LEVEL THREE MODEL EXAM

1. The accounting profession can be divided into three major categories; specifically, the
practice of public accounting, private accounting, and governmental accounting. A
somewhat unique and important service of public accountants is:
a. Financial accounting.
b. Managerial accounting.
c. Auditing.
d. Cost accounting.
2. The primary private sector agency that oversees external financial reporting standards is the:
a. Financial Accounting Standards Board.
b. Federal Bureau of Investigation.
c. General Accounting Office.
d. Internal Revenue Service.
3. Which of the following equations properly represents a derivation of the fundamental
accounting equation?
a. Assets =liabilities+ owner's equity.
b. Assets = owner's equity.
c. Cash = assets.
d. Assets – liabilities = owner's equity.
4. Wilson Company owns land that cost $100,000. If a “quick sale” of the land was necessary
to generate cash, the company feels it would receive only $80,000. The company continues
to report the asset on the balance sheet at $100,000. Which of the following concepts
justifies this?
a. The historical-cost principle.
b. The value is tied to objective and verifiable past transactions.
c. Neither of the above.
d. Both "a" and "b".
5. Retained earnings will change over time because of several factors. Which of the following
factors would explain an increase in retained earnings?
a. Net loss.
b. Net income.
c. Dividends.
d. Investments by stockholders.
6. Which of these items would be accounted for as an expense?
a. Repayment of a bank loan.
b. Dividends to stockholders.
c. The purchase of land.
d. Payment of the current period's rent.
7. Which of the following transactions would have no impact on stockholders’ equity?
a. Purchase of land from the proceeds of a bank loan.
b. Dividends to stockholders.
c. Net loss.
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 d. Investments of cash by stockholders.

8. Which of the following would not be included on a balance sheet?

a. Accounts receivable.
b. Accounts payable.
c. Sales.
d. Cash.
9. Gerald had beginning total stockholders’ equity of $160,000. During the year, total assets
increased by $240,000 and total liabilities increased by $120,000. Gerald’s net income was
$180,000. No additional investments were made; however, dividends did occur during the
year. How much were the dividends?
a. $20,000.
b. $60,000.
c. $140,000.
d. $220,000.
10. Which financial statement displays the revenues and expenses of a company for a period of
time?
a. Income statement
b. Balance sheet
c. Cash flow statement
d. Statement of stockholder’s equity
11. What is the main purpose of financial accounting?
a. Organize financial information
b. Provide useful, financial information to outsiders
c. Keep track of company expenses
d. Minimize company taxes
12. Which of these is not included as a separate item in the basic accounting equation?
a. Assets
b. Revenues
c. Liabilities
d. Stockholder’s equity
13. Which financial statement uses the expanded accounting equation?
a. Income statement
b. Balance sheet
c. Cash flow statement
d. Statement of stockholder’s equity
14. The accrual basis of accounting records revenues when they are:
a. Collected
b. Earned
c. Contracted
d. Readily available for use
15. The account format that displays debits, credits, balances, and headings.
a. General journal
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 b. General ledger
c. T-account
d. Ledger account

16. Asset accounts have what type of balance?

a. Debit
b. Credit
c. Contra
d. All of the above
17. Which account is not a liability account?
a. Accounts payable
b. Accrued expenses
c. Cash
d. Notes payable
18. Which account increases equity?
a. Expenses
b. Withdrawals
c. Treasury stock
d. Revenues
19. A contra asset account has what type of balance?
a. Debit
b. Credit
c. Contra
d. All of the above
20. A loan can be described as a short-term loan if the period is ..
a. three years
b. less than one year
c. over one year
d. more than two years

21. Companies profit divided among shareholder is ..

a. interest
b. reserve
c. dividend
d. surplus
22. Operating profit is
a. profit after deducting financial costs
b. profit after deducting taxes
c. profit after deducting normal operating expenses including depreciation
d. equal to net profit
23. Retained earnings is synonymous to..
a. accumulated profit and loss account
b. profit for the year
c. operating profit
d. gross profit

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24. Dividends are usually paid as a percentage of ..
a. authorized shares capital
b. net profit
c. paid up capital
d. called up capital

25. Economic life of an enterprise is split into the periodic interval as per..
a. Money measurement concept
b. Matching concept
c. Going concern concept
d. Accrual Concept
26. Which of the following is an example of fictitious assets?
a. Machinery
b. Stock
c. Patent
d. Preliminary Expenses
27. What is the main purpose of Bank Reconciliation?
a. To locate cashier’s mistake
b. Reconciliation of the cash book and bank balances
c. To find out bank balances
d. to find out cash balances

28. Double entry book-keeping was started by

a. `F.W Taylor
b. Henry Fayol
c. Lucas Pacioli
d. Adam Smith
29. Which financial statement is used to show what the firm owns?
a. income statement
b. balance sheet
c. statement of retained earnings
d. cash flow statement
30. According to accounting equation assets are equal to?
a. liabilities
b. liabilities and equities
c. equities
d. none of these
31. The accounting cycle represents a series of steps that a business uses
a. to record and classify the transactions
b. to summarize the transactions
c. to communicate financial events
d. for all of these
32. The cost concept states that all goods and services purchased should be recorded at
1. historical cost
2. market cost
3. both 1 and 2
4. none of these
33. The matching principle attempts to find satisfactory bases of association between
a. assets and liabilities

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 b. expenses and revenues
c. internal equities and external liabilities
d. none of these

34. The Statement that shows the cause of change in the financial position of an organization is
known as
a. balance sheet
b. funds flow statement
c. statement of financial position
d. none of these

35. The results of business activities are reflected in

a. profit and loss account
b. profit and loss appropriation account
c. balance sheet
d. none of these

36. Balance sheet is a statement which discloses an organization’s

a. assets
b. liabilities
c. owner’s equity
d. all of these

37. Current liabilities need to be paid

a. within one accounting cycle
b. beyond one accounting cycle
c. within 3 years
d. within 6 months

38. Revenue
a. causes a decrease in shareholder’s equity
b. causes a decrease or an increase in shareholder’s equity
c. has no impact on shareholder’s equity
d. causes an increase in shareholders’ equity

39. Financially, shareholders are rewarded by

a. interest
b. profits
c. dividends
d. none of these

40. Which of the following is not a current assets?

a. Accounts receivable
b. Inventory of finished products
c. Inventory of raw materials
d. Land

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41. Which of the following is a financial asset?
a. Inventories
b. Equipment
c. Loan to an associate
d. Accounts receivable

42. The cash flow statement consists of which of the following sections?
a. Operating and non-operating
b. current and non-current
c. operating, investing and financing
d. trading and financial

43. Which of the following is not a long-term liability?

a. Accounts payable (for payable due in more than one year)
b. Bank borrowings reimbursable in more than one year
c. Bank overdrafts
d. Cash Ratio

44. When does an accountant record a transaction?

a. If it is materialized by a concrete document
b. if it has a tax implication
c. on Manager’s demand
d. None of these
45. Which of the following equations represents the balance sheet?
a. Assets + Liabilities = Shareholders’ equity
b. Assets = Liabilities = shareholders’ equity
c. Assets = Liabilities – Shareholders’ equity
d. Assets = Liabilities + Shareholders’ equity
46. Which of the following describes a record of the transactions?
a. General ledger
b. Income statement
c. Balance sheet
d. Journal

47. The Four principal qualitative characteristics of useful financial statements are
a. understandability, relevance, reliability, comparability
b. timeliness, relevance, reliability, comparability
c. understandability, relevance, accuracy, comparability
d. understandability, relevance, reliability, simplicity

48. Earnings are the result of the difference between

a. revenue and assets
b. revenue and liabilities
c. liabilities and expenses
d. revenue and expenses

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49. In which order does the journal list transactions?
a. alphabetical
b. decreasing
c. increasing
d. chronological
50. Long term capital loss can be set off from which of the following?
a. short term capital gain only
b. long term capital gain only
c. income from business or profession
d. income from salary

51. Which of the following is not a correct expression of the accounting equation?
a. Assets - Liabilities = Owners' Equity
b. Net Assets = Liabilities + Equities
c. Assets = Equities
d. Assets = Liabilities + Owners' Equity
e. Net Assets = Owners' Equities

52. The owners' equity section of a balance sheet contains two major components:
a. Common Stock and Additional Paid-in Capital
b. Paid-in Capital and Retained Earnings
c. Common Stock and Retained Earnings
d. Net Income and Dividends
e. Additional Paid-in Capital and Net Income
53. The principle stating that all expenses incurred while earning revenues should be identified
with the revenues when they are earned, and reported for the same time period is the:
a. cost principle.
b. revenue principle.
c. expense principle.
d. matching principle.
e. timing principle.
54. The balance sheet is sometimes referred to as the:
a. Statement of Financial Position.
b. Statement of Assets and Liabilities.
c. Statement of Changes in Financial Position.
d. Statement of Current Affairs
e. none of the above
55. The purpose of the income statement is to show the:
a. change in the fair market value of the assets from the prior income statement.
b. market value per share of stock at the date of the statement.
c. revenues collected during the period covered by the statement.
d. net income or net loss for the period covered by the statement
e. all of the above.

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56. Cost, which is related to specific cost object and economically traceable, will be classified
as
a. direct cost
b. indirect cost
c. line cost
d. staff costnswer A
57.  Material or anything for which cost is to be measured is known as
a. measurement object
b. cost object
c. accounting object
d. budget object

58. Cost which is changed in proportion to level total volume is

a. fixed cost
b. variable cost
c. total cost
d. infeasible cost
59. Costs are classified as fixed or variable on basis of
a. specific activity
b. given time period
c. common activity
d. both a and bAnswD
60. Process of tracing direct costs and allocation of indirect costs is known as
a. cost assignment
b. direct assignment
c. indirect assignment
d. economic assignmentwer A
61. Which one of the following is not an external user of accounting information?
a.  Investor
b. Creditor
c. Manager
d. Customer

62. Which of the following is correct about double entry system of accounting?
a. Every business transaction brings at least two financial changes in business.
b. Financial changes are recorded as debits or credits in two or more accounts.
c. Every debit entry has a corresponding credit entry.
d. All of the above
63. The format of account that tells the balance after each entry is known as:
a. T-account format
b. Advanced account format
c. Running balance account format
d. None of the above

64. T-account format is used in situations where account balance is required:

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 a. Periodically
b. After each transaction
c. At the end of the business
d. None of the above

65. In a T-account, the balance is equal to:

a. the total of all debit entries
b. the total of all credit entries
c. the difference between the total of debit entries and the total of credit entries
d. the total of all debit and credit entries

66. A list of account names used in general ledger of an organization is known as:
a. balance sheet
b. Income statement
c. Account list
d. chart of accounts

67. The type and number of accounts to be listed in a chart of accounts depends on:
a. the nature and volume of business
b. the need of internal management
c. the need of external parties
d. all of the above

68. Which one of the following is not a real account?

a. machinery account
b. sales account
c. goodwill account
d. equipment account

69. Which one of the following is not a nominal account?

a. purchases account
b. sales account
c. salaries account
d. cash account

70. Which one of the following is valuation (or contra) account?

a. Accounts receivable account
b. Gain on sale of fixed asset account
c. Accumulated depreciation account
d. Copyright account

71. Which one of the following is a withdrawal account?

a. Cash account
b. Dividend account
c. Salaries account
d. Capital account

72. Which one of the following is a characteristic of a valid business transaction?

a. It is an event measurable in terms of money

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 b. It affects the financial position of the business
c. It should be supported by a source document
d. All of the above

73. Which one of the following is an internal transaction?

a. Recording salaries expense
b. Purchase of goods from supplier
c. Recording depreciation
d. Purchase of equipment for cash

74. Which of the following normally have a debit balance?

a. Liability accounts
b. Equity or capital accounts
c. Income or revenue accounts
d. Asset accounts

75. When an asset increases, its account is:

a. Debited
b. Credited
c. Increased
d. reduced
76. When a liability increases, its account is:
a. Debited
b. Credited
c. not changed
d. closed

77. An account used to determine the carrying or net value of another account is known as:
a. reverse account
b. opposite account
c. contra account
d. realization account

78. In accounting equation (Assets = Liabilities + Owner’s equity), the liabilities means the
claim of external creditors against:
a. the profit of the business
b. the assets of the business
c. the revenue of the business
d. the goodwill of the business

79. Accumulated depreciation account and allowance for doubtful accounts account are two
examples of contra asset account. The normal balance of these two accounts would be:
a. a credit balance
b. a debit balance
c. similar to the related normal asset accounts
d. nil balance

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 80. According to modern approach, the accounts are classified as:
a. personal accounts, nominal accounts, real accounts and valuation accounts
b. personal accounts, nominal accounts, revenue accounts, and expense accounts
c. asset accounts, liability accounts, sales accounts, profit accounts
d. asset accounts, liability accounts, capital accounts, withdrawal accounts, revenue
accounts, and expense accounts

81. The liability arising from the purchase of goods or services on credit is called:
a. Creditors
b. Accounts payable
c. Loan
d. Accounts receivable

82. The accounts which have their existence even after the close of the accounting year are
known as:
a. Nominal accounts
b. Real accounts
c. Permanent accounts
d. revenue accounts

83. The financial information provided by an accounting system is needed by:

a. Owners
b. Creditors
c. Management
d. All of the above

84. A document prepared to authorize and describe an expenditure is termed as:

a. Cash memo
b. Voucher
c. Bill
d.  Debit

85. A percentage reduction from the list price of merchandise allowed to retailers by whole
sellers is called:
a. Commission
b. Trade discount
c. Cash discount
d.  Allowance

86. Current assets minus current liabilities is equal to:

a. Working capital
b. Profit
c. Capital
d. Loss

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 87. The assets that are used in the operation of the business but have no physical existence are
usually known as:
a. Non-current assets
b. Fictitious assets
c. Intangible assets
d. Tangible assets

88. Double entry system of accounting means:

a. Entry in two sets of books
b. Entry on two dates
c. Entry for two aspects of the transaction
d. Entry for one aspect of transaction

89. The activities of selecting, processing and reporting the information can be described as:
a. Book-keeping
b. Accounting
c. Auditing
d. Costing
90. Resources minus capital equities is equal to:
a. Assets
b. Liabilities
c. Revenue
d. Equity
91. The complete process of accounting is called:
a. Journalizing
b. Posting
c. Accounting cycle
d. Business cycle
92. Stationary is classified as:
a. Factory supplies
b. Office supplies
c. Sales supplies
d. All of the above
93. Withdrawal of merchandise for personal use is:
a. Drawings
b. Sale of merchandise
c. Personal expense
d. None of the above
94. The modern system of recording business transactions in the books of accounts is known as:
a. Modern system
b. Single entry system
c. American system
d. Double entry system

95. A portion of the accounts receivable which proves to be uncollectible is termed as:
a. Bad debts
b. Doubtful debts
c. Provision for bad debts
d. All of the above

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