Western Governors University
ECITCARP 412C
★ ★
WGU College of Business — C214 Financial Management Concepts
O N L I N E . N O N P R O F I T. C O M P E T E N C Y - B A S E D .
EST. 1997
WGU C214 Financial Management Concepts Practice Exam
OBJECTIVE ASSESSMENT PREPARATION — FINANCIAL STATEMENT ANALYSIS, VALUATION, CAPITAL BUDGETING & RISK | 2026/2027
INSTITUTION Western Governors University (WGU) COURSE CODE C214 — Financial Management Concepts
PROGRAM Master of Business Administration (MBA) ACADEMIC YEAR
EXAM TITLE Financial Management Concepts Practice Exam TOTAL QUESTIONS 100+ Practice Questions with Answer Key
SUBJECT AREAS Accounting, Valuation, Capital Budgeting, Risk, Markets FORMAT Multiple Choice — Select the Single Best Answer
EXAMINATION INSTRUCTIONS
▸ Select the single best answer for each multiple-choice question.
▸ Topics include: accrual accounting principles, financial statement analysis, time value of money, bond and stock valuation, WACC, capital budgeting, risk and return, and working capital management.
▸ Questions are drawn from the WGU C214 Concepts Quizlets, Study Guide, and Pre-Assessment materials.
▸ Correct answers appear below each question for Objective Assessment (OA) preparation purposes.
▸ All content reflects current financial management concepts and MBA-level curriculum standards.
SECTION I — ACCOUNTING PRINCIPLES, FINANCIAL STATEMENTS & RATIO ANALYSIS Questions 1 – 20
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; the matching principle pairs expenses with the revenues they helped generate in the same period
RATIONALE The matching principle is a fundamental accrual accounting concept: expenses are recognized in the same period as the revenues they helped produce, regardless of when cash changes hands. Example: cost of goods sold
is matched to the sale it produced, not when inventory was purchased. This contrasts with cash-basis accounting where expenses are recorded when paid (b). The principle ensures the income statement accurately
reflects the economic reality of operations.
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; retained earnings increase by the portion of net income NOT paid out as dividends
RATIONALE Retained earnings = Beginning RE + Net Income - Dividends. The addition each year is Net Income minus dividends (the plowback or retention). The payout ratio = Dividends / Net Income. The retention ratio = 1 - Payout
Ratio. Retained earnings represent cumulative profits reinvested in the firm rather than distributed to shareholders. This is distinct from net income alone (a), which does not account for distributions.
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; NWC measures a firm's short-term liquidity position
RATIONALE Net Working Capital (NWC) = Current Assets - Current Liabilities. It represents the capital available to fund day-to-day operations. Positive NWC means current assets exceed current liabilities (liquidity buffer). Negative
NWC may indicate liquidity problems (though some firms operate with negative NWC efficiently). Components: Current Assets (cash, AR, inventory) minus Current Liabilities (AP, accrued expenses, short-term debt).
Retained earnings (c on Q33) are equity, not part of NWC.
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 — Transparent, accurate financial statements; SOX (2002) mandates CEO/CFO certification of financial accuracy and internal controls
RATIONALE The Sarbanes-Oxley Act (2002) was passed after Enron/WorldCom scandals to restore investor confidence. Key provisions: (1) CEO and CFO must personally certify financial statements. (2) Independent audit committees.
(3) Enhanced internal control reporting (Section 404). (4) Created the PCAOB to oversee auditors. SOX does not require a board of directors per se (a — many companies already had boards), register foreign sales (b), or
mandate estimated tax payments (c). The core requirement is transparency and accuracy of financial reporting.
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; even domestic-only firms face international competition from imported goods
RATIONALE A company that only sells domestically can still be affected by international competition: foreign competitors may import similar products at lower prices, capturing market share. Exchange rates (a) primarily affect
exporters/importers directly. Immigration policy (c) affects labor markets. European inflation (d) would have minimal direct impact on a U.S.-only firm. The key insight: in a globalized economy, competition is international
even if a firm's operations are purely domestic.
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 — WACC is NOT used to calculate Cash Flow Financing; WACC is the discount rate for capital budgeting and measures the firm's cost of capital
RATIONALE WACC (Weighted Average Cost of Capital) serves three primary purposes: (a) measures the blended cost of debt and equity financing, (c) provides the minimum required return (hurdle rate) for investment projects (if IRR >
WACC, the project adds value), and (d) reflects investors' required returns on the firm's securities. WACC is NOT used to calculate Cash Flow Financing (b) — that relates to the CFF section of the Statement of Cash Flows.
WACC is fundamentally a discount rate for evaluating investments.
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; negative NPV projects destroy shareholder value
RATIONALE The fundamental rule of capital budgeting: accept projects with positive NPV (they increase firm value), reject projects with negative NPV (they destroy value). Stock buybacks (a) can increase shareholder value by
returning excess cash. Risky investments (b) may be acceptable if the expected return compensates for the risk (positive NPV). Transparency (d) is essential for accurate valuation. The goal of maximizing stockholder
wealth means the firm should only invest when NPV > 0 — the project generates returns exceeding the cost of capital.
ECITCARP 412C
★ ★
WGU College of Business — C214 Financial Management Concepts
O N L I N E . N O N P R O F I T. C O M P E T E N C Y - B A S E D .
EST. 1997
WGU C214 Financial Management Concepts Practice Exam
OBJECTIVE ASSESSMENT PREPARATION — FINANCIAL STATEMENT ANALYSIS, VALUATION, CAPITAL BUDGETING & RISK | 2026/2027
INSTITUTION Western Governors University (WGU) COURSE CODE C214 — Financial Management Concepts
PROGRAM Master of Business Administration (MBA) ACADEMIC YEAR
EXAM TITLE Financial Management Concepts Practice Exam TOTAL QUESTIONS 100+ Practice Questions with Answer Key
SUBJECT AREAS Accounting, Valuation, Capital Budgeting, Risk, Markets FORMAT Multiple Choice — Select the Single Best Answer
EXAMINATION INSTRUCTIONS
▸ Select the single best answer for each multiple-choice question.
▸ Topics include: accrual accounting principles, financial statement analysis, time value of money, bond and stock valuation, WACC, capital budgeting, risk and return, and working capital management.
▸ Questions are drawn from the WGU C214 Concepts Quizlets, Study Guide, and Pre-Assessment materials.
▸ Correct answers appear below each question for Objective Assessment (OA) preparation purposes.
▸ All content reflects current financial management concepts and MBA-level curriculum standards.
SECTION I — ACCOUNTING PRINCIPLES, FINANCIAL STATEMENTS & RATIO ANALYSIS Questions 1 – 20
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; the matching principle pairs expenses with the revenues they helped generate in the same period
RATIONALE The matching principle is a fundamental accrual accounting concept: expenses are recognized in the same period as the revenues they helped produce, regardless of when cash changes hands. Example: cost of goods sold
is matched to the sale it produced, not when inventory was purchased. This contrasts with cash-basis accounting where expenses are recorded when paid (b). The principle ensures the income statement accurately
reflects the economic reality of operations.
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; retained earnings increase by the portion of net income NOT paid out as dividends
RATIONALE Retained earnings = Beginning RE + Net Income - Dividends. The addition each year is Net Income minus dividends (the plowback or retention). The payout ratio = Dividends / Net Income. The retention ratio = 1 - Payout
Ratio. Retained earnings represent cumulative profits reinvested in the firm rather than distributed to shareholders. This is distinct from net income alone (a), which does not account for distributions.
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; NWC measures a firm's short-term liquidity position
RATIONALE Net Working Capital (NWC) = Current Assets - Current Liabilities. It represents the capital available to fund day-to-day operations. Positive NWC means current assets exceed current liabilities (liquidity buffer). Negative
NWC may indicate liquidity problems (though some firms operate with negative NWC efficiently). Components: Current Assets (cash, AR, inventory) minus Current Liabilities (AP, accrued expenses, short-term debt).
Retained earnings (c on Q33) are equity, not part of NWC.
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 — Transparent, accurate financial statements; SOX (2002) mandates CEO/CFO certification of financial accuracy and internal controls
RATIONALE The Sarbanes-Oxley Act (2002) was passed after Enron/WorldCom scandals to restore investor confidence. Key provisions: (1) CEO and CFO must personally certify financial statements. (2) Independent audit committees.
(3) Enhanced internal control reporting (Section 404). (4) Created the PCAOB to oversee auditors. SOX does not require a board of directors per se (a — many companies already had boards), register foreign sales (b), or
mandate estimated tax payments (c). The core requirement is transparency and accuracy of financial reporting.
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; even domestic-only firms face international competition from imported goods
RATIONALE A company that only sells domestically can still be affected by international competition: foreign competitors may import similar products at lower prices, capturing market share. Exchange rates (a) primarily affect
exporters/importers directly. Immigration policy (c) affects labor markets. European inflation (d) would have minimal direct impact on a U.S.-only firm. The key insight: in a globalized economy, competition is international
even if a firm's operations are purely domestic.
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 — WACC is NOT used to calculate Cash Flow Financing; WACC is the discount rate for capital budgeting and measures the firm's cost of capital
RATIONALE WACC (Weighted Average Cost of Capital) serves three primary purposes: (a) measures the blended cost of debt and equity financing, (c) provides the minimum required return (hurdle rate) for investment projects (if IRR >
WACC, the project adds value), and (d) reflects investors' required returns on the firm's securities. WACC is NOT used to calculate Cash Flow Financing (b) — that relates to the CFF section of the Statement of Cash Flows.
WACC is fundamentally a discount rate for evaluating investments.
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; negative NPV projects destroy shareholder value
RATIONALE The fundamental rule of capital budgeting: accept projects with positive NPV (they increase firm value), reject projects with negative NPV (they destroy value). Stock buybacks (a) can increase shareholder value by
returning excess cash. Risky investments (b) may be acceptable if the expected return compensates for the risk (positive NPV). Transparency (d) is essential for accurate valuation. The goal of maximizing stockholder
wealth means the firm should only invest when NPV > 0 — the project generates returns exceeding the cost of capital.
