Western Governors University
MAXE ECITCARP
✦ WGU ✦
C214 C214 · Financial Management
A NEW KIND OF U.
SALT LAKE
WGU C214 Financial Management Concepts Practice Exam
F I N A N C I A L STAT E M E N TS · C A P I TA L B U D G E T I N G · W A CC · B O N D S · STO C K S · W O R K I N G C A P I TA L · E T H I CS
INSTITUTION Western Governors University COURSE CODE C214 · Financial Management
PROGRAM MBA / MS in Management & Leadership ACADEMIC YEAR
EXAM TITLE C214 — Concepts Practice Exam TOTAL QUESTIONS 50 Questions (Part 1 of 3)
SUBJECT AREAS Statements · Bonds · WACC · CAPM · Working Capital · Ethics FORMAT Multiple Choice — Select the Single Best Answer
PR ACTICE EXAMINATION INSTRUCTIONS
▸ Select the single best answer for each question.
▸ Content covers: financial statements, time value of money, bond/stock valuation, capital budgeting, WACC, working capital, ethics/regulations, and international finance.
▸ Each question includes the correct answer with a detailed rationale.
SECTION I — FINANCIAL MANAGEMENT CONCEPTS PRACTICE Questions 1 – 50
1. The matching principle in accrual accounting requires that:
A. Expenses are matched to revenue recognition.
B. Expenses are matched to the year in which they are incurred.
C. Revenues are matched to the year in which they are booked.
D. Revenues should be large enough to match expenses.
CORRECT ANSWER A — Expenses are matched to revenue recognition
RATIONALE The matching principle requires that expenses be recorded in the SAME period as the revenues they helped generate. For example, COGS is matched to the period
when the product was sold, not when it was manufactured. This ensures the income statement accurately reflects economic performance. The revenue
recognition principle states revenue is recognized when the earnings process is complete (product shipped/service delivered). Together, these accrual accounting
principles provide a more accurate picture than cash-basis accounting.
2. The addition to retained earnings each year is:
A. Net Income
B. Net Income minus dividends
C. Net Income plus dividends
D. Net Income times the Payout Ratio
CORRECT ANSWER B — Net Income minus dividends
RATIONALE The addition to Retained Earnings each year = Net Income − Dividends. This is the amount of profit REINVESTED in the business. Ending RE = Beginning RE + Net
Income − Dividends. The Payout Ratio = Dividends / Net Income — it represents the proportion of earnings paid to shareholders. The SGR (Sustainable Growth
Rate) = ROE × (1 − Payout Ratio). Net Income increases RE; paying dividends decreases RE. If a firm cannot access markets, strategies include: slow sales growth,
lower dividend payout, and increase net margin.
3. Net working capital equals:
A. Current assets
B. Current liabilities
C. Current assets minus current liabilities
D. None of the above
CORRECT ANSWER C — Current assets minus current liabilities
RATIONALE Net Working Capital = Current Assets − Current Liabilities. It measures a company's short-term liquidity — its ability to meet obligations due within one year.
Current assets: Cash, Accounts Receivable, Inventory, Short-Term Investments. Current liabilities: Accounts Payable, Accrued Expenses, Short-Term Debt. A positive
NWC indicates the company has sufficient short-term assets to cover short-term obligations. Retained Earnings is NOT part of Net Working Capital — it is an equity
account. The current ratio = CA/CL; quick ratio = (Cash + AR + Marketable Securities)/CL.
4. What does the Sarbanes-Oxley Act require companies to do?
A. Have a board of directors
B. Register all foreign sales
C. Make estimated tax payments
D. Have transparent, accurate financial statements
CORRECT ANSWER D — Have transparent, accurate financial statements
RATIONALE SOX was enacted in 2002 after Enron/WorldCom scandals. Its primary purpose: ensure honest audit/accounting procedures and transparent financial reporting.
Key provisions: CEO/CFO certification of financials, management assessment of internal controls (Section 404), external auditor attestation, and criminal penalties
for fraud. SOX does NOT require having a board of directors (most corps already have one), registering foreign sales, or making estimated tax payments. The
Prospectus requirement was established in the Securities Act of 1933. A 10-K is a firm's annual report to the SEC.
, 5. If a company produces and sells a product only in the U.S., what international developments may affect its sales?
A. Fluctuating exchange rates
B. Imports of competing products
C. Immigration policy
D. Inflation in Europe
CORRECT ANSWER B — Imports of competing products
RATIONALE Even a purely domestic company faces INTERNATIONAL COMPETITION — foreign producers can sell competing products in the U.S. market, affecting the domestic
company's sales and pricing. Fluctuating exchange rates (A) primarily affect companies that export/import or have foreign operations. Tariffs on imports benefit
special interests (protected domestic industry) but hurt consumers through higher prices. If the dollar strengthens, imports become cheaper. Currency
devaluation makes exports cheaper and imports more expensive. Export-oriented firms should favor a WEAK dollar (makes their products cheaper abroad).
6. Which is NOT a reason to calculate WACC?
A. To measure the overall cost of financing
B. Needed to calculate Cash Flow Financing
C. It is the minimum required return for investment projects
D. Measures investors' required return on firm securities
CORRECT ANSWER B — Needed to calculate Cash Flow Financing
RATIONALE WACC is NOT used to calculate Cash Flow Financing. WACC IS used to: (A) measure the blended cost of debt and equity financing, (C) serve as the hurdle rate for
capital budgeting decisions (minimum required return), and (D) represent investors' overall required return. WACC is calculated based on MARKET values and
yields of debt and equity (not book values). Management decisions that impact WACC include leverage decisions. WACC is needed in capital budgeting to evaluate
potential investments — if IRR > WACC, the project increases shareholder value.
7. If a firm's goal is to maximize stockholder wealth, which would the firm avoid?
A. Stock buybacks
B. Risky long-term investments
C. Investments with negative NPV
D. Transparency in financial statements
CORRECT ANSWER C — Investments with negative NPV
RATIONALE The goal of a corporation is to MAXIMIZE SHAREHOLDER VALUE (stock price). A firm should AVOID investments with negative NPV because they DESTROY value —
they cost more than they return. Stock buybacks (A) can increase EPS and signal undervaluation. Risky long-term investments (B) are acceptable if they offer
commensurately high expected returns (positive NPV). Transparency (D) reduces information asymmetry and agency costs. Firms maximize value by balancing risk
and return. The SGR measures potential sales growth with INTERNAL funding.
8. In which market transaction is the corporation NOT involved?
A. Primary Markets
B. Secondary Markets
C. IPO
D. Buy Backs
CORRECT ANSWER B — Secondary Markets
RATIONALE In SECONDARY markets (NYSE, NASDAQ), investors trade securities among themselves — the issuing corporation receives NO cash from these transactions. In
PRIMARY markets, the corporation IS involved — it sells new securities directly to investors (IPO, SEO). In an IPO, the corporation receives the proceeds. In stock
buybacks, the corporation purchases its own shares from the market. Secondary markets provide liquidity and price discovery. The difference between primary
and secondary: primary = new securities issued; secondary = existing securities traded.
9. What does Beta measure?
A. The yield on the S&P 500
B. The relative riskiness of an individual stock
C. Indicates the market value of the stock
D. Stocks to avoid purchasing
CORRECT ANSWER B — The relative riskiness of an individual stock
RATIONALE Beta (β) measures SYSTEMATIC risk — the sensitivity of a stock's returns to market movements. β = 1.0: moves with the market. β > 1.0: MORE volatile than the
market. β < 1.0: LESS volatile. According to CAPM, an increase in Beta causes the required return to INCREASE. Beta is a key input in CAPM: r = rf + β(rm−rf). The
risk-free rate is typically represented by Treasury yields. Diversification protects against IDIOSYNCRATIC (firm-specific) risk, not systematic risk. The market risk
premium = expected stock return minus risk-free rate — determined by investor-perceived riskiness of stocks.
10. If the yield of a bond is higher than the coupon rate, what is the price?
A. Premium price
B. Par price
C. Discount price
D. Secondary market price
CORRECT ANSWER C — Discount price
RATIONALE When Yield (market rate) > Coupon Rate, the bond's fixed payments are LESS attractive, so its price falls BELOW par — a DISCOUNT. When Yield < Coupon Rate =
PREMIUM price. When Yield = Coupon Rate = PAR. Bond prices and interest rates move INVERSEly. Duration measures the sensitivity of bond price to interest rate
changes. The interest rate on a corporate bond does NOT reflect Face Value — it reflects risk, inflation, and Treasury rates. Junk bonds are rated below BBB. A bond
downgrade causes the bond price to DECREASE. Collateralization LOWERS the yield (less default risk).
MAXE ECITCARP
✦ WGU ✦
C214 C214 · Financial Management
A NEW KIND OF U.
SALT LAKE
WGU C214 Financial Management Concepts Practice Exam
F I N A N C I A L STAT E M E N TS · C A P I TA L B U D G E T I N G · W A CC · B O N D S · STO C K S · W O R K I N G C A P I TA L · E T H I CS
INSTITUTION Western Governors University COURSE CODE C214 · Financial Management
PROGRAM MBA / MS in Management & Leadership ACADEMIC YEAR
EXAM TITLE C214 — Concepts Practice Exam TOTAL QUESTIONS 50 Questions (Part 1 of 3)
SUBJECT AREAS Statements · Bonds · WACC · CAPM · Working Capital · Ethics FORMAT Multiple Choice — Select the Single Best Answer
PR ACTICE EXAMINATION INSTRUCTIONS
▸ Select the single best answer for each question.
▸ Content covers: financial statements, time value of money, bond/stock valuation, capital budgeting, WACC, working capital, ethics/regulations, and international finance.
▸ Each question includes the correct answer with a detailed rationale.
SECTION I — FINANCIAL MANAGEMENT CONCEPTS PRACTICE Questions 1 – 50
1. The matching principle in accrual accounting requires that:
A. Expenses are matched to revenue recognition.
B. Expenses are matched to the year in which they are incurred.
C. Revenues are matched to the year in which they are booked.
D. Revenues should be large enough to match expenses.
CORRECT ANSWER A — Expenses are matched to revenue recognition
RATIONALE The matching principle requires that expenses be recorded in the SAME period as the revenues they helped generate. For example, COGS is matched to the period
when the product was sold, not when it was manufactured. This ensures the income statement accurately reflects economic performance. The revenue
recognition principle states revenue is recognized when the earnings process is complete (product shipped/service delivered). Together, these accrual accounting
principles provide a more accurate picture than cash-basis accounting.
2. The addition to retained earnings each year is:
A. Net Income
B. Net Income minus dividends
C. Net Income plus dividends
D. Net Income times the Payout Ratio
CORRECT ANSWER B — Net Income minus dividends
RATIONALE The addition to Retained Earnings each year = Net Income − Dividends. This is the amount of profit REINVESTED in the business. Ending RE = Beginning RE + Net
Income − Dividends. The Payout Ratio = Dividends / Net Income — it represents the proportion of earnings paid to shareholders. The SGR (Sustainable Growth
Rate) = ROE × (1 − Payout Ratio). Net Income increases RE; paying dividends decreases RE. If a firm cannot access markets, strategies include: slow sales growth,
lower dividend payout, and increase net margin.
3. Net working capital equals:
A. Current assets
B. Current liabilities
C. Current assets minus current liabilities
D. None of the above
CORRECT ANSWER C — Current assets minus current liabilities
RATIONALE Net Working Capital = Current Assets − Current Liabilities. It measures a company's short-term liquidity — its ability to meet obligations due within one year.
Current assets: Cash, Accounts Receivable, Inventory, Short-Term Investments. Current liabilities: Accounts Payable, Accrued Expenses, Short-Term Debt. A positive
NWC indicates the company has sufficient short-term assets to cover short-term obligations. Retained Earnings is NOT part of Net Working Capital — it is an equity
account. The current ratio = CA/CL; quick ratio = (Cash + AR + Marketable Securities)/CL.
4. What does the Sarbanes-Oxley Act require companies to do?
A. Have a board of directors
B. Register all foreign sales
C. Make estimated tax payments
D. Have transparent, accurate financial statements
CORRECT ANSWER D — Have transparent, accurate financial statements
RATIONALE SOX was enacted in 2002 after Enron/WorldCom scandals. Its primary purpose: ensure honest audit/accounting procedures and transparent financial reporting.
Key provisions: CEO/CFO certification of financials, management assessment of internal controls (Section 404), external auditor attestation, and criminal penalties
for fraud. SOX does NOT require having a board of directors (most corps already have one), registering foreign sales, or making estimated tax payments. The
Prospectus requirement was established in the Securities Act of 1933. A 10-K is a firm's annual report to the SEC.
, 5. If a company produces and sells a product only in the U.S., what international developments may affect its sales?
A. Fluctuating exchange rates
B. Imports of competing products
C. Immigration policy
D. Inflation in Europe
CORRECT ANSWER B — Imports of competing products
RATIONALE Even a purely domestic company faces INTERNATIONAL COMPETITION — foreign producers can sell competing products in the U.S. market, affecting the domestic
company's sales and pricing. Fluctuating exchange rates (A) primarily affect companies that export/import or have foreign operations. Tariffs on imports benefit
special interests (protected domestic industry) but hurt consumers through higher prices. If the dollar strengthens, imports become cheaper. Currency
devaluation makes exports cheaper and imports more expensive. Export-oriented firms should favor a WEAK dollar (makes their products cheaper abroad).
6. Which is NOT a reason to calculate WACC?
A. To measure the overall cost of financing
B. Needed to calculate Cash Flow Financing
C. It is the minimum required return for investment projects
D. Measures investors' required return on firm securities
CORRECT ANSWER B — Needed to calculate Cash Flow Financing
RATIONALE WACC is NOT used to calculate Cash Flow Financing. WACC IS used to: (A) measure the blended cost of debt and equity financing, (C) serve as the hurdle rate for
capital budgeting decisions (minimum required return), and (D) represent investors' overall required return. WACC is calculated based on MARKET values and
yields of debt and equity (not book values). Management decisions that impact WACC include leverage decisions. WACC is needed in capital budgeting to evaluate
potential investments — if IRR > WACC, the project increases shareholder value.
7. If a firm's goal is to maximize stockholder wealth, which would the firm avoid?
A. Stock buybacks
B. Risky long-term investments
C. Investments with negative NPV
D. Transparency in financial statements
CORRECT ANSWER C — Investments with negative NPV
RATIONALE The goal of a corporation is to MAXIMIZE SHAREHOLDER VALUE (stock price). A firm should AVOID investments with negative NPV because they DESTROY value —
they cost more than they return. Stock buybacks (A) can increase EPS and signal undervaluation. Risky long-term investments (B) are acceptable if they offer
commensurately high expected returns (positive NPV). Transparency (D) reduces information asymmetry and agency costs. Firms maximize value by balancing risk
and return. The SGR measures potential sales growth with INTERNAL funding.
8. In which market transaction is the corporation NOT involved?
A. Primary Markets
B. Secondary Markets
C. IPO
D. Buy Backs
CORRECT ANSWER B — Secondary Markets
RATIONALE In SECONDARY markets (NYSE, NASDAQ), investors trade securities among themselves — the issuing corporation receives NO cash from these transactions. In
PRIMARY markets, the corporation IS involved — it sells new securities directly to investors (IPO, SEO). In an IPO, the corporation receives the proceeds. In stock
buybacks, the corporation purchases its own shares from the market. Secondary markets provide liquidity and price discovery. The difference between primary
and secondary: primary = new securities issued; secondary = existing securities traded.
9. What does Beta measure?
A. The yield on the S&P 500
B. The relative riskiness of an individual stock
C. Indicates the market value of the stock
D. Stocks to avoid purchasing
CORRECT ANSWER B — The relative riskiness of an individual stock
RATIONALE Beta (β) measures SYSTEMATIC risk — the sensitivity of a stock's returns to market movements. β = 1.0: moves with the market. β > 1.0: MORE volatile than the
market. β < 1.0: LESS volatile. According to CAPM, an increase in Beta causes the required return to INCREASE. Beta is a key input in CAPM: r = rf + β(rm−rf). The
risk-free rate is typically represented by Treasury yields. Diversification protects against IDIOSYNCRATIC (firm-specific) risk, not systematic risk. The market risk
premium = expected stock return minus risk-free rate — determined by investor-perceived riskiness of stocks.
10. If the yield of a bond is higher than the coupon rate, what is the price?
A. Premium price
B. Par price
C. Discount price
D. Secondary market price
CORRECT ANSWER C — Discount price
RATIONALE When Yield (market rate) > Coupon Rate, the bond's fixed payments are LESS attractive, so its price falls BELOW par — a DISCOUNT. When Yield < Coupon Rate =
PREMIUM price. When Yield = Coupon Rate = PAR. Bond prices and interest rates move INVERSEly. Duration measures the sensitivity of bond price to interest rate
changes. The interest rate on a corporate bond does NOT reflect Face Value — it reflects risk, inflation, and Treasury rates. Junk bonds are rated below BBB. A bond
downgrade causes the bond price to DECREASE. Collateralization LOWERS the yield (less default risk).
