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 1. What is Accounting?
1.
Accounting consists of three basic activities—
it
 identifies,
 records, and
 communicates

the economic events of an organization to

interested users.
Three Activities
Illustration 1-1
The activities of the accounting
process

The accounting process includes

the bookkeeping function.
Who Uses Accounting Data?
o There are two broad groups of users of financial
information: internal users and external users.
1) INTERNAL USERS
o Internal users of accounting information are
managers who plan, organize, and run the business.
These include marketing managers, production
supervisors, finance directors, and company
officers.
o Managerial Accounting provides internal reports to
help users make decisions about their companies.
o Examples are financial comparisons of operating
alternatives, projections of income from new sales
 Cont’d

INTERNA
L USERS

Illustration 1-2
Questions that
internal users ask
 Cont’d

EXTERN
AL
USERS

Illustration 1-3
Questions that external
users ask
Measurement Principles
o IFRS generally uses one of two measurement
principles, the historical cost principle or the fair
value principle.
o The selection of which principle to follow generally
relates to trade-offs between relevance & faithful
representation.
o Relevance means that financial information is
capable of making a difference in a decision.
o Faithful representation means that the numbers
and descriptions match what really existed or
happened—they are factual.
 Cont’d
1) HISTORICAL COST PRINCIPLE (or Cost
Principle)
o It dictates that companies record assets at
their cost.

o This is true not only at the time the asset is

purchased, but also over the time the asset is
held.

2) FAIR VALUE PRINCIPLE

o It states that assets and liabilities should be
reported at fair value (the price received to
Assumptions
o Assumptions provide a foundation for the accounting
process.
o Two main assumptions are the monetary unit
assumption and the economic entity
assumption.

1) MONETARY UNIT ASSUMPTION

o The monetary unit assumption requires that
companies include in the accounting records only
transaction data that can be expressed in money terms.
o This assumption enables accounting to quantify
(measure) economic events.
o The monetary unit assumption is vital to applying the
 Cont’d
2) ECONOMIC ENTITY ASSUMPTION
o It requires that activities of the entity be kept
separate and distinct from the activities of its
owner and all other economic entities.
 Proprietorship
 Partnership
Forms of
Business
 Corporation Ownership
 The Basic Accounting
1. Equation
4.
Basic Accounting Equation
 Provides the underlying framework for
recording and summarizing economic events.
 Assets must equal the sum of liabilities and
equity.

Asset Liabilit Equi

= +
s ies ty
 Steps in the Recording
2. Process
2.
 Although it is possible to enter transaction
information directly into the accounts without using
a journal, few businesses do so.
 Practically every business uses three basic steps
in the recording process:
1) Analyze each transaction for its effects on the
accounts.
2) Enter the transaction information in a journal.
3) Transfer the journal information to the
appropriate accounts in the ledger.
 The recording process begins with the transaction.
 Business documents, such as a sales receipt, a
check, or a bill, provide evidence of the transaction.
1) The main purpose of accounting is

A. to provide financial information to users A

B. to accumulate and determine cost

C. to prove the equality of debits and credit

D. to record and post transactions

2) Which of the following shows the correct sequence of
flow of accounting data in accounting records?
A. Journal-Source document - Occurrence of transaction-Ledger

B. Ledger-Journal - Source document - Occurrence of

transaction

C. Source document - Journal - Occurrence of transaction -

ledger

D. Occurrence of transaction-Source document - Journal-Ledger

D
3) Which one of the following tasks in NOT part of the
recording process?

A. Posting journal entries

B. Entering transactions in a journal

C. Preparing an income statement

D. Analyzing transactions C
4) The accounting process involves all of the following except
•
a. identifying economic events that are relevant to the business.
•
b. communicating financial information to users by preparing
financial reports.
•
c. recording non quantifiable economic events.
•
C
d. analyzing and interpreting financial reports.
5) The accounting equation shows

A. The equality of net income with net loss

B. The equality of asset with owner's equity

C
C. The equality of resources with sources
Assets = Liabilities. + Owner's Equity.
D. The equality of revenue with expense
The right side shows where
the money came from to buy the assets.

The life side show where the money goes

6) If total liabilities increased by ETB 35,000 and equity increased by
ETB 10,000 during a period of time, then total assets must change by
what amount and direction during that same period?

a. ETB 45,000 decrease

b. ETB 45,000 increase

B
c. ETB 60,000 increase A=L+E
A= if L By 35000 + if E 10000
d. ETB 70,000 increase
A= 45000
7) The liabilities of Rain Company equal one-fifth of the total assets. The
owner’s equity is $40,000. What is the amount of the liabilities?
• A. $20,000
The accounting equation can be formulated as:
• B. $50,000
• C. $10,000 Assets = Liabilities + Equity

• D. $100,000 A = 1/5 A – Equity

• E. All (1- 1/5) A = 40000

(1-0.2) A = 40000
• F. None 0.8A= 40000

A= 40000/0.8 = 50000

Liabilities = 1/5 * 50000 = 10000 C

8) The economic entity assumption requires that the activities

a. Activities of different entities can be combined if all the entities are

corporations.

b. Activities must be reported to the Securities and Exchange Commission.

c. Activities of a sole proprietorship cannot be distinguished from the

personal economic events of its owners.

d. Activities of an entity be kept separate from the activities of its owner.

D
 Cont’d
Proprietors Partnershi Corporatio
hip p n
 Owned by one  Owned by two  Ownership
person or more divided into
 Owner is often persons shares
manager/oper  Often retail  Separate legal
ator and service- entity
 Owner receives type organized
any profits, businesses under
suffers any  Generally corporation
losses, and is unlimited law
personally personal  Limited
liable for all liability liability
9) In a Fire & Water partnership, net income and net loss is shared equally. On
the date of liquidation of their partnership, records showed the following
balances.
Cash Birr……………..200,000
Non cash assets……...400,000
Accounts payable…….100,000
Fire's capital…………300,000
Water's capital……….200,000
If non cash assets were sold at Br 500,000, which of the following
statement is correct?
A. The amount of distributed to Water equals CashBr200,000
noncash Liability F W
Balance 200000 400,000 100000 300000 200000
B. The amount of cash available to partners
Realization +
equal Br700,000+50000 50000
500000 -400000
C. The amount of cash distributed
Balance to Fire 700000
equals Br 0 350.000
100000 350000 250000
Payment Liability -100,000 -100,000
D. The amountC of cash distributed
Balance to Fire equals
600,000 Br0 300,000 0 350,000 250000
Distribution -600000 -350,000 -250000
0 0 0 0 0
10) Hiwot and Yonas have original investments of ETB 50,000 and ETB
100,000 respectively in a partnership. The articles of partnership include
the following provisions regarding the division of net income: interest on
original investment at 10%, salary allowances of ETB 27,000 and ETB
18,000 respectively, and the remainder equally. How much of the net
income of ETB 40,000 is allocated to Hiwot?
Hiwot Yonas Total
Salary allowance 27000 18000 45000
A. ETB 20,000 Capital interest
Remaining income
5000*
(10000)
10000*
(10000)
15000
(20000)
Total 22000 18000 40000
B. ETB 22,000
Hiwot capital interest = 50000*0.1 = 5000

C. ETB 32,000 Yonas Capital interest = 100000*0.1 = 10000

B
11) As part of the initial investment, Omar contributes accounts receivable
that had a balance of ETB 22,500 in the accounts of a sole proprietorship.
Of this amount, ETB 2,000 is completely worthless. For the remaining
accounts, the partnership will establish a provision for possible future
uncollectible accounts of ETB 1,500. The amount debited to Accounts
Receivable for the new partnership is
A. ETB 19,000 D
B. ETB 22,500
C. ETB 21,000
22500-2000 = 20500
D. ETB 20,500
 Forms of Joint arrangements
Joint operation or Joint venture

• A joint arrangement is classified as either a joint

operation or a joint venture.
• A joint operation is a joint arrangement whereby the
parties that have joint control of the arrangement have
rights to the assets, and obligations for the liabilities,
relating to the arrangement.
• A joint venture is a joint arrangement whereby the
parties that have joint control of the arrangement have
rights to the net assets of the arrangement.
12) Joint control exists where:

A. The decisions in areas essential to the goals of the joint

arrangement do not require the consent of the parties.

B. One party alone has power to control the strategic operating

decisions of the joint arrangement.

C. No single party is in a position to control the activity unilaterally.

D. No one party may be appointed as the manager of the joint

arrangement.

C
13) The joint arrangement is not structured through a
separate vehicle, the arrangement is classified as a

A. Joint venture

B. Joint vehicle.

C. Joint structure
D
D. Joint operation.
14) Assume that two parties structure a joint arrangement in an incorporated
entity (entity C) in which each party has a 50 per cent ownership interest.
The purpose of the arrangement is to manufacture materials required by the
parties for their own, individual manufacturing processes.
The arrangement ensures that the parties operate the facility that produces
the materials to the quantity and quality specifications of the parties
Assessment of the relevant facts and circumstances indicate that the
arrangement is a D
A. joint operation. The legal form of entity C (an incorporated entity) through which the activities
are conducted initially indicates that the assets and liabilities held in entity C
are the assets and liabilities of entity C.
B. Joint vehicle. The contractual arrangement between the parties does not specify that the
parties have rights to the assets or obligations for the liabilities of entity C.

C. Joint structure. Accordingly, the legal form of entity C and the terms of the contractual
arrangement indicate that the arrangement is a joint venture
15) Which of the following is a characteristic of a joint venture?

A. The initial carrying value reported must equal the book value of
resources contributed

B. Debt incurred by the venture is reported on the venturers' statement

of financial position

C. The partners can be individuals, but cannot be businesses.

D. The partners all jointly share in managing and controlling the venture.
D
16) A joint arrangement in which the assets and liabilities
relating to the arrangement are held in a separate vehicle.
• A. joint operation
• B. joint arrangement
• C. joint venture
• D. can be either a or c

D
17) X control over the composition of Y's board of directors. X
owns 49% of Y and is the largest shareholder. X has an agreement
with Z, which owns 10% of Y, whereby Z will always vote in the
same way as X. Can X exercise control over ?
A. X can exercise control because it controls more than 50% of the voting
power, and it can govern the financial and operating policies of Y.
B. X cannot exercise control because it owns only, 49% of the voting rights.
C. X can exercise control solely because it has an agreement with Z for the
voting rights to be used in whatever manner X wishes.
D. X cannot exercise control because it can control only the makeup of the
board and not necessarily the way the directors
A
 1.1. Classification of Inventories
Inventories are asset items held for sale in the
ordinary course of business, or goods to be used in
the production of goods to be sold.
Classifying Inventory
Merchandising Manufacturing
Company Company
One Classification: Three Classifications:
 Merchandise  Raw Materials
Helpful Hint:
Inventory
Regardless of the  Work in Process
classification,
companies report all  Finished Goods
inventories under
6-32
Current Assets on the
 1.2. Determining Inventory Quantities

No matter whether they are using a periodic or

perpetual inventory system, all companies need to
determine inventory quantities at the end of the
accounting period.
Physical Inventory taken for two reasons:
Perpetual System
1. Check accuracy of inventory records.
2. Determine amount of inventory lost due to wasted raw
materials, and employee theft.
Periodic System
3. Determine the inventory on hand.

6-33
4. Determine the cost of goods sold for the period.
 Cont’d
Determining inventory quantities involves two steps:
(1) taking a physical inventory of goods on hand and
(2) determining the ownership of goods.

Taking a Physical Inventory

Involves counting, weighing, or measuring each
kind of inventory on hand.
Companies often “take inventory”
 when the business is closed
 at the end of the accounting period.

6-34
 Cont’d

Determining Ownership of
Goods
GOODS IN TRANSIT
 Purchased goods not yet received.
 Sold goods not yet delivered.

Goods in transit should be included in the

inventory of the company that has legal title
to the goods. Legal title is determined by the
terms of sale.
6-35
 Cont’d
Goods In Transit Illustration 6-2 Terms
of sale
Ownership of the
goods passes to the
buyer when the
public carrier accepts
the goods from the
seller.

Ownership of the
goods remains with
the seller until the
goods reach the
buyer.
6-36
 Cont’d

CONSIGNED GOODS
To hold the goods of other parties and try to
sell the goods for them for a fee, but without
taking ownership of the goods.
Many car, boat, and antique dealers sell goods
on consignment,
why? to keep their inventory costs down and
to avoid the risk of purchasing an item that
they will not be able to sell.

6-37
18) Which one of the following is FALSE about perpetual
inventory system?

A. Average costs are computed as a simple average of unit costs

incurred.

B. Inventory records continuously show balances that should be on

hand.

C. Cost of goods sold is determined after each sale

D. FIFO cost of goods sold will be the same as in A

a periodic inventory
system.
19) Which of the following should not be included in
the physical inventory of a company?

A. Goods in transit, bought from another company with FOB

shipping point term

B. Goods held on consignment from another company

C. Goods shipped on consignment to another company

D. Goods in process
B
 1.5. Estimating Inventories

 Two circumstances explain why companies sometimes estimate

inventories.
First, a casualty such as fire, flood, or earthquake may make it
impossible to take a physical inventory.
Second, managers may want monthly or quarterly financial
statements, but a physical inventory is taken only annually.
 The need for estimating inventories occurs primarily with a periodic
inventory system because of the absence of perpetual inventory
records.
 There are two widely used methods of estimating inventories: (1) the
gross profit method, and (2) the retail inventory

Ermi E-learning | YouTube

 1.5. Estimating Inventories
Gross Profit Method
Estimates the cost of ending inventory by applying a gross profit rate
to net sales.
The gross profit method estimates the value of inventory by applying
the company's historical gross profit percentage to current‐period
information about net sales and the cost of goods available for sale.

Ermi E-learning | YouTube

 Retail Inventory Method
Company applies the cost-to-retail percentage to ending
inventory at retail prices to determine inventory at cost
Retail businesses track both the cost and retail sales price of
inventory.
This method can be used by retailers who have their
merchandise records in both cost and retail selling prices.

Ermi E-learning | YouTube

20) Which of the following is NOT a reason the retail inventory
method is used widely?

A. To defer income tax liability.

B. As a control measure in determining inventory shortages.

C. To permit the computation of net income without a physical count

of inventory

D. For insurance information.

A
21) Western PLC uses periodic inventory system. The following balances were taken from its
accounting record:

Merchandise inventory balance as of March 1, 2023 Birr 400,000

Merchandise inventory balance as of March 31, 2023. Birr 150,000
Purchase during the period. Birr 510,000
Purchase discount.. Birr 10,000
Freight out Birr 5,000

The cost of merchandise sold is: A

A. Birr 750,000 NP = P – PRA-PD = 510,000 – 10000= 500,000
CMP = NP + Freight in = 500,000 +0
B. Bir 760,000 CGS = BI + CMP – EI = 400,000+500,000 – 150,000
= 750,000
C. Birr 250,000
22) The following cost information about direct material-chemical, is taken from
Kokeb textile firm:
Chemicals on hand as of January 1, 2020, ……….Birr 100,000
Chemicals on hand as of January 31, 2020... ………..80,000
Cost of Chemicals issued to factory during January ….400,000
Excess Chemicals returned from factory
shop to store during January…………………………….. 30,000
What is the cost of direct materials purchased during the period?

A. Birr 400,000 C DMU= BDM +DMP –EDM

B. Birr 230,000 DMP= DMU+EDM-BDM

C. Birr 350,000 = 370,000 + 80,000 – 100,000

= 350,000
D. Birr 500.000
22) The contribution margin ratio always increases when the:

A. Break-even point increases.

B. Variable expenses as a percentage of net sales decrease.

C. Break-even point decreases.

D. Variable expenses as a percentage of net sales increase.

B
CM Ratio = 1 – Vc Ratio
23) When a multi-product factory operates at full capacity,
decisions must be made about which products to emphasize in
making such decisions, products should be ranked based on:

A. contribution margin per unit of the constraining resource

B. selling price per unit

C. Contribution margin per unit

A
D. unit sales volume
24) ABC Company has only 25,000 hours of machine time each month to

manufacture its two products. Product X has a unit contribution margin of Birr 50,

and Product Y has a unit contribution margin of Birr 64.

Product X requires 5 hour of machine time, and Product Y requires 8 hours of

machine time.

If ABC Company wants to dedicate 80% of machine time to the product that will
Product X Product Y
provide the most income, the company will CMa total Birr
have 50
contribution Birr 64
marge
Hour 5 8
CM/H (50/5) 10Birr/h (64/8) 8 Birr/h
A. Birr 210,000
25000*0.8= 20000 h
B. Birr 200,000
C. Birr 240,000 X= 20000H*10Birr = 200,000
D. C
Birr 250,000
Y= 5000*8Birr = 4000
Total CM 240,000
 1.3. Inventory Costing Methods
Inventory is accounted for at cost.
 Cost includes all expenditures necessary to
acquire goods and place them in a condition
ready for sale.
 Unit costs are applied to quantities to compute
the total cost of the inventory and the cost of
goods sold using the following costing methods:
► Specific identification
► First-in, first-out (FIFO)
► Average-cost
6-49
25) Sharp Company uses specific identification method to value its inventory it purchases
Coming at different costs as follows:
January 5 : 2 units at a cost of Birr 2,000
February 8: 3 units at a cost of Birr 3,000
June 10 :5 units at a cost of Birr 4,000
On June 25, 6 units are sold at Bir 5,000 each.
From the items sold, 3 units are from February 8's purchase and 3 units from June 10
purchase. The amount of cost of goods sold and ending inventory as of June 30 are
………..and…………. respectively February 8’s 3 * 3000 = 9000
June 10 purchase 3 * 4000 = 12000
C Unsold unit
CGS = 21,000
A. Birr 17,000 and Birr 16,000
Jan 2*2000 =4000
B. Birr 12,000 and Birr 21.000 June 2*4000= 8000
C. Birr 21,000 and B 12.000 EI= 12000

D. Birr 30000 and Ber 20,000

26) A company uses perpetual inventory system An inventory record card
shows the following details.
• January 1, inventory 5000 at a cost of 10
• January 15,sales 1000 at Birr 25
• February 10,purchase 3000 units at a cost Birrr20
• Sales on June 3 is 6000unit at Birr 25
In a perpetual inventory system, what is the Cost of Goods Sold as of June 3
sales connection if the company used FIFO ?
Purchase Cost of good sold Inventor
5000 *10 = 50,000
A)80,000 1000*10= 10,000 4000*10 = 40,000
3000*20= 60,000 4000*10 = 40,000
B)75,000 A 4000*10= 40,000
3000*20 = 60,000

C)60,000 2000*20= 40,000 1000*20= 20,000

CGS = 90,000
D)90,000
2.5 Components of Master Budget

• The master budget is the total budget package for an organization; it is

the end product that consists of all the individual budgets for each part
of the organization aggregated into one overall budget for the entire
organization.
• The two major components of master budget are
Operating budget: It focuses on income statement and its supporting
schedules. It is also called profit plan. However, such budget may show
a budgeted loss, or can be used to budget expenses in an organization or
agency with no sales revenues.

Financial budget: It focuses on the effects that the operating budget and
other plans will have on cash. Such as cash budget, capital budget and
budgeted balance sheet
The part of master budget for Merchandise company
1. Operating Budget
(a) Sales budget
(b) Cash collection Budget
(c) Inventory Purchases budget
(d) Disbursement budget for inventory purchase
(e) Operating expenses budget
(f) disbursement budget for Operating budget
(g) Budgeted income statement
2. Financial Budget
(a) Capital budget
(b) Cash budget
(c) Budgeted balance sheet
27) The expected cash collection pattern is 60% in the month of sale and 25% in
the following month,10% in the second following month. Given the sales budget
presented below, how much cash is expected to be collected in January if
uncollectible amount is 5% of monthly sales?

A)41,000 January = 0.6 jan sale + 0.25 Dec sale + 0.1 Nov Sale
B)35000 (0.6*35000) + (0.25*60000) + (0.1*50000)
C)33250 = 41,000
D)21,000 A
28) Hubo Company manufactures card tables. The company has a policy of
maintaining a finished goods inventory equal to 40% of the next month's planned
sales. Each card table requires 3 hours of labor.
• The budgeted labor rate for the coming year is Birr 13 per hour,
• Planned sales for the months of April, May, and June are respectively 4,000;
5,000, and 3,000 units. The budgeted direct labor cost for June for Hubo
Company is Birr 136,500. Direct Labor 136,500
• What are budgeted sales for July for Hubo Company? Divide: Cost per Hour 13
April, May, June Direct Labor Hours 10,500 hours
A. 3.500 units 4,000; 5,000, 3,000 unit Divide: Hours per Unit 3
EI 0.4*5000 0.4*3000 0.4* July sale
2000 1200 ----- Total Units 3,500
B. 4,000 units BI - Feb EI 2000 1200 Add: Beginning Inventory 1,200
(3,000 units x 40%)
C. 3,750 units EI = BI+ Unit Produced – unit sold Less: June Sales 3,000
Ending Inventory 1,700
D EI = 0.4*July sale
1700= 0.4*July sale Divide: Pecentage 40%
D. 4,250 units July sale = 1700/0.4= 4250 unit Budgeted Sales - July 4,250 units
29) A products standard cost card specifies that a unit of the product requires 4
direct labor-hours. During September, 3350 units were made, which was 150
units less than budgeted.
The total budgeted direct labor cost for September was Bir 117,600.
The Budgeted direct labor hour 13400 and Actual 13,450 direct labor-hours
were worked.
The direct labor efficiency variance for the month was:
A. Birr 415.80 Favourable Labor efficiency variance= (Actual hours - Standard

B. Bir 415.80 Unfavourable hours)*Standard rate

Standard units= 3350+150= 3500 units
C. Birr 420.00 Unfavourable Standard rate= 117600/(3500*4)= 8.40
D. Birr 420.00 Favourable Labor efficiency variance= (Actual hours - Standard
hours)*Standard rate

C = (13450-13400)*8.4= 420 U
It is favorable if the actual hours worked is lower than the
30) Robba Corporation manufactured 30,000 ice chests during
September. The overhead cost-allocation base is Birr per
machine-hour. The following variable overhead data pertain to
September Actual Budgeted
30,000 unit 24,000 unit
Machine hour 15,000 h 10,800 h
Variable overhead /mh Birr 11.00 Birr 11.25

What is the variable overhead spending variance?

Variable Overhead Spending Variance is essentially
A. Birr 16.875 unfavourable the difference between what the variable production
B. Birr 13,125 unfavourable overheads actually cost and what
they should have cost given the level of activity
C. Birr 3,750 favourable during a period.
D. Birr 30,375-unfavourable variable overhead spending variance
= (Budgeted. rate – Actual rate) AH
C = (11.25- 11) *15000
= 3750 F
 Decision-making is one of the basic functions of a
manager.
The purpose of management accounting is:

To provide information that enables

managers to make sound decisions.
Accountants have an important role in the
decision making process, not as a decision
makers but as a collectors and reporters of
relevant information.

The accountant's role in decision making is

primarily that of a technical expert on financial
analysis who helps managers focus on relevant
data, information that will lead to the best
decisions.
Relevance defined
Relevant information is the predicted future
costs and revenues that will differ among
the alternatives
Note that:
 Relevant information is a prediction of the future, not a
summary of the past.
 Historical (past) data are irrelevant to the decision itself,
because the decision cannot affect past data. Decisions affect
the future. Nothing can alter what has already happened.
 Of the expected future data, only those that differ from
alternative to alternative are relevant to decision.
 Any item that will remain the same regardless of the alternative
selected is irrelevant.
 Relevant cost and revenue
• Relevant costs are expected future costs, and
• relevant revenues are expected future revenues that differ
among the alternative courses of action being considered.
Revenues and costs that are not relevant are said to be
irrelevant.
• It is important to recognize that to be relevant costs and
relevant revenues they must:
Occur in the future—every decision deals with selecting a
course of action based on its expected future results.
Differ among the alternative courses of action—costs
and revenues that do not differ will not matter and, hence, will
have no bearing on the decision being made.
31) A business has acquired a special purpose machine at a cost of Birr 100,000. After it
is purchased it known that it was unwise is to buy this item. No amount of regret can
relieve the firm from this decision and there is no any future decision that can avoid this
cost.

What is the appropriate classification for this cost?

A. Sunk cost

B. Uncontrollable cost
A
C. Management cost

D. Period cost
32) Relevant costs of a make-or-buy decision include all of the
following EXCEPT

A. Fixed salaries that will not be incurred if the part is outsourced

B. Current direct material costs of the part

C. Material-handling costs that can be eliminated.

D. Special machinery for the part that has no resale value.

D
33)

A. Birr 37,000 in favor of keeping the old machine OLD NEW

Cost … 35000
B. Birr 37,000 in favor of replacing the old machine C Dis value
Operations cost
….
35000 (5*7000)
-8000
20000 (5*4000)
C. Birr 12,000 in favor of keeping the old machine Total 35000 47000

D. Birr 12,000 in favor of replacing the old machine So 12000 Birr Favor For Keping the old Machine
 Control Features: Use of
4. a Bank
4.
Contributes to good internal control over cash.
 Minimizes the amount of currency on hand.
 Creates a double record of bank
transactions.
 Bank reconciliation.
Reconciling the Bank Account
Reconcile balance per books and balance per
bank to their adjusted (corrected) cash
balances.
Reconciling Items:
1. Deposits in transit.
Time
2. Outstanding checks. Lags

3. Bank memoranda.
4. Errors.
Bank Statements Illustration 7-
10
Bank Statement
DEBIT
MEMORANDUM
 Bank service
charge.
 NSF (not sufficient
funds).
CREDIT
MEMORANDUM
 Collect notes
receivable.
 Interest earned.
 Cont’d
RECONCILIATION PROCEDURES Illustration 7-11
Bank
Reconciliation
Adjustments

+ Deposit in Transit + Notes collected by bank

- Outstanding Checks - NSF (bounced) checks
+/- Bank Errors - Check printing or other
service charges
+/- Book Errors

CORRECT BALANCE CORRECT BALANCE

35) An analysis of the items and amounts that result in the cash balance
reported in the bank statement to differ from the balance of the cash
account in the ledger is

• A. Bank statement

• B. Bank analysis

• C. Bank account D
• D. Bank reconciliation
36) In preparing its bank reconciliation for the month of April 2010, Henke, Inc. has
available the following information.
• Balance per bank statement, 4/30/10 Birr39,140
• NSF check returned with 4/30/10 bank statement 450
• Deposits in transit, 4/30/10 5,000
• Outstanding checks, 4/30/10 5,200
• Bank service charges for April 20

• What should be the correct balance of cash at April 30, 2010?

Bank balance ……………………39,140
• a. ETB 39,370 + Deposit in transit ….5000
• b. ETB 38,940 - Outstanding Check …5200
• c. ETB 38,490 Adjusted balance ………………….38940
• d. ETB 38,470
B
37) On March 31, Bora Company has the following information about cash at bank
Cash balance per bank statement Birr 10,500
Credit memo Birr 4,000
Bank debit memo Birr 300.
Outstanding checks Birr 1,500
Deposits in transit Birr 1,200
Based on the above information, what is the amount of the adjusted cash balance per bank
statement at March 31? Cash balance per bank statement Birr 10,500
+ Deposits in transit Birr 1,200
A. Birr 10,800 - Outstanding checks Birr 1,500
= 10,200

B. Birr 10,200 B
C. Birr 11,700

D. Birr 14 500
38) A Company has cash in bank of Birr 20,000, restricted cash
in a separate account of Birr 6,000, and a bank overdraft in an
account at another bank of Birr 2,000. The company should
report cash of
Cash in Bank
A. Birr 26,000 20,000
Bank Overdraft
B. Birr 18,000 (2,000)
Balance To Be Reported
B
C. Birr 20,000 18,000
D. Birr 24,000
 DEFINITIONS OF TERMS
Impairment
 A fall in the value of an asset (recoverable amount is less than carrying value).

Carrying amount (CA)

 The net value of the asset (after deducting accumulated depreciation & any impairment

losses).
 If value of the asset is higher than its realistic value (RA) ', the asset is judged to have

suffered an impairment loss.

 It will be reduced in value, by the amount of the imp. loss and the amount should be

written off against profit immediately

72
 THE THREE ACCOUNTING ISSUES
 How is it possible to identify when an imp. loss may have occurred?
 How should the RA of the asset be measured?
 How should an 'impairment loss' be reported in the accounts?

1. Identifying a Potentially Impaired Asset

 Assess at the end of each reporting period whether there are any indications of

impairment to any assets.

 The concept of materiality applies, & only material impairment needs to be

identified.

73
 THE THREE ACCOUNTING ISSUES…
 Suggestions by the standard are based largely on common sense
Source of Information
External Sources Of Information
 A fall in the asset's market value that is more significant than would normally be

expected.
 A significant change in the technological, market, legal or economic environment of

the business.
 An increase in market interest rates or market rates of return on investments likely

to affect the discount rate.

74
 THE THREE ACCOUNTING ISSUES…
 The carrying amount of the entity's net assets being more than its market
capitalization.
Internal Sources Of Information
 Obsolete or physically damaged asset
 Significant changes in the extent or manner in which, an asset is used (idle assets,

plans to dispose, discontinue…

 Internal reporting indicates that the economic performance of an asset is, or will

be, worse than expected

Exceptions:(must always be tested for impairment annually with no indication of
imp. )
 An intangible asset with an indefinite useful life ( 10 yrs renewable Brand right).
 Goodwill acquired in a business combination 75
 THE THREE ACCOUNTING ISSUES…
2. Measuring the Recoverable Amount of the Asset
 The RA should be the higher value of:
 The asset's fair value less costs to sell; and
 Its value in use. (IAS 36)
 Fair value less costs to sell is the amount net of selling costs that could be obtained

from the sale of the asset

 If there is an active market in the asset, the net selling price should be based on:
 the market value, or on
 the price of recent transactions in similar assets.

76
 THE THREE ACCOUNTING ISSUES…
 If there is no active market in the assets it might be possible to estimate a net selling
price using
 best estimates of what 'knowledgeable, willing parties' might pay in an arm's length

transaction.
 Net selling price cannot be reduced, by including within selling costs any
 restructuring or reorganization expenses, or
 costs that have already been recognized in the accounts as liabilities.

Value in Use (VU)

 The VU is the PV of estimated future cash flows including its estimated net disposal

value (if any) at the end of its UL.

77
 THE THREE ACCOUNTING ISSUES…
3. Recognition & Measurement Of An Impairment Loss
The Rule for Assets at Historical Cost:
 If the RA is lower than the CA , the CA should be reduced by the d/ce which should

be charged as an expense in p&l.

The Rule for Assets Held At a Revalued Amount (Such as PPE):
 The impairment loss is to be treated as a revaluation decrease under the relevant

IAS.

78
 THE THREE ACCOUNTING ISSUES…
In practice this means:
 If there is a revaluation surplus held in respect of the asset, the imp. loss

should be charged to revaluation surplus.

 Any excess should be charged to profit or loss.

Cash Generating Units (CGUs)

 When it is not possible to calculate the RA of a single asset, then that of its CGU

should be measured instead.

 A CGU is the smallest identifiable group of assets that
 can generate cash flows from continuing use and
 are mainly independent of the cash flows from other assets or groups of assets.

79
 THE THREE ACCOUNTING ISSUES…
Use of Cash-Generating Unit
 As a basic rule, the recoverable amount of an asset should be calculated for the

asset individually.
 when it is not possible to estimate value for an individual asset, we use CGU

Impairment Testing Levels

Inventories (other standards)
 Principle: test inventory for impairment item by item

80
39) An impairment loss is:

A. The amount by which the carrying amount of an asset

exceeds its market value.
B. The amount by which the recoverable amount of an asset
exceeds its written down value.

C. The amount by which the recoverable amount of an asset

exceeds its carrying amount.

D. The amount by which the carrying amount of an asset

exceeds its recoverable amount
D
40) On January 2, 2021, Triple Inc. purchased equipment with a cost of Birr 10,440,000, a
useful life of 10 years and no salvage value. The Company uses straight-line depreciation.
At December 31, 2021 and December 31, 2022, the company determines that
impairment indicators are present. The following information is available for impairment
Testing at each year end.
12/31/2021 12/31/2022
FV less cost to sale 9,315,000 8,350,000
Value in used 9,350,000 8,315,000
There is no change in the asset's useful life or salvage value. The 2022 profit or loss
statement will report: 2022
A. Recovery of impairment Loss of Birr 3,889 C Purchase value 9,350,000.00
B. Impairment loss of Birr 10,000 Depreciation (9 year) 1,038,888.89

C. Recovery of impairment Loss of Birr 38,889. Book Value after

Depreciation 8,311,111.11
D. Impairment Loss of Birr 1,000,000
Fair Value 8,350,000.00
10,440,000/10=1,044,000 dep Ex
10,440,000-1,044,000= 9,396,000 BV Recovery of
Impairment loss = 46,000 Impairment loss 38,888.89
41) Rice Industries owns a manufacturing plant in a foreign country. Political unrest in
the country indicates that face choose investigate for possible impairment. Below is
information related to the plant's assets (Birr in millions)
Book value Birr 190
Undiscounted sum of future estimated cash flows 210
Present value of future cash flows 175 A
Fair value less cost to sell (determined by appraisal) 180
The amount of impairment loss that Rice should recognize is:
impairment loss , If CV > Recoverable amount
A. Birr 10 million
Recoverable amount is the height of value in used and Fair value less to cost

B. Birr 20 million FV Less to cost = 180

Value in used = 175

C. Birr 15 million Recoverable amount = 180

CV > RV BY 10M so the impairment loss = 10 M

190 > 180
D. There is no impairment.
• 42) Hope Ltd has determined that one of its cash-generating units (CGUs) has sustained an impairment
loss of $50 000. The carrying amounts of the assets within the CGU are as follows.
• Asset 1 150,000
• Asset 2 200,000
• Asset 3. 50,000
• Total 400,000
• The estimated fair value less costs of disposal of Asset 2 is $190 000, which is greater than its value in use.
• A number of options are being considered as the amounts of impairment loss to be allocated to the three
assets within the CGU.
• In accordance with IAS 16 Property, Plant and Equipment and IAS 36 Impairment of Assets, which one of
the following options would be the amount of impairment loss allocated to the three assets?
• A. Asset 1: 16,667. Asset 2: 16,667. Asset 3: 16,667. Total: 50,000
• B. Asset 1: 18,750. Asset 2: 25,000. Asset 3: 6,250. Total: 50,000
• C. Asset 1: 20,000. Asset 2: 10,000. Asset 3: 20,000. Total: 50,000 to allocated to asset 2 is 10000
Max impairment
• D. Asset 1: 30,000. Asset 2: 10,000. Asset 3: 10,000 Total: b/c CV> RV 200000 > 190000
50,000
Asset 1 150000 150000/200000 * 40000 = 30000
• E. All Asset 3 50000 50000/200000 *40000 = 10000
• F. None Total 200000

D
 Statement of cash flow

• The statement of cash flows reports the cash receipts, cash

payments, and net change in cash resulting from operating,
investing, and financing activities during a period.

• Shows those activities that involve sources or provision (inflow)

of cash and spending cash are called uses (or applications)/outflow
of cash.
•
 The objective of PREPARATION OF
STATEMENT OF CASH FLOWS

Primary purpose:
To provide information about a company’s cash receipts and cash payments during a
period.

Secondary objective:
To provide cash-basis information about the company’s operating, investing, and financing
activities.

LO 1
 Usefulness of the Statement of Cash Flows

Provides information to help assess:

1. Entity’s ability to generate future cash flows.

2. Entity’s ability to pay dividends and meet obligations.

3. Reasons for the difference between net income and net cash flow from
operating activities.

4. Cash and noncash investing and financing transactions during the period.

LO 1
 PREPARATION OF STATEMENT

Classification of Cash Flows

Operating Investing Financing

Activities Activities Activities

Changes in Changes in Equity

Income Investments and Non- and Non-Current
Statement Items Current Asset Items Liability Items

LO 2
• Operating activity: Activity's include the cash effects of transactions that create revenues and expenses.
• They thus enter into the determination of net income. (Income statement items)

• Investment activity Activity's include (a) acquiring and disposing of investments and property, plant,
and equipment, and (b) lending money and collecting the loans. (Cash flows resulting from changes in
investments and long-term / non-current asset items.)

• Financing activity Activity’s include

• (a) obtaining cash from issuing debt and repaying the amounts borrowed,
(b) obtaining cash from stockholders, repurchasing shares, and paying dividends. (Cash flows
resulting from changes in long-term /non-current liability and stockholders’ equity items.)
• Simply, a capital structure components.
•
43) Creditors and investors would generally find the
statement of cash flows least useful for assessing the

A. Financial position at a point in time.

B. Ability to pay dividends.
C. Ability to generate future cash flows.
D. Quality of earnings.
A
44) Wilton Company reported net income of $80,000
for the year. During the year, accounts receivable
decreased by $7,000, accounts payable increased by
$3,000 and depreciation expense of $5,000 was
recorded.
Net cash provided by operating activities for the year
is B

a. $70,000. NI…………………..……….80000
+ Decreased AR ………..7000
b. $95,000. + increased AP……………3000
c. $79,000. + Depreciation ……..…..5000
= 95000
d. $75,000.
45) XYZ Company reported net income of ETB 200,000 for the year.
During the year, accounts receivable decreased by ETB 10,000, inventory
increased by ETB 8,000, accounts payable increased by ETB 6,000,
depreciation expense of ETB 10,000 was recorded, and land was purchased
for ETB 150,000 in cash. Net cash provided by operating activities for the
year is
a. ETB 218,000. NI ……………………………….….200,000
+AR decreased………………..10000
b. ETB 68,000. - inventory increased …………8000
+ AP increased……………………..6000
c. ETB 214,000. + depreciation expense…….10000
- Total
d. ETB 202,000.
A
46) Which one of the following is not a role played by an investment
bank?

A. Buying the securities from the issuer and then reselling them in the
market.

B. Advising the issuer on the terms and the timing of the offering.

C. Distributing newly issued securities to the public.

D. Investing in a diversified portfolio on behalf of its shareholders

D
47) The function of buying securities from a corporation at a
predetermined price and then reselling them in the market by an
investment bank is called:

A. Distributing

B. Underwriting. B
C. Advising.

D. Undertaking.
48) Which of the following is the common characteristics
of all financial markets:

A. It allows common stock to be traded.

B. It allows loans to be made.

C. It channels funds from lenders-savers to borrowers-

spenders.

C
D. It determines the level of interest rates
48) Bonds that are sold in a foreign country and are denominated in the
country's currency in which they are sold are known as

a. Country bonds.

b. Foreign bonds. B
Eurobond is an international bond issued in a different currency
than the domestic currency. A Eurobond is also called an external
c. Equity bonds: bond.

Equity-linked bonds have features of both debt and equity.

d. Eurobonds
49) Which of the following is not a function of a financial
system:

A. Investment function

B. Risk elimination function

B
C. Payment function

D. Saving function
50) Which of the following financial intermediaries is not a
depository institution?

A. A finance company A

A finance company is an organization

B. A savings and loan association that makes loans to individuals and
businesses.
Unlike a bank, a finance company does
C. A commercial bank not receive cash deposits from clients,
nor does it provide some other services
common to banks, such as checking
D. A credit union accounts.
51) Which of the following is commonly traded in the money
market

A. Preferred shares

B. Treasury note
D

C. Government bond

D. Treasury bill
53) Financial institutions will function in economy by:
A.Facilitate the flow of funds from savers (surplus units) to
borrowers (deficit units) in the most efficient manner.
B.Collect the savings of individuals and corporations and
channel them to firms that use the money to finance their
investments
C.Provision of liquidity and the transformation of the risk
characteristics of assets.
D.All of the above D
 Cost of capital
The minimum rate of return that a firm must earn on
its investments to compensate its investors for the use
of their capital.
The appropriate discount rate for cost of capital may
be called opportunity cost of capital, required rate of
return or weighted average cost of capital.
 Importance
For capital budgeting decisions:
to minimized, the cost capital, and to boost the value of
the firm.
For capital structure decisions: mix of debt and equity
For other decisions: leasing (or purchasing), to bond
refunding, and to working capital management
To regulate utilities: regulators determine the cost of
capital investors
 Cost of capital
components
The cost of capital must reflect the average cost of
the various sources of long term funds used- the
weighted average cost of capital
Capital component is one of the types of capital
used by firms to raise money.
Capital components are sources of funding that
come from investors
 Capital structuring
• The most crucial component of starting a business is capital.
• It acts as the foundation of the company.
• Debt and Equity are the two primary types of capital sources for a business.
• Capital structure is defined as the combination of equity and debt that is put
into use by a company in order to finance the overall operations of the
company and for its growth.
 Capital structuring

How should a firm go about choosing its debt–equity ratio?

• What is the primary goal of financial managers?
Maximize stockholder wealth
• We want to choose the capital structure that will maximize stockholder
wealth
• We can maximize stockholder wealth by maximizing the value of the
firm or minimizing the WACC
Q54) Cost of capital is
a. The amount the company must pay for its
plant assets.
b. The dividends a company must pay on its
equity securities.
c. The cost the company must incur to obtain its
capital resources.
d. The cost the company is charged by
investment bankers who handle the issuance
of equity or long-term debt securities.
C
Q55) The term "capital structure" refers to:
a. a mix of Long-term debt, preferred stock, and
common stock equity.
b. Current assets and current liabilities.
c. Total assets minus liabilities.
d. Shareholders' equity.

A
56) The weighted average cost of capital for a firm is the:
• a. discount rate which the firm should apply to all of the projects it
undertakes.
• b. overall rate which the firm must earn on its existing assets to maintain
the value of its stock.
• c. rate the firm should expect to pay on its next bond issue.
• d. maximum rate which the firm should require on any projects it
undertakes.
• e. rate of return that the firm’s preferred stockholders should expect to
earn over the long term
57) Central Systems, Inc. desires a weighted average cost of capital of 8 percent. The
firm has an after-tax cost of debt of 4.8 percent and a cost of equity of 15.2 percent.
What debt-equity ratio is needed for the firm to achieve its targeted weighted average
cost of capital?
• WACC = 0.08 = [We * 0.152] + [(1 - We) * 0.048)]
A. 0.38 0.08= 0.152We + 0.048 - 0.048We
B. 0.44
C. 1.02
D. 2.25 0.08-0.048= 0.152-0.048We
E. 2.63
0.032=0.104We
D We= 0.032/0.104

We = 0.3077;
Wd = 1 - We = 0.6923
Debt-equity ratio = 0.6923/0.3077 = 2.25
58) For a typical firm, which of the following sequences is
correct? All rates are after taxes, and assume that the firm
operates at its target capital structure. Note: Re is cost of new
equity while Rs is cost of retained earnings.

A. Rs > Re > Rd > WACC

B. WACC > Rd > Rs > Re.

C. Re > Rs > WACC > Rd.

C
D. Rd > Re > Rs > WACC
• MM Proposition I (with taxes): The value of the company with debt is
greater than that of the all equity company by an amount equal to the
tax rate multiplied by the value of the debt.
• MM Proposition I (without taxes): The market value of the company
is not affected by the capital structure of the company. MM Proposition II
(without taxes): The cost of equity is a linear function of the company's
debt/equity ratio.
• MM Proposition II (with taxes): The cost of equity increases as the company increases the
amount of debt in its capital structure, but the cost of equity does not rise as fast as it
does in the no tax case.
• MM Proposition II (No Taxes)
• What MM II says is that if you increase borrowing to get the cheaper
rate, you will also increase the amount you will have to pay on your
equity. In fact, the two will exactly offset leaving your (overall)
weighted-average cost of capital the same.
• Static Theory : that the firm's capital structure is determined by a trade-off of the value of
tax shields against the costs of bankruptcy.
59) M&M Proposition I with taxes is based on the concept that:

A. The value of the firm increases as total debt increases because of

the interest tax shield.
B. The capital structure of the firm does not matter because
investors can use homemade leverage.
C. The optimal capital structure is the one that is totally financed with
equity.
D. The weighted average cost of capital increases as the debt-equity
ratio of a firm increases
A
60) Which one of the following is the theory that a firm should borrow up
to the point where the additional tax benefit from an extra dollar of debt
equals the additional costs associated with financial distress from that
additional debt?

A. M&M Proposition II, with taxes Theory that the firm's

B capital structure is
determined by a trade-off
B. Static theory of capital structure of the value of tax shields
against the costs of
C. M&M Proposition I, without taxes bankruptcy.

D. M&M Proposition I, with taxes

Meaning of finance
• Finance is the application of economic principles and concepts to
business decision-making and problem solving
• It is concerned with the nature, creation, behavior, regulation and
problems of money.
• It focuses on how the individuals, businessmen, investors,
government and financial institutions deal.

12/25/2024 115
 Classification of finance
Personal finance:- deals with the mobilization of funds from own
sources
Public finance:- deals with the mobilization or administration of
public funds.
It includes the aspects relating to the securing the funds by the
government from public through various methods viz. taxes,
borrowings from public and foreign markets
Business finance is that business activity which is concerned
with the acquisition and conservation of capital funds in meeting
financial needs and overall objectives of a business enterprise.
• It is broadly defined as activity concerned with planning, raising,
controlling and administering of the funds used in the business

12/25/2024 116
AN OVERVIEW OF THE FINANCIAL
ENVIRONMENT
1. Financial Institutions: financial intermediaries, which are specialized
financial firms that facilitate the transfer of funds from savers to demanders
of capital.
2. Financial Instruments: Financial instruments are written and formal
documents of transferring funds between and among individuals,
businesses, and governments.
 They include loans and borrowing contracts, promissory notes, commercial
papers, treasury bills, bonds, and stocks
3. Financial market: are markets in which financial instruments are bought and
sold by suppliers and demanders of funds.
Unlike financial institutions, financial markets are places in which suppliers
and demanders of funds meet directly to transact business.
12/25/2024 117
Meaning of financial
management
Financial management is concerned with managerial
decisions that result in the acquisition and financial of long-
term and short-term credits for the firm.
Financial management actually concerned with business
finance
Also called corporate finance, focuses on decisions relating
to how much and what types of assets to acquire, how to
raise the capital needed to buy assets, and how to run the
firm so as to maximize its value.
12/25/2024 118
61) Which of the following is not considered as one of the basic
questions of corporate finance?
A. How much inventory should the firm sale in a period?
B. How can the firm raise cash for required capital
expenditures?
C. What long-lived assets should the firm invest in?
D. How should the short-term operating cash flows be
managed?
Three main questions in
corporate finance
A are capital budgeting,
capital structure, and
62) Which of the following is correct, if MAMA Share
Company issued 1,000 shares of Birr 100 par value ordinary
shares receiving a total amount of Birr 120,000?

A. Retained earnings account is credited for Birr 20,000

B. Ordinary share capital account is credited for Birr 120,000
C. The transaction results in a gain of Birr 20,000
D. Total shareholders equity increases by Birr 120,000

Cash ……………….120,000
Ordinary share(100*1000) …………..100,000 D
Share premium.. …………………………..20000
63 ) Before 3 years, HH Company issued 10,000 shares, Birr 100 par value ordinary shares

at Birr 120 per share. The following transactions occurred during the current year.

• October 1: Purchased 2.000 shares for the treasury at Birr 90 per share.
• December 5: Sold 1,000 treasury shares at Birr 95 per share
• December 31: Dividend of Birr 45,000 is declared.
• Based on the above information, which of the following is correct?

Cash (120*10000)…….1,200,000
A. Treasury stock account is credited for Birr 120,000Ordinary share .(100*10000)….1,000,000
Share premium (20*10000) 200,000

B. Dividend per share is Birr 4.5 C Oct 1= treasury Share (2000*90)………..180,000

Cash …………………………180000
Dec 5) = Cash .(1000*95)…….95000
C. Dividend per share is Birr 5 Treasury Share…(1000*90) ….90000
Share premium (1000*5)…….5000
Dec 31 = DPS = Dividend / Numbers of outstanding share
D. Cash is debited by Bin 120,000. 45000/ 9000 = 5
64) Typically, borrowers have superior information relative to lenders about
the potential returns and restricted with an investment project.
The difference in information is called:

A. Adverse hazard.

B. Asymmetric information.
C. Risk sharing.

D. Moral selection. B
65) Which one of the following is most
appropriate to align management's priorities
with shareholders interests?
A. Paying a special management bonus on every fifth
year of employment
B. Holding corporate and shareholder meetings at
high-end resort-type locations preferred by
managers
C. Increasing the number of paid holidays that long-
term employees are entitled to receive
D. Compensating managers with company shares that
must be held for a minimum ofDthree years
66) If you have a portfolio of two risky stocks which turns out
to have no diversification. The reason you have no
diversification is:

• A. The returns move perfectly with one another.

• B. The returns move perfectly opposite of one another.
• C. The returns are too small.
• D. The returns are completely unrelated to one another.
Diversification means the distribution of investment amounts into
different types and classes of assets to bring down the overall risk.
A Investors diversify their portfolio to bring down the overall risk of
the investments.

The advantage of diversification will increase when the returns on two securities
move in different directions.
67) Beginning with an investment in one company's
securities, as we add securities of other companies,
which type of risk declines?
A. Non-diversified risk Systematic risk is a market-wide
risk or non-diversifiable risk that
affects the securities of all the firms
B. Market risk whereas unsystematic risk is a
diversifiable or firm-specific risk
that affects only a particular
company's securities.
C. Unsystematic risk.
Thus, as we add securities of other
companies to a given portfolio, the
D. Systematic risk. C unsystematic risk declines.
© Tata McGraw-Hill Publishing Company Limited, Financial Management 14-126
 Motives For Holding Cash

Cash management is one of the key areas of

working capital management. There are four
motives for holding cash:
1) Transaction motive,
2) Precautionary motive,
3) Speculative motive, and
4) Compensating motive.

© Tata McGraw-Hill Publishing Company Limited, Financial Management 14-127

 Cash Management: Basic
Strategies
The broad cash management strategies are
essentially related to the cash turnover process, that
is, the cash cycle together with the cash turnover.
The cash cycle refers to the process by which cash is
used to purchase materials from which are produced
goods, which are then sold to customers, who later
pay the bills. The firm receives cash from customers
and the cycle repeats itself.

The cash turnover means the number of times cash

14-128
© Tata McGraw-Hill Publishing Company Limited, Financial Management
68) Which of the following statements is most consistent with efficient
inventory management? The firm has

A. Relatively low days sales outstanding (DSO).

B. Relatively high current ratio

C. Below average inventory turnover ratio,

D. Low incidence of production schedule

Efficient inventory management would result in low
wastage of raw materials and will also ensure sufficient D
stock of inventory at the right time for use in
production.
This would in turn reduce the possibility of production
69) Which of the following actions would be likely to shorten the cash
conversion cycle?

A. Change the credit terms offered to customers from 3/10 net 30 to 1/10 net
50.
B. Adopt a new manufacturing process that speeds up the conversion of raw
materials to finished goods from 20 days to 10 days
C. Adopt a new manufacturing process that saves some labor costs but
slows down the conversion of raw materials to finished goods from 10
days to 20 days.
D. Begin to take discounts on inventory purchases; we buy on terms of 2/10
net 30.
B
Cash Conversion Cycle = DIO + DSO
– DPO
• 70) A firm has an average age of inventory of 101 days, an average
collection period of 49 days, and an average payment period of 60 days.
The firm's cash conversion cycle is
• A) 150 days.
• B) 90 days.
• C) 112 days.
Cash Conversion Cycle = DIO + DSO
• D) 8 days. – DPO
= 101+49- 60
= 90Day

B
• Financial statement analysis: is a process of evaluating
relationships between component parts of financial
statements to obtain a better understanding of the firm’s financial
condition and performance.

• It used to determine the weakness and strength of the company

Ermi E learning YOUTUBE

• Internal users
• Used financial statement analysis to improve strategic
information to make effective and efficient decision
• External users
• Used financial statement analysis to make better decision on
investment, landing, Merger and acquisition and other
decision

Ermi E learning YOUTUBE

 Major steps in financial analysis
1. Preparation
 Setting Objectives and gathering data
• Shareholders – Current and future risk and return
• Creditors – Short term liquidity of the firm and profitability
• Management –Planning and controlling decisions
2. Computation
• Ratio analysis
• Common size statements: express individual statement
accounts as a percentage of a base amount
3. Evaluation and interpretation
• Determination of the meaningfulness of the analysis to
develop conclusions and recommendations about the
firm’s financial performance and status.
Ermi E learning YOUTUBE
 Common size Balance Sheet
Accounts 2013 % Accounts 2013 %

Cash 696 12.9 A/P 307 5.7

A/R 956 17.7 N/P 26 0.5
Inventory 301 5.6 Other CL 1662 30.8
Other CA 303 5.6 Total CL 1995 37
Total CA 2256 41.8 L-T Debt 843 15.6
Net Fixed 3138 58.2 Common 2556 47.6
Stock
Asset Total 5394 100 Tot 5394 100
Liab&Equity

Ermi E learning YOUTUBE

 Common size Income Statement
Accounts 2013 %
Revenues 5,000 100
Cost of Goods Sold (2,006) 40
Expenses (1,740) 34.8
Depreciation (116) 2.3
EBIT 1,138 22.8
Interest Expense (7) 0.0
Taxable Income 1,131 22.6
Taxes (442) 8.8
Net Income 689 13.8
Ermi E learning YOUTUBE
 RATIO ANALYSIS
• Calculating and interpreting financial ratios to assess financial
performance and status.
• A ratio expresses a mathematical relation between two quantities.
It can be expressed as a percent, rate or proportion
• Ratios are among the more widely used tools of financial analysis
because they provide clues to & symptoms of underlying
conditions
• Ratios standardize numbers and facilitate comparisons.
• Ratios are used to highlight weaknesses and strengths.
• Ratios are not very helpful by themselves; they need to be
compared to something
Ermi E learning YOUTUBE
Type of ratio ( Basic Approach )
1. Time-series analysis : Identify financial
trends over time for a single company. It is
used to see how the firm’s performance is
changing over time.
2. Cross-sectional analysis (Peer group
analysis): Compare to similar companies or
within industries at a single moment in time.
3. Benchmark comparison: measures a
company’s performance against some
predetermined standard.
Ermi E learning YOUTUBE
 Types of ratios
• Liquidity ratio
• Activity ratio (efficiency ratio)
• Debt ratio
• Profitability ratio
• Valuation ratios ( Market value
ratio)
• Coverage ratio

Ermi E learning YOUTUBE

71) Assume General hospital has a current ratio of 0.5.
Which of the following actions would improve (increase) this
ratio
A. Use cash to pay off current liabilities
B. Collect some of the current accounts receivable
C. Use cash to pay off some long term debt
D. Purchase additional inventory on credit (i.e., accounts
payable).
E. Sell some of the existing inventory at cost (book value).
F. None F
CR= CA/CL
CR increased if CA increased or CL decreased
72) Company A and Company B have the same gross
profit margin and the same total asset turnover, but
company A has a higher return on equity. This may
result from:

A. Company B has more common stock.

B. Company A has a lower debt ratio.
C. Company A has lower selling and administrative expenses,
resulting in a higher net profit margin.
D. Company A has lower cost of goods sold, resulting in a
higher net profit margin.
ROE= NI/Total Equity
C
73) ZEMENAY Company reported the following data for 2022:
• Net Profit Margin 10%
• Total Asset Turnover 4
• Total Debt Ratio 60%
• Credit sales Birr 2,920,000
• Average Accounts Receivable Birr 160,000
• Cost of Goods Sold Rate 40%
• Day’s sales in inventory 15 days
• What is the return on asset (ROA)? ROA = NI/Total Asset
ROA = NET profit margin * total asset turnover
• A. 24% 0.1*4= 0.4
• B. 40%
• C. 60% B
• D. 120%
• E. All
• F. None
74) Last year a small-firm had sales of Birr 205,000, assets of Birr 127,500, a
profit margin of 5.3%, and an equity multiplier of 12.
The finance manager believes that the company could reduce its assets by Birr
21,000 without affecting its profit margin.
Had reduced its assets in this amount, and had the debt ratio, sales, and profit
margin remained constant, by how much would the ROE have changed?
When asset = 127,500
A. 2.22%
ROE = Net Profits/Equity Capital
ROE = PM * AT  EM = 0.053* 1.6078 *12 = 0.1023 Or 10.23%
B. 2.02% AT = Sale/ Asset = 205,000/ 127,500 = 1.6078
Assets reduced by $21,000 No effect in sales and cost
B Assets = 127,500 - 21,000 = 106,500
C. 1.81% When asset = 106,500
ROE = PM * AT  EM = 0.053*1.9248*12 = 0.1224 or 12.24%
AT = Sale/ Asset = 205,000/ 106,500 = 1.9248
D. 2.44% So, 12.24 – 10.23 = 2.02 %
What is Time Value?
 We say that money has a time value because that
money can be invested with the expectation of
earning a positive rate of return
 A birr that you have today is worth more than the
promise or expectation that you will receive a birr
in the future.
 That is because today’s Birr can be invested so
that we have more than one Birr tomorrow
 A single sum of money or a series of equal, evenly-
spaced payments or receipts promised in the future
can be converted to an equivalent value today.
 Conversely, you can determine the value to which a
single sum or a series of future payments will grow 14
The Terminology of Time Value

 (PV) Present Value - An amount of money today, or the

current value of a future cash flow
 (FV) Future Value - An amount of money at some future time
period
 (n) Period - A length of time (often a year, but can be a
month, week, day, hour, etc.)
 (i )Interest Rate - The compensation paid to a lender (or
saver) for the use of funds expressed as a percentage for a
period (normally expressed as an annual rate)

FV= PV(1+I)
14
 Market Interest rate is
composed of
 The Real Rate of Interest compensates
lenders for postponing their own spending
during the term of the loan.
 An Inflation Premium to offset the
possibility that inflation may erode the value
of the money during the term of the loan.
 Various Risk Premiums to compensate the
lender for risky loans such as those that are:
 Unsecured
 illiquid loans that the lender may not be able
to readily resell. 14
 Type of interest
Simple interest is computed only on
the original amount borrowed.
Simple Interest = p * i * n
where:
p = principal (original amount borrowed or loaned)
i = interest rate for one period
n = number of periods
Example 1: You borrow $10,000 for 3 years at 5%
simple annual interest.
Interest = p x i x n = 10,000 x 0.05 x 3
= 1,500
Example 2: You borrow $10,000 for 60 days at 5%
simple interest per year (assume a 365 day year).
Interest = p xi x n = 10,000 x 0.05 x (60/365) =
82.1917
14
 Compound Interest
Compound interest is calculated each period on the
original amount borrowed plus all unpaid interest
accumulated to date.
 The interest earned in each period is added to the
principal of the previous period to become the principal
for the next period.
 The reason for the increase is that each year you are
earning interest on the interest that was earned in
previous years in addition to the interest on the original
principle amount
Example
You borrow $10,000 for three years at 5% annual interest
compounded annually:
interest year 1 = p x i x n = 10,000 x 0.05 x 1 = 500
interest year 2 = (p2 = p1 + i1) x i x n = (10,000 + 500) x 0.05 x 1 = 14
Annuities
 An annuity is a series of nominally equal payments
equally spaced in time
 The payments or receipts occur at the end of each
period for an ordinary annuity while they occur at
the beginning of each period for an annuity due.
 Annuities are very common:
• Rent
• Mortgage payments
• Car payment
• Pension income
 The timeline shows an example of a 5-year, $100
annuity 100 100 100 100 100

0 1 2 3 4 5 14
 Present Value of an Ordinary
Annuity (cont.)
 Actually, there is no need to take the
present value of each cash flow
separately
 We can use a closed-form of the PVA
 1 1 
N
Pmt t  1  i N

 1  i
PVA 
t1
t
 Pmt 
 i


 

equation instead:

 1 1 
N
Pmt t  1  i N

 1  i
PVA 
t1
t
 Pmt 
 i


 

Annuity due
* 1+i
PV =
15
 The Future Value of an Ordinary Annuity
(cont.)
 Just as we did for the PVA equation, we
could instead use a closed-form of the
FVA equation:
N
 1  i
N
 1
 Pmt 1  i
N t
FVA  t  Pmt  
 i 
t1  

N
 1  i
N
 1
 Pmt 1  i
N t
FVA  t  Pmt  
 i 
t1  

Annuity due
* 1+i
FV =
15
75) You want to go to USA 5 years from now for your MSc degree, and
you can save Birr 3,100 per year, beginning one year from today.
You plan to deposit the funds in one of the commercial banks that you
think will pay 8.5% interest per year.
Under these conditions, how much would you have just after you make
the 5th deposit, 5 years from now?
FVA 
N

 Pmt t 1  i
N t

 Pmt 
1  i
N
 1

Ordinary Annuity
t1 
 i 


A. Birr 19,287
D
B. Birr 21,264

C. Birr 20,251

D. Birr 18,369 = 18,369

76) You own two annuities that will each pay Birr 500 a month for the next
12 years. One payment is received at beginning of each month while the
other is received at the end of each month. At a discount rate of 7.25%
compounded monthly what is difference in the present values of these
PVA 
N

t1
Pmt t
 1  i t
 1

 Pmt 


1
1  i 
i
N






PV of ordinarily
annuities? annuity 500 = 47996.69

A. Birr 308.00
PV of annuity due = PV ordinary annuity (1+i)
= 47996.69 [1+ (0.0725/12)]
B. Birr 265:42 = 48286.59

C. Birr 289.98 C difference in the present values of these annuities = 48286.59 -

47996.69
= 289.9

D. Bin 299.01
77) Your father invested a lump sum 26 years ago at 4.25
percent interest. Today, he gave you the proceeds of that
investment which totaled ETB 51,480.79.
How much did your father originally invest?
A. ETB 15,929.47
B. ETB 16,500.00
C. ETB 17,444.86 C
D. ETB 17,500.00
E. ETB 17,999.45
= 51480.79
(1+0.0425)
= 17,444.86
 What is
Capital Budgeting?
 The process of identifying, analyzing, and selecting
investment projects whose returns (cash flows) are
expected to extend beyond one year.
 Capital budgeting is the process of planning for purchases
of assets whose returns are expected to continue beyond
one year (beyond one operating period). A capital
expenditure is a cash outlay that is expected to generate a
flow of future cash benefits lasting longer than one year.
 Capital budgeting is a decision-making process for
investment in fixed assets.
 It involves large cash outlay at the outset and commits the
firm to a particular course of action over a relatively long
2-155 period.
 Types
Types of
of capital
capital budgeting
budgeting
decisions/long-term
decisions/long-term investments
investments

1. Revenue expansions investments

 Involve expansion of present operations or
 development of new product line are intended to
increase revenue
 Introducing a new product ( R& D department may
show the feasibility of a new product)

2-156
 Types
Types of
of capital
capital budgeting
budgeting
decisions/long-term
decisions/long-term investments
investments
2. Cost- reduction investments
 add no revenue to the firm
 Help reduce costs such as cost of materials, cost of labor, etc.
 are usually replacement decisions:-
Replacement of worn-out and damaged fixed assets.
Replacement of obsolete fixed asset
 Mechanization or automation of a process
 Modernizing a process
3. Non-Revenue generating and non-cost saving investments
Are intended to comply with government orders, labor agreements, or
insurance policy terms.

2-157
 The
The Capital
Capital Budgeting
Budgeting Process
Process

1. Generate investment proposals

2. Review and Analysis
3. Decision making
4. Implementation (Execution)
5. Follow up

2-158
 Capital Budgeting
Techniques
Non-Discounted methods (cash flow/traditional
methods: do not consider time value of money.
 Payback period/PBP/
 Accounting (Average) rate of Return
Discounted Methods: Consider time value of
money
 Net Present value method/NPV?
 Profitability Index/PI/
 Internal rate of return
2-159
 Payback Period (PBP)
The payback period is the number of years needed to recover the initial
investment of a project. It is the number of years required for an investment’s
cumulative cash flows to equal its net investment.

Decision rule: Based on the payback rule, an investment is acceptable if its

calculated payback period is less than some pre specified number of years,
maximum desired payback period.

When cash flow of an investment is in annuity form, payback period is computed

by dividing the net investment by the annuity.

2-160
 Payback Period (PBP)

2-161
 b) Accounting Rate of Return
The percentage rate of return expected on an
investment or asset, compared to the initial
investment's cost.
The accounting rate of return compares the average
after-tax profits with the average size of investment.

It is computed by dividing a project's expected average

net income by the average investment.

2-162
 b) Accounting Rate of Return

2-163
 2. Discounted Methods
 A) Net Present Value
 B) Internal Rate of Return
 C) Profitability Index

2-164
 a) Net Present Value (NPV)
NPV is the present value of an investment
project’s net cash flows minus the project’s
initial investment. The discount rate is the
opportunity cost of capital
For annuity
NPV = CF (1+r) –n -- I Invt
CF
CF1 CF2 CFn
NPV = + +...+ - I Invt
(1+k)1 (1+k)2 (1+k)n

2-165
 a) Net Present Value (NPV)

2-166
 b) Internal Rate of Return
(IRR)
IRR is the discount rate that equates the present value of
the future net cash flows from an investment project with
the project’s initial investment. I.e. NPV at IRR = 0
IRR is the actual rate of return that a project earns when
profits and the time value of money are taken into
account.
Note that the IRR is stated as a percentage return.

CF1 CF2 CFn

IINVt = + +...+
(1+IRR) (1+IRR)2
1
(1+IRR)n

2-167
 b) Internal Rate of Return
(IRR)

2-168
 Profitability Index (PI)
PI is the ratio of the present value of a project’s
future net cash flows to the project’s initial
investment.
CF1 CF2 CFn
PI = + +...+ IInVT
(1+k) (1+k)
1 2
(1+k)n

PI = PV
Intial I

2-169
 Profitability Index (PI)

2-170
78) Feb 7, 2023 — Project B requires an investment of birr 750000 which will
give a return of first year birr 250000, 2nd year through fourth year birr
300000, and fifth year birr 100000. if RRR 12%
• WHAT IS THE NPV?

A)116,561.96
B)866,561.96
C)534331.23
D)324,533.20
A
 79) Assume you invested 70,000 in project A with 13% discount
rate , the project will have the following cash flow for next six year

What is the Pay back period and NPV of

the project A ?
A)3.5 Year and 11770
B)3.66 Year and 1768.98
C)2.66 year and 12770
PBP = 3 Year+ 10000
D)3 year and -11770 15000
PBP = 3.66 Year

- 70000 = 1768.98
NPV =
80) Your firm is considering investing in one of two mutually exclusive projects.
Project A requires an initial outlay of birr 3,500 with expected future cash flows of Birr
2,000 per year for the next three years.
Project B requires an initial outlay of birr 2,500 with expected future cash flows of Birr
1,500 per year for the next two years. The appropriate discount rate for your fam is
12% .
Assuming both projects can be replaced with a similar investment at the end of their
respective lives, compute the NPV of the two chain cycle for Project A and three chain
cycle for Project B Project A Project B
Cash outflows -3500 -2500
A. Birr 3.528 and Birr 136
C Cash inflows: 2000 1500
B. Birr 5,000 and Birr 1,500 2000 -1000 (1500)
-1500 (2000) 1500
C. Birr 2.232 and Birr 85 2000 -1000 (1500)
2000 1500
D. Birr 2,865 and Bim 94 2000 1500
NPV 2,232 85
• Your firm is considering investing in one of two mutually exclusive projects.
• Project A requires an initial outlay of $2,800 with expected future cash flows
of $1,000 per year for the next three years.
• Project B requires an initial outlay of $5,500 with expected future cash flows
of $3,000 per year for the next two years.
• The appropriate discount rate for your firm is 12% and it is not subject to
capital rationing.
• Assuming both projects can be replaced with a similar investment at the end
of their respective lives, compute the NPV of the two chain cycle for Project A
and three chain cycle for Project B.
• A) (681.58) and (1,045.69)
• B) 681.58 And 1045.69
• C) 618.58 and 1054.69
• D) (618.8) and 1054.69)
81) Which of the following is correct?

A. Declaration of all types of dividend reduces cash balance.

B. As compared to other form of businesses it is difficult to raise
funds in share companies.
C. Shareholders equity account is credited by authorized shares
multiplied by par value.
D. Dividend payable is recorded on the date of declaration of
dividend.
D
82) Which one of the following would tend to favor a low-
dividend pay-out?

A. Elimination of the tax deferral on capital gains

B. Investors' desire for a high-dividend yield

C. Higher tax rates on capital gains than on dividend income

D. High flotation cost for equity issues D

83) High Dividend may increase stock values due
to all of the following reasons except:
A. higher dividends allow companies to increase their
proportion of external equity financing
B. dividends are used as a tool to minimize agency
costs
C. higher dividends are used to signal higher
expected future earnings
D. dividends are more certain than capital gains
Paying higher dividends will decrease the
cash available to firm. It will not help in
A
anyway to firm to increase external equity
84) Which one of the following is NOT the duty of the Board
of Directors of a Share Company?

A. Controlling the day to day activities of the operations

B. Authorizing contracts & setting executive salaries

C. Declaration of dividend
A
D. Arranging major loans with banks
85) All of the following are likely to result in a lower dividend, other things
the same, Except:

• A. Statutory restrictions
D
• B. Liquidity constraints

• C. Debt covenants

• D. Highly diverse ownership

86) A Company is planning its operations the coming year, and the CEO wants you to the firm's

additional funds needed (AFN). The firm is operating at full capacity. Data for use in the forecast are

shown below. However, the CEO is concerned about the impact of a change in the pay-out ratio from

the 10% that was used in the past to 50%, which the firms investment bankers have recommended.

Based on the AFN equation, by how much would the AFN for the coming year change If the Company

increased the pay-out from 10% to the new and higher level? All Birrs are in millions
Last year's sales (S) Birr 300.0 Last year's accounts payable Birr 50.0
Sales growth rate (g) 40% Last year's notes payable Br 15.0
Last year's total assets (A) Birr 500.0 Last year's accruals Birr 20.0
Last year's profit margin (PM) 20.0% Initial pay out ratio 10%

A. Birr 319 B
B. Bir 33.6
C. Bin 35.3
D. Birr 37.0
 AFN = Change in Asset – Change in liability – change in retained earning
For payout ratio = 10%:
Change in Asset = 500*0.4=200
Change in liability = (50+20)*0.4= 28
change in retained earning
Increase in Retained earnings = forecasted sale * PM * b
= (300*1.4) * 20%*(1-0.1) = 75.6

AFN = 200 – 28 – 75.6 = 96.4 million

• For payout ratio = 50%:
Increase in Retained earnings = forecasted sale * PM * b
• (300*1.4) * 20%*(1-0.5) = 42
AFN = 200 – 28 – 42 =130 million
•
AFN change = 130 - 96.4 = 33.6
87) Clayton Industries is planning its operations for next year, and Ronnie
Clayton, the CEO, wants you to forecast the firm's additional funds needed
(AFN). The firm is operating at full capacity. Data for use in your forecast are
shown below. Based on the AFN equation, what is the AFN for the coming
year? All Birrs are in millions.
Last year's sales (S) Birr 350.0 Last year's accounts payable Birr 40.0
Sales growth rate (g) 30% Last year's notes payable Br 50.0
Last year's total assets (A) Birr 500.0 Last year's accruals Birr 30.0
Last year's profit margin (PM) AFN
5.0%= Change inInitial
Assetpay out ratio
– Change 60% – change in RE
in liability
For payout ratio = 60%:
Change in Asset = 500*0.3=150
A. Birr 102.8
D Change in liability = (40+30)*0.3= 21
B. Bir 108.2 change in retained earning
C. Bir 113.9 Increase in Retained earnings = forecasted sale * PM * b
D. Birr 119.9 = (350*1.3) * 5%*(1-0.6) = 9.1
AFN = 150 – 21 – 9.1 = 119.9 million
 2.1. Plant Assets
Plant Assets are resources that have
 physical substance (a definite size and
shape),
 are used in the operations of a business,
 are not intended for sale to customers,
 are expected to provide service to the
company for a number of years.
Referred to as Property, Plant, and
Equipment; Plant and Equipment; and
Fixed Assets.
 2.2. The Initial Cost of Plant Assets
The historical cost principle requires that
companies record plant assets at cost.
Cost consists of all expenditures necessary to
acquire an asset and make it ready for its
intended use.
 2.3. Depreciation
Process of allocating the cost of a plant asset
to expense over its useful (service) life in a
rational and systematic manner.
 Process of cost allocation, not asset
valuation.
 Applies to land improvements, buildings,
and equipment, not land.
 Depreciable, because the revenue-
producing ability of asset will decline over
 Causes of Depreciation

•The two major causes of depreciation are physical

deterioration & obsolescence.
•a. Physical Deterioration – occurs from wear & tear
while in use as well as from the action of the weather
(exposure to sun, wind, and other climatic factors)
•b. Obsolescence (Function Depreciation) - is the process
of becoming out of date before the assets physically wears
out.
 Factors In Computing
Depreciation
Illustration 9-6 Three Factors in Computing Depreciation.

• HELPFUL HINT
Depreciation expense is reported on
the I/S. Accumulated depreciation is
reported on the SoFP as a deduction
from plant assets.
 2.6. Plant Assets Disposals
Companies dispose of plant assets in three ways: Sale,
Retirement, or Exchange.
Illustration 9-19 Methods of Plant Asset Disposal

Record depreciation up to the date of disposal.

Eliminate asset by (1) debiting Accumulated Depreciation,
and (2) crediting the asset account.
 2.8. Extractable Natural Resources

Natural resources is a resource existing

naturally, not constructed by humans.
It consist of standing timber and resources
extracted from the ground, such as oil, gas, and
minerals.
IFRS defines extractive industries as those
businesses involved in finding and removing
natural resources located in or near the earth’s
crust.
 2.9. Intangible Assets
Intangible assets are rights, privileges, and
competitive advantages that result from ownership of
long-lived assets that do not possess physical
substance.
Limited life or indefinite life.
Common types of intangibles:

  Goodwill
Patents
  Franchises
Copyrights
  Leases
Trademarks
 Trade Names
88) Which one of the following statements is FALSE about
property plant and equipment (PPE)?

A. Are acquired for use but not for sale under no normal course
of business

B. Can provide service for more than a year period

C. All items of PPE have unlimited life

C
D. They are tangible in nature
89) An entity imported machinery to install in its new factory premises before
year-end. However, due to circumstances beyond its control, the machinery
was delayed by a few months but reached the factory premises before year-
end.
While this was happening, the entity learned from the bank that it was being
charged interest on the loan it had taken to fund the cost of the machinery.

What is the proper treatment of freight and interest expense?

A. Interest may be capitalized but freight should be expensed.
B. Both expenses should be expensed,
C. Freight charges should be capitalized but interest cannot be capitalized
under these circumstances
D. Both expenses should be capitalized.

C
• 90) On February 1, 2007, Morgan Corporation purchased a parcel of land as a
factory site for $200,000. An old building on the property was demolished, and
construction began on a new building which was completed on November 1,
2007. Costs incurred during this period are listed below:
• Demolition of old building $20,000
• Architect's fees 35,000
• Legal fees for title investigation and purchase contract 5,000
Construction costs 1,090,000
• (Salvaged materials resulting from demolition were sold for $10,000.)
• Morgan should record the cost of the land and new building, respectively, as
• a. $225,000 and $1,115,000. D Land cost ……………………Building cost
200,000 1,090,000
• b. $210,000 and $1,130,000. + 20,000 + 35,000
+ 5000 = 1,125,000
• c. $210,000 and $1,125,000. - 10,000
= 215,000
• d. $215,000 and $1,125,000.
91) After using equipment for five years, its major part that is believed to
increase life by 3 years is changed at a cost of Br. 30,000.
Which of the following is a correct about the effect of this cost?

• A. Increasing period costs by Br. 30,000

• B. Increasing revenue expenditure by Br 30,000

• C. Increasing general expense by Br. 30,000

D
• D. Increasing carrying value of the asset by Br. 30,000
92) ABC Company purchased a piece of equipment on January 1, 2012. The
equipment cost Birr 60,000 and has an estimated life of 8 years and a
salvage value of Birr 8,000.
What was the depreciation expense for the asset for 2013 under the
double-declining-balance method

Rate = (1/n ) * 2 = (1/8) *2 = 0.25

• A. Birr 6,562
B. Book value rate dep Ex Acc Dep exp E book value
60,000 0.25 15,000 15,000 45000
• B. Birr 15,000 45000 0.25 11250 26,250 33750

• C. Birr 11,250
C
• D. Birr 6.500
93) Hope Bank purchased a Special Copier machine. The machine, costs Birr 340,000,
and was estimated to have useful life of 10 years.
The estimated residual value is Birr 40,000. After two years of service it became
evident that the copier machine's total useful life is 7 years instead of 10 years.
Depreciation was recorded for two years based on straight line method. There is no
change on estimated residual value. Based on this information, what is the new annual
depreciation charge on the basis of the revised estimated useful life?
Original depreciation expense = [(340,000 − 40,000) ÷ 10] = 30,000
A. Birr 52,000 Accumulated depreciation after 2 years = 2 × 30,000 = 60,000
Book value = 340,000 − 60,000 = 280,000
B. Birr 48,000 Book value after 2 years of depreciation 280,000
Less: New salvage value 40000
C. Birr 42,500 B Depreciable cost 240,000
Remaining useful life 5 years
D. Bir 30,000 Revised annual depreciation (280,000 ÷ 5) 48,000
94) Yene Company purchased land containing an estimated
1,000,000 tons of ore for a cost of Birr 10,500,000. The land
without the ore is estimated to be worth Bir 500,000.
During its first year of operation, the company mined and sold
300,000 tons of ore.
What is the amount of depletion expense that Yene Company
should record for the year? Depletion Expense = Cost – SV
Estimated life
D 10,000,000 – 0
1,000,000
A. Birr 7,000,000 10 birr/ton
300,000 * 10 = 3,000,000
B. Birr 3,150,000 Depletion Expense ….. 3,000,00
C. Birr 10,000,000 Acc Depletion expense ….3,000,000

D. Birr 3.000.000
Q95) On April 1, 2001 La Presa Company sells some equipment for $18,000.
The original cost was $50,000, the estimated salvage value was $8,000, and
the expected useful life was 6 years. On December 31, 2000 the Accumulated
Depreciation account had a balance of $29,400.
The gain or loss on the sale was: (SL depreciation method )
a) $2,600 gain Dec 31 2000 Acc Dep Exp = 29400

b) $300 gain Assets slod on April 1 2001

c) $850 loss Cost – salvage = 50000-8000 = 7000

d) $5,400 gain Estimated life 6

7000/12= 583.33 so 3*583.33= 1750

April 1 2001 Acc Dep Exp = 1750+29400= 31150

Book value = 50000- 31150= 18850
Process value = 18000
So PV < BV BY 850

c
96) Which of the following intangible assets could not be
sold by a business to raise needed cash for a capital project?

A. Copyright.

B. Trade name.

C. Patent.
D
D. Goodwill.
97) At the beginning of the year, a company purchases a patent for Birr 2,400,000. The

remaining legal life of the patent is 12 years but management estimates that the patent will

generate additional revenue for the next 16 years because there are currently no known

competitors.

At the end of the first year, management calculates straight-line amortization to be Birr

150,000 Which of the following statements is correct?

A. Management's calculation is correct.

B. D
Management should not amortize the asset until its useful life becomes more evident.

C. Management should amortize the asset over 20 years.

D. Management should amortize the asset over 12 years

99) Which of the following is a reason why a company
would expand through a combination, rather than by
building new facilities?

a. A combination might provide cost advantages.

b. A combination might provide fewer operating delays.
c. A combination might provide easier access to
intangible assets.
d. All of the above are possible reasons that a company
might choose a combination.
D
 Tactics for Defense Used in Hostile
Takeovers
• Pac-man Defense: A threat to undertake a hostile takeover of the prospective
combinor.
• White Knight: A search for a candidate to be the combinor in a friendly takeover.
• Scorched Earth: The disposal, by sale or by spin-off to stockholders, of one or
more profitable business segments.
• Shark Repellent: An acquisition of substantial amts of outstanding C/S for the treasury
or for retirement, or the incurring of substantial LTD in exchange for outstanding
common stock.
• Poison Pill: An amendment of the articles of incorporation or bylaws to make it more
difficult to obtain s/holder approval for a takeover.
• Green Mail: An acquisition of common stock presently owned by the prospective
combinor at a price substantially in excess of the prospective combinor’s cost, with the
stock thus acquired placed in the treasury or retired.
202
The defense tactic that involves purchasing shares held by the
would-be acquiring company at a price substantially in excess
of their fair value is called
• a. poison pill.
• b. pac-man defense.
• c. greenmail.
• d. white knight.
C
100) In a Statutory merger, which of the following will
occur?
a. A merger occurs when one corporation takes over the
operations of another business entity, and the acquired entity
is dissolved.
b. None of the business entities will be dissolved.
c. The acquired assets will be recorded at book value by
the acquiring entity.
d. None of the above is correct.
A
101) According to the acquisition method of accounting for business
combinations, costs paid to attorneys and accountants for services in
arranging a merger should be:

A. Capitalized as part of the overall fair value acquired in the merger.

B. Recorded as an expense in the period the merger takes place.

C. Included in recognized goodwill.

B
D. Written off over a 5-year maximum useful life.
102) Assume that two companies wish to engage in a Business Combination
involving a share exchange. Once the share exchange is consummated,
each shareholder group will have an equal number of voting shares.
Which of the following statement best describes the course of action
that must be taken under these circumstances?

A. The Boards of Directors of both companies must enter into discussions to agree
on which party will be the acquirer
B. No acquirer can be identified since no shareholder group has majority voting
control so the share exchange must be annulled...
C. Other factors must be examined to determine which shareholder group is more
dominant
D. The company with the largest net assets (at fair market value) is deemed to be
the acquirer.
C
103) The "excess of the acquirer's interest in the net fair value of
acquiree's identifiable assets, liabilities, and contingent liabilities
over cost" (formerly known as negative goodwill) should be:

A. Carried as a capital reserve indefinitely.

B. Recognized in retained earnings.
C. Recognized immediately in profit or loss.
D. Amortized over the life of the assets acquired.
C
 104)

Assuming that Parent Inc. acquires 100% of Sub Inc. on August 1, 2022 for cash of Birr 135,000, what would be the amount of
goodwill or (a gain from bargain purchase or negative goodwill) appearing on the Consolidated financial statements on the date
of acquisition if the identifiable net assets (INA) or partial goodwill method were used?
Goodwill, IF Consideration payment > NA of the Acquiree
A. Birr 2.000
B. (Birr 2.000)
B gain from bargain purchase IF Consideration payment < NA of the Acquiree

C. Birr 7,000 NA = FV Asset – FV Liability = (36000+40000+27000+93000+15000) - (50000+24000)

D. (Birr 7.000) = 211000 -74000 = 137000
gain from bargain purchase 135000 < 137000 = 2000
105)

Assuming that Parent Inc acquires 80% of Sub Inc on August 1, 2022 for cash of $180,000, what would be the amount of
goodwill appearing on the Consolidated Balance Sheet on the date of acquisition if the proportionate consolidation
method were used?
A) 72,000 FV Net Asset = 137,000
B) 88,000
C) 70,400 C Consideration transfer : 180,000 + (137000*0.2) =207400
Goodwill = 207400 -137000= 70,400
D) Nil
 106) On January 1, 20x1, ABC Co. acquired 75% interest in XYZ, Inc. for Birr
2,500,000 cash. ABC Co. incurred transaction costs of birr 250,000 for legal,
accounting and consultancy fees in negotiating the business combination.
ABC Co. elected to measure NCI at the NCI’s proportionate share in XYZ, Inc.’s
identifiable net assets.
• The carrying amounts and fair values of XYZ’s assets and liabilities at the
acquisition date were as follows:
How much is the goodwill
(gain on a bargain
purchase)? FV of Net Asset =
3,950,000- 1000,000 = 2,950,000
a.140,000
NCI= 2950000*0.25= 737,500
b.287,500
c.278,500 Consideration transfer
2500,000+737500 =3237,500
d.
B 264,500 3,237,500 > 2,950,000 by 287,500
Goodwill = 287500
107) On November 30, year 1, Star, Inc. purchased for cash at Birr 15 per share all 250,000 shares of
the outstanding common stock of Green Co.

At November 30, year 1, Green's statement of financial position showed a carrying amount of net
assets of Bir 3,000,000. At that date, the fair value of Green's property, plant and equipment
exceeded its carrying amount by Bim 400,000 in its November 30, year 1 consolidated statement of
financial position, what amount should Star report as goodwill?
15*250,000 = 3,750,000 Consideration transfer
A. Birr 350,000
Fair value Net asset= 3,000,000+ 400,000 = 3,400,000
B. Birr 400,000
A Goodwill = 3,750,000 - 3,400,000 = 350,000
C. Birr 0

D. Birr 750,000
108) Which of the following is the best theoretical justification for
consolidated financial statements?

A. In form the companies are one entity; in substance they are

separate.

B. In form and substance, the companies are separate.

C. In form and substance, the companies are one entity.

D. In form the companies are separate, in substance they one entity

D
109) Which of the following adjustments do not occur in the consolidating
process?

A. Allocations of difference between implied and book values.

B. Elimination of the investment account

C. Elimination of intra company balances D

D. Elimination of parents retained earnings
110) A Corporation had net income of Birr 50,000 in 2019 and Birr
60,000 in 2020, excluding any income from its investment in B
Company. B Company had net income of Birr 30,000 in 2019 and Birr
40,000 in 2020.
On January 1, 2020, A Corporation acquired all of the outstanding
common shares of B Company for a cash payment of Birr 300,000.
Assume that there was no acquisition differential on this business
combination.
What net income would A Corporation report for 2020 in its
comparative consolidated financial statements at the end of
2020?
B
A. Birr 40,000
B. Birr 100,000
C. Birr 80,000
D. Birr 60,000
111) On March 31, 2022, Meade Company merged into Steele Corporation.
The separate income statements of the two companies for the fiscal year ended March
31, 2022, prior to any journal entries necessary to record the business combination on
that date, showed the following net income: Steele, Birr 500,000; Meade, Birr 100,000.
Steele's post- merger income statement for the year ended March 31, 2022, shows net
income in the amount of

A. Birr 600,000

B. Birr 500,000

C. Birr 470,000

D. Birr 570,000
B
112) Which of the following transactions involving the
issuance of shares does not come within the definition
of a share based payment?
A. Employee share option plans.
B. Employee share purchase plans.
C. Share-based payment relating to an acquisition of a
subsidiary. The following transactions are not in the scope of
IFRS 2:
D. Share appreciation rights.⦿ (a) transactions with counterparties (employees)
acting as shareholders rather than as suppliers
of goods or services;
C ⦿ (b) transactions in which a share-based payment
is made in exchange for control of a business (I,e.,
business combination);
⦿ (c) commodity-based derivative contracts that may
be settled in shares or rights to shares.
113) Entity X has entered into a contract with entity Y. Y will provide
a range of services to X. The payment for those services will be in
cash and based upon the price of the X’s ordinary shares on
completion of the contract.
In accordance with IFRS 2, what type of share-based payment
transaction does this represent?
a. Asset settled share-based payment transactions

b. Liability settled share-based payment transactions

c. Cash settled share-based payment transactions C

d. Equity settled share-based payment transactions

114) An entity grants 1,000 share options to each of its five directors on
January 1, 2015. The options vest on June 30, 2018. The fair value of each
option on July 1, 2014, is Birr 5, and it is anticipated that all of the share
options will vest on December 31, 2018.
What will be the accounting entry in the financial statements for the year
ended December 31, 2015? 1000*5*5*1/4 = 6250

A. Increase equity Birr 6,250, increase in expense statement of comprehensive

income Birr 6,250.
B. Increase equity Birr 5,000, increase in expense statement of comprehensive
income Birr 5,000
A
C. Increase equity Birr 25,000, increase in expense statement of comprehensive
income Birr 25,000.
D. Increase equity zero, increase in expense statement of comprehensive income
zero.
115) Elizabeth, a public limited company, has granted 100 share
appreciation rights to each of its 1,000 employees in January 2014. 90% of
the awards will vest on December 31, 2016. The fair value of each share
appreciation right on December 31, 2014, is Birr10.
What is the fair value of the liability to be recorded in the financial
statements for the year ended December 31, 2014?

A. Birr 10 million (100 × 1000 × 90% × Birr 10

× 1/3)
300,000
B. Birr 90,000 C
C. Birr 300,000
• 116) RR Company granted 10,000 share options to each of its
five directors on January 1,2015. The options vest on December
31 2018. The fair value of each option on January 1, 2015 is
Birr 50 and it is anticipated that all of the share options will
vest on December 31 2018.
• What amount should be reported as increase in expense and
equity for the year ended December 31, 2015?
A. 750,000 FV of share options (10,000 * 5 directors * 50)
2,500,000
B. 500,000 Compensation expense (2,500,00/4) 625,000
Salaries 625,000
C. 625,000 Share options outstanding 625,000
D. 125,000
C
• 117. On 1 June 2011 Bridget Ltd acquired an item of plant for an agreed
consideration of 1,000 of its own shares.
• The plant was received on 1 June 2011 and the obligation to transfer shares
was to be settled on 1 August 2011. The fair value of the plant was$10 000 on
1 June 2011. Bridget’s share price was $8 on 1 June 2011 and $9 on 30 June
2011.
• In accordance with IFRS 2 Share-based Payment Bridget should
• A. remeasure the equity to $9000 on 30 June 2011.
• B. initially recognize the plant and equity at $8000 on 1 June 2011.
• C. make no entry in relation to the transaction until 1 August 2011.
• D. initially recognize the plant and equity at $10 000 on 1 June 2011.
• E. All D
• F. None
118) Theinvestment category for which
the investor's "positive intent and
ability to hold" is important is
A. Securities reported under the equity method.

B. Trading securities.

C. Securities available-for-sale. D

D. Securities classified as held-to-maturity

119) The amortized cost method of accounting for
investments is not applicable to:

A. Trading debt instruments.

B. Trading equity instruments.

C. Held-to-maturity debt instruments. B

D. Available-for-sale debt instruments.

• 120) Greene Corporation pays Br.500,000 to acquire 40% of the voting stock
of Universal Technologies, Inc. on May 5, 2019. This investment will be
classified as a(n) ________.
• A. trading equity investment
• B. available-for-sale equity investment
• C. significant influence equity investment
• D. held-to-maturity equity investment
• E. All
C
• F. None
• 121) In a bond amortization table for bonds issued at discount.
• A. the interest expense is less than interest payment at the end of each period
• B. the interest expense is greater than interest payment at the end of each
period
• C. the carrying amount the bonds declines eventually to face value
• D. the reduction in the discount is less with each successive interest payment
• E. All
• F. None B
122) Refer to the following lease amortization schedule. The five payments are made annually
starting with the beginning of the lease. A Birr 2.000 purchase option is reasonably certain to be
exercised at the end of the five-year leave. The asset has an expected economic life of eight years.

What would be the amount of interest expense recorded with payment 5?

A. Birr 2,000 Interest Rate= Effective Interest/ Outstanding Balance of
B. Birr 7,107 Previous Month
C. Birr 1,107 2660/ 26600 = 10.%
D. Birr 893 D Interest payment = Outstanding Amount X Interest Rate
= 8925*0.10
123) Refer to the following lease amortization schedule. The five payments
are made annually starting with the inception of the lease. A $2,000 bargain
purchase option is exercisable at the end of the five-year lease. The asset has
an expected economic life of eight years.

What is the outstanding balance after payment 5 ?

A. Birr 3818
Interest Rate= Effective Interest/ Outstanding Balance of
B. Birr 1818 Previous Month
C. Birr 2182 2660/ 26600 = 10%
D. Birr 2000 Interest payment = Outstanding Amount X Interest Rate
B = 8925*0.10 = 893
Decrease in balance = 8000 – 893 = 7107
124) Which of the following does not define
investment property?
A. Property held to earn rentals.
B. Property held for capital appreciation.
C. Property used in the production or supply of
goods or services.
D. A and C.

C
Q125) If a property is partly an investment property,
and partly owner-occupied, the company should
account for the property:
A. As owner-occupied.
B. Each portion should be accounted for separately.
C. As investment property.
D. As inventory

B
126) If the investment property is measured using the fair value model, a
gain arising from a change in the fair value of an investment property must
be:

• A. Recognized as other comprehensive income

• B. Recognized in the calculation of profit or loss

B
• C. Ignored

• D. Credit to a revaluation reserve

127) Accounts and notes receivable are reported in
the current assets section of the statement of
financial position

A. Invoice cost
B
B. Net realizable value

C. Lower-of-cost-or-net realizable value

D. Net book value

128) South Ltd. uses allowance method of accounting for uncollectible.
Analysis of long outstanding balance of Br 500,000 expected from customer Z
reveals the amount will not be collected because of disappearance of the
customer following bankruptcy.
The correct journal entry is
A. Debit Bad debt expense and credit Allowance for uncollectible by Br 500,000
B. Debit Allowance for uncollectible and credit Accounts Receivable by Br
500,000
C. Debit Bad debt expense and credit Accounts Receivable by Br 500,000
D. Debit Allowance for uncollectible and credit Bad debt expense by Br 500,000
Bad debt expense ……….500,000
Allowance for uncollectable account ….500,000 B
Allowance for uncollectable account ….500,000
AR………………………………………….500,000
• 129). At the end of December 2022, Star Company’s management estimates the
uncollectible accounts expense to be 1% of net credit sales of $2,000,000. Identify
the correct journal entry to record the uncollectible accounts expense, assuming
the Allowance for Uncollectible Accounts has a credit balance of $5,000:
• A. Dr. Uncollectible accounts/bad debt expense…..20,000
Cr. Allowance for Uncollectible Accounts……20,000
• B. Dr. Uncollectible accounts/bad debt expense…..15,000.
Cr. Allowance for Uncollectible Accounts……15,000
• C. Dr. Uncollectible accounts/bad debt expense…..25,000
Cr. Allowance for Uncollectible Accounts……
25,000
• D. Dr. Uncollectible accounts/bad debt expense…..20,000
Cr. Accounts Receivable…………………………20,000
• E. All
• F. None
A
EXAMPLE:
• Transactions and events during the first year of operations of Bahir Dar Branch (for the year 2000)
are summarized below

1. Cash of Br 10,000 was forwarded to branch by the H.O.

2. Merchandise with a H.O cost of Birr 300,000, was shipped to Branch

3. Equipment was acquired by branch for Birr 4,000 to be carried in the H.O account records
(other PPEs for branches are acquired by the H.O).

4. The H.O shipped Equipments of Br 5,000 to B-Dar Branch.

5. Credit sales by branch Br250,000 to various organization the CGS was Br 175,000
Home Office Bahir Dar Branch

1. Investment in Bahir Dar branch. 10,000 1.Cash…………………….10,000

Cash……………..…………..10,000 Home Office…………….10,000

2. Investment in Bahir Dar branch… 300,000 2.Merchandise inventory……300,000

Merchandise Inventory………..300,000 Home office……………..300,000

3. Equipment: Bahir Dar branch….4,000 3. Home office…………….4,000

Investment In Bahir Dar Branch….4,000 Cash……………………4,000

4. Equipment :Bahir Dar Branch……5,000 4. No entry

Cash……………………..5,000

5. Trade A/R……………250,000

Sales………………………250,000

Cost of Goods Sold…..175,000

5.None Merchandise Inventory……..175,000

130) A journal entry debiting Cash in Transit and crediting
Investment in Branch is required for.

A. The home office to record the mailing of a check by the branch on

the last day of the accounting period.
B. The home office to record the mailing of a check to the branch
early in the accounting period.
C. The branch to record the mailing of a check to the home office on
the last day of the accounting period.
D. The branch to record the mailing of a check to the home office
early in the accounting period.
A
131) At the end of the year, after adjusting and closing entries,
the Overvaluation of Branch Inventory account on the home
office books will contain

A. The markup on the branch's ending inventory.

B. The markup on the branch's beginning inventory plus the

markup on this year's shipments to the branch.

C. The markup on the branch's ending inventory less the markup on

the branch's beginning inventory.
D. The unrealized profit on branch sales for the year.
A
132) The home office accounts for shipments of merchandise to the branch as
sales. The billed price reflects a mark-up equal to 40% of billed price. The branch
reported beginning and ending inventories at billed prices of Birr 80,000 and Birr
60,000, respectively.
Which of the following statements is FALSE?

A. Working paper elimination entries will reduce combined cost of goods sold by
Birr 8,000. D

B. Home office beginning retained earnings next year is overstated by Birr 32,000.

C. Unrealized intra-firm profit at the end of the year is Birr 24,000.

D. The Overvaluation of Branch Inventory account balance at the end of the year is
Birr 8,000.
133) In 2021, Cupid Construction Co. (CCC) began work on a two-year fixed price
contract project. CCC recognizes revenue over time according to percentage of
completion for this contract, and provides the following information (birr in millions)

• Accounts receivable, 12/31/2021 (from construction progress billings) Birr 75

• Actual construction costs incurred in 2021 270
• Cash collected on project during 2021 Birr 210
• Construction in progress 12/31/2021 Birr 414
• Estimated percentage of completion during 2021 60%
• How much cash remains to be collected by CCC on the project?
A. Birr 140 million
B. Birr 405 million
C. Birr 480 million
D. Cannot be determined from the given information.
Cash remains = Contract price - cash collected to date
Cash remains = 690 – 210 = 480
Construction in progress = Actual costs incurred + E.
Gross profit
E. Gross profit = 414 – 270 = 144
Total Gross profit = Contract price - Estimated total construction costs
Contract price = T GP + E.T.C = 240+450 = 690
Total Gross profit = Estimated GP/%GP = 144/0.6 = 240
Estimated total construction costs =
• Percentage completion to date = A. Cost / Total Estimated cost
= 60 % = 270
T. E.C
E.T.C= 270/0.6 = 450
134) In 2021, Cupid Construction Co. (CCC) began work on a two-year fixed price
contract project. CCC recognizes revenue over time according to percentage of
completion for this contract, and provides the following information (birr in millions)

• Accounts receivable, 12/31/2021 (from construction progress billings) Birr 75

• Actual construction costs incurred in 2021 270
• Cash collected on project during 2021 Birr 210
• Construction in progress 12/31/2021 Birr 414
• Estimated percentage of completion during 2021 60%
• What is the amount of gross profit recognized by CCC during the period ?
Construction in progress =
A. Birr 320 million B Actual costs incurred + Gross profit
B. Birr 144 million Recognized
C. Birr 96 million E. Gross profit = 414 – 270 = 144
D. Cannot be determined from the given information.
135) Export Company had a trade account receivable from a foreign customer
stated in the local currency of the foreign customer.
The trade account receivable for 900, 000 local currency units (LCU) had
been restated to $ 315,000 in Export's June 30, 2005, balance sheet. On July
26/2005, the account receivable was collected in full when the exchange rate
was LCU1= $ 0.33 (1/3.)
The journal entry that Export prepares to record the collection of this
trade account receivable include:
A. Credit to Foreign Currency Translation Adjustments, 15,000.
B. Debit to Foreign Currency Transaction Gains 15,000.
C. Credit to Trade Accounts Receivable 300,000
D. Debit to Cash, 300,000.
Cash 300,000
June 30) 315,000/900,000 = $0.35
Forex loss 15,000
D July 25) 1/3= $0.3333333
Accounts Receivable 315,000
(0.35-0.333333) * 900,000 = 15000 Loss
136) Slick Co. had a Swiss franc receivable resulting from exports to
Switzerland and a Mexican peso payable resulting from imports from Mexico.
Slick recorded foreign exchange gains related to both its franc receivable and
peso payable. How did the foreign currencies increase or decrease in Birr value
from the date of the transaction to the settlement date?
A
A. Increase Franc, Decrease Peso
The exporter is exposed to the risk that the foreign currency
might depreciate (decrease in value)
B. Increase Franc, Increase Peso The importer is exposed to the risk that the foreign currency
might appreciate (increase in price),

C. Decrease Franc Decrease Peso

D. Decrease Franc Increase Peso

137) On January 1, 2022, Star Ethiopian coffee exporter, shipped $120,000
worth of inventory to its main US distributor, with full payment of these goods
due by February 28, 2022. Star has a January 31 year end.
A list of significant dates and exchange rates is shown below.
Transaction Date: January 1, 2022 US $1 Birr 59.332
Year-End Date: January 31, 2022 US $1 Birr 59.384
Settlement Date: February 28, 2022 US $1- Birr 59.540.
The invoice price billed by Star was US $120.000. What is the amount of Star's
foreign exchange gain or loss at year-end?
A. Birr 6,240 loss AR ----(59.332*120,000) --- 7,119,840
Sale …………………………..7119840
B. Birr 24,960 gain AR (59.384-59.332)*120,000……6240
C. Bir 6,240 gain Gain on FX………………….6240
D. Nil foreign exchange gains or losses are deterred to settlement

C
 First Level: Basic Objective

OBJECTIVE
“To provide financial information about the reporting entity that is useful to
present and potential equity investors, lenders, and other creditors in making
decisions in their capacity as capital providers.”

 Provided by issuing general-purpose financial statements.

 Assumption is that users have reasonable knowledge of business and
financial accounting matters to understand the information.
 Second Level: Fundamental Concepts

Enhancing Qualities
Distinguish more-useful information from less-useful information.
 Second Level: Basic Elements

Elements of Financial Statements

 Asset: A present economic resource controlled by the entity as a result of past
events. (An economic resource is a right that has the potential to produce
economic benefits).
 Liability: A present obligation of the entity to transfer an economic resource as a
result of past events.
 Equity: The residual interest in the assets of the entity after deducting all its
liabilities. The elements of income and expenses are defined as follows.
 Income: Increases in assets, or decreases in liabilities, that result in increases in
equity, other than those relating to contributions from holders of equity claims.
 Expenses: Decreases in assets, or increases in liabilities, that result in decreases in
equity, other than those relating to distributions to holders of equity claims.
Third Level: Recognition, Measurement,
and Disclosure Concepts
These concepts explain how companies should recognize,
measure, and report financial elements and events.

Recognition, Measurement, and Disclosure Concepts

ASSUMPTIONS PRINCIPLES CONSTRAINTS
1. Economic entity 1. Measurement 1. Cost
2. Going concern 2. Revenue recognition
3. Monetary unit 3. Expense recognition
4. Periodicity 4. Full disclosure
5. Accrual

Illustration 1-10
Framework for
Financial Reporting
138) A Company issues its annual financial reports within one
month of the end of the year. This is an example of was
enhancing quality of accounting information?

A. Relevance

B. Verifiability

C. Timeliness C

D. Confirmatory value
139) According to the IASB Framework, the two criteria required for

incorporating items into the income statement or statement of financial

position are that:

C
A. It satisfies the criteria of capital maintenance.

B. It meets the requirements of comparability and consistency.

C. It meets the definition of an element and can be measured reliably.

D. It meets the definition of relevance and faithful representation

140) The tax base of an asset is the amount which is
attributable to that asset for tax purposes. If the tax base of
an asset is less than its carrying amount, this is an evidence
of:
C
A. A deductible temporary difference

B. A taxable permanent difference

C. A taxable temporary difference

141) All of the following are examples of
temporary book-tax differences except
A. Depreciation

B. Product warranty costs.

C. Payment of premiums for life insurance

D.Contingent liabilities
D
142) Ortiz Corporation, a manufacturer of household paints, is preparing annual
financial statements at December 31, 2022.
Because of a recently proven health hazard in one of its paints, the government has
clearly indicated its intention of having Ortiz recall all cans of this paint sold in the last
six months.
The management of Ortiz estimates that this recall would cost Birr 800,000. What
accounting recognition, if any, should be recorded this situation?

A. Operating expense of Birr 800,000 and liability of Birr 800,000.

B. No recognition.

C. Appropriation of retained earnings of Birr 800,000. D

143) A competitor has sued an entity for unauthorized use of its patented technology.
The amount that the entity may be required pay to the competitor if the competitor
succeeds in the lawsuit is determinable with reliability, and according to the legal counsel
it is less than probable (but more than remote) that an outflow of the resources would be
needed to meet the obligation. The entity that was sued should at year-end

A. Make no provision or disclosure and wait until the lawsuit is finally decided and then
expense the amount paid on settlement, if any.

B. Set aside as an appropriation, a contingency reserve, an amount based on the best

estimate of the possible ability

C. Recognize a provision for this possible obligation.

D. Make a disclosure of the possible obligation in the footnotes to the financial
statements
D
144) Company purchases a one-year insurance policy on
June 1 for Birr 5,520. The adjusting entry on December 31 is
A. debit Prepaid Insurance, Birr 5,520, and credit Cash, Birr
5,520
B. debit insurance Expense, Birr 2,760, and credit Prepaid
Insurance, Birr 2,760
C. debit Insurance Expense, Birr 3,220, and credit Prepaid
Insurance, Birr 3,220
D. debit Insurance Expense, Bin 2,300, and credit Prepaid
Insurance, Birr 2,300 Insurance Expense, Birr 3,220
Prepaid Insurance, Birr 3,220
C 5520/12 = 460 So 460*7 = 3220
145) If accrued Utility expense of Br 5,000 is not recorded,
which of the following is correct?

A. Expense will be overstated

B
B. Liability will be understated
Utility Expense ………….5000
Accrued payable ….5000
C. Owner's equity be will understated

D. Net income will be understated

146) ………………is the management of the biological
transformation and harvest of biological assets for sale or for
conversion into agricultural produce or into additional biological
assets.
•
a. Agricultural activity
•
b. Agricultural management
•
c. Biological transformation A
•
d. Biological management
147) Which of the following does define “bearer plant”?

A) A living plant that is used in the production or supply of agricultural

produce
B) A living plant that is expected to bear produce for more than one period
C) A living plant that has a remote likelihood of being sold as agricultural
produce, except for incidental scrap sales
D) A and C
E) All of the above
E
148) It Entity IQ had a plantation forest that is likely to be harvested and
sold in 30 years, in which way should the income be accounted for?

A. Income should be measured annually and reported using a fair value

that recognizes and measures biological growth.

B. The plantation forest should be valued every five years and the increase
in value should be shown in the statement of recognized gains and
losses.

C. No income should be reported until first harvest and sale in 30 years.

D. The eventual sale proceeds should be estimated and matched to the

profit and loss account over the 30- year period A
149) When agricultural produce is harvested, the harvest should
be accounted for by using IAS 2 Inventories, or another applicable
International Accounting Standard. For the purposes of that
Standard, cost at the date of harvest is deemed to be

A. Its fair value less estimated point-of-sale costs at point of

harvest.

B. The historical cost of the harvest. A

C. Market value

D. The historical cost less accumulated impairment losses

• 150) PS is a farmer and is concerned how to apply IAS 41, Agriculture on his
financial statements. Which of the following assets owned by PS is subject to
the standard?
• A. 3,000 liters of milk waiting for collection by the local milk processing
entity
• B. License from the government allowing to produce 2,500 liters of milk per
day
• C. 200 hectares of land on which the cows feed
• D. A head of 100 cows held for the production of milk
• E. All
• F. None
D
150) Which of the following is FALSE about public finance?

A. Public finance deals with the wants and the satisfaction of households
and firms.

B. Public finance is the study of income and the expenditure of the

government.

C. Fiscal operations and fiscal policies are integral part of public finance.

D. Public finance aims at maximizing social welfare or social benefit by

efficient use of public goods A
151) Public finance has to do with all of the following activities
of the government except
A. Stabilization activities
B. Allocation activities
C. Competition with private sector
C
D. Distribution activities
152) All of the following are characteristics of tax except:

A. Certain taxes are imposed to achieve specific objectives such as

reducing consumption of luxurious goods

B. tax is a legal collection that can be levied only by the federal

government not by any one else including regional government.

C. Tax is a compulsory contribution by the taxpayers to the

government.

D. For the payment of tax, there is no direct return to

B the taxpayers.
153) Aster is an employee in one of the government organization in Ethiopia. Her
monthly salary is Birr 4,000. During Tir 2015 she worked on Public holiday for 10 hours.
She has a position allowance of Birr 1000.
Aster is a member of the saving and credit association of the organization in which she
works and decided to save 10% of her salary. She is expected to work 160 hours per
month and she worked accordingly.
What is the amount of overtime related to Aster's payment?
Over time = Bs/Nwh * Rate * Hour
= 4000/160 * 2.5 * 10 = 625
A. Birr 950
D GE= 4000+1000+625 = 5625
Tax = 5625* 0.25 – 565 = 841.5
B. Birr 781.25
Pc= 4000*0.07= 280
Other Deduction = 4000*0.4= 400
C. Birr 500 Total deduction = 841.5+280+400= 1521.5

D. Birr 625 Net pay = 5625 - 1521.5 = 4103.5

154) Abebu is an employee in one of the factory owned by the
government in Ethiopia. Her monthly salary is Birr 2,600.
She has taxable allowance of Birr 300 and a non-taxable allowance
of Birr 200. She earned an overtime of Birr 100
What is the amount of tax deducted from Abebu's earning?

A. Birr 307.50 GE = 2600+300+200+100 = 3200

Taxable income = GE – non taxable income
B. Birr 247.50 A = 3200- 200 = 3000

0 – 600 0 0
C. Birr 277.50 600 -1650 0.1 60
1650-3200 0.15 142.5

(3000*0.15) – 142.5 = 307.5

D. Birr 300
155) Which of the following is not the role played by National Bank
of Ethiopia in the Ethiopian financial system?

A. National Bank of Ethiopia provide insurance to help ensure the

soundness of financial intermediaries
B. Regular on-site examinations to monitor whether the institution is
complying with capital requirements and restrictions on asset
holdings
C. Prints money
D. National Bank of Ethiopia restrict those who can set up a financial
intermediary A
155) Which of the following is not a revenue source for the
Regional Governments of Ethiopia

A. Profit and sales tax collected from individual traders.

B. Taxes collected on income from air, train and marine

transport activities.

C. Rural land use fee. B

D. Tax on income from inland water transportation.

156) Which of the following is not a legal requirement on
Category 'B' tax payers:

A. Use registered vouchers

B. Submit the Tax Declaration Form to the tax authority within

2 months from the end of the fair year

C. Submit Balance sheet and a profit & loss statement

D. Maintain accounting records C

 Deductible Expenses (Allowable Deductions)

Any direct costs and expenses of producing income is

deductible .

It includes:
Direct cost of manufacturing

Purchasing

Importations and such other similar costs.

Insurance Expense directly connected with the business

activity.

Promotional Expense

Commissions Expense

Payment to Holding or Parent Company

Salary Expense
Salary paid to employees

Salary paid to Management of the Company

Salary paid to children of business owners:
 If they possess the required
qualification, experience and skill for
the position.

Interest Expense – Shall not exceed Inter-Bank

Interest Rate + 2%:
To lending institutions recognized by the NBE

To foreign banks permitted to lend to

enterprises in Ethiopia
 Donations and Gift Expense.
 Conditions to be satisfied:
If the recipient of the donation is registered as welfare
organization with:
 Successful achievement,
 Transparent system and
 With accountability.

If the donation is made in response to emergency call by

the gov’t:
 To prevent sovereignty and integrity of the country
 To prevent man made or natural catastrophes, etc.

 If the donation is made to non-commercial (not for profit)

like educational and health institutions.
Note: The donation to be made shall not exceed 10% of

taxable income of a taxpayer at particular period.

Maintenance and Improvement Expense – 20% of
Depreciation Base at the end of the year. If expense
incurred is exceed 20% of DB , the excess will be
added to DB of category

Bad Debts Expense (Uncollectible Accounts Expense).

 Conditions to be met:
 If an amount corresponding to the bad debt was included in
the revenue during the year.
 If the debt is written off/cancelled from the book of the
taxpayer.
 If the debt is not recoverable in any case after taking legal
action.

Participation deduction (Deduction for Reinvestment of Profit)

Special Reserves for Finance Institutions – provisions
for NPLs

Transportation Allowance paid to Employees not

exceeding the limit 25% of basic salaries of the
employees or not more than 2,200 birr.

Retirement Benefits – less or equal to 15 or18% of BS

Representation Expense – 10% of BS

Trading Stock Disposed (Cost of Goods Sold) –

The cost of trading stock disposed during a

tax period is determined on the basis of the
Average Cost Method.
 Depreciation Expense (Article 22)

Method of Depreciation for Tax Purposes

Fine Art, Antiques, Jewelry, Trading Stock and Other
Business which are not subject to tear and wear shall not be
depreciated.

Buildings and constructions shall be

depreciated individually on a straight-line
basis at 5% (20 years).
Intangible assets shall be amortized
individually on a straight-line basis at
(10%)or (10 years) .
Computers, information systems, software

products and data storage equipment on

Pooling basis at (25% or 4 years).

All other business assets like vehicles,

machineries, earth moving machineries (loader,

damper, etc), furniture, equipments, etc shall

be depreciated on basis of Pooling at (20%) or

(5 years).
*******
 Non-Deductible Expenses
An increase in share capital of a company or the
basic capital of a registered partnership.

PC or PF > 18%

Declared dividends and paid-out profit shares.

Interest in excess of rate used b/n NBE &

commercial banks increased by 2%

Damages covered by insurance policy.

Punitive damages and penalties.

Representation expenses over and above 10% of

BS
 Personal consumption expenses.
 This again not deductible in case of FA report.

Example: If Br. 2,000 is registered as fuel

expense in the book of the business and from
this amount Br. 1,500 is incurred for business
truck and the remaining amount Br. 500 is for
owner’s automobile.

Entertainment expenses,
 But deductible in case of FA report.

Donation or gift to other entities exceeding 10%

TI
Expenditure for maintenance of other
private properties.

Losses not connected with activity of

the enterprise or extra ordinary losses.
 But this is deductible for financial
reporting purpose

Transportation allowance exceeding

25% of BS or Br. 2,200 which is so ever
the lower.
 Income Exemptions
Awards for adopted or suggested innovations and
cost saving measures/Techniques.
 But, for financial reporting purpose it shall be
added on revenue from formal business to
arrive at total revenue.

Public awards for outstanding performance.

Income specifically exempted from income tax by

the law.

The revenue obtained by the gov’t and NBE from

activities that are incidental to their operations.
157) Among the following, which one is a tax

deductible expense in the Ethiopian tax system

A. Insurance Expenses.
B. Damages covered by insurance policy or a contract
of indemnity, guarantee, or surety.
C. Depreciation expense on Buildings computed in line
with IFRS using the units of production method.
D. An expenditure of a capital nature.
A
158) Assume that the sales revenue of ABC Share Company is Birr 10,000,000 during Tax Year ended
Sene 30, 2014.
Cost of goods sold was Birr 4,000,000 (determined on the basis of the average cost method) and expenses
were Birr 1,000,000.
The operating expenses comprises of salary expense of Birr 270,000, store rent expense of Birr 100,000, a
5% depreciation expense on a not fully depreciated Building with a cost of Birr 4,000,000, a penalty of
Birr 40,000, an interest expense of Birr 190,000 on Birr 1,000,000 principal amount of loan where the
interest rate between National Bank of Ethiopia and Commercial Banks was 10% and a donation of Birr
200,000 to help its sister Company recover from the fire damage on its working infrastructures.
What is the amount of business tax liability of the Share Company?
Sale ------------------10,000,000 Sale ------------------10,000,000
CGS---------------------4,000,000 CGS---------------------4,000,000
A. Birr 1,629,000 GP-----------------------6,000,000
GP-----------------------6,000,000
B. Birr 1,593,000 Operating expense Operating expense 1,000,000
Salary expense ………270000 NI------------------------5,000,000
C Birr 1,500,000 Rent expense ………..100,000 +Penalty -----------------40,000
Dep Exp -----------.-200,000 +Interest -----------------70000
D. Birr 1,533,000 +Donation ……………….200000
Interest expense –120000 (0.12*1M)
B NI = …………………………………….5,310,000
Tax---(5,310,000 *0.3) ……………..1,593,000
TBI--------------------------5,310,000
Tax 5,310,000 *0.3) ----1593000
159) Assume that the sales revenue of ABC Share Company is Birr 12,000,000 during Tax Year ended Sene 30,
2014.

Cost of goods sold (determined on the basis of the average cost method) and Expenses were Birr 5,000,000
and Birr 800,000, respectively.

The operating expenses comprises of store rent expense of Birr 400,000, a 5% depreciation expense on a not
fully depreciated Building with a cost of Birr 2,000,000, a penalty of Birr 50,000, and a donation of Birr
250,000 to the government of FDRE as a contribution to the 'Gebeta Lelimat Project.

What is the amount of taxable business profit to be presented on the tax return?
Sale ------------------12,000,000
CGS---------------------5,000,000
GP-----------------------7,000,000
A. Birr 6,500,000 Operating expense
Rent expense ………..400,000
B. Birr 6,600,000 Dep Exp -----------.-100,000
Donation ……………250,000
C. Bir 6,200,000 NI = …………………………………….6,250,000
D
D. Bin 6,250,000
160) All of the following are advantages of indirect tax over direct tax
except:
A. In the case of indirect tax, the tax burden is distributed on different
sections of the society in a just and equitable manner.
B. Tax evasion is relatively difficult in the case of indirect tax as taxes are
included in the prices of commodities
C. Indirect tax has wider scope than direct tax.
D. Indirect taxes are more convenient to the taxpayers than direct tax.

A
161) Good are purchased at VAT inclusive price of
Birr 180,150.
• The amount of input VAT on this transaction
• A. Birr 23,497.47
• B. Birr 27,022.50
• C. Birr 21,750.00
VAT =
• D. Birr 20,837.50 [VAT Inclusive Price] @ [VAT Rate / (1 +
Rate)]
= 180150* 0.15/1.15
= 23497.47
A
• The C.I.F value of the good is imported 15,000
• The excise tax rate for these goods is 10%
• Custom Tariff is 25% and Withholding tax rate is 3%
• 162) The value of imported goods for the determination of VAT is
• A. Birr 20,700 value of imported goods = ( CIF + CD +
ET)
• B. Birr 20,250 CD = 15000*0.25 = 3750
Withholding = 0.03*15000= 450
• C. Birr 16,500 Excise tax = 0.1*15000= 1500
• D. Birr 15,000
= 15000+ 3750+450+1500 =
• 163. The amount paid (Input Tax) at customs station at the time of custom clearance is
20700 A
• A. Birr 3,105.00
• B. Birr 3,037.50
VAT = 15% ( CIF + CD +
• C. Birr 2,475.00 ET)
VAT = 0.15*20700 = 3105
• D. Birr 2,250.00
A
164) Activity-based costing (ABC) can eliminate cost
distortions because ABC systems _____.
A. establish a cause-and-effect relationship with the activities
performed
B. use single cost pool for all overhead costs, thereby enabling
simplicity
C. use a broad average to allocate all overhead costs
D. never consider interactions between different departments
in assigning support costs
A
165) Which of the following is correct about activity based costing?

A. It tends to allocate too great a proportion of overheads to high volume

products
B. Assign costs to a product on the basis of the product's consumption of
the activities
C. It assume that all products consume all resources in proportion to their
production volumes
D. It allocates equal amount of overheads to all products

B
166) A purpose of standard costing is to

A. Eliminate the need to account for year-end under-applied or over-

applied manufacturing overhead.
B. Simplify costing procedures.
C. Eliminate the need for actual costing for external reporting purposes.
D. Replace budgets and budgeting.
Standard costing is the practice of
estimating the expense of a
B production process.
To achieve maximum efficiency and
cost control.
167) ABC furniture produces items based on customer's order. It uses job order system with
normal costing. In March 2022, the cost sheet for Job No. 125 showed the following data:

Predetermined overhead rate... Birr 25 per machine hour.

Direct materials used………………………..8000 Birr
Direct labour rate per hour...............................19 birr
Machine time used.. …………………………30 hours.
Direct labour hours worked…………………20 H
What is the total cost of Job No. 125 for March under normal costing?
A. Birr 2,380
DM Cost ………………………………8,000
B. Birr 9,130 DL Cost (19*20)……………………380
B Machine cost (30*25)……………..750
Total cost 9130
C. Birr 8,750

D. Birr 10,275
168) Under a job-order costing system, the dollar
amount transferred from Work in Process to
Finished Goods is the sum of the costs charged to
all jobs:
A. started in process during the period.
B. in process during the period.
C. completed and sold during the period.
D.completed during the period. D FG….XXX
WIP…..XXX
169) Which of the following is FALSE in connection to job order
costing system?

A. Work in process is credited for the transfer of completed items to

Finished Goods Inventory

B. Finished goods is debited for goods completed & sold during the
period

C. In normal costing method, work in process is debited factory

overhead applied B

D. Finished goods is credited for cost of goods shipped to customers

170) JJ manufacturing uses process costing system with two departments:

Department A and Department B. It uses weighted average method.

Which of the following is correct to compute cost per equivalent unit for a

given cost component?

A. Current period cost less the cost of beginning inventory divided by EUP

B. Current period cost plus the cost of ending inventory divided by ELIP

C. Current period cost plus the cost of beginning inventory divided by EUP
C
D. Current period cost divided by FUP
171) HH Company uses process costing system in weighted average method. Record for department
1 the following for March 2022:
• Beginning Work in process, 80% complete as to cost 5000 units
• Units stared in March. 25,000
• Ending work in process, 25% complete as to Conversion cost. 8,000 unit
• Beginning work in process inventory cost:
• Material... Birr 20,000
• Conversion cost. 60,000
• Costs in March:
• Material Birr 34,000
• Conversion cost 72.000
• All material is added at the start of the process and all finished products are transferred out. What is
cost equivalent unit of production for material and conversion cost?

A. Birr 1.70 and 5.30 respectively B

B. Birr 1.80 and Br 5.50 respectively
C. Birr 2.70 and 6.6 respectively
BWIP 5000
Unit started 25000
Total 30000
Unit Completed 22,000 22,000 22000
EWIP 8000 8000 2000
(8000*0.25)
Total 30000 30000unit 24000 unit
Beginning cost 20000 60000
Cost add current 34000 72000
Total 54,000 Birr 132000 Birr
Unit cost 54000 132000
30000 24000
1.8 birr/unit 5.5Birr/ unit
172)Which of the following is a fixed cost for
an automobile manufacturing plant?
A) administrative salaries
B) electricity used by assembly-line machines
C) sales commissions
D) windows for each car produced

A
173) The following cost information is taken from Chereka textile firm:
Cost of Cotton used in production during the period. ………….....600,000
Factory supervisors salary…………………………………………………………
100,000
Cost incurred for factory labor converting cotton in to tape....... 300,000
Factory overhead cost other than indirect labor……………………….. 80,000

Based on the above information, what is the amount of prime cost?

Prime cost = Direct material cost + Direct Manufacturing labor cost
= 600,000 + 300,000
A. Birr 600,000
= 900,000

B. Bir 900,000 B
C. Birr 480,000

D. Birr 400,000
174) Which of the following is FALSE about cost allocation methods?

A. The dual-rate method provides better information for making decisions

B. The single-rate method aggregates fixed and variable costs and allocates
them to objects using a single allocation base and rate

C. The dual-rate method, groups costs into separate variable cost and fixed
cost pools and use a single cost- allocation base and rate.

D. The single-rate method is relatively simple to apply

C
175) Which of the following may be used by managers to
discourage unnecessary use of service of a support department
by user departments?
A. Allocate support department costs based upon user department
usage
B. Prohibiting user departments from using service of support
departments
C. Allocate a fixed amount of support department costs to each
department regardless of use
D. Not allocate any support department costs to user departments
A
 Definition of Auditing
• Auditing is the accumulation and evaluation
of evidence about information to determine
and report on the degree of correspondence
between the information and established
criteria.
• Evidence is any information used by the
auditor to determine whether the
information being audited is stated in
accordance with the established criteria.
• To satisfy the purpose of the audit, auditors
must obtain a sufficient quality and volume
of evidence.
12/25/2024 300
 Cont.…
The phrases used; “to express the auditor’s opinion” means that
the financial statements give a true and fair view or have been
presented fairly in all material respects.
True and fair presentation means that the financial statement are
prepared and presented in accordance with the requirements of the
applicable International Financial Reporting Standards (IFRS) or GAAP and
local pronouncements/legislations.
12/25/2024 301
 Accounting and Auditing

 Accounting covers only quantitative data. However,

Similarities auditing covers both quantitative and qualitative data.
Both are concerned with accounting information  Accounting starts where book keeping ends. Whereas,
Both accountants and auditors have to have auditing starts where accounting ends.
considerable expertise in accounting mater.
Both accounting and auditing deliver reports to their
users.
Difference
 Accounting is analyzing, recording classifying and
summarizing events and transactions to prepare financial
statements. Nevertheless, auditing is concerned with
obtaining and evaluating evidence covering financial
statements
 Objective of accounting is to prepare financial statements
where as , the objective of auditing is to determine
fairness of statements in conformity with IFRS
12/25/2024 302
 Types of Audits
1. Audits of Financial Statements: The goal is to determine whether
financial statements have been prepared in conformity with
specified criteria and to provide assurance for third parties or
external users that such statements present a company's financial
condition and results of operations 'fairly'. statement audits.
2.. Compliance Audits: concerned with examining whether
government resources are used properly and in compliance with
related government rules and regulations.
3. Internal Audits: Internal auditing is essentially an appraisal activity within an
organization for the review of accounting, financial and other operations as a basis for
service to management.
4. Operational Audits: evaluates the efficiency and effectiveness of any part of an
organization’s operating procedures and methods.
12/25/2024 303
176) Which of the following is FALSE about auditing?

A. at involves the task of recording business transactions

B. It involves the task evaluations of evidences

C. involves checking the information with established criteria

D. It involves communicating results to users A

177) Which of the following is not among the responsibilities of an auditor?

A. Performing an audit with an attitude of professional skepticism

B. Maintaining adequate internal control system

C. Detecting material misstatements in the financial statement

D. Detecting direct-effect illegal acts

B
 3.3 Audit planning process

The audit planning process begins when the auditor accepts an audit engagement and
continues until the completion of the audit.
Generally, the six procedures of audit plan are:
1. Pre – plan
2. Obtaining back ground information
3. Obtaining information about client legal obligations
4. Assess materiality & determine acceptable and inherent risk
5. Understand the ICS & determine control risk
6. Develop overall audit plan & program

12/25/2024 306
 Audit planning process - the pre –
plan procedure
An engagement letter includes the following matters:
Scope: This is a description of the services to be provided, particularly whether there is
to be an audit in accordance with IFRSs or a more limited accounting services are to be
provided, and whether additional services are to be provided, such as preparation of tax
returns or tax planning.
Responsibility: This is an explanation of the relative responsibilities of management
and the auditor for assuring that financial statements are in all material respects in
conformity with IFRSs and other matters that often raise questions of responsibility such
as fraud, illegal acts,
• Procedural Arrangements: This is the specification of the schedules to be prepared by
the client, the method and frequency of billing the auditor’s fee and similar matters.

12/25/2024 307
178) Which of the following procedures is not performed as a part of planning
an audit engagement?

A. Performing analytical procedures

B. Confirmation of all major accounts

C. Designing an audit program

D. Reviewing the working papers of the prior year

B
179. In planning the audit engagement, the auditor should consider each of
the following except

• A. The kind of opinion that will likely be given

• B. Matters relating to the entity’s business and the industry in which it
operates
• C. The entity’s accounting policies and procedures
• D. Anticipated levels of control risk and materiality
• E. All
• F. None
A
180) The use of statistical sampling technique enables the auditor to:

A. Eliminate the need for judgmental decisions

B. Quantify sampling risk

C. Select a perfectly representative sample

D. Be more subjective in evaluation of sample results

B
181) When the auditor goes through a population and selects items for the
sample without regard to their size, source, or other distinguishing
characteristics, it is called:

• a. block sample selection.

• b. haphazard selection.

• c. systematic sample selection B

• D. none
182) Which of the following method can help the auditor to
reduce non-sampling risk?

A. Using a representative sample

B. Reducing supervision
C. Careful design of audit procedure
D. Increasing sample size

C
 Cont’d….
Generally Accepted Auditing
Standards
2. Field Work 3. Reporting
1. General
performance of the results
qualifications audit
and conduct 1. Whether
statements were
1. Adequate 1. Adequate & Proper prepared in
technical planning and accordance with
training and supervision GAAP
proficiency 2. Sufficient 2. Circumstances when
2. Independence in understanding of the GAAP not consistently
mental attitude entity, its environment, followed
and its internal control
3. Due professional 3.Adequacy of
care 3. Sufficient competent informative disclosures
evidence
4. Expression of 313
 Audit planning process - Assess Materiality and
Determine Acceptable & Inherent Audit Risks

• AUDIT RISK: Audit risk is the risk that financial statements are materially incorrect, even though
the audit opinion states that the financial reports are free of any material misstatements.
• The second standard of fieldwork requires the auditor to obtain an understanding of the entity
and its environment, including its internal control, to assess the risk of material misstatements in
the client’s financial statements.
• Risk, in auditing, is defined as some level of uncertainty that an auditor accept in performing the
audit function.
• Audit Risk Model: The audit risk model is used primary for planning purpose in deciding how
much evidence to accumulate in each side. The audit risk model is stated as follows:

AAR = PDR X CR X IR
AAR
PDR 
CR x IR
12/25/2024 314
• 183) The risk of a material misstatement occurring in an account, assuming
an absence of internal control, is referred to as:
• A. Account risk.
• B. Control risk.
Control risk is the risk that the internal control
• C. Detection risk. arrangements will fail to prevent material
deviations, or to detect and correct them on a
• D. Inherent risk. timely basis.

• E. All Inherent risk is the risk of a material

misstatement in a company's financial
• F. None statements without considering internal
controls.
D
Detection risk, which is the risk that the
auditor will not detect a material
misstatement
• 184) Audit risk' represents the risk that the auditor will give an inappropriate
opinion on the financial statements when the financial statements are materially
misstated. Which of the following categories of risk can be controlled by the
auditor?
• Category of risk:
• (1) Control risk D
Control risk (together with inherent risk) are components of the risk
• (2) Detection risk of material misstatement, which is governed by the circumstances
the audit client and therefore is outside the control of the auditor.
• (3) Sampling risk
• A. (1) and (2) Detection risk, which is the risk that the auditor will not detect a
material misstatement
• B. (2) only
• C. (1) and (3) Sampling risk is the risk that the auditor's conclusions based on a
• D. (2) and (3) sample may be different from the conclusion if the entire population
were the subject of the same audit procedure.
• E. All
Sampling risk is a component of detection risk, which is controlled b
• F. None the auditor.
185) Which one of the following is FALSE?

A. The risk of material misstatement is a function of inherent and control

risk

B. A financial statement that contain immaterial misstatement is not

considered to show true and fair view

C. Knowledge about the client's industry is an essential factor for a

successful audit
B
D. Audit planning can keep audit costs reasonable
 Audit reports
• An audit report expresses an auditor's opinion on a company's
financial performance and compliance with IFRS
• The profession recognizes the need for uniformity in
reporting as a means of avoiding confusion.
• The professional standards have defined and enumerated the
types of audit reports that should be included with the financial
statements.
• The wording of audit reports is reasonably uniform, but
different audit reports are appropriate for different
circumstances.
Audit reports
Types of audit report: There are Five types of audit
reports that might be issued by the auditors.
These are:
1. Unqualified opinion
2. Unqualified opinion with explanatory paragraph
/modified wording
3. Qualified opinion
4. An adverse opinion
5. Disclaimer opinion
186) Under which of the following set of circumstances might
the auditors disclaim an opinion?

A. The financial statements contain a departure from accepted

accounting principles, with a material effect
B. When the portion of the financial statement audited by the
other audit firm is material in relation to the whole.
C. There are significant scope limitations on the audit
D. The method of application of accounting principles is not
consistent.
C
187) If the phrase "except for" is present in the opinion
paragraph of the audit report, the auditor has issued a(n):

• A) adverse opinion.

• B) disclaimer of opinion.

• C) unqualified opinion.
D
• D) qualified opinion.
 Audit evidence
•Audit evidence is any information used by the auditor to determine
whether the quantitative information being audited is stated in
accordance with the established criteria.
• Audit evidence includes all the things that influence the auditor’s
judgment in evaluating whether the financial statements are in
conformity with IFRS .
• Audit evidence is any information or document that confirms or
rejects a premise (a statement or hypothesis).
• Competency of evidence is related to its quality and reliability.
Evidence is said to be competent if it is both valid and relevant.
• Sufficiency of evidence relates to the quantity of evidence
auditors should obtain.

12/25/2024 322
188) Auditors basically accumulate evidence to

A. Reach a conclusion about the fairness of the financial

statements

B. Defend themselves in the event of a court case

C. Satisfy the requirements of code of ethical conduct

D. Determine if the financial statements are correct

A
189) Which of the following is correct?
A. Analytical review is sufficient evidence for a reasonable
assurance audit
B. Limited assurance audit opinion is worded negatively
C. Auditors apply professional judgment only on deciding on
the type of opinion
D. Limited assurance audit is acceptable for organizations of
all size B
The principle of integrity imposes an obligation on all professional accountants to be straightforward and
honest in all professional and business relationships. Integrity also implies fair dealing and truthfulness.

The principle of objectivity imposes an obligation on all professional accountants not to compromise their
professional or business judgment because of bias, conflict of interest or the undue influence of others.

The principle of professional competence and due care imposes the following obligations on all professional
accountants:
(a) To maintain professional knowledge and skill at the level required to ensure that clients or employers
receive competent professional service; and
(b) To act diligently in accordance with applicable technical and professional
standards when providing professional services.

The principle of professional behavior imposes an obligation on all professional accountants to comply with
relevant laws and regulations and avoid any action that the professional accountant knows or should know
may discredit the profession.

The principle of confidentiality imposes an obligation on all professional accountants to refrain from: (a)
Disclosing outside the firm or employing organization confidential information acquired as a result of
professional and business relationships without proper and specific authority or unless there is a legal or
professional right or duty to disclose; and (b) Using confidential information acquired as a result of
190) Which of the following ethical principles requires
the auditor to be honest and straightforward in all
professional and business relationships?
A. Integrity
A
B. Professional behavior

C. Professional competence and due care

D. Objectivity
191) Auditors are periodically punished for holding an investment in a client.
This violates which ethical rule?

• A. Integrity.

• B. Independence.
B
• C. Noncompliance with IFRS.

• D. Confidentiality.
190) The main purpose for establishing a code of conduct for professionals
is to:
A. Protect members of the profession from being sued for substandard
work
B. Demonstrate acceptance of responsibility to the interests of those
served by the profession
C. Enable users to evaluate by themselves the quality of professional
services
D. Guarantee that all members of the profession perform at the same level
of competence
B
• Five classes of transactions (sales & collection cycle)
• Sales ( cash and on account sales)
• Cash Receipts.
• Sales Return and Allowances.
• Write-off uncollectible accounts.
• Estimate of Bad Debts.
191) Which of the following is not one of the five classes of
transactions included in the sales and collection cycle?

A. Interest income

B. Write-off of uncollectible accounts

A
C. Bad debt expense

D. Sales returns and allowances

192) Which of the following is an account that is not affected by the sales
and collection cycle?

• A) cash

• B) accounts receivable

• C) allowance for doubtful accounts

• D) accounts payable D
193) As used in auditing which of the following statement
best describes "Assertion” ?
A. Assertions are the representations of management as to
the reliability of the information system.
B. Assertions are the auditor's findings to be communicated in
the audit report.
C. Assertions are the representations of management as to
the fairness of the financial statements.
D. Assertions are found only in the footnotes to the financial
statements.
C
194) All of the following are part of tests of control for the
occurrence assertion in the acquisition & payment cycle Except

A. Tracing a sample of goods receiving note to entries on purchases

journal

B. Examine payment documents for approval

C. Inspection of purchase order evidencing authorization

D
D. Observation of existence of proper segregation of duties
195) The main reason for the auditor to trace shipping
documents to pre-numbered sales invoices is to
determine that:

A. All goods ordered by customers were shipped

B. Shipments to customers were properly billed

C. All pre-numbered sales invoices were recorded

D. Recorded sales invoices are not fictitious D

• 196) Which of the following is least likely to be considered a financial
statement audit risk factor?

• A. Management operating and financing decisions are dominated by top

management.
• B. A new client with no prior audit history.
• C. Rate of change in the entity's industry is rapid.
• D. Profitability of the entity relative to its industry is inconsistent.
• E. All
• F. None
B
197) Which of the following is not a fraud factor for the revenue recognition
process?

• A. Creating of fictitious invoices

• B. Recognition of revenue on shipments that never occurred

• C. Recording advance collections as revenue

• D. Not recording consignment sales revenue

A
198) Which of the following is least likely to cause uncertainty
about the ability of an entity to continue as a going concern ?

A. The entity has working capital deficiencies

B. The entity has lost a major customer
C. The entity has significant recurring operating losses
D. The entity has a court case with competitor for a minor patent
infringement
D
199) The auditor wants to examine whether shipping documents are
properly billed. He selected 100 shipping documents from a population of
1,000 shipping documents and performed examination. 5 unbilled shipping
documents were found if the tolerable deviation rate is 4%, which one of
the following is FALSE?

A. The auditor needs to test alternative controls to achieve the objective"

B. The auditor needs to extend sample size

C. The auditor needs to modify audit opinion

C
D. The auditor needs to extend substantive procedures
200) Which of the following principle may reduce or entirely
eliminate auditor liability to a client?

A. Auditor ordinary negligence

B. Client contributory negligence

C. Auditor gross negligence

B
D. Client constructive negligence
201) An auditor know that the purpose of her audit was to render reasonable
assurance on financial statements that were to be used for the application for a
loan; the auditor did not know the identity of the bank that would eventually
give the loan. Under the foreseeable third party approach the auditor is
generally liable to the bank which subsequently grants the loan for:

• A. Lack of due diligence. D

• B. Lack of good faith.

• C. Gross negligence, but not ordinary negligence.

• D. Either ordinary or gross negligence.

202) Assume that $500,000 in damages are awarded to a plaintiff, and the CPA's
percentage of responsibility established at 10%, while others are responsible for
the other 90%. Assume the others have no financial resources. The CPA has been
required to pay $50,000. The auditor's liability is most likely based upon which
approach to assessing liability?

• A. Absolute liability.

• B. Contributory negligence. D
• C. Joint and several liability.

• D. Proportional liability.
 Substantive procedures of
Assertions for balances
transactions
Audit Objectives
Assertions 1. Occurrence / Existence
1. Existence
2. Completeness
2. Completeness
3. Accuracy
3. Accuracy
4. Cut-off 4. Valuation

5. Presentation and
disclosure 5. Cut-off

6. Classification

6. Detail tie-in
203) Substantive procedures to examine the cut-off assertion
for accounts payable include
A. Re-computing the mathematical accuracy of a sample of vendor
invoices
B. Selecting a sample of receiving reports around year-end and
comparing dates on related vouchers to date the purchases journal
C. Selecting a sample of vouchers and agreeing them to authorized
purchase orders
D. Selecting a sample of vouchers and agreeing them to the
purchases journal
The cut-off assertion is used to
B determine whether the
transactions recorded have been
recorded in the appropriate
• 204) Tracing from source documents forward to ledgers is most likely to
address which assertion related to posted entries:

Existence or occurrence – Assets or

• A. Completeness. liabilities of the company exist at a given
• B. Existence. date, and recorded transactions have
occurred during a given period.
• C. Rights.
Completeness – All transactions and
• D. Valuation. accounts that should be presented in the
financial statements are so included.
• E. All
Rights and obligations assertions
• F. None are used to determine that the assets,
A liabilities, and equity represented in the
financial statements are the property of
the business being audited.

The valuation assertion is used to

determine that the financial statements
presented have all been recorded at the
• 205). Determining that receivables are presented at net-realizable value is
most directly related to which management assertion?
Existence or occurrence – Assets or liabilities of
• A. Presentation and disclosure. the company exist at a given date, and recorded
transactions have occurred during a given period.
• B. Existence.
• C. Rights. Rights and obligations assertions are used to
determine that the assets, liabilities, and equity
• D. Valuation. represented in the financial statements are the
property of the business being audited.
• E. All
The valuation assertion is used to determine that
• F. None D the financial statements presented have all been
recorded at the proper valuation.

This is the assertion that all appropriate information and

disclosures are included in a company's statements and all the
information presented in the statements is fair and easy to
understand.
206) The auditor tests entity's policy of obtaining credit
approval before shipping goods to customers to support
which of the following management assertions?

A. Completeness
B. Valuation or allocation
C. Existence or occurrence B
D. Rights and obligations
Testing credit approval before shipping goods to
customers tests the valuation assertion.
This test addresses the collectability of accounts
receivable.
Slide
11-348
Accounting for Governmental and Not-for-
Profit Organizations
A government Organization or Public agency,
is often a government appointed group, it
can be permanent or semi-permanent
organization and is funded by the
government.
 Why are accounting practices for these
organizations very different from those of
business organizations?
 It provides different purposes for society
 Financed by resource providers who do not
expect benefits proportional to the resources
they provide © The McGraw-Hill Companies, Inc., 2004
McGraw-Hill/Irwin
 What are Governmental
Slide
11-349

Organizations?
 General purpose governments
 Provide a broad array of services
 Examples: Federal government, state
governments, cities, towns, counties (police and
fire protection; sanitation; construction and
maintenance of streets, roads, and bridges; and
health and welfare)
 Special purpose governments
 Usually provide only a single or just a few/limited
services
 Examples: Independent school systems, public
colleges and universities, public hospitals, fire
protection districts, sewer districts,
McGraw-Hill/Irwin transportation authorities, and many others
© The McGraw-Hill Companies, Inc., 2004
 What are Not-for-Profit
Slide
11-350

Organizations?
 Legally separate organizations
 Usually exempt from federal, state,
and local taxation
 Religious, community service,
private educational and health
care, museums, and fraternal and
social organizations, among many
other kinds of organizations.
 Currently, there are nearly 1000
not-for-profit organizations in
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2004
Slide How Do Governmental and
Not-For-Profit Organizations
11-351

Differ from Business

Organizations?

 Resource providers do not expect to receive

proportional benefits
 Lack of a profit motive
 Absence of transferable ownership rights

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2004

Slide
11-352 How Do Governmental Entities
Differ From Not-For-Profit
Organizations?
Power ultimately rests in the hands of the
people
People delegate power to public officials
through the election process
Officials are empowered by and
accountable to a higher level government
Taxation powers

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2004

Slide
11-353 Sources of GAAP and
Financial Reporting Standards

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2004

Slide
11-354 Objectives of Financial
Reporting—
SLG (Cont’d)
“ACCOUNTABILITY is the cornerstone of
all financial reporting in government”
 Accountability arises from citizens’ “right
to know.”
 It imposes a duty on public officials to be
accountable to citizens for raising public
money and how they are spent.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2004

Slide
11-355 Objectives of Financial
Reporting—
Not-for-Profit (NFP)
NFP financialOrganizations
reporting should provide
information useful in:
 Making resource allocation decisions
 Assessing services and ability to provide
services
 Assessing management stewardship and
performance
 Assessing economic resources, obligations,
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2004
 Government-wide Financial
Slide
11-356

Statements

 Provide an aggregated overview of the

government’s net position and change in
net position, reported for the government
as a whole.
 Assist in assessing operational
accountability—whether government has
used its resources efficiently and effectively
in meeting service objectives
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2004
 Fund Financial Statements
Slide
11-357

 A fund is a separate set of accounts used

to account for resources segregated for a
particular purpose.
 Funds that focus on the flow of current
financial resources are called
governmental funds

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2004

 2.1. Activities of government

There are three major activity categories of a state and local

governments –
1. Governmental Activities,
2. Business-Type Activities
3. Fiduciary Activities.

12/25/2024 358
 1. Governmental Activities
The government provides certain core services called General
Activities. General Activities provided by most general purpose
governments are related to:

Protection of life and property, police and fire protection,

A Public works (streets and highways, bridges, and public building),

A Parks and recreation facilities and programs,

A Cultural and social services

costs for general administrative support such as data processing,

12/25/2024 finance, and personnel. 359

 2. Business-type Activities
• Governments engage
G. a Parking garages and lots;
in business type
activities. These H. a Liquor stores;
include: I. a Swimming pools;
A. a Public utilities (electric,
J. a Stadiums and arenas
water, gas and sewer utilities)
• Many of these activities are
B. a Transportation system;
intended to be self supporting by
C. a Toll roads and toll bridges; charging users for the services they

D. a Airports; receive.

E. a Hospitals;

12/25/2024 F. a Parking garages and lots 360

 3. Fiduciary Activities

Governments often act in a fiduciary capacity, either as an

agent or trustee, for parties outside the government.
A government may serve as agent for other governments
in the administering and collecting of taxes.
 Governments serve also as trustees for amounts placed in
trust from private citizens for parks and other purposes

12/25/2024 361
 Types of Funds (Principle # 3)
All funds fall into one of three
broad classifications.
Governmental
Governmental Proprietary
Proprietary Fiduciary
Fiduciary
Funds
Funds Funds
Funds Funds
Funds

Accounting
Accounting Accounting
Accounting Accountingfor for
Accountingfor for for
for business-
business- financial
activities financial
activitiesrelated
related type
to type activities.
activities. resources
resourcesheld
held
toserving
servingthe
the for
public. forothers
othersin
inaa
public. trustee
trusteecapacity.
capacity.

12/25/2024 362
207) Which of the following statements is true for both
governmental organizations and for-profit organizations?

A. Revenue may be earned through exchange transactions.

B. Absence of owners.
C. Lack of a profit motive.
D. Resources are provided by individuals and entities that may
not directly benefit from the use of the resources

A
206) Which of the following would not be
considered a government or nonprofit
organization?

A. A software company that sells software

exclusively to state and local governments.
B. A public elementary school.
C. A church.
D. A private trust organized for charitable
purposes.
A
207) Which of the following is FALSE about public debt

A. Public debt may be raised to meet the normal current expenditure,

exigencies like war, finance productive government enterprise, finance
public social welfare and economic development.
B. It is one source of financing budget deficit.
C. It can only be used to promote economic development not to finance
wars.
D. Public debt raised for productive purpose will not be a burden on the
economy,
C
208) Which of the following statement is FALSE regarding the objective
of financial reporting by public sector
A. The objectives of financial reporting by public sector entities are to provide
information about the entity that is useful to users of GPFRS for decision-
making purposes.
B. The objectives of financial reporting by public sector entities are to provide
information about the entity that is useful to users of GPFRS for accountability
purposes.
C. The identification of accountability as an objective of financial reporting
reflects that most governments and public sector entities have a profit seeking
rather than service delivery objective
D. The identification of accountability as an objective of financial reporting
reflects the fact that most governments and public sector entities have their
funding mainly through taxation, but also transfers from other tiers of
government.
C
209) For which of the following funds, would a government be least likely to
record its annual budget and thereby integrate to accounting system?

A. Enterprise fund
B. Special revenue fund
C. General fund A
D. Capital project fund
210) Which of the following is true regarding capital projects funds?
A) Capital projects funds are considered to be governmental funds.
B) Capital projects funds use the economic resources measurement focus
and accrual basis of accounting.
C) Encumbrance accounting is not used.
D) Fixed assets are depreciated in capital projects funds.

A
• 211). Which of the following types of funds recognize its long-term debt as a
liability and settles it?
• A. Debt Service Fund
• B. Capital Projects Fund
• C. Enterprise Fund
A
• D. Special Revenue Fund
• E. All
• F. None
212) A fund that is used to account for assets held by a government
temporarily for one or more other governments units or for individuals or
private organizations is a(n):
• A) Agency fund
• B) Private-Purpose Trust Fund
• C) Investment Trust Fund
• D) Pension Trust Fund
A
213) Which of the following accounts typically would
be used by an Agency Fund?

A. Revenue
C
B. Bonds payable Agency funds are used to account for
C. Cash assets held by the government as an
agent for individuals, private
organizations, other governments,
D. Notes receivable and/or other funds.
214) Central City was awarded two state grants during its fiscal year ending September 30, 2020: a

Birr 2 million block grant that can be used to cover any operating expenses incurred during fiscal

2021, and a Birr 1 million grant that can be used any time to acquire equipment for its police

department.

For the year ending September 30, 2020, Central City should recognize in grant revenue in its fund

financial statements (in millions):

A. Birr 2 million
B
B. Bir 1 million

C. Birr 0

D. Birr 3 million
215) Bonds are sold to finance the construction of a new public
safety station. Bond proceeds equal to the face value of the
bonds are reported in a Capital Projects Fund as:

A. other financing source

B. deferred inflow of resources

C. other financing use

D. a revenue A
216) The repayment of bond principal should be reported
in the fund statements of a debt service fund as

A. A reduction of bonds payable

B. An expenditure

C. A direct charge to fund balance B

D. An "other financing use

217) As a general rule, debt service expenditures in a Debt
Service Fund are recognized

A. when the debt service payment is due

B. when resources to be used for the repayment are made available

to a Debt Service Fund

C. in accordance with the requirements of the original bond order that

specifies the basis of expenditure recognition

D. when due for principal repayments but on an accrual

A basis for
interest
218) The City of Turkana arranged for a 10-year, Birr 40 million loan
to finance construction of a toll bridge.

If the toll bridge is accounted for as an Enterprise Fund activity and

a certain portion of the tolls collected is required to be set aside for

maintaining the bridge, these resources should be accounted for in

A. the Toll Bridge Enterprise Fund

A
B. the General Fund

C. a Capital Projects Fund

D. a Debt Service Fund

219) Which of the following statements is FALSE regarding the
definition of a fund?

A. A fund is an accounting entity that is used for one year only and each
year a new set of funds must be established.

B. A fund is a fiscal entity used to account for a subset of an organization's

resources that is to be used for a specific purpose.

C. A fund has a self-encompassing, self-balancing accounting equation.

D. A fund is an accounting entity for which financial statements can be

prepared. A
220) During the year an enterprise fund purchased $230,000 worth of
equipment. The equipment was acquired with a cash down payment of
$30,000 and a $200,000 loan. A partial year of depreciation on the equipment
was taken in the amount of $23,000. What is the net effect of this transaction
on the net position accounts of the enterprise fund?
A. Net investment in capital assets is increased by $7,000.
B. Net investment in capital assets is increased by $30,000.
C. Net investment in capital assets is increased by $207,000.
D. Net investment in capital assets is increased by $230,000.

A
221) During the year an enterprise fund purchased Birr 230,000 worth of
equipment. The equipment was acquired with a cash down payment of Birr
23,000 and a Birr 207,000 loan.
What is the net effect of this transaction on the net asset accounts of the
enterprise fund?
A. Invested in capital assets, net of related debt is increased by Birr 23,000.
B. Invested in capital assets, net of related debt is increased by Birr 230,000.
C. Invested in capital assets, net of related debt is increased by Birr 207,000.
D. Invested in capital assets, net of related debt is decreased by Birr 207,000.
Net assets = (Total Fixed Assets) + (Total Current Assets) - (Total Long-term Liabilities) -
(Total Short-term Liabilities).

Net assets of the enterprise shows what will be left for the owners in case of liquidation. A
Given that the equipment costs $230,000 and loan is of $207,000

The increase in capital assets, net of related debt is of $23,000 ($230,000 - $207,000)
• 222). The General Fund acquired items through purchase on account.
Which one of the following entries is made to close purchase orders for
which goods and services are NOT fully received at the end of the fiscal
period?

• A. DEBIT Encumbrance
• B. DEBIT Reserve for Encumbrance D
• C. CREDIT Fund Balance In order to close the encumbrance at the end of the year:
The journal entry is made below:

General Journal Debit Credit

• D. CREDIT Encumbrance
Fund balance $XX
• E. All Encumbrances $XX
• F. None
• 223). International Public Sector Accounting Standard 17 deals with

• A. Presentation of general purpose financial statement

• B. Accounting policies, changes in accounting estimates and errors
• C. Property, plant and equipment
• D. Revenues from non-exchange transactions
• E. All
C
• F. None
224) If businesses are "governed by the marketplace, governments are
governed by

A. State constitutions

B. Budgets
B
C. Legislative bodies

D. Taxes
225) What is the major source of revenue for an
insurance company?

A. Salvage
B. Rental income
C. Insurance premiums
D. Interest income
C
 226) Which one of the following statements is FALSE about the tasks involved in
accounting system installation and revision?

A. Problems on existing system are identified on system analysis stage rather than
system design stage
B. Data needs should be identified at system analysis stage C
C. New systems should be designed based on feedback from system implementation
stage
D. In both new system installation and revising existing system, analysis should
precede system design
INSTALLING & REVISING ACCOUNTING SYSTEMS
The installation and revision of an accounting system requires a complete knowledge of a business
operation. The following steps are necessary when installing or changing an accounting system.
1)- Systems analysis: this stage determines data needs, the sources of data and any problem in
processing current data.
2)- Systems design: this stage involves designing new or revising current accounting systems
based upon the results of the systems analysis.
3)- Systems implementation: this final stage installs and evaluates the new or revised accounting
system.
229) Which of the following is likely to be information
rather than data?

A. Customer number

B. Employee name
C
C. Net profit

D. Sales price
230) The primary purpose of deposit insurance is to

A. Protect bank employees from unemployment

B. Improve the flow of information to investors
C. Prevent banking panics.
D. Protect bank shareholders against losses.
When numerous banks face the same problem
simultaneously, panic sets in, culminating in an C
economic downturn, economic instability, and a
systemic banking crisis.

It can be avoided by banks providing loans, selling

assets, limiting withdrawals, and borrowing more
capital from other financial institutions.
231) The process of turning money that is derived from criminal
activities-dirty money-into money which appears to have
been legitimately acquired and which can therefore be
more easily invested and spent is called:

A. Market Abuse
B. Money laundering
C. Insider Trading
D. Market manipulation

B
232) The risk structure of interest rates is
A. The relationship among interest rates of different
bonds with the same maturity.
B. The relationship among interest rates on bonds with
different maturities.
C. The relationship among the term to maturity of different
bonds.
D. The structure of how interest rates move over time.
The risk structure of interest rates
explains why bonds of the same
A maturity but issued by different
economic entities have different
yields (interest rates).
233) Which of the following is FALSE about short-term
financing
A. Short-term credit agreements are generally more restrictive than
long-term credit agreements
B. If funds are needed in a hurry, the firm should look to the short-
term markets.
C. If a firm thinks its need for funds will diminish in the near
future, it should choose short-term debt.
D. Interest costs at the time the funds are obtained will be lower if
the firm borrows on a short-term rather than a long-term basis.

A
234) Assuming that the ideal measure of short-term receivables in the
statement of financial position is the discounted value of the cash to be
received in the future, failure to follow this practice usually does not
make the statement of financial position misleading because:
A. The allowance for uncollectible accounts includes a discount element.
B. Most receivables can be sold to a bank or factor.
C. Most short-term receivables are not interest-bearing.
D. The amount of the discount is not material
D
Short term receivables are the receivables which are due within a
period of 1 year. The discounted cash flows of the short term
receivables will be almost equal to the receivables amount.
235) The fair value of an asset at initial
recognition is
A. The price paid to acquire the asset.
B. The book value of the asset acquired.
C. The price paid to transfer or sell the asset.
D. The price paid to acquire the asset less
transaction costs.
When an asset is acquired or a liability is assumed in an
exchange transaction for that asset or liability, the
transaction price is the price paid to acquire the asset or
received to assume the liability (an entry price).
A