Choose the correct answer from the given alternatives and write the

letter of your choice for each question on the separate answer sheet (1
point each) (Total 100
points)
1. The objective of IAS 1 Presentation of Financial Statements is

A. To provide the basic principles in the presentation of general purpose financial statements to

improve comparability.

B. To provide the basic principles in the presentation of general and special purpose financial

statements to improve comparability.

C. To provide the basic principles in the presentation of general purpose financial statements to

improve consistency.

D. All of the above

2. The amount of profit or loss appears in which of the following financial statements?

A. Statement of financial position

B. Statement of comprehensive income

C. Statement of changes in equity

D. B and C

3. Primary users for general-purpose financial statements is;

A. Creditors.

B. Employees.

C. Investors.

D. Both creditors and investors

4. Which of the following will be of interest to investors in decision-making?

A. Assessing the company’s ability to generate net cash inflows.

B. Assessing management’s ability to protect and enhance the capital providers’ investments.

C. Both assessing the company’s ability to generate net cash inflows and assessing

management’s ability to protect and enhance the capital provider’s investments.

D. Assessing the company’s ability to collect debts.

5. Which of the following statements best describes the term “going concern”?

P a g e 1 | 21
A. When current liabilities of an entity exceed current assets.

B. The ability of the entity to continue in operation for the foreseeable future.

C. The potential to contribute to the flow of cash and cash equivalents to the entity.

D. The expenses of an entity exceed its income.

6. Which one of the following statements is correct?

A. A partnership is separate legal entity.

B. A sole trader cannot employ staff.

C. An incorporated entity is otherwise known as a ‘limited’ company.

D. The owners of a limited company are otherwise known as the ‘directors’.

7. Which of the following statements is true?

A. The directors of a company are liable for any losses of the company

B. A sole trader business is owned by shareholders and operated by the proprietor

C. Partners are liable for losses in a partnership in proportion to their profit share ratio

D. A company is run by directors on behalf of its members

8. A credit sale of $800 is made on April 25, terms 2/10, n/30, on which a return of Br. 50 is

granted on April 28. What amount is received as payment in full on May 4?

A. $ 735 C. $ 800

B. $ 784 D. $ 750

9. Which ONE of the following statements best describes the term 'liability'?

A. An excess of equity over current assets

B. Resources to meet financial commitments as they fall due

C. The residual interest in the assets of the entity after deducting all its liabilities

D. A present obligation of the entity arising from past events

10. Which of the following statements concerning the debit-credit feature of the accounting model

is correct?

A. Debits are entered on the right and credits are entered on the left.

B. A debit entry will decrease a liability account and increase an asset account

C. Stock sold to investor’s increases stockholders' equity and is recorded as a debit.

D. A liability account should be credited upon payment of an account payable.

E. None of the above is correct.

11. RAYA is preparing her year-end final accounts and she has to deal with a prepayment for rent.
Which of the following statement is correct?

A. The prepayment will increase the charge to the income statement

B. The prepayment will reduce the charge to the income statement

C. The prepayment has no effect on the income statement

D. The prepayment will only affect the income statement

12. A company receives a $50,000 cash deposit from a customer on October 15 but will not deliver

the goods until November 20. Which of the following statements is true?

A. Cash will be reported on the statement of cash flows for the month of November

B. Revenue will be recorded and reported on the income statement for October

C. A liability will be reported on the balance sheet at the end of October

D. All of the above are true

E. None of the above is true

13. Punisher COMPANY reported profit after tax of $210,000. Punisher’s income tax rate is 30%.

Operating expenses for the year is 15% of sales and 25% of cost of sales. Other expenses were

10% of sales. How much is the total sales?

A. $1,800,000 C. $2,000,000

B. $2,200,000 D. $2,240,000

14. X and Y invest $100,000 and $50,000 respectively in partnership and agree on a division of net

income that provides for interest at 10% on original investment, salary allowances of $ 12,000

and $ 24,000 yearly respectively, with the remainder divided equally, What would be X’s share

of a periodic net income of $45,000?

A. $22,500 C. $22,000

B. $19,000 D. $10, 500

15. Good are purchased at a price of Birr 166,750 with VAT or sales tax. The amount of VAT on

this transaction

A. Birr 25,012.5 C. Birr 21,000

B. Birr 21,750.00 D. Birr 19,837.00

16. W/ro Kidist is a permanent employee of a government owned organization. The employees

contribute Birr 490 for pension on behalf of W/ro Kidist for the month of Ginbot 2014. The

monthly basic salary of W/ro Kidist is?

A. Birr 4,000 C. Birr 770

B. Birr 7,000 D. Birr 4,454.5

17. The Conceptual Framework uses the term “economic resources” to refer to:

A. Income B. Equity C. Assets D. A and C

18. BAKER Company sells $200,000 of ten-year, 8% bonds to yield 10% on January 1, 2014. The

bonds pay interest annually on December 31. The bonds were sold at a discount of $24,578.

The amount of bond interest expense for 2015 is

A. $17,542 C. $17,696

B. $18,458 D. $19,280

19. According to the IASB conceptual framework, which of the following correctly pairs a primary

qualitative characteristic of accounting information with one of its components?

A. Relevance and Timeliness.

B. Relevance and Verifiability.

C. Reliability and Predictive Value.

D. Reliability and Feedback Value.

20. Revenues are earned when

A. A contract is signed by both parties.

B. The seller substantially completes performance required by an agreement.

C. The buyer completes payment required under an agreement.

D. The buyer accepts delivery and completes required payments.

21. It is an agreement between two or more parties that creates enforceable rights and obligations.

A. Obligation C. Revenue

B. Contract D. Any of these

22. At December 31, 2015, the Gibe Corporation reported a $40,000 deferred tax liability

pertaining to a $100,000 temporary difference which will reverse equally during the next four

years. On December 31, 2015, after determining the deferred tax liability, Gibe management

was informed that the income tax rate for years subsequent to 2015 had been changed to 42%.

As a result of the tax rate change, Gibe’s 2015 income tax expense will;

A. Decrease $1,200 C. Decrease $2,000

B. Increase $1,200 D. Increase $2,000

23. Which of the following is not considered an item of PPE?

A. Land classified as investment property

B. Land used in agricultural activity by a farming entity

C. Equipment manufactured or acquired primarily to be held for rentals

D. All of the these

24. Which of the following assets may not be depreciated?

A. Building that is measured under the revaluation model

B. Equipment that becomes idle or retired from active use

C. Land

D. Landfill site

25. A company has purchased a tract of land and expects to build a production plant on the land in

approximately 5 years. During the 5 years before construction, the land will be idle. Under

IFRS, the land should be reported as:

A. Land expense. C. Property, plant, and equipment.

B. An intangible asset. D. A long-term investment.

26. A company purchases a machine for $64,000. It has no residual value and an expected useful

life of eight years. It is depreciated using the straight line method for two years when the

company decides to change the depreciation method to reducing balance at 30%. The annual

depreciation for the first year under the new method will be?

A. $8,000 C. $14,400

B. $19,200 D. $9,408

27. A change in depreciation method, estimate of useful life or residual value is accounted for as a:

A. Change in accounting policy

B. Change in accounting estimate

C. Correction or error

D. Any of these

28. Which of the following is correct about definition of asset

A. An asset is a resource controlled by the entity as a result of past events and from which

future economic benefits are expected to flow to the entity.

B. An asset is a present economic resource controlled by the entity as a result of past events

C. Asset is an economic resource

D. Asset is a resource owned by the business.

29.A property developer must classify properties that it holds for sale in the ordinary course of
business as:

A. Inventory C. Property, plant and equipment

B. Financial asset D. Investment property

30. Entity A exchanges its equipment for Entity B’s equipment. If the exchange has commercial

substance, Entity A should measure the equipment received from Entity B on initial recognition

at:

A. The fair value of the equipment received

B. The fair value of the equipment given up

C. The carrying amount of the equipment received

D. The carrying amount of the equipment given up

31. The balance sheet amount reported for a long-term debt on the issue date is the

A. Discounted present value of the future principal repayment.

B. Discounted present value of the periodic interest payments.

C. Sum of the future value of principal repayment and the periodic interest payments.

D. Sum of the discounted present values of the future principal repayments and the periodic

interest payments.

32. The unpaid amount of income taxes due to the government for a given year are found on the

A. Balance sheet in the account Deferred Income Taxes.

B. Balance sheet in the account Income Taxes Payable.

C. Income statement in the account Income Tax Expense Current.

D. Income statement in the account Income Tax Expense Deferred.

33. In accounting, depreciation means:

A. The decline in the value of an asset during the period

B. The amount derived by dividing the cost of an asset over its useful life

C. The amount derived by multiplying the cost of an asset by its useful life

D. The systematic allocation of the depreciable amount of an asset over its useful life

34. If the carrying amount of an asset is less than its recoverable amount, the asset:

A. Is impaired C. Is not impaired

B. Should be written-down D. Should be written-off in profit or loss

35. On January 1, 2021, entity A obtained a 10%, $5,000,000 loan, specifically to finance the
construction of a building. The proceeds of the loan were temporarily invested and earned

interest income of $180,000. The associate on December 31, 2021?

A. $600,000 C. $660,000

B. $645,000 D. $630,000

36.Which one of the following statements is correct with regard to intangible assets:

A. Goodwill and copyrights are always capitalized.

B. Brands are never capitalized.

C. Intangible assets have a finite life span.

D. Amortization is an application of the accruals concept.

37.The replacement cost of an inventory item is below the net realizable value and above the net

realizable value less the normal profit margin. The original cost of the inventory item is above

the replacement cost and below the net realizable value. As a result, under the lower of cost or

market method, the inventory item should be valued at the

A. Net realizable value

B. Original cost

C. Replacement cost

D. Net realizable value less the normal profit margin

38. Economic significance of public finance in developed countries differs from developing

countries in

A. Its focus on reduction of poverty

B. Maintenance of economic stability and full employment

C. Its focus on reduction of inequalities

D. Its aim of capital formation

39. Which one of the following is not the characteristic of tax?

A. It is compulsory payment made to the government

B. It is the major source of income to the government

C. Citizens get direct benefit from the tax payment

D. None of the above

40. Which of the following best describe the relationship between internal control and internal

audit?

A. Internal audit is part of internal control system

B. Internal control is part of internal audit

C. They are different techniques of exercising control over the functioning of an enterprise

which can be operated simultaneously

D. They are different techniques of exercising control over the functioning of an enterprise

which cannot be operated simultaneously

41. During the course of an audit, the client imposes certain very significant restrictions on the

scope of your audit. In such cases, which of the following type of opinion would you generally

consider appropriate?

A. Qualified opinion C. Disclaimer opinion

B. Adverse opinion D. Unqualified opinion

2. HAYU WHOLE Supermarket earns revenue of Br 1,440,000 in its special distribution plant

around Mexico and only 25% of the sales are made on cash. At the end of the working year the

Mexico distribution plant holds Br 75,000 as account receivables. Average collection period

need to collect the receivable is (use 360 days a year);

A. 180 days B. 105 days C. 40 days D. 25 days

43. The stock selling price is Birr 45, an expected dividend is Birr 10 and an expected growth rate

is 8% then cost of common stock would be;

A. 55 B. 53 C. 38 D. 0.3022

44. Which one of the following statements is correct with regard to intangible assets:

A. Goodwill and copyrights are always capitalized

B. Brands are never capitalized

C. Intangible assets have a finite life span.

D. Amortization is an application of the accruals concept

45. Which of the following is true about the WACC?

A. The optimal capital structure is the one that maximizes the WACC.

B. The value of the firm will be maximized when the WACC is minimized.

C. The WACC is the appropriate discount rate for all new projects of the firm.

D. The WACC is impossible to calculate for a firm with multiple divisions.

E. Since discount rates and firm value move in the same direction, minimizing the WACC will

minimize the value of the firm.

46. John deposited $10,000 to open a new savings account that earned 4 percent annual interests,

compounded quarterly. What was the amount of money in John's account 6 months after the

account was opened?

A. $ 10,100 B. $ 10,101 C. $ 10,200 D. $ 10,201

47. The profitability index (cost-benefit ratio) of a project can be the best evaluation criteria stated

as?

A. A project is acceptable if its PI is greater than one

B. A project is acceptable if its PI is less than one

C. A project is acceptable if its PI is greater than the internal rate of return (IRR)

D. A project is acceptable if its PI is less than the net present value (NPV)

48. Jan plans to invest an equal amount of Birr 2,000 in an equity fund every year-end beginning

this year. The expected annual return on the fund is 15 percent. She plans to invest for 20 years.

How much could she expect to have at the end of 20 years?

A. Birr 237,620 B. Birr 176,424 C. Birr 204,887 D. Birr 178,424

49. In assessing the financial health of a firm, financial analysts use different techniques. One

technique is the vertical, common size analysis, an example of which is

A. Total current assets is 20% of the total assets as of certain date

B. Total current assets as of a certain date is 20% greater compared with the previous year

C. The finished goods inventory turnover is twelve time during the year

D. Cash provided by operations is $100,000

50. You just won a lottery and are offered the following two payment options:

Plan A: Receive $100,000 now

Plan B: Receive $1,000 every month for 10 years. The first payment will start in one month.

The required rate of return is 5% APR. Which plan has the higher value?

A. Plan A

B. Plan B

C. The two plans have the same value.

D. More information is needed to determine.

E. None of the above

51. If the weighting of equity in total capital is 1/3, that of debt is 2/3, the return on equity is 15%

that of debt is 10% and the corporate tax rate is 32%, what is the Weighted Average Cost of

Capital (WACC)?

A. 10.533% C. 9.533%

B. 7.533% D. 11.350%

52. Which one of the following is the best example of unsystematic risk?

A. Inflation exceeding market expectations

B. A warehouse fire

C. Decrease in corporate tax rates

D. Decrease in the value of the dollar

E. Increase in consumer spending

53. A bank that originates, underwrites, and distributes new security issues of corporations and

government agencies to any potential investors are called;

A. Central Bank C. Commercial Bank

B. Investment Bank D. Development Bank

54. Commercial bank of Ethiopia pays 5.60%, compounded daily (based on 360 days) on a 9

month certificate of deposit. If you deposit Br. 20, 000 you would expect to earn around

__________ in interest.

A. Br. 840 C. Br. 1, 032

B. Br. 858 D. Br. 1, 121

55. Which of the following statements is not true with regard to capital market?

A. The funds are raised for a short period of time

B. Both debt and equity funds can be raised

C. It is classified into two types

D. All of the above

56. Which of the following statements is not true with regard to primary market?

A. Is also known as the old issues market

B. It facilitates the transfer of investible funds from savers to entrepreneurs

C. It deals with new securities being issued for the first time.

D. It facilitates the transfer of investible funds from savers to entrepreneurs.

57. ABC Corporation sells its product for $195.70 per unit. In 2015 the company had total sales in
units of 6,000. The total costs were the following:

Variable cost of sales $ 457,800

Fixed cost of sales 100,000

Variable selling & administrative costs 108,500

Fixed selling & administrative costs 512,400

What is the best estimate of the total contribution margin?

A. $4,600 C. $507,800

B. $607,900 D. $616,400

58. Manufacturing costs do not include

A. Prime costs C. Conversion costs

B. Indirect materials D. Salary of the company president

59. Management is considering replacing its existing sales commission compensation plan with a

fixed salary plan. If the change is adopted, the company’s

A. Break-even point must increase C. Margin of safety must decrease

B. Operating leverage must increase D. Profit must increase

60. ___________ is a cost that already been incurred and that cannot be changed by any decision

made now or in the future.

A. Opportunity cost C. Differential cost

B. Sunk cost D. Relevant cost

61. Last month 10,000 units of a product were manufactured, and the total cost per unit was $60.

At this level of production the variable cost is $30 per unit and the fixed cost is $30 per unit. If

10,500 units are manufactured the next month, and the costs remain within the same relevant

range,

A. Total variable cost will remain unchanged.

B. Fixed costs will increase in total

C. Variable cost per unit will increase

D. Total cost per unit will decrease

62. The following activity and costs data that were provided by HOIST Corporation would help

in estimating its future maintenance costs

Units Maintenance Costs

3 $450
7 $530

11 $640

15 $700

Using the least- square method to estimate the costs formula, the expected total costs for an

activity level of 10 units would be closest to

A. $612.50 B. $581.82 C. $595.84 D. $601.50

63. Given the formula Y = $ 17,500 + $4x, at what level of activity will total costs be $42,500?

A. 10,625 Units C. 4,375 Units

B. 6,250 Units D. 5,250 Units

64. The controller of Gemma Company has requested a quick estimate of the manufacturing

supplies that it needs for the month of July when the expected production are 470,000 units.

Below are the actual data from the prior three months of operations.

Production in units Manufacturing supplies

March 450,000 $723,060

April 540,000 853,560

May 480,000 766,560

Using these data and the high-low method, what is the reasonable estimate of the cost of

manufacturing supplies that would be needed for July? (Assume that this activity is within the

relevant range)

A. $805,284 C. $755,196

B. $1,188,756 D. $752,060

65. Which of the following statements correctly defines the term "reasonable assurance"?

A. A high, but not absolute, level of assurance to allow an auditor to detect a material

misstatement.

B. An attestation engagement is one in which a CPA is engaged to issue an examination, a

review, or an agreed-upon procedures report on subject matter, or an assertion about subject

matter, that is the responsibility of another party.

C. A CPA firm should establish procedures for conducting and supervising work at all

organizational levels to provide reasonable assurance that the work performed meets the

firm's standards of quality.

D. To achieve this goal, the firm most likely would establish procedures for reviewing
documentation of the work performed and reports issued

65. Which of the following statements correctly defines the term "reasonable assurance"?

A. A high, but not absolute, level of assurance to allow an auditor to detect a material

misstatement.

B. An attestation engagement is one in which a CPA is engaged to issue an examination, a

review, or an agreed-upon procedures report on subject matter, or an assertion about subject

matter, that is the responsibility of another party.

C. A CPA firm should establish procedures for conducting and supervising work at all

organizational levels to provide reasonable assurance that the work performed meets the

firm's standards of quality.

D. To achieve this goal, the firm most likely would establish procedures for reviewing

documentation of the work performed and reports issued.

66. This focus on assurance engagements, in particular the nature and purpose of a financial report

audit. Emphasis will be placed on understanding the role of different parties in an assurance

engagement such as a financial report audit and on why there is always a demand for audit

services. The audit expectation gap is an important concept. It is essentially the difference

between user’s expectations of an auditor and what an auditor can realistically actually achieve

when carrying out an audit. In this module emphasis is placed on identifying the components

of the expectation gap with a view to understanding how we can attempt to reduce this gap in

practice.

The parties relevant to an assurance engagement are:

A. Users, responsible party, subject matter.

B. Assurance practitioner, responsible party.

C. Responsible party, users, subject matter, criteria.

D. Assurance practitioner, users, responsible party

67. When performing an audit required under section 301 of the Corporations Act the auditor has

a responsibility to:

A. Form an opinion on the subject criteria.

B. Form an opinion on the independence of the directors.

C. Form an opinion on the truth and fairness of the financial report.

D. All of the above.

68. Performance audits are useful because they:

A. Include a comprehensive audit.

B. Allow the auditor to demonstrate how well they are performing.

C. Are concerned with the economy, efficiency, and effectiveness of organizations activities.

D. Involve gathering evidence to ascertain whether the entity under review has followed the

rules, policies, procedures, laws or regulations with which they must conform.

69. Negative assurance means:

A. The auditor has conducted an audit and provides an opinion that the financial reports are

true and fair.

B. The auditor has conducted sufficient work to conclude that the appropriate outcome is an

adverse audit report.

C. The auditor has done adequate work and nothing came to their attention which would lead

them to believe that the information being assured is not true and fair.

D. The auditor disclaims responsibility for the audit opinion because they are unable to do

sufficient work to conclude that the information being assured is true and fair.

70. Which of the following best describes the reason an independent auditor reports on financial

statements?

A. The company preparing the statements and the persons using the statements may have

different interests.

B. When the client fails to include information that is necessary for the fair presentation of

financial statements in the body of the statements or in the related notes, it is the

responsibility of the auditor to present the information, if practicable, in the auditor's report

and express

C. A qualified or an adverse opinion.

D. A financial statement audit is designed to obtain reasonable assurance about whether the

financial statements are free of material misstatement, whether due to fraud or error.

71. An auditor disclaims responsibility when:

A. The users cannot rely on the financial report.

B. The audit opinion is unqualified and unmodified.

C. The auditor is unable to obtain sufficient evidence about a potentially material and

pervasive matter
D. The audit opinion is unqualified and the auditor includes a paragraph in the audit report to

emphasize something important.

72. One of the following best describes what is meant by GAAS?

A. Audit objectives generally determined on audit engagements

B. Acts to be performed by the auditor

C. Measures of the quality of the auditor's performance

D. Procedures to be used to gather evidence to support financial statements

73. You are assigned to an audit which your firm has been performing for the last five years. You

realize that adequate knowledge of the enterprise is necessary for planning the current year

audit. Out of the following, which one do you think will be useful to you for this purpose?

A. Previous year audit working paper

B. Discussion with the management of the client

C. Accounting and auditing’ guide to which the industry pertains

D. All of the above

74. Sampling method employed by an auditor involves the use of statistical techniques for;

A. Determination of sample size

B. Interpretation of sample results

C. Selection of sample

D. All of the above

75. The audit expectation gap occurs when:

A. The public is well educated about auditing.

B. User beliefs do not align with what an auditor has actually done.

C. Auditors perform their duties appropriately and satisfy users’ demands.

D. Peer reviews of audits ensure that auditing standards have been applied correctly and the

standards are at the levels that satisfy users’ demands.

76. On December 31, 20X1, Shark Corporation was merged into the Palos Corporation. In the

business combination, Palos issued 200,000 of its $10 par common stock, with a market value

of $18 per share, for all of Sapp's common stock. The stockholders' equity section of each

company's balance sheet immediately before the combination was as follows:

Palos Shark

Common stock....................... $3,000,000 $1,500,000

Additional paid in capital......... 1,300,000 150,000

Retained earnings.................. 2,500,000 2,500,000

---------- ----------

Total ........................ $6,800,000 $4,150,000

========== ==========

Assume that the merger qualifies as a pooling of interests. In the December 31, 20X1

consolidated balance sheet, additional paid -in capital should be reported at

A. $950,000 C. $1,300,00

B. $1,450,000 D. $2,900,000

77. Goodwill represents the excess cost of an acquisition over the

A. Sum of the fair values assigned to identifiable assets less liabilities assumed.

B. Sum of the fair values assigned to tangible assets acquired less liabilities assumed.

C. Sum of the fair values assigned to intangibles acquired less liabilities assumed.

D. Book value of an acquired company.

78. Assume that Shark Corporation purchases all of Dolphin Company’s assets and liabilities at a

total cost of $ 1,500,000. The fair values of Dolphin’s assets and liabilities total $ 1,570,000.

Therefore, the $ 1,570,000 total fair value of the net identifiable assets acquired exceeds the $

1,500,000. The good will is:

A. Positive C. Negative

B. No recognize D. None

79. Which of the following types of business combinations typically occurs when management is

attempting to monopolize a particular industry?

A. Horizontal combination

B. Vertical combination

C. Conglomerate combination

D. Market domination can be the goal of any type of combination

80. A business combination in which the boards of directors of the potential combining companies

negotiate mutually agreeable terms is a(n):

A. Agreeable combination.

B. Friendly combination.

C. Hostile combination.
D. Unfriendly combination.

81. Ownership of 51% of the outstanding voting common stock of a company would usually result

in:

A. The use of the cost method.

B. The use of the lower of cost or market method.

C. The use of the equity method for financial reporting.

D. Consolidation of the subsidiary.

82. A business combination is accounted for appropriately as a pooling of interests. Costs of

furnishing the information to the stockholders related to effecting the business combination

should be

A. Capitalized and subsequently amortized over a period not exceeding 40 years.

B. Capitalized but not amortized.

C. Deducted directly from retained earnings of the combined corporation.

D. Deducted in the determination of net income of the combined corporation for the period in

which the costs were incurred

83.Which statement is correct when the effective interest method is used to amortize bond

premium or discount?

A. The carrying at the end of the first year would be the highest if the bonds were issued at a

discount.

B. The interest expense increases each period if the bonds were issued at a premium.

C. The periodic amortization will increase or decrease depending on whether the bonds were

issued at a premium or at a discount.

D. The periodic amortization will increase regardless on whether the bonds were issued at

either a discount or a premium.

84.On December 31, 2017, Omega Co. issued $200,000 of 8% serial bonds, to be repaid in the

amount of $40,000 each year. Interest is payable annually on December 31. The bonds were

issued to yield 10% a year. The bonds proceeds were $190,280 based on the present values at

December 31, 2017 of the five annual payments. In its December 31, 2018 statement of

financial position, at what amount should Omega report the carrying amount of the bonds?

A. $139, 380 C. $150, 280

B. $149, 100 D. $153, 308

85. Why is it generally believed that there is an optimal capital gearing ratio?

A. There is a precise gearing ratio at which the benefit of the tax shield is exactly matched by

the increasing risk of financial distress.

B. There is a precise gearing ratio at which the risk of the tax shield is exactly matched by the

increasing benefit of financial distress.

C. There is a precise gearing ratio at which the benefit of the tax shield is exactly matched by

the increasing risk of agency.

D. There is a precise gearing ratio at which the benefit of managerial motivation is exactly

matched by the increasing risk of agency.

86. Which of the following represents Modigliani and Miller's second position on the effect of

capital gearing?

A. There is a negative relationship between financial gearing and the WACC because of the

'free lunch' effect of the tax shield.

B. There is a positive relationship between financial gearing and the WACC because of

financial distress.

C. There is no relationship between financial gearing and the WACC as there are no 'free

lunch' benefits from higher gearing

D. There is a positive relationship between financial gearing and the WACC because of the

increased volatility of the ROE.

87. Which of the following represents Modigliani and Miller's first position on the effect of capital

gearing on Weighted Average Cost of Capital (WACC)?

A. There is a negative relationship between financial gearing and the WACC because of the

'free lunch' effect of the tax shield.

B. There is a positive relationship between financial gearing and the WACC because of

financial distress.

C. There is no relationship between financial gearing and the WACC as there are no 'free lunch'

benefits from higher gearing.

D. There is a positive relationship between financial gearing and the WACC because of the

increased volatility of the ROE.

88. In both their dividend model and capital gearing model, Modigliani and Miller use which of

the following principles?

A. The value of the firm is fundamentally determined by its capital gearing ratio.

B. The value of the firm is fundamentally determined by the NPV of the firm's projects.

C. The value of the firm is fundamentally determined by its dividend policy.

D. The value of the firm is fundamentally determined by the ability of managers to

communicate with the capital markets

89. Which is not a characteristic of property, plant and equipment?

A. The property, plant and equipment are tangible assets.

B. The property, plant and equipment are used in business.

C. The property, plant and equipment are expected to be used over a period of more than one

year.

D. The property, plant and equipment are subject to depreciation.

90. Under the cost model, subsequent to initial recognition as an asset, an item of property, plant

and equipment shall be carried at

A. Cost

B. Revalued amount

C. Cost less accumulated depreciation and any accumulated impairment loss

D. Revalued amount less accumulated depreciation and any accumulated impairment loss

91. When the revaluation model is used for reporting property. Plant and equipment, the gain

should be included in

A. Retained earnings

B. Revaluation gain in the income statement

C. Revaluation surplus

D. An extraordinary gain in the income statement

92. When a company receives a deposit from a customer to protect itself from nonpayment for

future services, the deposit should be classified by the company as

A. Revenue

B. A deferred credit deducted from accounts receivable

C. A liability

D. Part of the allowance for bad debts

93. Which of the following is the correct definition of a provision?

A. A possible obligation arising from past event

B. A liability of uncertain timing or amount

C. A liability which cannot be easily measured

D. An obligation to transfer funds to an entity

94. In assessing the financial health of a firm, financial analysts use different techniques. One

technique is the vertical, common size analysis, an example of which is

A. Total current assets is 20% of the total assets as of certain date

B. Total current assets as of a certain date is 20% greater compared with the previous year

C. The finished goods inventory turnover is twelve time during the year

D. Cash provided by operations is $100,000

95.Oil Corporation sells a product for $130 per unit. The product's current sales are 28,900 units

and its break-even sales are 25,721 units. What is the margin of safety in dollars?

A. $413,270 C. $3,343,730

B. $2,504,667 D. $3,757,000

96.Which one of the following statements is correct with regard to intangible assets?

A. Goodwill and copyrights are always capitalized.

B. Brands are never capitalized.

C. Intangible assets have a finite life span.

D. Amortization is an application of the accruals concept.

97. ETU Enterprises purchased a machine for $260,000. The seller paid $900 freight to deliver the

machine. ETU used $4,600 of staff mechanics’ time to install the machine and employee

training cost $7,000. The state charged a 5% sales tax on the invoice price. What is the

capitalized cost of the machine?

A. $260,900 C.$285,500

B. $271,600 D.$284,600

98. Which of the following statements is correct?

A. A provision is recognized only when it represents a present obligation

B. An event or transaction whose outflow of economic benefits is probable and can be

measured reliably is always recognized

C. A contingent asset that is possible is usually ignored

D. A contingent liability that is possible is ignored

99. Governmental units that engage in self-supporting activities by providing goods and services
to the public on a user charge basis should be accounted for in what fund category?

A. Governmental fund

B. Any non-expendable fund

C. Proprietary fund

D. Fiduciary fund

100. Waver Ltd is testing an asset for impairment. The carrying amount of the asset is $85,000.

The following data has been obtained by Roller in relation to the asset.

Future cash flows expected to be derived from the asset, $100 000.

Estimated fair value of the asset, $80 000.

Present value of future cash flows expected to be derived from the asset, $60 000.

Costs of disposal for the asset, $2000.

In accordance with IAS 36 Impairment of Assets, what is the recoverable amount of the asset?

Select which one of the following is correct.

A. $60,000 C. $78,000

B. $80,000 D. $100,000