio = Current Assets ÷
Current Liabilities = $500,000 ÷ $250,000 = 2.0. This means the company has $2.00 in
current assets for every $1.00 of current liabilities.
Q10. The quick ratio differs from the current ratio in that it:
A. Excludes cash from the numerator B. Includes long-term assets in the calculation C.
Excludes inventory and prepaid expenses from current assets D. Uses total assets
instead of current assets E. Divides net income by current liabilities
CORRECT ANSWER: C. Excludes inventory and prepaid expenses from
current assets RATIONALE: The quick ratio (or acid-test ratio) = (Current Assets
− Inventory − Prepaid Expenses) ÷ Current Liabilities. It is a more stringent measure of
liquidity as it excludes the least liquid current assets.
, Q11. Gross profit is calculated as:
A. Net Income − Operating Expenses B. Revenue − Cost of Goods Sold C. Operating
Income − Interest Expense D. Revenue − Total Expenses E. EBIT − Taxes
CORRECT ANSWER: B. Revenue − Cost of Goods Sold RATIONALE:
Gross profit represents the profit remaining after subtracting the direct costs of
producing goods or services (COGS) from total revenue. It measures production
efficiency before overhead and other expenses.
Q12. Which of the following is NOT found on the income statement?
A. Revenue B. Depreciation C. Interest Expense D. Retained Earnings E. Income Tax
Expense
CORRECT ANSWER: D. Retained Earnings RATIONALE: Retained
earnings appear on the balance sheet under stockholders' equity, not on the income
statement. The income statement shows revenues, expenses, and net income for a
specific period.
Q13. EBITDA stands for:
A. Earnings Before Interest, Taxes, Depreciation, and Amortization B. Equity Before
Income, Taxes, Dividends, and Assets C. Earnings Before Investment, Trade,
Depreciation, and Arrears D. Estimated Basis Income, Taxes, Dividends, and
Amortization E. Earnings Balance including Taxes, Dividends, and Assets
CORRECT ANSWER: A. Earnings Before Interest, Taxes, Depreciation, and
Amortization RATIONALE: EBITDA is a widely used measure of a company's
core operational performance. It strips out financing costs (interest), tax obligations, and
non-cash accounting charges (depreciation and amortization).
Q14. The debt-to-equity ratio is primarily used to assess a company's:
A. Profitability B. Liquidity C. Financial leverage D. Operational efficiency E. Market
valuation
CORRECT ANSWER: C. Financial leverage RATIONALE: The debt-to-equity
ratio (Total Debt ÷ Total Equity) measures the degree to which a company is financing
FINANCE | EXAM PREP, VERIFIED QUESTIONS
& ANSWERS, STUDY GUIDE
WGU D775 — INTRODUCTION TO BUSINESS FINANCE
EXAM PREP | VERIFIED QUESTIONS & ANSWERS | STUDY GUIDE
400 Multiple Choice Questions
SECTION 1: FINANCIAL STATEMENTS & ANALYSIS
Q1. Which financial statement reports a company's revenues and expenses over
a specific period of time?
A. Balance Sheet B. Statement of Cash Flows C. Statement of Retained Earnings D.
Income Statement E. Statement of Stockholders' Equity
CORRECT ANSWER: D. Income Statement RATIONALE: The income
statement (also called the profit and loss statement) summarizes revenues, expenses,
and net income or loss over a defined accounting period such as a quarter or fiscal
year.
Q2. Which of the following is classified as a current asset on the balance sheet?
A. Equipment B. Goodwill C. Accounts Receivable D. Long-term Investments E. Land
CORRECT ANSWER: C. Accounts Receivable RATIONALE: Current assets
are assets expected to be converted to cash within one year. Accounts receivable
represents money owed to the company by customers and is typically collected within
30–90 days.
Q3. What does the accounting equation state?
A. Assets = Liabilities + Revenue B. Assets = Equity − Liabilities C. Assets = Liabilities +
Stockholders' Equity D. Assets + Equity = Liabilities E. Revenue − Expenses = Assets
CORRECT ANSWER: C. Assets = Liabilities + Stockholders' Equity
RATIONALE: The fundamental accounting equation forms the basis of double-entry
bookkeeping. It states that everything a company owns (assets) is financed either by
borrowing (liabilities) or by owner investment (equity).
,Q4. Depreciation is best described as:
A. A cash outflow for asset replacement B. A non-cash expense that allocates the cost
of a tangible asset over its useful life C. The market value decline of an asset D. The
interest paid on borrowed funds E. A reduction in stockholders' equity due to losses
CORRECT ANSWER: B. A non-cash expense that allocates the cost of a
tangible asset over its useful life RATIONALE: Depreciation is a non-cash
charge that reduces the book value of an asset over time. It appears on the income
statement as an expense but does not involve an actual cash outflow in the period it is
recorded.
Q5. Which of the following best describes the purpose of the balance sheet?
A. To show cash inflows and outflows during the year B. To report a company's financial
position at a specific point in time C. To summarize the revenues earned during a period
D. To explain changes in retained earnings E. To compare current year performance
with prior year
CORRECT ANSWER: B. To report a company's financial position at a specific
point in time RATIONALE: The balance sheet is a snapshot of what a company
owns (assets), owes (liabilities), and the residual interest of shareholders (equity) on a
given date, unlike the income statement which covers a period.
Q6. Which section of the cash flow statement reports the purchase of long-term
assets?
A. Operating Activities B. Financing Activities C. Supplemental Disclosures D. Investing
Activities E. Non-Cash Activities
CORRECT ANSWER: D. Investing Activities RATIONALE: The investing
activities section of the cash flow statement includes cash transactions related to the
purchase and sale of long-term assets such as property, plant, equipment, and
investment securities.
Q7. Retained earnings on the balance sheet represent:
,A. Cash reserved for future dividends B. The total amount of equity raised through stock
issuances C. Cumulative net income not distributed to shareholders as dividends D.
The market value of outstanding shares E. The difference between current assets and
current liabilities
CORRECT ANSWER: C. Cumulative net income not distributed to
shareholders as dividends RATIONALE: Retained earnings are the
accumulated profits kept in the business after dividends have been paid. They represent
reinvested earnings used to fund operations and growth.
Q8. Which ratio measures a company's ability to meet its short-term obligations?
A. Debt-to-Equity Ratio B. Return on Assets C. Current Ratio D. Price-to-Earnings Ratio
E. Asset Turnover Ratio
CORRECT ANSWER: C. Current Ratio RATIONALE: The current ratio
(Current Assets ÷ Current Liabilities) is a liquidity ratio that measures a firm's ability to
pay its short-term obligations using its short-term assets. A ratio above 1.0 generally
indicates adequate short-term liquidity.
Q9. If a company has current assets of $500,000 and current liabilities of
$250,000, what is the current ratio?
A. 0.5 B. 1.5 C. 2.5 D. 2.0 E. 3.0
CORRECT ANSWER: D. 2.0 RATIONALE: Current Ratio = Current Assets ÷
Current Liabilities = $500,000 ÷ $250,000 = 2.0. This means the company has $2.00 in
current assets for every $1.00 of current liabilities.
Q10. The quick ratio differs from the current ratio in that it:
A. Excludes cash from the numerator B. Includes long-term assets in the calculation C.
Excludes inventory and prepaid expenses from current assets D. Uses total assets
instead of current assets E. Divides net income by current liabilities
CORRECT ANSWER: C. Excludes inventory and prepaid expenses from
current assets RATIONALE: The quick ratio (or acid-test ratio) = (Current Assets
− Inventory − Prepaid Expenses) ÷ Current Liabilities. It is a more stringent measure of
liquidity as it excludes the least liquid current assets.
, Q11. Gross profit is calculated as:
A. Net Income − Operating Expenses B. Revenue − Cost of Goods Sold C. Operating
Income − Interest Expense D. Revenue − Total Expenses E. EBIT − Taxes
CORRECT ANSWER: B. Revenue − Cost of Goods Sold RATIONALE:
Gross profit represents the profit remaining after subtracting the direct costs of
producing goods or services (COGS) from total revenue. It measures production
efficiency before overhead and other expenses.
Q12. Which of the following is NOT found on the income statement?
A. Revenue B. Depreciation C. Interest Expense D. Retained Earnings E. Income Tax
Expense
CORRECT ANSWER: D. Retained Earnings RATIONALE: Retained
earnings appear on the balance sheet under stockholders' equity, not on the income
statement. The income statement shows revenues, expenses, and net income for a
specific period.
Q13. EBITDA stands for:
A. Earnings Before Interest, Taxes, Depreciation, and Amortization B. Equity Before
Income, Taxes, Dividends, and Assets C. Earnings Before Investment, Trade,
Depreciation, and Arrears D. Estimated Basis Income, Taxes, Dividends, and
Amortization E. Earnings Balance including Taxes, Dividends, and Assets
CORRECT ANSWER: A. Earnings Before Interest, Taxes, Depreciation, and
Amortization RATIONALE: EBITDA is a widely used measure of a company's
core operational performance. It strips out financing costs (interest), tax obligations, and
non-cash accounting charges (depreciation and amortization).
Q14. The debt-to-equity ratio is primarily used to assess a company's:
A. Profitability B. Liquidity C. Financial leverage D. Operational efficiency E. Market
valuation
CORRECT ANSWER: C. Financial leverage RATIONALE: The debt-to-equity
ratio (Total Debt ÷ Total Equity) measures the degree to which a company is financing
