VAC2 Accounting for Decision Makers Version 1
Practice exam for Western Governors University WGU Exams under Western Governors University Exams (College Exams). 5 sample questions.
Sample Questions
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Question 1
___ evaluates the ability to repay loans?
Correct Answer: C
Rationale: The correct answer is 'Income Statement.' While financial statements as a whole provide insight into a business, the specific ability to repay loans is best evaluated through profitability and cash flows. The income statement shows revenues, expenses, and net income, which reflect a firm’s operating performance and ability to generate earnings to service debt. The balance sheet only shows assets and liabilities at a point in time, not repayment ability. The cash flow statement shows liquidity, but not repayment capacity tied to ongoing earnings. Thus, income statements are the primary tool for assessing whether a business can consistently meet its loan obligations.
Rationale: The correct answer is 'Income Statement.' While financial statements as a whole provide insight into a business, the specific ability to repay loans is best evaluated through profitability and cash flows. The income statement shows revenues, expenses, and net income, which reflect a firm’s operating performance and ability to generate earnings to service debt. The balance sheet only shows assets and liabilities at a point in time, not repayment ability. The cash flow statement shows liquidity, but not repayment capacity tied to ongoing earnings. Thus, income statements are the primary tool for assessing whether a business can consistently meet its loan obligations.
Question 2
What information does a balance sheet provide about a company?
Correct Answer: B
Rationale: The correct answer is 'Assets and liabilities at a specific point in time.' A balance sheet is a financial statement that summarizes a company's assets, liabilities, and equity on a specific date. Unlike the income statement, which covers a time period, the balance sheet is a snapshot, showing financial position rather than performance. Options A and D describe the income statement and statement of cash flows, while option C is inaccurate since cash flows are reported over a period of time, not at a point in time. Thus, the balance sheet provides point-in-time financial position data.
Rationale: The correct answer is 'Assets and liabilities at a specific point in time.' A balance sheet is a financial statement that summarizes a company's assets, liabilities, and equity on a specific date. Unlike the income statement, which covers a time period, the balance sheet is a snapshot, showing financial position rather than performance. Options A and D describe the income statement and statement of cash flows, while option C is inaccurate since cash flows are reported over a period of time, not at a point in time. Thus, the balance sheet provides point-in-time financial position data.
Question 3
Which statement best describes financial information recorded in the accounting system of a business?
Correct Answer: B
Rationale: The correct answer is 'Events that have already occurred.' Accounting systems are based on the historical cost principle, recording economic transactions that have actually taken place. This ensures reliability and verifiability of financial data. Predictions or future expectations may be part of managerial forecasts, but they are not part of the financial records. Personal transactions of owners are excluded unless directly tied to business operations. Thus, accounting focuses on past, objective, and verifiable events that have already occurred.
Rationale: The correct answer is 'Events that have already occurred.' Accounting systems are based on the historical cost principle, recording economic transactions that have actually taken place. This ensures reliability and verifiability of financial data. Predictions or future expectations may be part of managerial forecasts, but they are not part of the financial records. Personal transactions of owners are excluded unless directly tied to business operations. Thus, accounting focuses on past, objective, and verifiable events that have already occurred.
Question 4
Which body oversees a certified public accounting firm's audit practices when the firm is auditing large, public companies?
Correct Answer: A
Rationale: The correct answer is 'PCAOB.' The Public Company Accounting Oversight Board is the regulator established by the Sarbanes–Oxley Act of 2002 to oversee the audits of public companies in order to protect investors. The IRS is concerned with taxation, not auditing oversight. The FASAC and FASB set accounting standards but do not supervise auditing practices. Therefore, the PCAOB is the governing body responsible for ensuring audit quality and compliance when it comes to publicly traded entities.
Rationale: The correct answer is 'PCAOB.' The Public Company Accounting Oversight Board is the regulator established by the Sarbanes–Oxley Act of 2002 to oversee the audits of public companies in order to protect investors. The IRS is concerned with taxation, not auditing oversight. The FASAC and FASB set accounting standards but do not supervise auditing practices. Therefore, the PCAOB is the governing body responsible for ensuring audit quality and compliance when it comes to publicly traded entities.
Question 5
Which organization establishes the rules US companies use to record and report accounting information?
Correct Answer: A
Rationale: The correct answer is 'FASB.' In the United States, the Financial Accounting Standards Board develops and issues Generally Accepted Accounting Principles (GAAP), which dictate how companies record and report their financial information. The SEC has oversight authority but does not create GAAP. The IRS deals with tax regulations, not financial accounting standards. The IASB sets international standards (IFRS), but US companies follow GAAP. Thus, the FASB is the primary body responsible for establishing accounting rules in the US.
Rationale: The correct answer is 'FASB.' In the United States, the Financial Accounting Standards Board develops and issues Generally Accepted Accounting Principles (GAAP), which dictate how companies record and report their financial information. The SEC has oversight authority but does not create GAAP. The IRS deals with tax regulations, not financial accounting standards. The IASB sets international standards (IFRS), but US companies follow GAAP. Thus, the FASB is the primary body responsible for establishing accounting rules in the US.