Part I. Multiple Choice.

(Use Answer Sheet One)

Choose the correct answer from the given alternatives write the letter of your
choice on the answer sheet. (1 point each)
1. Of the following one is not external user of financial accounting information:
A. lenders C. labor unions
B. customers D. Management of the firm
2. A debit side of an account may signify:
A. increase in an income account
B. an increase in a liability account
C. decrease in owner's equity D. decrease in an asset
3. X Company sold goods worth Birr 320,000 on account to Y company terms 1/10,
n/60 on January 18, 2001. Y Company paid on January 28, 2001. What is the
necessary journal entry on January 28?
A. cash debit 320,000 and Sale credit 320,000
B. debit Cash 316,800; debit Sales Discount 3200 and credit Account
Receivable 320,000
C. debit Account Receivable 320,000 and credit Sales 320,000
D. None of the above
4. One of the following is not the characteristics of a corporation:
A. It is not a separate legal entity.
B. It has a legal status in court.
C. It has its own charter.
D. It pays income taxes on its earnings.
5. Which of the following accounts is not closed at the end of the accounting
period?
A. Revenue account C. Maintenance Expense account
B. Income Summary account D. Capital account
6. Accounts that start each new accounting period with zero balances are ____.
A. permanent accounts
B. temporary accounts/Nominal Account
C. asset accounts D. liability accounts
7. When a plant asset is retired from productive service and has no salvage value,
and that originally cost Birr 50,000 and had accumulated depreciation of Birr
40,000, the correct accounting treatment is:
A. Plant Asset 50,000
Accumulated Depreciation 40,000
Loss 10,000
B. Loss 10,000
Accumulated Depreciation 40,000
Plant Asset 50,000
C. Loss on Plant Asset 10,000
Plant Asset 10,000

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 D. Plant Asset 10,000
Loss on Plant Asset 10,000
8. Smith. Corp. sold 100 shares of Birr 50 par value common stock for Birr 70 per
share. What would be the correct journal entry?
A. Cash 7,000
Common Stock 7,000
B. Cash 7,000
Common Stock 5,000
Paid in Capital 2,000
C. Common Stock 7,000
Cash 7,000
D. Cash 7,000
Common Stock 2,000
Paid in Capital 5,000
9. Brooks Co. declared and paid a cash dividend of Birr 5,000 immediately. What
would be the journal entries?
A. Retained Earnings 5,000
Cash 5,000
B. Retained Earnings 5,000
Dividends Payable 5,000
C. Dividends Payable 5,000
Cash 5,000
Retained Earnings 5,000
Dividends Payable 5,000
D. None of the above
10. Warriner, Ltd. sells widgets for Birr 100, costing Birr 70 with payments to be
made in 10 equal installments of Birr10. If 3 payments have been received this
year, using the installment basis of revenue recognition, what would be the
realized profit?
A. 0 B. Birr 3 C. Birr 9 D. Birr 30
Use the following table and answer the next three question number 11, 12, 13
and 14.
Machine Purchase price Birr 80,000
Estimated Salvage Value 20,000
Estimated Useful Life 5 years
Estimated Units of Production 12,000
11. What will be the depreciation expense of the machine for its second service year
based on Straight-line-method?
A. 0 B. Birr 5,000 C. Birr 16,000 D. Birr 12,000
12. What will be the depreciation expense of the machine using the units of
production method for its second service year when 4,000 units are made?
A. Birr 4,000 B. Birr 10,000 C. Birr 20,000 D. Birr 27,000
13. What will be the depreciation expense of the machine for its second service year
using the sum-of-the-years’-digits method?
A. Birr 36,000 B. Birr 16,000 C. Birr 48,000 D. Birr 21,333

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14. What will be the depreciation expense of the machine for its second service year
using the double- declining-balance method?
A. Birr 19,200 B. Birr 32,000 C. Birr 11,520 D. Birr 8,800
15. From merchandiser’s income statement, assume you know that Sales revenue is
Birr 650,000 and the gross margin is 20%. What would the Cost of Goods Sold?
A. Birr 650,000 B. Birr 130,000 C. Birr 26,000 D. Birr 520,000
16. Which of the following is not a characteristic of a fund as defined by GASB
standards?
A. A segregated quantity of cash and other financial resources on deposit
with a designated trustee.
B. A self-balancing set of accounts.
C. A fiscal entity. D. An accounting entity.
17. For governmental accounting and reporting, the reporting entity consists of:
A. the primary government only
B. the primary government and component units
C. the primary government and component units and other smaller units
within the geographical boundaries of the primary government.
D. as directed by the state legislation that established the primary
government.
18. A company is considering the following projects:
W X Y
Annual after-tax cash inflows Birr 620,000 Birr 1,000,000 Birr 2,000,000
Initial project cost Birr 2,000,000 Birr 5,000,000 Birr 10,000,000
Cost of capital 9% 11% 13%
Project life 4 years 5 years 7 years
Based only on profitability index, in which project(s) should the company invest in?
A. Only W B. Only X C. Only Y D. All three projects
19. As a result of a project, the income gained/lost by four groups in the society
with their respective marginal propensity to save is as follows: What is the
impact of the project on saving of the society?

Income Marginal propensity to save

Group
gained/lost as a result of the project
1 100,000 0.05
2 600,000 0.10
3 -200,000 0.20
4 -400,000 0.40
A. 135,000 Income lost C. 145,000 income lost
B. 135,000 income gain D. 145,000 income gain
20. Which one of the following conditions is advisable for investors to acquire
financial securities?
A. if market value > the estimated value
B. If the estimated value > market price
C. If the intrinsic value < market price

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 D. All of the above
21. _______ is designed to determine a firm's long-run ability to meet its obligations.
A. Financial leverage ratio
B. Asset utilization ratio
C. Profitability ratio
D. Liquidity Ratio
22. A firm with net income of Br.500, 000 pays 48% of net income out in dividends.
If the firm has 150,000 shares of common stock outstanding, what is the
dividend paid per share of stock?
A. Br. 3.33 B. Br. 1.44 C. Br. 0.30 D. Br. 1.60
23. Which one of the following is not the characteristics of projects?
A. Require fixed (capital) investments in real assets.
B. Are usually the subject of special arrangements and procedures for their
planning, appraisal, and soon.
C. Involve special financial arrangements, including loans from overseas,
development banks and agencies.
D. Pattern of resource commitment: usually for capital investments to
establish productive capacity or physical works, which then have a long
life of operation or use.
24. Qualified type audit opinion on financial statements indicates that:
A. The financial statement is fairly stated in any material respects according
to the GAAP.
B. The existence of some material misstatements within the financial
statements as per GAAP.
C. The way of the audited financial statements preparation was totally
departed from GAAP
D. The absence of sufficient information to be audited.
25. When production levels are expected to decline within a relevant range, what
effects would be anticipated with respect to each of the following?
Fixed costs Variables costs
Per unit Per unit
A. Increase Increase
B. Increase No change
C. No change No change
D. No change Increase
26. When investors use the top-down approach of security valuation, what will be
the procedure of security analysis?
A. Industry analysis – company analysis and economy analysis
B. Economy analysis – company analysis and industry analysis
C. Company analysis – industry analysis and economy analysis
D. Economy analysis – industry analysis and company analysis
27. Which one of the following is the over-the-counter market on which exchange-
listed securities are traded?
A. Fourth market C. Third market
B. Block market D. Primary market

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28. A relevant range of activity refers to:
A. The range of activity within which variable costs are constant per unit.
B. The range of activity within which the assumptions about variable costs
and fixed costs are valid.
C. The range of activity within which fixed costs are constant in total.
D. All of the above
29. Which one of the following factors can not affect directly the risk level of a
portfolio?
A. Expected rates of returns of each asset in a portfolio.
B. Risk level of each asset in a portfolio.
C. Proportion of assets in a portfolio
D. Covariance between assets
30. Which of the following are not commonly the functions of the Central
Bank?
A. Conduct of monetary policy.
B. Lending to the general public.
C. Lending to the commercial banking system.
D. None of the above
31. What is the main responsibility of auditor for financial statement audit?
A. Preventing fraud and error
B. Discovering material misstatements.
C. Discovering illegal Acts made by the client
D. B & C
32. A type of audit that determines whether the specified rules, regulations, or
procedures are being carried out or followed by a firm is termed as:
A. Compliance audit C. Operational audit
B. Performance audit D. None of the above
33. Which of the following is not a common feature of Money Market instruments?
A. as short-term instrument
B. highly marketable investments
C. low risk
D. its maturity is often less than 90 days
34. Which of the following is not true about audit evidence?
A. It must be gathered through observation
B. It must be Sufficient
C. It must be Competent
D. It must be Relevant
35. Why risk assessment is needed in compliance audit?
A. To identify the more risky area in which compliance measures should be
taken.
B. To identify the areas which are considered as deficiencies of effective
compliance program.
C. To identify the risky areas which need more resources to enforce policies.
D. All of the above

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36. Sales volume variance represents the difference between:
A. Actual result and expected performance
B. The quantity actually sold and the quantity expected to be sold
C. The actual result and the flexible budget
D. All of the above
37. Which one of the following is not categorized under Capital Market?
A. Preferred stock C. Bonds
B. Common Stock D. Certificate of deposit
38. Which one of the following factors can not impair independence for auditing?
A. Non-audit services with Client Company
B. Litigation between the audit firm and Client Company
C. Financial interest in Client Company
D. None of the above
39. Which one of the following best explains the information required for decision
making purpose?
a. The information should be both relevant and accurate.
b. The information should be relevant with reasonable degree of accuracy.
c. The information should have more degree of accuracy than relevance.
d. None of the above
40. Process costing is not appropriate for one of the following production processes.
A. Cement factory
B. House hold Furniture factory
C. Chemical factory
D. Oil factory
41. Which one of the following exposure is considered to be bank risk?
A. Fluctuations in foreign exchange rates
B. Political situation
C. Nationalization D. All of the above
Use the following data to solve Q42-Q44
Assume a manager of XYZ Company has set a 10% of good units completed as
normal spoilage rate and the production report of the production department indicates
that 100,000 units are started during the period; the department didn’t have
beginning work in process inventory. 60,000 units of the total started units are
completed as good units and 25,000 units are retained in ending work in process.
42. How many units are totally spoiled?
A. 4,000 C. 15,000
B. 9,000 D. 6,000
43. How many units are considered as normal spoilage?
A. 4,000 C. 15,000
B. 9,000 D. 6,000
44. How many units are considered as normal spoilage?
A. 4,000 C. 15,000
B. 9,000 D. 6,000
Use the following information for Q45 & Q46

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 A major retailer is reevaluating its bonds since it is planning to issue a new bond in
the current market. The firm's outstanding bond issue has 10 years remaining until
maturity. The bonds were issued with 8 percent coupon rate (paid semiannually) and
a par value of Birr 1,000. Because of increased risk the required rate has risen to 10
percent.
45. What is the current value of these securities?
A. Birr 699.00 C. Birr 868.50
B. Birr 875.38 D. Birr 902.00

46. What will be the value of these securities in one year if the required return
declines to 6 percent?

A. Birr 802.50 C. Birr 1012.17

B. Birr 1259.05 D. Birr 1137.54

47. Assume ABC Company's last dividend was Birr1.25; how much should you be
willing to pay for the common stock if you feel that the 7 percent growth rate
can be maintained indefinitely and you require a 16 percent return?

A. Birr 11.15 C. Birr 14.86

B. Birr 14.44 D. Birr 18.90

48. The preferred stock of the XY Company has a par value of Birr100 and a Birr9
dividend rate. You require an 11 percent rate of return on this stock. What is
the maximum price you would pay for it?

A. Birr 900 C. Birr 101

B. Birr 81.81 D. Birr 90
49. In accounting for state and local governments the modified accrual basis is
required for:
A. All the funds in the governmental entity.
B. Governmental funds only.
C. The major funds only.
D. Just the general fund.
50. Static budget refers to:
a. Flexible budget c. Master budget
b. Standard budget d. All of the above
51. Which of the following statement is true about bank regulation?
A. It refers to a framework of law to control how banks operate.
B. It prohibits the public from going to commercial banks
C. It discourages an efficient, competitive banking system.
D. All of the above
52. The cost incurred in the previous department and carried forward as the
product’s cost when the product moves to the subsequent processing
department is known as:
a. Separable cost c. Transferred-in cost
b. Joint cost d. None of the above
53. Which one of the following is a temporary account?

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 A. Cash C. Interest Income
B. Account Payable D. Owner’s Equity
54. If the interest rate increases in the economy what will be its effect to the bond’s
price?
A. The bond price will increase C. It doesn’t have any effect
B. The bond price will decrease D. None of the above
55. Why restricted physical access is needed over computerized accounting system?
A. Because financial reports are confidential information
B. To protect from alteration by unauthorized individuals
C. To make authorized individuals accountable for any alteration
D. All except A

Part III. Workout Questions

Workout the following questions as required in the instructions. Show all
supporting computations. (Use Answer Sheet Two)

I. Bank Reconciliation (10 points)

On January 31, 2014, the Bank Statement sent by Dashen Bank to FOI Company
shows Br. 10,000.17. Assume also that on January 31, 2014, the Cash account of
FOI Co. shows a balance of Br. 20,698.33. The accountant of FOI Company has
identified the following items:
1. A deposit of Br. 5410.90 made after banking hours on Jan. 31 does not
appear on the bank statement.
2. Two checks issued in January have not yet been paid by the bank:
Check No. 301 Br. 5110.25
Check No. 342 5607.50
3. A credit memorandum was included in the bank statement, which was for
proceeds from collection of a non-interest bearing note receivable from NAN
Company Br. 5524.74.
4. Three debit memorandums accompanied the bank statement: Fee charged by
bank for handling collection of notes receivable Br. 5; a check of Br. 50.25
received from a customer, RON company, and deposited by FOI company was
charged back as NSF; and service charge by bank for the month of January
amounts to Br. 12.00.
5. Check No. 305 was issued by FOI Company for payment of telephone expense
in the amount of Br. 85 but was erroneously recorded in the cash payments
journal as Br. 58.
Required:
i) Prepare a bank reconciliation at January 31.
ii) Prepare the necessary journal entry or entries to update the accounting
records based on the reconciliation.

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II. Payroll (5 points)
The following data is taken from ABC Company, which pays monthly salary for its
employees, pension contribution to Ministry of Social Affairs and employees income
tax to Ethiopian Revenue & Custom Authority. The forth-coming data relates to the
month of Tahisas, 2006 E.C.
Employee’s Basic Salary No. of Over-Time Duration of Over-
Name (Birr) Hours Worked Time Work
6 Week Endings
Almaz Nigatu 4,800
10 Public Holidays
Asrat Lemma 2,880 15 Up to 10 P.M.

Additional Information:
Employees are expected to work for 160 hours in a month and both workers have
been done during Tahisas 2006 E.C. Besides, both employees are permanent
workers. In addition to this:
 Pension contribution is 7% of basic salary
 Employees income tax is applicable according to the current Ethiopian
employees income tax regulation.
Required: Calculate:
1. the gross earnings of Almaz Nigatu.
2. the total deductions of Asrat Lemma.
3. total Income tax deducted from both employees

Name: _______________________________

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ID No.: ____________
Section: ____________

ANSWER SHEET ONE

MULTIPLE CHOICE
1. 11. 21. 31. 41. 51.
2. 12. 22. 32. 42. 52.
3. 13. 23. 33. 43. 53.
4. 14. 24. 34. 44. 54.
5. 15. 25. 35. 45. 55.
6. 16. 26. 36. 46.
7. 17. 27. 37. 47.
8. 18. 28. 38. 48.
9. 19. 29. 39. 49.
10. 20. 30. 40. 50.

ANSWER SHEET TWO

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