1 ,What is the objective of audit sampling?

A. To test every transaction in a company's financial statements.

B. To obtain reasonable assurance that the financial statements are free from material misstatement.
C. To evaluate the quality of the company's internal controls.
D. To identify and prevent fraudulent activities in a company's financial statements.
ANSWER: B
2,Which of the following factors should be considered when determining the sample size for an audit?
A. The auditor's personal preferences.
B. The amount of the company's assets.
C. The level of risk associated with the account being audited.
D. The company's profit margin.
ANSWER: C
3,Which of the following sampling techniques is used to select a sample that is representative of the
population being tested?
A. Cluster sampling.
B. Stratified sampling.
C. Systematic sampling.
D. Random sampling.
ANSWER: D
4,Which is not the objective of Operational audit?
A. Evaluating Unit performance in relation to established criteria
B. Assuring that all operating reports are on constant basis
C. Assuring operational efficiency and economy
D. Assuring fair presentation of financial statements
ANSWER: D
5,A management assertion category which asserts whether particular components of an account is
properly classified and disclosed is
A. Valuation
B. Existence and occurrence
C. Presentation and disclosure
D. Right and obligations
ANSWER: C
6,Audit report is the final steps in the entire audit process among the standard, collecting and
accumulating sufficient and appropriate evidence is expressed in which paragraph of audit report.
A. Additional paragraph
B. Scope paragraph
C. Opinion paragraph
D. Introductory paragraph
ANSWER: B
7,Which is not the possible defense mechanism to auditor against lawsuit by third parties?
A. Lack of duty to perform
B. Contributory negligence
C. Non- negligent performance
D. Absence of causal connection
ANSWER: B
8,Which of the following is an example of fraud?
A. A company overestimates the amount of inventory on hand
B. An employee accidentally misstates the company's revenue
C. A company mistakenly records an asset as a liability
D. An employee intentionally manipulates financial records
ANSWER: D
9,Which of the following is an example of a substantive test?
A. Testing the control environment
B. Confirming account balances with third parties
C. Testing for fraud
D. Reviewing management's financial representations
ANSWER: B
10,Which audit report indicates that there are no material misstatements in the financial Statements?
A. Qualified opinion
B. Adverse opinion
C. Unmodified opinion
D. Disclaimer of opinion
ANSWER: C
11,Company A acquires 80% of company B for $1,000,000. Calculate the non-controlling interest (NCI)
based on the fair value of company B’s net assets being $600,00.
A. $240,000
B. $120,000
C. $180,000
D. $60,000
ANSWER: B
12,What is the primary purpose of a capital project fund in governmental accounting?
A. To account for general government operations
B. To accumulate resources for and manage long-term capital projects
C. To record day-to-day operational activities
D. To manage specific revenue sources
ANSWER: B
13,What are current assets?
A. Assets purchased within the last year.
B. Assets expected to be converted into cash within one year or operating cycle.
C. Assets which will be used within the next month.
D. Assets are the net working capital of the firm.
ANSWER: B
15,The income statement reveals
A. Resources and equities of a firm at a point in time
B. Net earnings (net income) of a firm for a period of time
C. Resources and equities of a firm for a period of time
D. Net earnings (net income) of a firm at a point in time
ANSWER: B
16,Which one of the following statements regarding the statement of financial position is false?
A. It was formerly known as the balance sheet.
B. It shows the assets and liabilities of a business at a certain point in time.
C. It shows how much the owner has invested in the business.
D. It shows the average assets and liabilities of a business over the last financial period
ANSWER: D
17,Which one of the following is not a category of cash flows required to be shown on the statement of
cash flows?
A. Cash flows from operating activities
B. Cash flows from taxation
C. Cash flows from financing activities
D. Cash flows from investing activities
ANSWER: B
18,When preparing bank reconciliation, bank collections are:
A. Deducted from the bank statement balance.
B. Added to the balance per books.
C. Added to the bank statement balance
D. Deducted from the balance per books.
ANSWER: B
19,Receipt of unearned revenue
A. Decreases a liability; increases stockholders’ equity.
B. Decreases revenue; increases stockholders’ equity.
C. Increases an asset; increases revenue.
D. Increases an asset; increases a liability.
ANSWER: D
20,The economic entity assumption in financial accounting assumes that:
A. The business will continue operating indefinitely
B. The financial statements are prepared using historical cost
C. The business is separate from its owners and other entities
D. Financial information should be presented with a view to maximizing profits
ANSWER: C
21,The principle that requires an entity to disclose all necessary information for users to understand the
impact of its financial position and performance is called:
A. Materiality
B. Full disclosure
C. Consistency
D. Conservatism
ANSWER: B
22,The accounting assumption that allows financial information to be recorded and reported in intervals is
known as:
A. Periodicity
B. Consistency
C. Objectivity
D. Going concern
ANSWER: A
23,Which of the following methods assumes that the first inventory purchased is the first inventory sold?
A. FIFO
B. LIFO
C. Weighted Average
D. Specific Identification
ANSWER: A
24,Which one of the following is correct about Credits?
A. Increase both assets and liabilities
B. Decrease both assets and liabilities
C. Increase assets and decrease liabilities
D. Decrease assets and increase liabilities
ANSWER: D
25,In preparing a bank reconciliation, the amount of checks outstanding would be
A. Deducted from the bank balance according to the depositor’s records
B. Deducted from the bank balance according to the bank statement
C. Added to the bank balance according to the bank statement
D. Added from the bank balance according to the depositor’s records
ANSWER: B
A debit may signify:
A. A decrease in an asset account
B. An increase in the owner’s capital account
C. An increase in asset account
D. An increase in liability account
ANSWER: C
26. Which one of the following account is not appear on post-closing trial balance?
A. Cash
B. notes payable
C. Revenue
D. Owner’s equity
ANSWER: C
27,The balance in unearned revenue at the end a period represents:
A. An asset
B. A liability
C. A revenue
D. An expense
ANSWER: B
28,The use of prenumbered checks in disbursing cash is an application of the principle of
A. Establishment of responsibility
B. physical controls
C. Segregation of duties
D. documentation procedure
ANSWER: D
29,Assume at the end of the fiscal year, accounts receivable has a balance of 120,000 Birr and allowance
for doubtful accounts has a balance of 15,000Birr Then the expected realizable value of the accounts
receivable is:
A. 15,000Birr
B. 135,000Birr
C. 105,000Birr
D. 120,000Birr
ANSWER: C
30,Assume ABC Company had an owner’s equity balance of 180,000Birr at beginning of the period at the
end of the period, the company had total assets of 245,000Birr and total liabilities 25,000Birr had occurred
during the period?
A. 170,000 net income
B. 170,000 net loss
C. 15,000 net income
D. 15,000 net loss
ANSWER: C
31,An example of an accelerated depreciation method is:
A. straight-line
B. double-declining-balance
C. units-of-production
D. Depletion.
ANSWER: B
32,The receipt of cash from customers in payment of their accounts would be recorded by:
A. a debit to Cash and a credit to Accounts Receivable.
B. a debit to Accounts Receivable and a credit to Cash.
C. a debit to Cash and a credit to Accounts Payable.
D. a debit to Accounts Payable and a credit to Cash.
ANSWER: A
33,Which of the following transactions would increase both assets and liabilities?
A. Purchase of equipment on credit
B. Payment of utility bills
C. Sale of inventory for cash
D. Withdrawal of cash by the owner
ANSWER: A
34,If a company receives cash from customers for services rendered, how does it affect the accounting
equation?
A. Assets decrease, Liabilities decrease
B. Assets increase, Owner's Equity increases
C. Liabilities decrease, Owner's Equity decreases
D. Assets decrease, Liabilities increase
ANSWER: B
35,Which of the following represents the residual interest in the assets of the entity after deducting
liabilities?
A. Assets
B. Liabilities
C. Owner's Equity
D. Revenue
ANSWER: C
36,Company X acquires 100% of company Y for $2,000,000 in a cash acquisition. If the fair value of Y’s
identifiable net assets is $1,500,000, what is the goodwill recognized?
A. $1,500,000
B. $2,000,000
C. $500,000
D. $3,500,00
ANSWER: C
37. Under IPSAS, when a grant is received for a specific program and is required to be used only for that
program, which fund would account for it?
A. General revenue fund
B. Debt service fund
C. Capital projects fund
D. Special revenue fund
ANSWER: D
38,What type of basis of accounting is typically used in general revenue funds under IPSAS?
A. Accrual basis
B. Modified accrual basis
C. Cash basis
D. IFRS basis
ANSWER: B
39,Under IPSAS, what is the primary purpose of the general revenue fund’s budget?
A. To allocate resources for specific programs
B. To ensure compliance with debt service requirements
C. To plan and control general government operations
D. To fund long-term capital projects.
ANSWER: C
40,In a general revenue fund under IPSAS, which of the following is an example of expenditure?
A. Property tax collections
B. Purchase of office furniture
C. Transfer from another fund
D. Interest income
ANSWER: B
41,Which of the following represents the financial performance of a company over a specific period?
A. Statement of Financial Position
B. Statement of profit or loss
C. Statement of cash flow
D. Statement of changes in equity
ANSWER: B
42,Which financial statement provides a snapshot of a company's financial position at a specific point in
time?
A. Statement of Financial Position
B. Statement of profit or loss
C. Statement of cash flow
D. Statement of changes in equity
ANSWER: A
43,What does it mean that accrual basis in accounting?
A. Recording revenue and expenses when cash is received or paid
B. Recording transactions at their fair market value
C. Recognizing revenue or expenses when earned or incurred, regardless of when cash is exchanged
D. Adjusting entries made at the beginning of the accounting period
ANSWER: C
44,What is the first step in the accounting cycle?
A. Journalizing transactions
B. Posting to ledger accounts
C. Analyzing transactions
D. Preparing financial statements.
ANSWER: C
45,Which financial statement is prepared first using the adjusted trial balance?
A. Statement of Financial Position
B. Statement of profit or loss
C. Statement of cash flow
D. Statement of changes in equity
ANSWER: B
46,Which of the following accounts is unique to a merchandising business compared to a service- based
business?
A. Accounts Receivable
B. Merchandising Inventory
C. Salaries Expense
D. Rent Expense
ANSWER: B
47,Which inventory system is more suitable for businesses with high-value, low-volume inventory items?
A. Perpetual inventory system
B. Periodic inventory system
C. Perpetual and periodic systems are equally suitable.
D. A periodic system is more suitable than perpetual system.
ANSWER: A
48,In a perpetual inventory system, when is the cost of goods sold (COGS) recorded?
A. At the end of the accounting period
B. After each sale
C. At the beginning of the accounting period
D. Only during physical inventory counts
ANSWER: B
49,Which of the following statements is true regarding the perpetual inventory system?
A. It is only suitable for businesses with low-value, high-volume inventory items.
B. It updates inventory records continuously after each sale.
C. It requires physical inventory counts to determine the cost of goods sold (COGS).
D. It does not provide real-time information on inventory levels.
ANSWER: B
50,Which of the following best describes a merchandising business?
A. A business that provides services to customers
B. A business that manufactures goods for sale
C. A business that buys and sells goods to customers
D. A business that invests in financial assets
ANSWER: C
51,How does the rendering of services on account affect the accounting equation?
A. Liabilities increase; stockholder‘s equity decreases
B. Assets increase; liabilities increase
C. Assets decrease; stockholder‘s equity increases
D. Assets increase; stockholder‘s equity increases
ANSWER: D
52,If assets and liabilities at the beginning of the year were Birr 65,000 and Birr 40,000 respectively and at
the end of the year were Birr 85,000 and Birr50, 000 respectively, calculate the net income if dividends of
Birr 2,000 were paid and Birr 3,000 of additional capital stock was issued.
A. Net income of Birr 9,000
B. Net loss of Birr 10,000
C. Net income of Birr 11, 000
D. Net income of Birr 8,000
ANSWER: A
53,The financial statements are usually prepared in which of the following sequences?
A. Income Statement, Balance Sheet, Retained Earnings, Cash Flows
B. Balance Sheet, Retained Earnings, Cash Flows, Income Statement
C. Balance Sheet, Retained Earnings, Income Statement, of Cash Flows
D. Income Statement, Retained Earnings, Balance Sheet, Cash Flows
ANSWER: D
54,What is the primary goal of international Financial Reporting Standards (IFRS)?
A. Harmonizing financial reporting globally
B. Maximizing shareholder wealth
C. Standardizing tax regulations
D. Controlling inflation
ANSWER: A
55,Which organization is responsible for developing and issuing IFRS?
A. Financial Accounting Standards Board (FASB)
B. International Accounting Standards Board (IASB)
C. Securities and Exchange Commission (SEC)
D. International Monetary Fund (IMF)
ANSWER: B
56,What is the primary regulatory body responsible for setting financial reporting standards in Ethiopia?
A. Financial Standards Board of Ethiopian (FSBE)
B. Accounting and Auditing Board of Ethiopian (AABE)
C. Ethiopian Revenue and Customs Authority (ERCA)
D. Ministry of Finance and Economic Development (MoFED)
ANSWER: B
57,When a company operates in multiple countries and conducts transactions in different currencies,
which of the following risks is most relevant to its financial reporting?
A. credit risk
B. liquidity risk
C. exchange rate risk
D. Market risk.
ANSWER: C
58,Which of the following best describes the concept of the exchange rate?
A. The rate at which one currency can be exchanged for another
B. The rate at which a currency depreciates over time
C. The rate at which a currency is issued by a central bank
D. The rate at which a currency is regulated by the government.
ANSWER: A
59,When a company has a foreign currency transaction and the exchange rate changes between the
transaction date and settlement date, which of the following accounts is affected?
A. Accounts receivable
B. Accounts payable
C. Prepaid expenses
D. Accrued liabilities.
ANSWER: B
60,Company A, based in the United States, imports goods from a supplier in Europe and agrees to pay
€100,000. If the exchange rate is 1 EUR = 1.2 USD, what is the USD equivalent of the liability?
A. $80,000
B. $100,000
C. $120,000
D. $125,000.
ANSWER: C
61,Company B, based in Europe, exports goods to a customer in the United States and invoices $50,000. If
the exchange rate is 1 EUR = 1.3 USD, what is the EUR equivalent of the revenue?
A. €38,461.54
B. €50,000
C. €62,500
D. €65,000.
ANSWER: A
62,Which of the following is not a primary user of financial accounting information?
A. Shareholders
B. Management
C. Regulatory authorities
D. Customers
ANSWER: B
63,What is the purpose of financial accounting?
A. To provide information for internal decision-making
B. To facilitate strategic planning by management
C. To communicate financial information to external parties
D. To control and monitor internal operations
ANSWER: C
64,A company has 100 units of inventory with a cost of Birr 50 per unit. On March 1, they purchase 150
additional units of inventory with a cost of Birr 60 per unit. On April 1, they sell 200 units of inventory.
Using the FIFO method, what is the cost of goods sold?
A. Birr 11,000
B. Birr 12,000
C. Birr 13,000
D. Birr 14,000
ANSWER: A
65,Which of the following asset must be depreciated over its useful life?
A. Land
B. Buildings
C. Account receivable
D. Cash
ANSWER: B
66,Which of the following is an example of tangible fixed assets?
A. Goodwill
B. Patents
C. Land and Buildings
D. Copyright
ANSWER: C
67,Which of the following is an example of a public enterprise in Ethiopia?
A. Ethiopian Airlines
B. Safaricom Ethiopia
C. Dangote Cement Ethiopia
D. MOENCO
ANSWER: A
68,Which of the following is a characteristic of a public enterprise?
A. Privately owned and controlled
B. Run for profit
C. Governed by a board of directors
D. Regulated by the stock market
ANSWER: C
69,Which of the following is an internal factor affecting the operations of a public enterprise in Ethiopia?
A. Economic conditions
B. Political stability
C. Regulatory environment
D. Organizational culture
ANSWER: D
70,Impairment of an asset occurs when:
A. The asset's fair value exceeds its carrying amount
B. The asset's carrying amount exceeds its recoverable amount
C. The asset is sold for a profit
D. The asset is depreciated over time
ANSWER: B
71,The recoverable amount of an asset is the:
A. Original cost of the asset
B. Higher of its fair value less costs to sell and its value in use
C. Accumulated depreciation of the asset
D. Market value of the asset
ANSWER: B
72,Impairment loss on an asset is calculated as the difference between:
A. The asset's carrying amount and its fair value
B. The asset's historical cost and its recoverable amount
C. The asset's fair value and its value in use
D. The asset's carrying amount and its recoverable amount
ANSWER: D
73,How fair value is typically determined for a Level 1 asset?
A. Through discounted cash flow analysis
B. Based on quoted prices in an active market
C. Using management estimates
D. Through an independent appraisal
ANSWER: B
74,When measuring fair value, what does the term "exit price" refer to?
A. The price at which an asset could be acquired
B. The price at which an asset could be sold or transferred
C. The historical cost of the asset
D. The price at which an asset could be purchased
ANSWER: B
75,Which of the following is an example of a Level 3 input in the fair value hierarchy?
A. Quoted prices in an active market for identical assets
B. Inputs that are observable, but not considered to be the most reliable
C. Unobservable inputs that are developed using the reporting entity's own assumptions
D. Historical cost of an asset
ANSWER: C
76,When estimating the fair value of an asset, which approach involves estimating the present value of
expected future cash flows?
A. Market approach.
B. Income approach.
C. Cost approach.
D. Replacement cost approach.
ANSWER: B
Assets are best described as:
A. Money owned by the company
B. Debts owed to the company
C. Economic resources owned or controlled by the company
D. Investments in other companies
ANSWER: C
77,What is the primary responsibility of AABE?
A. Taxation enforcement
B. Issuing accounting and auditing standards
C. Managing government budgets
D. Conducting financial audits
ANSWER: B
78,Impairment of an asset occurs when:
a. The asset's fair value exceeds its carrying amount
b. The asset's carrying amount exceeds its recoverable amount
c. The asset is sold for a profit
d. The asset is depreciated over time
ANSWER: B
79,The recoverable amount of an asset is the:
A. Original cost of the asset
B. Higher of its fair value less costs to sell and its value in use
C. Accumulated depreciation of the asset
D. Market value of the asset
ANSWER: B
80,What is the journal entry to record the write-off of an uncollectible account using the allowance
method?
A. Debit Allowance for Doubtful Accounts, Credit Accounts Receivable
B. Debit Bad Debt Expense, Credit Allowance for Doubtful Accounts
C. Debit Accounts Receivable, Credit Allowance for Doubtful Accounts
D. Debit Bad Debt Expense, Credit Accounts Receivable
ANSWER: A
81,Which one of the following not describes cash?
A. Most illiquid asset
B. Basis for measuring and accounting for all items
C. Standard medium of exchange
D. Current asset
ANSWER: A
82,What is the primary purpose of accounting software in a computerized accounting system?
A. To manually record transactions
B. To calculate financial ratios
C. To store and process financial data efficiently
D. To eliminate the need for internal controls
ANSWER: C
83,Which of the following is a feature of computerized accounting systems?
A. Reliance on manual data entry
B. Limited reporting capabilities
C. Ability to automatically generate financial statements
D. Requirement of extensive paper-based records
ANSWER: C
84,Which of the following is a characteristic of a manual accounting system?
A. Real-time processing of transactions
B. Utilization of accounting software
C. Reliance on paper-based records and journals
D. Automated generation of financial statements
ANSWER: C
85,Which of the following statements is true regarding the accuracy of financial reporting in manual and
computerized accounting systems?
A. Manual systems are generally more accurate than computerized systems.
B. Computerized systems are generally more accurate than manual systems.
C. Both manual and computerized systems have similar levels of accuracy.
D. The accuracy of financial reporting depends solely on the type of system used.
ANSWER: B
86,How does the speed of processing transactions differ between manual and computerized accounting
systems?
A. Manual systems process transactions faster than computerized systems.
B. Computerized systems process transactions faster than manual systems.
C. Both manual and computerized systems process transactions at the same speed.
D. The speed of processing transactions depends on the complexity of the transaction.
ANSWER: B
87,Green Company’s ending inventory is understated 4,000 Birr. The effects of this error on the current
year’s cost of goods sold and net income, respectively, are:
A. Understated, overstated
B. Overstated, overstated
C. Overstated, understated
D. Understated, understated
ANSWER: C
88,What is a joint arrangement in accounting?
A. A business owned and operated by a single entity
B. A partnership between two or more entities with shared control
C. A subsidiary controlled by a parent company
D. A government-controlled entity
ANSWER: B
89,Which of the following statement is true about joint arrangement?
A. They always involve full control by one party
B. They may involve joint control or significant influence
C. They are solely government-controlled entities
D. They are limited to two parties only
ANSWER: B
90,What are the primary characteristics of a joint control arrangement?
A. Full control by one party
B. Shared decision-making rights
C. Majority ownership by one party
D. Control exercised by a government entity
ANSWER: B
91,How are joint arrangements classified under IFRS?
A. Joint control only
B. Significant influence only
C. Joint control or significant influence
D. Sole control by one party
ANSWER: C
92,What is the main difference between a joint operation and a joint venture under IFRS?
A. A. Joint operations involve significant influence, while joint ventures involve joint control
B. Joint operations involve sole control, while joint ventures involve joint control
C. Joint operations are government-controlled entities, while joint ventures are private entities
D. There is no difference; the terms are used interchangeably
ANSWER: B
93,Which type of joint arrangement involves the joint control parties having rights to the assets and
obligations for the liabilities of the arrangements?
A. Joint venture
B. Joint operation
C. Joint control entity
D. Joint entity
ANSWER: B
94,What distinguishes a joint venture from a joint operation?
A. Joint ventures involve shared control, while joint operations involve unilateral control
B. Joint ventures always have three or more parties involved, while joint operations involve only two
parties
C. Joint ventures are only recognized under local accounting standards, while joint operations are
recognized under international accounting standards
D. Joint ventures are limited to specific industries, while joint operations can occur across various
industries
ANSWER: A
95,XYZ Ltd has a 30% ownership interest in a joint venture. How should XYZ account for its investment in
the joint venture under the equity method if the joint venture reports a profit of $100,000?
A. Recognize $30,000 as revenue in XYZ's income statement
B. Recognize $100,000 as revenue in XYZ's income statement
C. Recognize $30,000 as a reduction in the carrying amount of the investment
D. Recognize $100,000 as an increase in the carrying amount of the investment
ANSWER: A
96,Which account is not closed at the end of the accounting period?
A. Revenue accounts
B. Expense accounts
C. Dividend accounts
D. Asset accounts
ANSWER: D
97,ABC Ltd. purchased equipment for Birr 800,000 by issuing a promissory note. Which accounts are
affected by this transaction?
A. Equipment increases; Notes Payable increases
B. Equipment increases; Cash increases
C. Equipment decreases; Notes Receivable decreases
D. Equipment decreases; Cash decreases
ANSWER: A
98,If a company records Birr 20,000 in depreciation expense for the period, which accounts are affected?
A. Depreciation Expense increases; Accumulated Depreciation decreases
B. Depreciation Expense decreases; Accumulated Depreciation decreases
C. Depreciation Expense increases; Accumulated Depreciation increases
D. Depreciation Expense decreases; Accumulated Depreciation increases
ANSWER: C
99,Which costing method assigns fixed overhead costs to products?
A. Variable costing
B. Activity-based costing
C. Standard costing
D. Absorption costing
ANSWER: D
100,Which cost changes in direct proportion to changes in the volume of production?
A. Direct costs
B. Indirect costs
C. Variable costs
D. Fixed costs
ANSWER: C
101,What is the formula for contribution margin?
A. Sales revenue - variable costs
B. Gross profit - fixed costs
C. Operating income - sales revenue
D. Cost of goods sold - operating expenses
ANSWER: A
102,Which of the following is an example of a fixed cost?
A. Direct labor
B. Raw materials
C. Property taxes
D. Packaging materials
ANSWER: C
103,What is the difference between absorption costing and variable costing?
A. Absorption costing assigns all manufacturing costs to products, while variable costing assigns only
variable costs.
B. Absorption costing is used for internal decision-making, while variable costing is used for financial
reporting.
C. Absorption costing provides a more accurate picture of product costs, while variable costing provides a
better measure of profitability.
D. Absorption costing is used for long-term planning, while variable costing is used for short-term decision-
making.
ANSWER: A
104,In a merchandising business, which of the following represents the primary source of revenue?
A. Investments
B. Sales of goods
C. Service fees
D. Interest income
ANSWER: B
105,Company A sells a portion of its interest in a joint venture to company B. How should this transaction
be accounted for under the equity method?
A. Record a gain or loss on the sale and adjust the investment account
B. Recognize the transaction as revenue in the income statement
C. No accounting treatment is required for the sale of the interest
D. Record the transaction as an extraordinary item in the financial statements
ANSWER: A
106,In accounting for a branch operation, how are revenues and expenses typically treated?
A. Included in the main entity's financial statements
B. Accounted for separately from the main entity
C. Ignored in the financial statements
D. Treated as extraordinary items
ANSWER: A
107,How are intercompany transactions between the main entity and its branch usually accounted?
A. Ignored in the financial statements
B. Recorded as revenue for the branch
C. Eliminated in consolidation
D. Recorded as an extraordinary item.
ANSWER: C
108,In a sales agency arrangement, who typically has control over decision-making and operations?
A. The main entity
B. The sales agency
C. Both entities share control
D. Independent third parties
ANSWER: B
109In the context of branch and home office accounting, what does “consolidation” refers to?
A. Combining the financial statements of the branch and home office.
B. Eliminating intercompany transactions in the financial statements.
C. Recognizing the branch's equity separately in the consolidated financial statements.
D. Ignoring the financial statements of the branch in the consolidation process.
ANSWER: A
110,When preparing consolidated financial statements, what does eliminating intercompany transactions
involve?
A. Recognizing intercompany transactions as revenue.
B. Adjusting the financial statements to remove transactions between the branch and home office.
C. Ignoring the impact of intercompany transactions.
D. Treating intercompany transactions as extraordinary items
ANSWER: B
111,Which method of business combination involves the creation of a new entity to which the combining
companies transfer their net assets?
A. Merger
B. Consolidation
C. Amalgamation
D. Purchase method
ANSWER: A
112,In a statutory merger, what happens to the combining companies?
A. They continue to exist as separate legal entities
B. They dissolve, and a new entity is formed
C. They become subsidiaries of a new parent company
D. They enter into a joint venture agreement
ANSWER: B
113,In a leveraged buyout (LBO), how is the acquisition financed?
A. Through stock issuance
B. With funds borrowed against the target company's assets
C. Through government grants
D. By issuing bonds
ANSWER: B
114,Which accounting standard provides guidance on business combinations?
A. IFRS 9
B. IFRS 3
C. IAS 16
D. IAS 38
ANSWER: B
115,In a hostile takeover, how does the acquiring company gain control of the target company?
A. Through negotiation and agreement
B. By purchasing a majority of the target company's stock without its approval
C. By forming a joint venture
D. Through a court order
ANSWER: B
117,What is the primary reason for recognizing deferred tax liabilities and assets?
A. To minimize current income tax payable
B. To smooth out fluctuations in income tax expense
C. To comply with tax regulations
D. To adjust financial statements to tax accounting.
ANSWER: B
118,Deferred tax liabilities are recognized when:
A. Taxable income exceeds book income
B. Tax expense is greater than book income
C. Tax rates decrease
D. Tax expense is less than book income
ANSWER: B
119,Which of the following situations would prompt an adjustment under the LCNRV method?
A. When market value exceeds historical cost.
B. When there is a decrease in demand for the product.
C. When there is an increase in production costs.
D. When there is a seasonal fluctuation in sales.
ANSWER: A
120,What is the main drawback of using the LCNRV method for inventory valuation?
A. It may lead to overstatement of inventory value.
B. It requires frequent adjustments and re-evaluations.
C. It is not compliant with international accounting standards.
D. It is only suitable for companies with low inventory turnover.
ANSWER: B
121,Identify the wrong statement
A. Taxation has insignificant effect on consumption and employment pattern
B. Taxes are compulsory payments to the government
C. Tax imposes duty of payment on person who is liable to it
D. Tax receipts are commonly used for the production of public goods
ANSWER: A
122,One of the following is not true about category “C” tax payers
A. The payment of such tax is made with one month
B. They are expected to maintain all Book account
C. A standard assessment method is used to determine the income tax liability
D. Their annual turnover is less than 500,000 birr per annum.
ANSWER: B
123,Which of the following is not true about similarity of public and private finance?
A. Both the private and public finance have the same objective, viz, the satisfaction of human wants
B. Both private and public finance aim at maximum satisfaction.
C. Both public and private finance aims at individual benefit
D. Both the individual and Government face the problem of economic choice.
ANSWER: C
124,Which of the following not among revenues assigned to the state/reginal governments of Ethiopia?
A. Customs duties, taxes and other charges levied on the importation and exportation of goods.
B. profit and sales taxes collected from individual traders operating within state territories
C. Income taxes collected from employees of the States/regional government and of private enterprises
D. Taxes collected from rent of houses and State/regional government owned properties
ANSWER: A
125,In the payment of tax, there is no direct quid proquo to the taxpayers is:-
A. Common Interest
B. Legal Collection
C. Benefit is not the Basic Condition
D. Tax is a Compulsory Contribution
ANSWER: C
126,A government objectives of taxation is that ensuring to economic stability of the country by:
A. Providing essential goods to the society
B. Imposing low tax rate at inflation time
C. Exemptions tax from exported product
D. Imposing high tax rate at inflation time
ANSWER: D
127,Which one of the following of taxing system is imposed on the movement of goods through a political
border?
A. Consumption Taxes
B. Customs Duties Tax
C. Foreign Trade Taxes
D. Stamp Duties Tax
ANSWER: B
128,According to Modigliani and Miller's Proposition I without taxes, how is the value of a leveraged firm
related to its capital structure?
A. The value of the leveraged firm increases with the use of debt.
B. The value of the leveraged firm decreases with the use of debt.
C. The value of the leveraged firm is independent of its capital structure.
D. The value of the leveraged firm is maximized when there is no debt.
ANSWER: C
129,According to Modigliani and Miller's Proposition I with taxes, how does the value of a leveraged firm
compare to the value of an unleveraged firm?
A. The leveraged firm is valued higher due to the tax shield on interest payments.
B. The leveraged firm is valued lower due to the tax shield on interest payments.
C. The leveraged and unleveraged firms have the same value.
D. The leveraged firm is valued higher, but taxes do not play a role.
ANSWER: A
130,Modigliani and Miller's Proposition II with taxes suggests that the cost of equity
A. Decreases with the use of debt.
B. Increases with the use of debt.
C. Remains constant regardless of the capital structure.
D. Is not affected by taxes.
ANSWER: A
131,In Modigliani and Miller's Proposition I without taxes, the cost of equity is assumed to:
A. Increase with the use of debt.
B. Decrease with the use of debt.
C. Remain constant regardless of the capital structure.
D. Be irrelevant in determining the firm's value.
ANSWER: C
132,What does Modigliani and Miller's Proposition II without taxes state about the relationship between
the cost of equity and the use of debt.
A. The cost of equity increases linearly with the use of debt
B. The cost of equity decreases linearly with the use of debt
C. The cost of equity is independent of the use of debt
D. The cost of equity is inversely proportional to the use of debt
ANSWER: C
133,What is the primary source of business risk for a company?
A. Financial leverage
B. Interest rate fluctuations
C. Changes in market demand
D. Currency exchange rates.
ANSWER: C
134,How is the Net Realizable value (NRV) calculated for inventory?
A. Cost - Market Value
B. Selling Price - Selling Costs
C. Cost - Estimated Selling Price
D. Market Value - Selling Costs
ANSWER: C
135,In the context of LCNRV, when is the write-down of inventory necessary?
A. When the historical cost exceeds the replacement cost
B. When the estimated selling price is less than the original cost
C. When the market value is higher than the selling price
D. When the historical cost is lower than the net realizable value
ANSWER: B
136,Which of the following is the main purpose of applying LCNRV to inventory?
A. Maximize reported profit
B. Minimize tax liability
C. Maintain historical cost accuracy
D. Ensure inventory is fairly presented on the balance sheet
ANSWER: D
137,How is goodwill calculated in a business combination?
A. it is the excess of the fair value of consideration transferred over the fair value of the identifiable net
assets acquired
B. it is the difference between the historical cost of the target company and the fair value of consideration
transferred
C. it is the difference between the market value of the acquiring company's shares and the market value of
the target company's shares
D. it is the amount paid by the acquiring company to the target company's shareholders.
ANSWER: A
138,What is a common defense mechanism used by target companies to resist hostile takeovers?
A. poison pill
B. white knight
C. golden parachute
D. crown jewel.
ANSWER: A
139,Company A, based in the United States, purchases inventory from a supplier in Europe for €100,000.
The exchange rate at the time of purchase is 1 EUR = 1.2 USD. Subsequently, when the payment is made,
the exchange rate has changed to 1 EUR = 1.3 USD. What amount should company a record as the cost of
inventory in USD?
A. $100,000
B. $120,000
C. $130,000
D. $108,333.33.
ANSWER: B
140,In a computerized accounting system, what is the purpose of backup?
A. To prevent unauthorized access to financial data
B. To reduce the risk of data loss
C. To automate the reconciliation process
D. To generate financial reports
ANSWER: B
141,What is the primary focus of CVP (Cost-Volume-Profit) analysis?
A. Sales revenue
B. Cost behavior
C. Breakeven point
D. Profitability
ANSWER: C
142,What is the formula for total cost in CVP analysis?
A. Total cost = fixed cost + variable cost per unit
B. Total cost = fixed cost / contribution margin per unit
C. Total cost = variable cost per unit / contribution margin per unit
D. Total cost = contribution margin per unit / variable cost per unit
ANSWER: A
143,What is the formula for breakeven point in units?
A. Breakeven point in units = fixed costs / contribution margin per unit
B. Breakeven point in units = sales revenue / variable cost per unit
C. Breakeven point in units = variable costs / contribution margin per unit
D. Breakeven point in units = contribution margin per unit / variable cost per unit
ANSWER: A
144,Which of the following is an example of indirect financing?
A. an SSU purchasing a financial claim from a commercial bank
B. an SSU purchasing a financial claim from an underwriter
C. an SSU purchasing a financial claim from a DSU
D. an SSU purchasing a financial claim from a dealer
ANSWER: A
145,Which of the following is not a characteristic of money market instruments?
A. low default risk
B. short-term to maturity
C. high marketability
D. small denomination
ANSWER: D
146,To increase the money supply immediately, the government would most likely
A. Lower the Discount Rate
B. Lower reserve requirements
C. Buy securities on the open market
D. Issues a treasury bond
ANSWER: C
147,Deficit spending units (DSU) are represented in loanable funds theory as
A. demanders of loanable funds.
B. suppliers of loanable funds.
C. DSUs are not represented in the loanable funds theory of interest rate determination.
D. demanders of financial claims.
ANSWER: A
148,Which of the following is the best alternative for small investors to invest in a money market?
A. locally; their credit union
B. indirectly; negotiable CDs
C. directly; commercial paper
D. indirectly; money market mutual funds
ANSWER: D
148,Which of the following money market instruments would typically be used in international
transactions?
A. treasury bill
B. commercial paper
C. banker's acceptance
D. negotiable CD
ANSWER: C
150,The purchase of one million dollars of Treasury Bonds, delivered in 60 days, from a government
securities dealer is:
A. a call option
B. a forward contract
C. a swap
D. a put
ANSWER: B
151,ABC Inc. purchased land and building from XYZ Corporation for a cash payment of Br. 480,000. The
estimated fair values of the assets are land Br. 220,000, and building Br. 280,000. At what amounts should
each of the assets be recorded respectively?
A. Br. 240,000, Br. 240,000
B. Br. 220,000, Br. 280,000
C. Br. 480,000, Br. 480,000
D. Br. 211,200, Br. 268,800
ANSWER: D
152,The three types of business entities are:
A. Proprietorships, small businesses, and partnerships.
B. Proprietorships, partnerships, and corporations.
C. Proprietorships, partnerships, and large businesses.
D. Financial, manufacturing, and service companies.
ANSWER: B
153,Which of the following statement is incorrect according to Modigliani and Miller’s Approach?
A. Under a perfect market condition, the dividend policy of the company is irrelevant
B. The value of the firm depends on how this income is split between dividends and retained earnings.
C. Investors don’t care about payout.
D. There is no relation between the dividend rate and value of the firm.
ANSWER: B
154,Which of the following statement is not an assumption of Walters’ model of dividend theory?
A. The firm finances its entire investments by means of retained earnings only.
B. The firm uses either debt or equity for financing its investment
C. Internal rate of return (R) and cost of capital (K) of the firm remains constant.
D. The firms’ earnings are either distributed as dividends or reinvested internally.
ANSWER: B
155,In which of the following condition a corporation may pay a dividend?
A. When the firm's liabilities exceed its assets
B. When the amount of the dividend exceeds the accumulated profits (retained earnings)
C. When the dividend is being paid from capital invested in the firm
D. When the government gives tax incentives
ANSWER: D
156,Which of the following statement is incorrect about stock split?
A. When a firm conducts a stock split, its stock’s per-share par value declines
B. Stock splits affect firms’ shares similar to stock dividend effects
C. A stock split has effect on the firm’s capital structure
D. Stock splits increases the number of shares outstanding
ANSWER: C