Hawassa University

College of Business and Economics

Department of Accounting and Finance
Model Exam for the course Fundamentals of Accounting – I
Choose the best answer among the given alternatives and write on the answer sheet provided
1. Performing services on account will have the following effects on the components of the
basic accounting equation:
A. Increase assets and decrease equity.
B. Increase assets and increase equity.
C. Increase assets and increase liabilities.
D. Increase liabilities and increase equity
2. Which of the following statements about an account is true?
A. The right side of an account is the debit or increase side.
B. An account is an individual accounting record of increases and decreases in specific
asset, liability, and equity items.
C. There are separate accounts for specific assets and liabilities but only one account for
equity items.
D. The left side of an account is the credit or decrease side.
3. The objective of financial reporting places most emphasis on:
A. Reporting to capital providers.
B. Reporting on stewardship.
C. Providing specific guidance related to specific needs
D. Providing information to individuals who are experts in the field.
4. If a machine whose original cost is 40,000 having accumulated depreciation 12,000, were
sold for 34,000 then while preparing Cash Flow Statement its effect on cash flow will be
A. Cash flow from financing activities 34,000
B. Cash flow from financing activities 6,000
C. Cash flow from investing activities 34,000
D. Cash flow from investing activities 6,000
5. The financial statement or statements that pertain to a stated period of time is (are) the:
A. Balance sheet C. Work sheet
B. Trial balance D. Income statement
6. From legal point of view which one of the following has separate legal entity?
A. Partnership C. Corporation
B. Sole proprietorship D. Manufacturing
7. Which of the following is an economic event or condition that directly changes an entity’s
financial condition or directly affects its results of operations
A. Assets C. Journaling
B. Liabilities D. Business transaction
8. Which of the following statements describe transactions that would be recorded in the
accounting system?
A. An exchange of an asset for a promise to pay.
B. An exchange of a promise for another promise.
C. An employee dismissed from the job.
D. A plan to sell of machinery
9. The users of financial information who want to assess the ability of the entity to continue in
business to supply them with the necessary goods and services and to know their outstanding
balances.
A. Suppliers C. Creditors
B. Customers D. Consultants
10. Which of the following events is not a business transaction?
A. Investment of cash by the owner
B. Hired an employees in the business
C. Incurred utility expenses for the month
D. Earned revenue from service provided
11. Which of the following statements is incorrect?
A. Accounting as a language of business can be viewed as an information system that
provides essential information about economic activities of an entity to various
individuals and groups.
B. It is the role of the accounting system to provide economic information for users on
which to base their decisions concerning the allocation of the scarce resources
C. The goal (objective) of accounting is to identify, analyze, record, report, and interpret
(communicate) economic data for use by decision makers.
D. Management accounting is the accounting area that intends to serve information needs of
external users.
12. One of the following statements is incorrect.
A. Revenue recognition principle requires that companies recognize/record revenue in the
accounting period in which the performance obligation is satisfied.
B. Going concern assumption requires that the activities of the entity be kept separate and
distinct from the activities of its owner and any other economic entities.
C. Selection of which measurement principle of accounting to record and report transactions
to follow generally relates to trade-offs between relevance and faithful representation.
D. The periodicity assumption implies that a company can divide its economic activities into
artificial time periods to communicate to users who need to know a company‘s
performance and economic status on a timely basis.
13. Which of the following statements is false?
A. Double-entry system is a system that records the dual effect of each transaction in
appropriate accounts.
B. Normal balance an account is the side where a decrease in the account is recorded.
 C.
A. Accrual-basis
Capital accounting is accounting basis in which companies record transactions that
C. Liabilities
B. change
Assets a company’s financial statements in the periodsD. Equityin which the events occur.
15. D. Andecide
Desta account is an aindividual
to open accounting
computer service recordonofSeptember
company increases 1,and decreases
2014, in €60,000
he invest specific
cashasset,
in theliability,
businessand equity items.
in exchange for €60,000 of ordinary shares. This transaction result in;
14. Which of the following
A. Increase account receivableis a resource that a business
C. organization
Increase equityowns and possesses the
account
capacity to provide
B. Increase liabilityfuture services or economic benefits?
account D. Increase equipment
16. Which of the following statements is incorrect?
A. In order to ensure high-quality financial reporting, accountants present financial
statements in conformity with accounting standards that are issued by standard setting
bodies.
B. The fair value principle states that assets and liabilities should be reported at fair value
(the price received to sell an asset or settle a liability).
C. Relevance and faithful representation are two primary qualities that make accounting
information useful for decision-making.
D. Relevance means that the numbers and descriptions match what really existed or
happened they are factual.
17. Hello Company buys a $30,000 car on credit. The transaction will affect the statement;
A. Income Statement C. Owner’s equity statement
B. Statement of financial position D. Cash flow statement
18. The accounting part that intends to serve accounting information needs of external users.
A. Management Accounting C. Financial Accounting
B. Cost Accounting D. Tax Accounting
19. International Financial Reporting Standards (IFRS) is considered to be more:
A. Rule-based C. The same to GAAP
B. Principle-based D. Bases on guidelines
20. Which of the following statements is false?
A. A statement of cash flows summarizes information about the cash inflows (receipts) and
outflows (payments) for a specific period of time.
B. A statement of financial position reports the assets, liabilities, and equity at a specific
date.
C. A retained earnings statement summarizes the changes in retained earnings for a specific
period of time.
D. An income statement presents the revenues, expenses, changes in equity, and resulting
net income or net loss for a specific period of time.
21. One of the following is different

[A] Dividend [C] Liabilities

[B] Share capital [D] Expenses

22. In Accounting Companies initially record transactions in chronological order. Here the
phrase chronological order, implies?
 [A] The order of transactions based on their transaction size.
[B] The order in which business transactions occur.
[C] The sequence in which financial statement items are presented.
[D] The serially ordered number of records where transactions appear.
23. Determine the ending balance in cash for cash account of the general ledger after posting.
The beginning balance on March 1 was ETB 6000; on March 4 debited cash for ETB 2580
from sales of services; on March 15 paid ETB 4000 for salaries and wages expense; on
March 19 paid ETB 920 for utilities expense.

[A] ETB 8580 [C] ETB (2340)

[B] ETB 3660 [D] ETB 13500

24. A trial balance:

[A] Is the same under GAAP and IFRS
[B] Proves that transactions are recorded correctly.
[C] Proves that all transactions have been recorded.
[D] Will not balance if a correct journal entry is posted twice.
25. The general policy for using proper currency signs (Birr, dollar, yen, pound, etc.) is the same
for both GAAP and IFRS. This policy is:
[A] Currency signs only appear in ledgers and journal entries.
[B] Currency signs are only shown in the trial balance.
[C] Currency signs are shown for all compound journal entries.
[D] Currency signs are shown in trial balances and financial statements.
26. The trial balance of CCC Corporation had accounts with the following normal balances:
Cash $5,000, Service Revenue $85,000, Salaries and Wages Payable $4,000, Salaries and
Wages Expense $40,000, Rent Expense $10,000, Share Capital— Ordinary $42,000,
Dividends $15,000 and Equipment $61,000. In preparing a trial balance, the total in the debit
column is:

[A] $131,000. [C] $91,000.

[B] $216,000. [D] $116,000

27. One difference between GAAP and IFRS is that:

[A] IFRS uses accrual- concepts, and GAAP uses primarily the cash basis of accounting.
[B] GAAP uses a different journal, ledger and posting process than IFRS.
[C] IFRS uses more fair value measurements than GAAP.
[D] The double-entry accounting system is different between GAAP and IFRS.

TAT hires five employees on Nov.5, to begin work on Nov. 8. Each employee is to receive a
weekly salary of 1000 Birr for a five day work week (Monday to Friday), payable every two
weeks – first payment will be made on Nov. 19. Answer questions 8 to 10

28. How much employee salary does TAT owes and pays in cash on Nov.?
 [A] ETB 5,000 [C] ETB 2,000
[B] ETB 10,000 [D] ETB 200

29. When will be the second pay day?

[A] November – 19 [C] December – 3

[B] November – 26 [D] December – 4

30. How much is accrued salaries, assuming adjusting entries are dated November 30?

[A] ETB 10,000 [C] ETB 7,000

[B] ETB 1400 [D] ETB 3,000

31. Debits:
[A] Increase both assets and liabilities. [C] Increase assets and decrease liabilities.
[B] Decrease both assets and liabilities. [D] Decrease assets and increase liabilities.
32. Accounts that normally have debit balances are:
A. Assets, expenses, and revenues.
B. Assets, expenses, and owner’s capital.
C. Assets, liabilities, and owner’s drawings.
D. Assets, owner’s drawings, and expenses.

33. Adjustments for unearned revenues:

[A] Decrease liabilities and increase revenues.
[B] Have an assets and revenues account relationship.
[C] Increase assets and increase revenues.
[D] Decrease revenues and decrease assets.
34. The receipt of cash from customers in payment of their accounts would be recorded by:
[A] A debit to Cash and a credit to Accounts Receivable.
[B] A debit to Accounts Receivable and a credit to Cash.
[C] A debit to Cash and a credit to Accounts Payable.
[D] A debit to Accounts Payable and a credit to Cash.
35. Which of the following statements about the accrual basis of accounting is false?
A. Events that change a company’s financial position are recorded in the periods in which
the events occur.
B. Revenue is recognized in the period in which services are performed.
C. The accrual basis is in accordance with IFRS.
D. Revenue and expense are recorded only when cash is received, or only when cash is paid.
36. An accrued expense is an expense
[A] Incurred but not paid [C] Incurred and paid
[B] Paid but not incurred [D] Not reasonably estimable
37. Which one of the following is correct statement about revenue recognition principle
 A company recognizes revenue when it agrees to perform a service or sell a product to a
[A]
customer.
[B] Requires that companies recognize revenue in the accounting period in which they
receive cash.
[C] Revenue shall be recognized in the accounting period in which the performance
obligation is satisfied.
[D] It is based on a simple rule, “Let the revenue follow the expenses”
38. The purchase of supplies on account should result in:
A. A debit to Accounts payable and a credit to Cash.
B. A debit to cash and a credit to Accounts Payable.
C. A debit to Supplies and a credit to Accounts Payable.
D. A debit to Supplies and a credit to Accounts Receivable.
39. In accordance with International Financial Reporting Standards, Revenue and Expense
Recognition principles are defined, what does recognition implies in this context?

[A] To defer or accrue [C] To enter in to a contract with a customer.

[B] To record or report [D] To reconcile

40. Companies record transactions in the period in which the events occur.

[A] Time period assumption. [C] Cash – basis of accounting

[B] Accrual – basis accounting. [D] Fiscal year

41. Expenses paid in cash before they are used or consumed.

[A] Unearned revenue [C] Prepaid expenses

[B] Accrued revenue [D] Accrued expense

42. Identify correct statement regarding periodicity assumption

[A] An assumption requiring companies to use calendar year (Jan. 1 to Dec. 31) as their
accounting time period.
[B] It is also called time period assumption, in which accountants divide the economic life of
a business in to artificial time periods (like a month, a quarter or a year).
[C] It states the company’s year-end shall not vary from year to year.
[D] Divides accounting time period in to a period that is one year in length known as – fiscal
year only.
43. Which of the following statements is incorrect concerning the adjusted trial balance?
[A] An adjusted trial balance proves the equality of the total debit balances and the total
credit balances in the ledger after all adjustments are made.
[B] The adjusted trial balance provides the primary basis for the preparation of financial
statements.
[C] The adjusted trial balance lists the account balances segregated by assets and liabilities.
 [D] The adjusted trial balance is prepared after the adjusting entries have been journalized
and posted.
44. The trial balance shows Supplies $0 and Supplies Expense $1,500. If $800 of supplies are on
hand at the end of the period, the adjusting entry is:
[A] Debit Supplies $800 and credit Supplies Expense $800.
[B] Debit Supplies Expense $800 and credit Supplies $800.
[C] Debit Supplies $700 and credit Supplies Expense $700.
[D] Debit Supplies Expense $700 and credit Supplies $700.
45. Identify the incorrect statement
[A] Closing entries produce a zero balance in each temporary account.
[B] If total debits exceed total credits in the income statement columns of the worksheet. In
that case, the company has a net loss.
[C] The purpose of the post-closing trial balance is to prove the equality of the permanent and
temporary account balances carried forward into the next accounting period.
[D] As a required step in the accounting cycle firms should correct errors, as soon as they
discover them, by journalizing and posting correcting entries.
46. Gross profit will result if:
[A] Operating expenses are less than net income.
[B] Sales revenues are greater than operating expenses.
[C] Sales revenues are greater than cost of goods sold.
[D] Operating expenses are greater than cost of goods sold.
47. Under a perpetual inventory system, when goods are purchased for resale by a
company:
[A] Purchases account are debited to Merchandise Inventory.
[B] Purchases on account are debited to Purchases.
[C] Purchase returns are debited to Purchase Returns and Allowances.
[D] Freight costs are debited to Freight-out
48. The sales accounts that normally have a debit balance are:
[A] Sales Discounts.
[B] Sales Returns and Allowances.
[C] both (a) and (b).
[D] neither (a) nor (b)
49. A credit sale of $750 is made on June 13, terms 2/10, net/30. A return of $50 is granted
on June 16.The amount received as payment in full on June 23 is:
[A] $700. [B] $686. [C] $685. [D] $650.

50. Which of the following accounts will normally appear in the ledger of a merchandising
company that uses a perpetual inventory system?
[A] Purchases.
[B] Freight-in.
[C] Cost of Goods Sold.
[D] Purchase Discounts
51. To record the sale of goods for cash in a perpetual inventory system:
[A] Only one journal entry is necessary to record cost of goods sold and reduction of
inventory.
[B] Only one journal entry is necessary to record the receipt of cash and the sales
revenue.
[C] Two journal entries are necessary: one to record the receipt of cash and sales revenue,
and one to record the cost of goods sold and reduction of inventory.
[D] Two journal entries are necessary: one to record the receipt of cash and reduction of
inventory, and one to record the cost of goods sold and sales revenue
52. The steps in the accounting cycle for a merchandising company are the same as those in
a service company except:
[A] An additional adjusting journal entry for inventory may be needed in a merchandising
company.
[B] Closing journal entries are not required for a merchandising company.
[C] A post-closing trial balance is not required for a merchandising company.
[D] A multiple-step income statement is required for a merchandising company

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53. The multiple-step income statement for a merchandising company shows each of the
following features except:
[A] Gross profit. [C] Sales revenue section.
[B] Cost of goods sold. [D] Investing activities section
54. When goods are purchased for resale by a company using a periodic inventory system:
[A] Purchases on account are debited to Merchandise Inventory.
[B] Purchases on account are debited to Purchases.
[C] Purchase returns are debited to Purchase Returns and Allowances.
[D] Freight costs are debited to Purchases
55. In determining cost of goods sold:
[A] Purchase discounts are deducted from net purchases.
[B] Freight-out is added to net purchases.
[C] Purchase returns and allowances are deducted from net purchases.
[D] Freight-in is added to net purchases
56. A company has cash sales of $75,000, credit sales of $320,000, sales returns and allowances
of $13,700, and sales discounts of $6,000. Its net sales equal
[A] $395,000 [C] $414,700 [E] $339,700
[B] $300,300 [D] $375,300
57. If merchandise purchased on account is returned, the buyer may inform the seller of the
details by issuing
[A] a debit memorandum [C] an invoice
[B] a credit memorandum [D] a bill
58. The income statement in which the total of all expenses is deducted from the total of all
revenues is termed:
[A] multiple-step form [C] single-step form
[B] account form [D] report format
59. Which of the following expenses would normally be classified as other expense on a
multiple-step income statement?
[A] Depreciation expense office [C] Insurance expense
equipment [D] Interest expense
[B] Sales salaries expense
60. A kind of inventory system which updates accounting records for each purchase and each
sale of inventory is
[A] Periodic inventory system [C] Perpetual inventory system
[B] Just in time inventory system [D] Economic order quantity

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61. ____________ refers to a seller granting a price reduction (allowance) to a buyer of defective
or unacceptable merchandise.
[A] Purchase discount
[B] Purchase return
[C] Purchase allowance
[D] Freight out

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62. In FOB shipping point agreement, which of the following is true:
[A] ownership of goods transfers to the buyer when the goods arrive at the buyer’s place of business
[B] The buyer accepts ownership when the goods depart the seller’s place of business
[C] The seller pays shipping costs and has the risk of loss in transit
[D] The goods are part of the seller’s inventory when they are in transit
63. Which of the following statement is true about expenses incurred by merchandising business
[A] Selling expenses are the expenses of advertising merchandise, making sales, and delivering
goods to customers.
[B] General and administrative expenses support a company’s overall operations and include
expenses related to accounting, human resources, and finance
[C] Other expenses and losses commonly do not include interest expense, losses from asset
disposals, and casualty losses
[D] Operating expenses are separated into two parts selling and General and Administrative expense.
64. Except one All are the basic elements of an accounting system
A. Input device C. Internet
B. Information processor D. Source documents
65. Computer software that controls the computer hardware and makes hardware respond the user’s
needs is?
A. Application software C. Peachtree
B. System software D. Computer hardware
66. One of the following is not accounting applications software?
A. QuickBooks C. Peachtree
B. STATA D. ACCPAC
67. One of the following is not true regarding computerized accounting system?
A. It is an accounting system that performs data processing manually
B. It increases efficiency, accuracy, speed and timeliness
C. It enables to handle complex and large transactions easily
D. It reduces cost in relation to record keeping (cost per transaction)
68. Which method should be selected if you want to recognize revenue when earned and expense when
incurred?
A. Accrual basis of accounting C. Real time posting
B. Cash basis of accounting D. Batch Posting
69. Which one of the following cannot be taken as difference between manual and computerized
systems?
A. Speed
B. Meaning
C. Backup
D. Source document
70. ______ is a system that interprets, transforms and summarizes information for use in analysis and
reporting.
A. Input device B. Information processor
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 C. Output device D. Source documents
71. A group of related accounts showing the details of the balance of general ledger accounts are
A. General journal C. Special journal
B. Subsidiary ledger D. General ledger
72. What does it mean by saving your data permanently in data storage devices?
A. Creating data
B. Maintaining data
C. Backup data
D. Restore data

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73. Choose the correct match
A. Sales Journal- For recording credit sales
B. Purchase journal- For recording cash purchase
C. Special Journal – For recording detail balance
D. Payment Journal – For recording credit purchase
74. Which of the following is considered cash?
A. Certificates of deposit (CDs)
B. Money market checking accounts
C. Money market savings certificates
D. Postdated checks
75. A Cash Over and Short account
A. Is not generally accepted.
B. Is debited when the petty cash fund proves out over.
C. Is debited when the petty cash fund proves out short.
D. Is a contra account to cash.
76. In preparing its May 31, 2007 bank reconciliation, Dogg Co. has the following information
available:
Balance per bank statement, 5/31/07 ……………………. Birr 30,000
Deposit in transit, 5/31/07…………………………………….. 5,400
Outstanding checks, 5/31/07………………………………… 4,900
Note collected by bank in May …………………………….. 1,250
The correct balance of cash at May 31, 2007 is
A. Birr 35,400. C. Birr 30,500.
B. Birr 29,250. D. Birr 31,750.
77. The category "trade receivables" includes
A. Advances to officers and employees.
B. Income tax refunds receivable.
C. Claims against insurance companies for casualties sustained.
D. none of these.
78. When preparing bank reconciliation, bank credits are
A. Added to the bank statement balance.
B. Deducted from the bank statement balance.
C. Added to the balance per books.
D. Deducted from the balance per books.
79. The journal entries for bank reconciliation
A. are taken from the "balance per bank" section only.
B. may include a debit to Office Expense for bank service charges.
C. may include a credit to Accounts Receivable for an NSF check.
D. may include a debit to Accounts Payable for an NSF check.
80. A deposit made by a company will appear on the bank statement as a
A. Debit C. Debit memorandum
B. Credit D. Credit memorandum
81. A bank statement
A. let’s a depositor know the financial position of the bank as of a certain date
B. is a credit reference letter written by the depositor’s bank
C. is a bill from the bank for services rendered
D. shows the activity that increased or decreased the depositor’s account balance
82. Control over cash disbursements is generally more effective when
 A. all bills are paid in cash
B. disbursements are made by the accounts payable subsidiary clerk
C. payments are made by cheque
D. all purchases are made on credit
83. Which of the following would be added to the balance per books on bank reconciliation?
A. Outstanding cheques
B. Deposits in transit
C. Notes collected by the bank
D. Service charges
84. A bank reconciliation should be prepared
A. whenever the bank refuses to lend the company money
B. when an employee is suspected of fraud
C. to explain any difference between the depositor's balance per books with the
balance per bank
D. by the person who is authorised to sign cheques
85. If a cheque correctly written and paid by the bank for $438 is incorrectly recorded on the
company's books for $483, the appropriate treatment on the bank reconciliation would be to
A. add $45 to the bank's balance C. deduct $45 from the bank's balance
B. add $45 to the book's balance D. deduct $438 from the book's balance
86. Accounts receivable includes
A. non-trade receivables
B. amounts owed by customers on account
C. interest receivable
D. loans to company officers
87. A written promise to pay a sum of money on demand or at a definite time is:
A. Accounts Receivable C. Notes Receivable
B. Accounts Payable D. Trade Receivable
88. What is the maturity value of a 90-day, 12% note of Br. 10,000?
A. 8,000 C. 10,300
B. 10,000 D. 11,200
89. When a Note Receivable is discounted, Accounts Receivable is debited for what amount?
A. The face value of the note
B. The maturity value of the note
C. The maturity value of the note less accrued interest
D. The maturity value of the note plus accrued interest
90. Which one of the following items would not be considered cash?
A. Coins
B. Money orders
C. Currency
D. Post-dated cheques
91. Which of the following is not a suggested procedure to establish internal control over
cash disbursements?
A. Anyone can sign the cheques
B. Different individuals approve and make the payments
C. Blank cheques are stored with limited access
D. The bank statement is reconciled monthly
92. Which one of the following would not cause a bank to debit a depositor’s account?
A. Bank service charge C. EFT of funds to other locations
B. Collection of a note receivable D. Cheques marked NSF
93. Accounts receivable includes
 A. non-trade receivables
B. amounts owed by customers on account
C. interest receivable
D. loans to company officers
94. The primary source of revenue for a wholesaler is:

[A] The sale of fixed assets the company

[B] The sale of merchandise
[C] Service fees
[D] Investment income
95. When the terms are FOB Destination, transportation costs are covered by:
[A] Buyer [C] Both parties
[B] Seller [D] None
96. In credit term “1/15, n/40”; the 15 indicates
[A] Discount rate [C] Discount period
[B] Net payment [D] Credit period
97. Shalom enterprise earned revenue from service performed for $58,000 on credit. The effect of
this transaction result in;
A. An increase service revenue C. A decrease in Accounts receivable
B. An increase in Accounts payable D. A decrease in capital account
98. A trial balance will not balance if:
A. A correct journal entry is posted twice.
B. The purchase of supplies on account is debited to Supplies and credited to Cash.
C. A $ 550 cash drawing is debited to withdrawal for $5,500 and credited to Cash for $ 550.
D. A $860 payment on account is debited to Accounts Payable for $86 and credited to Cash
$86.
99. Alemu Garment paid 19,000 to creditors on account. The effect of this event in this enterprise
result in;
A. An increase in Cash C. A decrease in Accounts payable
B. An increase in Accounts payable D. A decrease in Accounts receivable
100. Which of the following statement about adjustment is correct?
A. The adjusting entry for unearned revenues results in a decrease (a debit) to a liability
account and an increase (a credit) to a revenue account.
B. When companies record payments of expenses that will benefit t more than one
accounting period, they record an asset called prepaid expenses or prepayments.
C. When companies receive cash before services are performed, they have a performance
obligation (liability or unearned revenue) to transfer a service to one of its customers.
D. Accrued revenues may accumulate (accrue) and may be unrecorded because only a
portion of the total service has been provided and the clients won’t be billed until the
service has been completed.
E. All of the above